taxation

TAXATIONCONCEPTS 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

Economy & Finance

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regressive tax means

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