INCOME TAXATION BAM 127

BAM 127

Taxation

Inherent power of sovereign exercised through legislature

Purpose of raising revenues to carry out of legitimate objects of government

TAXES

Enforced proportional contribution from persons and property levied by the law-making body of state

For the support of the government and all public needs

. Police Power

Inherent and plenary power.

Enables it to prohibit all that is hurtful tocomfort, safety, and welfare of society.

Eminent Power

Inherent right of the State to condemn private property to public useupon payment of just compensation. Also known as the power of expropriation

Taxation

Enforced proportional contributions from persons and property

Lifeblood Theory

Taxes are the lifeblood of government, should be collected without unnecessary hindrance.

Necessity Theory

Government is necessary; however, it cannot continue without themeans of paying for its existence.

Benefits Received Principle/Doctrine of Symbiotic Relationship –

Bases power of the State to demand and receive taxes on reciprocal duties of support and protection.
Citizen supports the State by paying the portion from his property that is demanded

Public Purpose (IL)

Taxes may only be levied for a public purpose.

Non-Delegability of Taxing Power (IL)

The power to tax is legislative and, as a rule, cannot be delegated.

Territoriality (IL)

Taxation is generally confined to the territory of the taxing authority

. International Comity (IL)

Principle of respect for sovereignty of other states, generally precludes one state from taxing another.

. Exemption of the Government from Taxation (IL)

Government and its agencies are generallyexempt from paying taxes.

Due Process of Law (CL)

No person shall be deprived of life, liberty, or property without dueprocess of law.

Equal Protection of the Law (CL)

Requires that taxpayers in similar circumstances be treatedalike.

Uniformity and Equity of Taxation (CL)

Ensures taxation must be uniformand equitable

Progressive System of Taxation (CL)

Tax burden increases with taxpayer’s ability to pay.

National Taxes

Fees that BIR collects from taxpayers all over the Philippines

Imposed on different incomes and transactions

Local Taxes

Involuntary fees that local government units (LGUs) collect from their constituents to finance activitiesandprojects to their city or municipality (e.g. real property tax)

Special Taxes

Special taxes that must be paid during certain transactions or purchases (e.g motor vehicle user charge)

INHERENT LIMITATIONS

restrictions that naturally stem from the nature of the taxing power. They exist independently of statutory or constitutional provisions

CONSTITUTIONAL LIMITATIONS

restrictions specifically imposed by the Philippine Constitution on the government’s power to tax.

Safeguards citizens’ rights and ensure the integrity of the taxation system.

Non-Impairment of Contracts (CL)

Article III, Section 10 – no law impairing the obligation of contracts shall be enacted.

Non-Impairment of Contracts (CL)

Tax laws should respect the terms of existing contracts, and the government cannot use taxationtoundermine or alter contract terms, except when justified by the exercise of police power.

Free Exercise of Religion (CL)

Article III, Section 5 – protects free exercise of religion, including non-establishment of religion.

Free Exercise of Religion (CL)

Religious organizations – generally exempt from taxation on their income and assets, provided they are used for religious, charitable, or educational purposes.

Non-Appropriation for Religious Purposes (CL)

Article VIII of the Constitution – guarantees judicial review, and thus, the judiciary has the authority to assess the constitutionality and legality of tax laws and actions of tax authorities

Non-Impairment of the Jurisdiction of the Judiciary (CL)

Taxpayers may challenge any law or tax measure that violates constitutional rights

Non-Appropriation for Religious Purposes (CL)

This ensures that taxes collected from the general population are not directed toward advancing or supporting specific religious organizations

Non-Impairment of the Jurisdiction of the Judiciary (CL)

Article VIII of the Constitution – guarantees judicial review, and thus, the judiciary has the authority to assess the constitutionality and legality of tax laws and actions of tax authorities

Exemption of Religious, Charitable, and Educational Entities (CL)

Article VI, Section 28(3) – provides tax exemptions to properties used exclusively for religious, charitable, or educational purposes. These exemptions recognize the social contributions of these entities,as they help alleviate the burden on the government to provide certain public services.

Exemption of Non-Profit Institutions (CL)

Their activities are strictly charitable, scientific, educational, or cultural and that income is not used for the benefit of any private individual.

Prohibition Against Improper Delegation of Taxing Power (CL)

Article VI of the Constitution ensures only Congress has the exclusive power to impose taxes, although it may delegate taxing authority to local governments within prescribed limits. This ensures accountabilityand oversight in tax legislation.

Rule of Taxation and the Power of Taxation by LGUs (CL)

Article X, Sections 5 and 6 of the Constitution outline the taxing power of local government units, allowing them a degree of fiscal autonomy to impose local taxes, fees, and charges.

Fiscal Adequacy (PRINCIPLES OF SOUND TAX SYSTEM (FAT))

– revenue raised must be sufficient to meet government/public expenditures and other public needs

Administrative Feasibility (PRINCIPLES OF SOUND TAX SYSTEM (FAT))

tax laws must be clear and concise, capable of effective and efficient enforcement

Theoretical Justice (PRINCIPLES OF SOUND TAX SYSTEM (FAT))

must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory)

Levy (Stages of Taxation)

Determination by Congress of the subject and object of taxation, as well as rate.

Assessment & Collection (Stages of Taxation)

Notice to the effect that the amount therein stated is due as tax and demand for payment thereof.

Payment (Stages of Taxation)

Act of compliance by taxpayer

Refund (Stages of Taxation)

Taxpayer asks for restitution of the money paid, which was either excessiveor erroneous

Citizens (Classification of Taxpayer)

Resident Citizen & Non-Resident Citizen.

