TAXATION

1. What is Taxation?

Taxation refers to compulsory or coercive money collection by a levying authority,

usually a government. The term "taxation" applies to all types of involuntary levies, income to
capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as
an act; the resulting revenue is usually called “taxes.” (Investopedia, 2016)

Taxation refers to the practice of a government collecting money from its citizens to
pay for public services. Without taxation, there would be no public libraries or parks.
One of the most frequently debated political topics is taxation. Taxation is the practice
of collecting taxes (money) from citizens based on their earnings and property. The money
raised from taxation supports the government and allows it to fund police and courts, have a
military, build and maintain roads, along with many other services. Taxation is the price of being
a citizen, though politicians and citizens often argue about how much taxation is too little or too
much. (Vocabulary, n.d.)
Taxation is different from other forms of payment, like payment for a purchase of
goods or services, because taxation does not require consent from the payor and the payment is
not directly tied to any goods bought or services rendered. The government compels taxation
through an implicit or explicit threat of force — through penalties and/or imprisonment.
Taxation is legally different than extortion or a protection racket because the imposing
institution is a government, not private actors.
Tax systems have varied considerably across jurisdictions and time. In most modern
systems, taxation occurs on both physical assets, such as property, and specific events, such as a
sales transaction. The formulation of tax policies is one of the most critical and contentious
issues in modern politics. (Investopedia, 2016)

2. What are taxes?

According to the Department of Finance, Republic of the Philippines, taxes are

mandatory contributions of everyone 4 to raise revenue for nation-building. The revenue is used
to pay for our doctors, teachers, soldiers, and other government personnel and officials, as well
as for building schools, hospitals, roads, and other infrastructure. It is our duty to pay our taxes.

3. Why does the government collect taxes?

The government collects taxes go provide basic services such as education, health,
infrastructure, and other social services for all. These taxes are used to pay for our doctors,
teachers, soldiers, and other government personnel and officials. These are also used to build
schools, hospitals, roads, and various infrastructure for connectivity, and industrial and
agricultural facilities.
 4. Who pays taxes?

We all pay taxes, either directly or indirectly. We pay taxes according to our income
and/or level of consumption.

Income tax is based on the ability-to-pay principle wherein people with higher income
should pay more.

Consumption tax is based on the amount of goods and services utilized such that the
more you consume, the higher the tax you pay.
Filipinos residing in the Philippines are taxed based on income earned here and abroad.
In the case of Filipinos living abroad, they are only taxed based on their income earned in the
Philippines. Similarly, resident aliens and non-resident aliens in the Philippines are taxed based
on their income earned in the country.

5. Where do our taxes go?

Taxes are used to fund social services and investment in infrastructure and human capital
development. Part of our taxes gets directly transferred to the poorest through targeted
transfers (e.g. 4Ps, pension to qualified senior citizens, allowance for PWDs, and PhilHealth).

LEGAL BASES OF PHILIPPINE TAXATION

The policy of taxation in the Philippines is governed chiefly by the Constitution of the
Philippines and three Republic Acts.

a. Constitution

Article VI, Section 28 of the Constitution states that “the rule of taxation shall be
uniform and equitable” and that “Congress shall evolve a progressive system of taxation.”

Find a copy of the original document at this site:

http://WWw.officialgazette.gov.ph/constitutions/the1987-constitution-of-the-repubbc-of-the-
philippines/ https://www.lawphil.net/consti/cons1987.html

b. National Law
 1. National Internal Revenue Code – enacted as Republic Act. No. 8424 or the Tax
Reform Act of 1997. Find a copy of the original document at this site:
http://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
2. Subsequently amended by Republic Act No. 10963 or the Tax Reform for
Acceleration and Inclusion Act of 2017; Find a copy of the original document this site:
http://www.officialgazette.gov.ph/2017/12/27/repubIic-act-no10963/
3. Republic Act No. 7160 or the Local Government Code of 1991, and those
sourced from the proceeds collected by virtue of a local ordinance. Find a copy of the
original document at these sites: https://www.lawphi/.net/statutes/repacts/ra1.991/ra_7160
1991.html and http://www.officialgazette.gov.ph/1991/10/10/republic-act-no-7160/

Taxes imposed at the national level are collected by the Bureau of Internal Revenue (BIR),
while those imposed at the local level (i.e., provincial, city, municipal, barangay) collected by a
local treasurer's office.
The powers and duties of the Bureau of Internal Revenue are:
1. Reduction and collection of all internal revenue taxes, fees and charges; and
2. Enforcement of all forfeitures, penalties, and fines connected therewith including the
execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts;
3. It shall also give effect to the administer supervisory and police powers conferred to it by
the National Internal Revenue Code and special laws.

KINDS OF TAXES

According to the Department of Finance, Republic of the Philippines, taxes can either be
direct or indirect.

Direct taxes are those that are paid from your income and properties. Examples include
personal and corporate income taxes, property and capital taxes.
Indirect taxes are collected based on consumption. Examples include excise taxes VAT,
percentage tax, and documentary stamp tax (DST).
a. DIRECT TAXES

1. Income Tax
Income tax is a direct tax paid by an individual or organization imposed on:

• Compensation Income - Salaries, wages, taxable bonuses, fringe benefits and other
allowances
 • Business Income - Practice of profession, trades, gains from sale of assets and other
income not covered by compensation
• Passive Income - Tax on deposits, royalties, and dividends

Compensation and self-employment income

Individuals earning compensation income are taxed based only on income individuals on
the income tax schedule for individuals. On the other hand, self-employed individuals and
professionals are based on the income tax schedule for individuals, applicable percentage taxes,
tax (VAT). However, if their gross sales (or gross receipts plus other income) does not exceed
the VAT threshold, they have the option to be taxed either on the basis of the income tax
schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8% on
their gross sales (or gross receipts plus other operating income).

