TAXATION

TAXATION
CONCEPTS OF TAXATION AND INCOME TAXATION

DEFINITION OF TAXATION
 It is the process by which the sovereign, through its
lawmaking body, raises revenues used to defray
expenses of government
 It is a way of the government in increasing its
revenue under the authority of the law, purposely
used to promote welfare and protection of its
citizenry
 It is the collection of a share of individual and
organizational income by a government under the
authority of the law

CONCEPT OF TAXATION
 Taxation is the inherent power of the state to
impose and demand contribution upon persons,
properties, or rights for the purposes of generating
revenues for public purposes. This power is
legislative in nature and is essential to the
existence of any independent government.

PRINCIPLES AND THEORIES OF TAXATION
 The Benefit Principle. This principle holds that
individuals should be taxed in proportion to the
benefit they receive from the government.

 The Ability-To-Pay Principle. This principle holds that
taxes should relate with the people’s income or
ability to pay.

 The Equal Distribution Principle. The principle holds
that income, wealth, and transaction should be
taxed at fixed percentage.

STRUCTURES OF A TAX SYSTEM
 A tax is proportional. A proportional tax means
that the government takes an amount of money
from a person which is in proportion to his/her
income.

 A tax is regressive. A regressive tax means that the
government takes a larger percentage of a
person’s income for tax while he is receiving a
lower income.

 A tax is progressive. A progressive tax means that
the government takes a larger percentage of a
person’s salary for tax due to his high salary.

SIGNIFICANCE OF TAXATION
 The primary purpose of taxation is to generate
funds/revenues that can be used to defray
expenses incurred by the government in
promoting the general welfare of its citizenry.
 Taxes are the major source of government
income.
 Taxes are the lifeblood of a nation.

SIGNIFICANCE OF TAXATION
 Other purposes of taxation includes:
 To equitably contribute to the wealth of nation
 To protect new industries
 To protect local producers

ESSENTIAL CHARACTERISTICS OF TAX
 It is an enforced
contribution
 It is generally payable in
cash
 It is proportionate in
character
 It is levied on person or
property
 It is levied by the state
which has jurisdiction
over the person or
property
 It is levied by the
lawmaking body of the
state
 It is levied for public
purposes

BASIC PRINCIPLES OF A SOUND TAX SYSTEM
 Fiscal Adequacy. It means that sources of revenue
taken as a whole should be sufficient to meet the
expanding expenditures of the government.

 Equality or Theoretical Justice. It means that taxes
levied must be based upon the ability of the citizen to
pay.

 Administrative Feasibility. It means that taxes should be
clear and plain to tax payers.

 Consistency or Compatibility with Economic goals. It
refers to tax laws that should be consistent with the
economic goals.

CLASSIFICATION OF TAXES
 As to subject matter
 Personal/Poll/Capitation Tax. This tax means that there is a
fixed amount upon all persons residing within a specified
territory with no regards to their property or occupation.
(e.g., Residence Tax)
 Property Tax. This tax refers to one assessed on all property
located within a certain territory on a specified date in
proportion to its value. (e.g., Real Estate Tax)
 Excise Tax. This tax embraces any form of burden not laid
directly upon person or property. (e.g., Value-Added
Tax/VAT)
 VAT is a form of sales tax. It is an indirect tax levied upon the
consumption of the sale of goods and services and on the
imports of goods into the country.

 As to who bears the burden
 Direct Tax. This tax refers to the tax which is demanded
from an individual who tends to buy or purchase a good
or service. (e.g., Income Tax)
 Indirect Tax. This refers to the tax paid primarily by a
person who can shift the burden upon someone else.
(e.g., VAT)

 As to determination of account
 Specific Tax. This tax is fixed or determinate sum imposed
by the head or number or some standard of weight and
measurement, and requires no assessment beyond listing
and classification. (e.g., Taxes on wines)
 Ad Valorem Tax. This tax is fixed proportionate with the
value of the property and requires the intervention of
assessors before the amount due from each taxpayer.
(e.g., Real Estate Tax)

 As to purpose
 General Tax. It refers to the tax levied to an individual for a
general public purpose.
 Special Tax. It refers to the tax levied to an individual for a
particular or specific purpose.

