Income Taxation Reviewer PDF

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Summary

TAXATION - the process by which the sovereign, through its law-making body, imposes burdens for the purpose of raising revenues to carry out legitimate objects of the governmentTAXES - the enforced contribution levied by the law-making body of the state for the support of the government and all the ...

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TAXATION - the process by which the sovereign, through its law-making body, imposes burdens for the purpose of raising revenues to carry out legitimate objects of the government TAXES - the enforced contribution levied by the law-making body of the state for the support of the government and all the public needs. 3 INHERENT POWERS OF THE STATE 1. POLICE POWER - the power of promoting public welfare and regulating the use of liberty and property 2. POWER OF TAXATION - the power which raises revenue for the expenses of the government 3. POWER OF EMINENT DOMAIN - the power to acquire private property for public purpose upon payment of just compensation PURPOSES OF TAXATION 1. PRIMARY: Revenue or fiscal purpose - To provide funds or property with which to promote general welfare and protection of its citizens. 2. SECONDARY: Regulatory purpose - Employed as a device for regulation or control Effect: - Promotion of general welfare - Reduction of social inequality - Economic growth THEORIES OF TAXATION 1. NECESSITY THEORY - To preserve the state’s sovereignty - A means to give protection or facilities 2. LIFEBLOOD THEORY - Used to continue to perform the government’s basic function of serving and protecting its people - Give tangible and intangible benefits BASIS OF TAXATION - the government may be able to perform its functions while the citizens may be secured in the enjoyment of the benefits MANIFESTATION OF LIFEBLOOD THEORY 1. Rule of “No estoppel against the government” 2. Collection of taxes cannot be stopped by injunction - Court of tax appeals have the authority to grant injunction to restrain collection of internal tax revenue, fee, or charge 3. Taxes could not be subject of compensation or set-off - Tax is compulsory not bargain 4. Right to select objects (subjects) of taxation a. Subject or object to be taxed b. Purpose of the tax (as long as it’s a public purpose)

c. Amount or rate of the tax d. Kind of tax e. Apportionment of the tax f. Situs (place) of taxation g. Manner, means, agencies of collection of the tax 5. A valid tax may result in the destruction of the taxpayer’s property. - Lawful tax cannot be defeated. - Bring out the insolvency of the taxpayer - Forfeiture of property through police power SCOPE OF TAXATION The power of taxation is the most absolute of all the powers of the government. a. Comprehensive - covers all (business, persons, professions) b. Unlimited - absence of limitations c. Plenary - it is complete d. Supreme ESSENTIAL ELEMENTS/CHARACTERISTICS OF TAX a. It is an enforced contribution. b. It is generally payable in money. c. It is proportionate in character. d. It is levied on persons, property, or right, e. It is levied by the law-making body of the state. f. It is levied for public purpose. ASPECTS OF TAXATION a. Levying or imposition of tax b. Assessment or determination of the correct amount c. Collection of tax NATURE/CHARACTERISTICS OF THE STATE’S POWER OF TAX A. It is inherent in sovereignty. - Can enforce contribution in the absence of law B. It is legislative in character, - Cannot be exercised by executive and judicial branches. C. Exemption of government entities, agencies, and instrumentalities D. International Comity E. Limitation of territorial jurisdiction F. Strongest among all the inherent powers of the state. -

Agencies performing governmental function are tax exempt unless expressly taxed Agencies performing proprietary functions are subject to tax unless expressly exempted GOCCs performing proprietary functions are subject to tax, however the following are granted tax exemptions: - Government Service Insurance System (GSIS) - Social Security System (SSS)

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Philippine Health Insurance Corporation (PHIC) Philippine Charity Sweepstakes Office (PCSO) Local Water Districts (RA 10026)

CLASSIFICATION OF TAXES 1. As to scope: - National - imposed by the national government - Local - imposed by the local government 2. As to subject matter or object: - Personal, poll, or capitation - tax of a fixed amount imposed upon an individual residing within a specified territory. - Property - imposed on property in proportion to their value - Excise - tax on certain rights and privileges (sin products or imported goods) 3. As to who bears the burden: - Direct - taxpayer cannot shift to another - Indirect - indemnify himself in the expense of another 4. As to determination of fixed amount: - Specific - tax of fixed amount by number, standard of weight, or measurement - Ad valorem - tax of fixed proportion of the value property 5. As to purpose: - Primary, Fiscal or Revenue Purpose - Secondary, Regulatory, Special, or Sumptuary Purpose 6. As to graduation or rate: - Proportional - tax based on fixed percentage of amount - Progressive - tax the rate of which increases as the tax base or bracket increases - Regressive - tax the rate of which decrease as the tax base or bracket increases 7. As to the taxing authority - National - imposed under National Internal Revenue Code, collected by Bureau of Internal Revenue - Local - imposed by LGUs ELEMENTS OF SOUND TAX SYSTEM a. Fiscal Adequacy - sources must be enough b. Theoretical Justice or Equity - tax should be proportionate c. Administrative Feasibility - law must be capable of effective and efficient enforcement LIMITATIONS ON THE STATE’S POWER TO TAX 1. Inherent Limitations 2. Constitutional Limitations - Progressive system - emphasis on direct taxes - Regressive system - more indirect taxes imposed - Regressive tax rates - tax rates which decreases as tax base or bracket increases

