TAXATION 101

Taxation 101

Basic Rules and Principles in Philippine Taxation

What is Taxation?

It is the inherent power by which the sovereign state imposes a financial burden upon persons and property as a means of raising revenues in order to defray the necessary expenses of the government (Tax Digest by Crescencio Co Untian, 2002)

Taxation is the imposition of financial charges or other levies, upon a taxpayer (an individual or legal entity) by a state such that failure to pay is punishable by law.

It is a mode by which government make exactions for revenue in order to support their existence and carry out their legitimate objectives (Tax law and Jurisprudence by Justice Vitug, 2000)

It is the most pervasive and the strongest of all the powers of the government.

Taxes are the lifeblood of the government, without which, it cannot subsist.

Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

(GR No. 160756) (https://www.projectjurisprudence.com/2018/05/nature-of-power-of-taxation.html)

Distinction of Tax

Tax distinguished from Toll
- A tax is a demand of sovereignty, while toll is demand for proprietorship
- A tax is paid for the use of government’s property, while a toll is paid for the use of another’s a property
- A tax may be imposed by the government only, while a toll is enforced by the government or a private individual or entity

Tax distinguished from Penalty
- a tax is intended to raise revenue, while the penalty is designed to regulate conduct.
- a tax may be imposed by the government only while a penalty may be imposed by the government or a private individual.

Tax distinguished from Debt
- a tax is based on law, while debt is based on contract
- a tax may not be assignable, while debt is assignable
- a tax is generally payable in cash, while debt is payable in cash or in-kind,
- a person may be imprisoned for a non-payment of taxes, but any person may not be imprisoned for non-payment of debt.

Why Tax?

The main purpose of taxation is to accumulate funds for the functioning of the government machinery. No government in the world can run its administrative an office without funds and it has no such system incorporated in itself to generate profit from its functioning.

The government’s ability to serve the people depends upon the taxes that are collected. Taxes are indispensable in government operation and without it, the government will be paralyzed.

History of Taxation

The first known system of taxation was in Ancient Egypt around 3000 BC- 2800 BC in the first dynasty of the Old Kingdom.

In Biblical times, tax is already prevalent.

According to Genesis 47:24:

“But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children”.

Earliest axes in Rome are called as portoria were customs duties on imports and exports

Augustus Caesar introduced the inheritance tax to provide retirement funds for the military. The tax was five percent on all inheritances except gifts to children and spouses.

In England, taxes were first used as emergency measures.

History of taxation in the Philippines

The pre-colonial society, being communitarian did not have taxes.

During the Spanish Period, new income-generating means were introduced by the government such as the:

Manila-Acapulco Galleon Trade

Polo Y Servicio (Forced Labor)

Bandala

Encomienda System

Tribute

Manila – Acapulco Galleon Trade was the main source of income for the colony during its early years. The Galleon trade brought silver form Nueva Castilla and silk from China by way of Manila.

Polo Y Servicio is the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community projects. One could be exempted from the polo by paying a fee called falla (which was worth one and a half real).

Bandala is one of the taxes collected from the Filipinos. It comes form the Tagalog word mandala, which is around the stock of rice stalks to be threshed.

Encomienda is large tracts of land given to a person as a reward for a meritorious act. The encomenderos were given full authority to manage the encomienda by collecting tribute from the inhabitants and govern people living on it.

Tribute was the residence tax during the Spanish times. It may be paid in cash or kind, partly, or wholly.

But in 1884, the tribute was replaced by the cedula personal or personal identity paper, equivalent to the present community tax certificate.

Did you Know?That in the 19^th century, the “cedula” served as an identification card that had to be carried at all times. A person who could not present his or her cedula to a guardia civil could then be detained for being “indocumentado”.  Andres Bonifacio and othe Katipuneros tore their cedulas in August 1896, signaling the start of the Philippine Revolution.

The Development of the Community Tax

The cedula was imposed by the Americans on January 1, 1940, when Commonwealth Act No. 465 went into effect, mandating the imposition of a base residence tax of fifty centavos and an additional tax of one peso based on factors such as income and real estate holdings. The payment of this tax would merit the issue of a residence certificate. Corporations were also subject to the residence tax.

Why is “cedula” important?

A person is required to present a cedula when he or she acknowledges a document before a notary public; takes an oath of office upon election or appointment to a government position; receives a license, certificate or permit from a public authority; pays a tax or free; receives money from a public fund; transacts official business, or receives salary from a person or corporation.

Purposes and Significance of Tax

Primary purpose: generates funds or revenues use to defray expenses incurred by the government in promoting the general welfare of its citizenry, Public expenditure Other purposes: to equitably contribute to the wealth of the nation.