 As to scope
 National Tax. It refers to the tax imposed by the state itself
and is effective within the entire jurisdiction thereof.
 Local Tax. It refers to the tax imposed by a political
subdivision of the state and is effective only within the
territorial boundaries thereof.

DISTINCTION OF TAX FROM OTHER TERMS
TAX
 A demand of sovereignty
 Paid for the use of
government’s property
 May be imposed by
government only
TOLL
 A demand of proprietorship
 Paid for the use of
another’s property
 Enforced by the
government or a private
individual

TAX
 Intended to raise revenue
 May be imposed by
government only
PENALTY
 Designed to regulate
conduct
 Enforced by the
government or a private
individual

TAX
 Based on law
 May not be assignable
 Generally payable in cash
 Any person may be
imprisoned for non-
compliance
DEBT
 Based on contract
 May be assignable
 Payable in cash or any kind
 Any person may not be
imprisoned for non-
payment

 Tax distinguished from other terms
 Revenue. This refers to all funds or income derived by the
government whether from tax or any other source. It is the
amount collected while tax refers to amount imposed.
 Internal Revenue. This refers to taxes imposed by the
legislature other than duties on imports and exports.
 Customs Duties. This refers to taxes on goods exported to
other countries.

SITUS OF TAXATION
 Situs is a Latin term which means “situation,” “location,”
or “place.” its literal meaning refers to place od
taxation.
 In real property, the rule is “tax is imposed to a place or
state where the property is located, subject to be
taxed, has a jurisdiction over the said property
 In movable property taxation, the rule is “tax imposed
to movables follow the law person.

CONCEPT OF DOUBLE TAXATION
 The two concepts of double taxation are:
 Direct Duplicate
 Indirect Duplicate

 Direct Duplicate has the following elements:
 Taxing twice
 By the same taxing authority
 Within the same taxing jurisdiction
 For the same purpose
 In the same taxable period
 Involving the same purpose

 Indirect duplicate taxation, on the other hand, occurs
when taxes on the property are not imposed by the
same taxing authority

FORMS OF ESCAPE FROM TAXATION
 Shifting. It is one way of passing the burden of tax from
one person to another.
 Kinds of shifting:
 Forward Shifting occurs when the burden of the tax is
transferred from a factor of production to the factor of
distribution
 Backward Shifting occurs when the burden of the tax is
transferred from the consumer to the producer or
manufacturer
 Onward Shifting occurs when tax is shifted to two or more
times either forward or backward

 Capitalization. This refers to the reduction in the price of
the taxed object to the capitalized value of future
taxes which the purchaser expects to be called upon
to pay

 Transformation. It occurs when the manufacturer or
producer upon whom the tax has been imposed pays
the tax and endeavor to recoup himself by improving
his process of production.

 Tax Evasion. It is the practice by taxpayers through
illegal means to defeat or lessen the amount for tax.

 Tax Avoidance. It is the exploitation by the taxpayer of
legally permissible methods in order to avoid or reduce
tax liability.

 Tax Exemption. It is the grant of immunity or freedom
from financial charge, obligation, or burden to which
others are subjected.
 Grounds for Tax Exemption
 Contract
 Public policy
 Reciprocity

KINDS OF TAXES UNDER EXISTING LAWS
 National Taxes. These are taxes imposed by the
national government.
 National Internal Revenue Code
 Income Tax. Tax on person’s income in one taxable year.
 Estate Tax. Tax on the right of the deceased person to transmit
his/her estate to his/her lawful heirs and beneficiaries
 Donor’s Tax. Tax derived from donations/testamentary
disposition
 Inter Vivos (made between living persons; effective during the
lifetime of the donor)
 Mortis Cansa (made in the nature of testamentary disposition;
effective upon the death of the donor)