FACTORS IN DETERMINING THE SITUS OF TAXATION a. Subject matter (person, property, or activity) b. Nature of tax c. Citizenship d. Residence of the taxpayer e. Source of income f. Place of excise, business, or occupation being taxed TOLL is a sum of money for the use of something which is paid for the use of a road, bridge, or public nature. PENALTY is a sanction imposed as a punishment for violation of law or acts deem injurious. SPECIAL ASSESSMENT is an enforced proportional contribution from owners of the lands for special benefits resulting from public improvements, Characteristics: A. Levied only on land B. Not a personal liability of the person assessed C. Based wholly on benefits (not necessary) D. Exceptional both as to time and place REVENUE refers to all funds or income derived by the government. SUBSIDY is a pecuniary aid directly granted by the government to an individual or enterprise deemed beneficial to the public. PERMIT or LICENSE is a charge imposed under the police power for purposes of regulation. CUSTOMS DUTIES are taxes imposed on goods exported from or imported into a country. TARIFF is the system of imposing duties on the importation or exportation of goods. DIRECT DOUBLE TAXATION means taxing twice: 1. By the same taxing authority, jurisdiction, or taxing district 2. For the same purpose 3. In the same year or taxing period 4. Same subject or object 5. Same kind or character of the tax MEANS OF AVOIDING THE BURDEN OF TAXATION 1. Shifting - the transfer of the burden of tax by the original taxpayer to someone else

2. Transformation - the producer pays the tax and endeavor to recoup himself by improving his process of production 3. Evasion - the use of illegal means to defeat or lessen tax 4. Tax avoidance - the exploitation of legally permissible alternative tax rates of assessing taxable income to reduce tax liability 5. Exemption - the grant of immunity to particular persons of a particular class 6. Capitalization - the reduction in the selling price of income producing property by an amount equal to the capitalized value 7. Avoidance - the tax saving device within the means sanctioned by the law SOURCES OF TAX LAWS 1. Constitution 2. National Internal Revenue Code 3. Tariff and Customs Code 4. Local Government Code (Book II) 5. Local tax ordinances/City or municipal tax codes 6. Tax treaties and international agreements 7. Special laws 8. Decision of the Supreme Court decisions and the Court of Tax Appeals 9. Revenue rules and regulations and administrative ruling and opinion INDIVIDUAL TAXPAYERS are natural persons with income derived from within the territorial jurisdiction of taxing authority. They are classified as: 1. 2. 3. 4.

Resident Citizens (RC) Nonresident Citizens (NRC) Resident Aliens (RA) Nonresident Aliens (NRA) - Engaged in trade/business (NRA-ETB) - Nonresident aliens not engaged in trade or business (NRANETB)

Importance of classification: They differ as to: - Situs of income - Manner of computing tax - Treatment of certain passive incomes - Allowable deductions - References in the tax choice CITIZENS OF THE PHILIPPINES 1. Born with father and/or mother as Filipino citizens 2. Born before Jan, 17, 1913 of Filipino mother who elects Philippine citizenship upon reaching the age of maturity, 3. Acquired Philippine citizenship after birth (naturalized) in

accordance with Philippine Laws. NONRESIDENT CITIZEN OF THE PHILIPPINES 1. Establishes to the satisfaction of the Commissioner of Internal Revenue, the fact of his physical presence abroad with a definite intention to reside therein. 2. Leaves the Philippines during the taxable year to reside abroad: - As an immigrant - For employment on a permanent basis - For work and derives income that requires him to be physically abroad most of the time during the taxable year 3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred eight-three days (183) or more by the end of the year. -

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A Filipino citizen taxpayer not classified as a nonresident citizen is considered a RESIDENT CITIZEN for tax purposes. An ALIEN is a foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth Section 22(F) of the tax code defines RESIDENT ALIENS as an individual whose residence is within the Philippines and who is not a citizen thereof The term NONRESIDENT ALIEN under Section 22(G) of the Tax Code means an individual whose residence is not in the Philippines and not a citizen thereof Under Section 22(S) of the Tax Code, ‘trade or business” includes performance of the functions of a public service or performance of personal service in the Philippines. A nonresident alien not engaged in trade or business is subject to 25% income tax based on gross profit from all sources within the Philippines.

APPLICABLE TAXES AND TAX RATES 1. Classification of the Taxpayer 2. Source of Income Taxpayer - Taxbase - Source of taxable income RC - Net Income - Within and without NRC, RA, NRA-ETB - Net Income - within NRA-NETB - gross income - within 3. Type of Income (APPLICABLE TAX) a. Ordinary or regular income (GRADUATED RATE) - Refers to income such as compensation income, business income, and income from practice of a profession b. Passive income (FINAL WITHHOLDING TAX) - Subject to final withholding taxes are certain passive incomes from sources within the Philippines such as:

- Interest income - Dividend income - Royalties - Prizes - Other winnings c. Capital gains subject to gains tax (CAPITAL GAIN TAX) - Capital gains from sale of shares of stocks of a domestic corporation - Capital gains from sale of real property in the Philippines

Under RA 10963 (TRAIN LAW), self-employed is defined as a sole proprietor or independent contractor who reports income earned from self-employment, PROFESSIONAL is a person formally certified by a professional body belonging to a specific profession. Regular income of SELF-EMPLOYED and/or PROFESSIONALS (SEP) amounting to more than 250,000 but with a gross sales and other operating income not exceeding 3M shall have the option to avail 8% tax. FINAL WITHHOLDING TAX F...