The Four R’s of Taxation

Taxation has four main purposes or effects:

1.      Revenue

2.      Redistribution

3.      Repricing

4.      Representation

Revenue – The taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems

Redistribution – This refers to the transferring wealth from the richer sections of society to poorer sections.

Repricing – Taxes are levied to address externalities; for example, tobacco is taxed to discourage smoking and a carbon tax discourages the use of carbon-based fuels.

Representation – As what goes with the slogan “no taxation without representation” it implies that: rules tax citizens and citizens demand accountability from their rulers as the other part of this bargain.

The Philippine Tax System

Tax law in the Philippines covers national and local taxes. National taxes refer to national internal revenue taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR) and local taxes refer to those imposed and collected by the local government. The 1987 Philippine Constitution sets limitations on the exercise of the power to tax. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation (Article VI, Section 28, Paragraph 1).

  

Government Budget and Expenditures

GFCE (GOVERNMENT FINAL CONSUMPTION EXPENDITURE) – Government acquisition of goods and services for current use to directly satisfy individual or collective needs of members of the community.

GFCF (GROSS FIXED CAPITAL FORMATION or government investment) – Government acquisition of goods and services intended to create future-benefits such as infrastructure investment or research.

The Branches of Government vis-à-vis the Tax Law

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharf-age dues, and other duties or imposts within the framework of the national development program of the Government (Article VI, Section 28, Paragraph 2).

The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, buy the veto shall not affect the item or items to which he does not object (Article VI, Section 27, Paragraph 2).

The Supreme Court has the power to: review, revise, reverse, modify, or affirm on appeal or certification, as the law or the Rules of Court may provide, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto (Article VIII, Section 5, Paragraph 2b).

The Forms of Taxes Imposed on Persons and Property

A)     Personal, capitation or poll taxes
These are taxes of fixed amount upon residents or persons of a certain class without regard to their  property or business

B)     Property taxes
1. Real Property Tax – an annual tax they may be imposed by a province or city or a municipality on real property such as land, building, machinery and other improvements affixed or attached to real property.
2. Estate Tax (Inheritance Tax) -  a tax on the right of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death.
3. Gift or Donor’s Tax – a tax on the privilege of transmitting one’s property or property rights to another or others without adequate and full valuable consideration.
4. Capital Gains Tax – a tax imposed on the sale or exchange of property. Those imposed are presumed to have been realized by the seller for the sale, exchange or other disposition of real property located in the Philippines classified as capital assets.

C)     Income Taxes – Taxes imposed the income of the taxpayers from whatever sources it is derived. Tax on all yearly profits arising from property, possessions, trades

D)     Excise or License Taxes – imposed on the privilege, occupation or business not falling within the classification of a poll taxes or property taxes. These are imposed on alcohol products; on tobacco products; on petroleum products like lubricating oils, grease, processed gas etc on mineral products such as coal and coke and quarry resources; on miscellaneous articles such as automobiles.

1.      Documentary Stamp Tax – imposed upon documents, instruments, loan agreements and papers and upon acceptance of assignments, sales, and transfers of obligation and etc.

2.      Value-added Tax – imposed on any person who, in the course of trade or business sells, barters, exchanges, leases, goods or properties render services or engages in similar transactions.

Who Should Pay Taxes?

1.      Individuals
a. Resident Citizen
b. Non-resident Citizens
c. Resident Aliens
d. Non-resident Aliens

2.      Corporations
a. Domestic Corporations
b. Foreign Corporations

3.      Estate under Judicial Settlement

4.      Trust irrevocable both as to the trust property and as to the income

Exempted in Paying Taxes

1.      Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and nonprofit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes (Article VI, Section 28, Paragraph 3)

2.      Non-stock non-profit educational institutions used actually, directly, and exclusively for educational purposes. ( Article XVI, Section 4 (3))

Exempted to tax as stated in the Article 283 of Rules and Regulations Implementing Local Government Code of 1991 (RA 7160):
a. Local water districts
b. Cooperatives duly registered under RA 6938 (Cooperative Code of the The Philippines)
c. Non-stock and non-profit hospitals and educational institutions
d. Printer and/or publisher of books or other reading materials prescribed by DECS (DepEd) as school texts or references, insofar as receipts from the printing and/or publishing thereof are concerned.

Issues on Public Finance

1.      Taxation

2.      Budget Deficit

3.      Privatization

Budget Deficit

“Kapag lumabis ang gastos sa kita ng pamahalan, nagiging malaki ang kakulangan at naapektuhan ang katatagan ng pamahalaan. Ito ay tinatawag na deposit sa badyet o budget deficit.” (www.dbm.gov.ph)