 Value-Added Tax. Tax levied on the sales, barter, exchange, or
lease of goods, properties, and services, and on the importation of
goods. (12%)
 Withholding Tax on Compensation. Tax from income payment to
individual arising from employer-employee relationship.
 Excise Tax. Tax imposed on certain specified goods
manufactured/produced inside the country for domestic purposes
 Documentary Stamp Taxes. Tax on documents, instruments, and
papers evidencing the acceptance, assignment, sale/transfer of
an obligation right of property

 Customs Duties. Tax levied on all articles imposed in the country.
 Travel Tax. Tax imposed by the government on persons who are
leaving the country regardless of the country where the air ticket is
issued.
 Energy Tax. Tax imposed to discourage uneconomic consumption
of fuel
 Electric Power Consumption. Tax imposed on the monthly consumption
of every residential customer.
 Private Motor Vehicle Tax. Tax that was issued to rationalize the
structure of tax on private motor vehicle by basing the same on
ability to pay of the owners

 Local Taxes. These are taxes imposed by the local
government.

DIFFERENT AUTHORITIES IN IMPOSING TAX
 National Government. This refers to the national
government imposing tax.
 Municipal or Local Government. This refers to the
municipal or the local government or a public
corporation imposing tax.

CLASSIFICATION OF TAXPAYERS
 Individual Taxpayer
 Resident Citizens
 Non-resident Citizens
 Resident Aliens
 Non-resident Aliens
 Corporate Taxpayer
 Domestic Corporation
 Foreign
 Resident Corporation
 Non-resident
Corporation
 General Professional
Partnership
 CPA
 Lawyer

PUBLIC OFFICER IN CHARGE OF TAX
COLLECTION
 Finance Secretary
 Commissioner on Internal Revenue
 Commissioner of Customs
 Provincial Treasurer
 City Treasurer
 Municipal Treasurer

TAX REMEDIES OF THE GOVERNMENT AND
TAXPAYERS
 Distraint/Distress. This refers to seizure by the
government of personal property, tangible or
intangible, to enforce the payment of taxes.
 Actual Distraint. The government takes the property from
the taxpayer’s possession which involves physical transfer.
 Constructive Distraint. The possession remains with the
taxpayer but he is not allowed to dispose the said
property subject of distrain.

TAX REMEDIES OF THE GOVERNMENT AND
TAXPAYERS
 Levy. This pertains to the same act of seizure but of real
property in order to enforce the payment of taxes.
 Forfeiture. This pertains to divestiture of a property
without compensation in consequent of a default or
offense.
 Compromise. This pertains to a contract whereby
parties avoid litigation.

INCOME TAXATION
 Income refers to all wealth which flows into the
taxpayer other than as mere return on capital. Capital,
on the other hand, refers to the investment made
which is the source of income.
 Income Tax refers to the tax imposed on the net
income or the entire income received by a taxpayer in
one taxable period.

GROSS INCOME, TAXABLE INCOME, NET
INCOME
 Gross Income refers to all income from whatever
source but not excluding exempt income and the
income subject to final income tax. (e.g., salaries and
wages, commission, rents, etc.)
 Exclusion from gross income are those of:
 Life insurance, compensation, retirement benefits, etc.
 Deductions are those amounts which the law allows to
be deducted from the gross income to arrive at
taxable income.

GROSS INCOME, TAXABLE INCOME, NET
INCOME
 Taxable Income refers to a pertinent item of gross
income specified in the tax code less deduction of
personal and/or exemptions.
 Net Income refers to the gross income less allowable
deductions.

STATUS OF TAXPAYERS
 Single. It refers to an individual who is unmarried.
He/she may also be widowed or a married individual
but judicially decreed as legally separated or annulled
with no qualified dependents.
 Head of the Family. It refers to an unmarried or legally
separated man or woman with one or both
dependents.
 Married.

TAXATION

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