Aliens (Classification of Taxpayer)

Resident Alien & Non-Resident Alien

Corporations (Classification of Taxpayer)

Domestic Corporation and Foreign Corporation

Partnerships (Classification of Taxpayer)

Taxable and exempt

Passive Income

Earned with very minimal or without active involvement.

Active/Regular Income

Arises from transactions requiring considerable degree of effort.

EXAMPLE OF ACTIVE/REGULAR INCOME

1. Compensation income

2. Business income

3. Professional income

EXAMPLE OF PASSIVE INCOME

1. Interest income from banks

2. Dividends from domestic corporations

3. Royalties

DOUBLE TAXATION

taxing same person for same tax period and same activity twice by same jurisdiction

Tax Avoidance

Exploitation by taxpayer of legally permissible alternative tax rates or methods of assessing taxableproperty/income

Also known as “tax minimization”

Tax Evasion

Use of taxpayer illegal or fraudulent means to defeat or lessen payment of tax

Also known as “tax dodging”

PROGRESSIVE TAX (system of tax)

as the tax base increase the tax, due also increases

. Proportionate tax (system of tax)

based on rate of tax base

citizens

Naturalized in accordance with law.

current Commissioner

Romeo D. Lumagui, Jr.

CITIZENS

Citizens of the Philippines at time of the adoption of the Feb 2, 1987 Constitution.

CITIZENS

Father/mothers citizens of PH

CITIZENS

Who are born before Jan 17, 1973 of Filipino mothers

RESIDENT CITIZEN

Filipino citizen residing in PH

NON-RESIDENT CITIZEN

Filipino citizen residing abroad for more than 183 days

NON-RESIDENT CITIZEN

Leaves PH during the taxable year to reside abroad

NON-RESIDENT CITIZEN

Works and derives income from abroad

NON-RESIDENT CITIZEN

Who has been previously considered as nonresident citizen and who arrives in the PH at any time during the taxable year to reside permanently.

ALIEN

Employed by multinational companies offshore banking units and petroleum contractors and subcontractors

RESIDENT ALIEN

Residing in PH but not a citizen thereof

RESIDENT ALIEN

Present in PH and who is not mere transient or sojourner

RESIDENT ALIEN

Individual who comes to the PH for indefinite purpose

NON-RESIDENT ALIEN

Mere transient or sojourner

NON-RESIDENT ALIEN

Comes to PH for a definite purpose

NON-RESIDENT ALIEN

Not residing in PH and who is not a citizen there of; NETB LESS THAN 180 DAYS OR ETB IF MORE THAN 180 DAYS

ESTATE

Net worth of person at any point in time alive or dead

ESTATE

Sum of person’s assets – legal rights, interests, & entitlements to property of any kind – less all liabilities

TRUST

Three-party fiduciary relationship in which first party, trustor or settlor, transfers (settles) a property upon the 2 nd party (trustee) for benefit of 3 rd party, the beneficiary

DOMESTIC CORP

Corporation organizes in accordance with the Philippine laws

DOMESTIC CORP

Liable to pay corporate income tax from sources within/without

FOREIGN CORP.

Organized under a foreign law.

Resident Foreign Corp.

Operates and conducts business in PH through a permanent establishment. (branch)

Non-Resident Foreign Corp

Does not operate or conduct business in PH

Exempt Partnerships

- General Professional Partnership (GPP)

- Joint Venture or Consortium

3 INCOME TAX SCHEMES under NIRC:

1. Final Income Tax

2. Capital Gains Tax

3. Regular Income Tax

FINAL INCOME TAXATION

Characterized by final taxes

Full taxes are withheld by the income payor at source

CAPITAL GAINS TAXATION

imposed on the gain realized on sale, exchange, and other disposition of certaincapital assets located in PH, including pacto de retro sales

pacto de retro sales

title and ownership of the property sold are immediatelyvested in the vendee a retro

CAPITAL ASSETS

Any other assets other than ordinary assets.

Personal Assets.

ORDINARY ASSETS

Stock in trade of a taxpayer or other real property

Return of Capital

recovery of an initial investment or cost basis, which is not taxable.

Life Insurance Proceeds (ex of RC)

– The amount payable upon the death of theinsured is excluded from gross income.

Return of Premiums (ex of ROfC)

If an insurance policyholder receives a refundof premiums paid, it is not considered taxable income.

Value of Property Acquired by Gift, Bequest, or Descent (ex of ROfC)

These arenot included in gross income as they represent a transfer of wealth rather than earned income

Return on Capital

Refers to earnings or gains from an investment, which are taxable.

Capital Gains (ROnC)

Gains from the sale or exchange of assets such as stocks, real estate, or business property are taxable.

Dividends (ROnC)

Cash or property dividends received by shareholders aresubject to income tax, depending on residency and corporate classification.

Interest Income (ROnC)

– Earnings from bank deposits, bonds, and promissorynotes are taxable unless explicitly exempted.

Sale of Capital Asset

Sale of Capital Assets

Gains from the sale of stocks, real estate, or other properties aresubject to Capital Gains Tax

Ordinary Assets

If sold, these are subject to Regular Income Tax (RIT) insteadof Capital Gains Tax

Regular Income Tax (RIT)

applies to all items of income except those subject tofinal tax, capital gains tax, and special tax.

Compensation Income (In. Gross Income)

Earnings from an employer-employee relationship

Gross Income from Business/Profession (In. Gross Income)

Income from trade, business, or profession, subject to Regular Income Tax (RIT).
exempted: Barangay Micro Business Enterprises (BMBEs), enterprises withtaxholidays.