Income tax schedule for individuals effective FY 2018 until FY 2022

Annual Taxable Income Tax to pay

Over But not over
P0 P 250,000 0%
P 250,000 P 400,000 20 % of the excess over P 250,000
P 400,000 P 800,000 P 30,000 + 25 % of the excess over P 400,000
P 800,000 P 2,000, 000 P 130,000 + 30 % of the excess over 800,000
P 2,000, 000 P 8,000,000 P 490,000 + 32% of the excess over 2,000,000
P 8,000,000 P2, 410,000 + 35 % of the excess over P8,000,000

Interest, royalties, prizes and other winnings

Interest income from bank deposits, deposit substitutes, trust funds similar products
(except for its long-term variants) is taxed at the rate of 20%.
Royalties, except on books, literary works and musical compositions, are taxed at the rate
of 10%.

Prizes and winnings from Philippine Charity Sweepstakes excess of P10, 000 (upon
which individual prizes and winnings P10, 000 or below are taxed on the basis of the income tax
schedule for individuals) are taxed at the rate of 20%.

Interest income from a depository bank under the expanded foreign currency deposit
system is taxed at the rate of 15%.

Income from the long-term deposits and investments, when pre-terminated in less than
three years after making such deposit or investment, is taxed at the rate of 20%; less than four
years, 12%; and, less than five years, 5%.
 Dividends

Cash and property dividends are taxed at the rate of 10%.

Capital gains
Capital gains from the sale of shares of stock not traded in stock exchange are at the rate
of 15%.

Capital gains from the sale of real property arc taxed at the rate of 6 %. except such proceeds
would be used to construct a new property within eighteen months after the sale had occurred.

Income tax for corporations

The income tax rate for corporations is 30%.

b. Indirect Taxes

1. Value-Added Tax
\
Value-Added Tax is a type of indirect tax imposed on goods and services. It is
typically passed on to the buyer as part of the selling price. The value-added tax (VAT) rate
since 2006 is 12%. Both imported and domestic goods and services are covered by VAT,
but there are many exemptions. The list of exemptions can be found in Section 109 of the
Tax Code

2. Percentage tax
Percentage tax is a business tax imposed on persons or entities/ transactions: who
sell or lease goods, properties or services in the course of trade or business and are exempt
from value-added tax (VAT) under Section 109 (w) of the National Internal Revenue Code, as
amended, whose gross annual sales and/or receipts do not exceed Php 1,919,500 and who are
not VAT-registered; and, engaged in businesses specified in Title V of the National Internal
Revenue Code.

3. Excise tax
 Excise tax is an indirect tax on selected goods that have negative externalities and
are non-essentials. Excise tax can be either, specific or ad valorem.

• Specific is based on weight, volume capacity, or any other physical unit of

measurement.

• Ad valorem (literally meaning “according to value”) is based on selling price or

other specified value. This is a measure to discourage too much consumption of
scarce resources and limit the bad effects of some products.

These are the commodities subject to excise taxes: Sin products (alcohol and tobacco),
petroleum, miscellaneous articles (automobiles, jewelry, perfume, and toilet waters, yachts,
and other vessels intended for pleasure or sports), and mineral products.

Taxes can also be classified as to who imposes them, either the national Government or
the Local Government (LGU)

c. NATIONAL TAXES

The taxes imposed by the national government of the Philippines include, but are not
limited to:

 Income tax – is a tax on all yearly profits arising from property, profession, trades or
offices or as a tax on a person’s income, emoluments, profits and the like. Self-employed
individuals and corporate taxpayers pay quarterly income taxes from 1st quarter to 3rd
quarter. And instead of filing quarterly income tax on the fourth quarter, they file and pay
their annual income tax return for the taxable year. Individual income tax is based on
graduated schedule of tax rate, while corporate income taxes in based on a fixed rate
prescribe by the tax law or special law.
 Estate tax – is a tax on the right of the deceased person to transmit his/her estate to
his/her lawful heirs and beneficiaries at the time of death and on certain transfers which
are made by law as equivalent to testamentary disposition. Estate tax is also based on a
graduated schedule of tax rate.
 Donor's tax – is a tax on a donation or gift, and is imposed on the gratuitous transfer of
property between two or more persons who are living at the time of the transfer. Donor’s
tax is based on a graduated schedule of tax rate.
 Value-added tax – is a business tax imposed and collected from the seller in the course of
trade or business on every sale of properties (real or personal) lease of goods or properties
(real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to
the buyer, causing this to increase the prices of most goods and services bought and paid
by consumers. VAT returns are usually filed and paid monthly and quarterly.
  Percentage tax – is a business tax imposed on persons or entities who sell or lease goods,
properties or services in the course of trade or business whose gross annual sales or
receipts do not exceed the amount required to register as VAT-registered taxpayers.
Percentage taxes are usually based on a fixed rate. They are usually paid monthly by
businesses or professionals. However, some special industries and transactions pay
percentage tax on a quarterly basis.
 Excise tax – is a tax imposed on goods manufactured or produced in the Philippines for
domestic sale or consumption or any other disposition. It is also imposed on things that
are imported.
 Documentary Stamp tax – is a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or
property incident thereto. Examples of documentary stamp tax are those that are charged
on bank promissory notes, deed of sale, and deed of assignment on transfer of shares of
corporate stock ownership.

d. LOCAL TAXES

One of main sources of revenues of the local government units is the real property tax,
which is a tax imposed on all types of real properties including lands, buildings, Improvements,
and machinery.

Another source of revenue are local ordinances such as parking fees and the like.