Income Taxation

Vocabulary flashcards related to income taxation in the Philippines.

Taxation

The process by which a government, through its lawmaking body, imposes charges on its inhabitants to raise money for public use.

Revenue Purpose of Taxation

The primary purpose of taxation is to raise revenue that will be used in defraying government expenses.

Non-Revenue Purpose of Taxation

Taxation may also be used to achieve certain social and economic objectives, such as regulating inflation, minimizing adverse effects of certain activities and equitable distribution of wealth.

Inherent Power of Taxation

Taxation is one of the three inherent powers of a sovereign state (Eminent domain, Police power, and Taxation).

Legislative Nature of Taxation

Tax laws must first be enacted before taxes can be imposed.

Constitutional and Inherent Limitations of Taxation

The power of taxation is considered plenary, subject only to constitutional and inherent limitations. This means that the government can tax anything or anyone within its jurisdiction.

Purpose (Inherent Limitation of Taxation)

Taxes can only be levied for public purposes.

Territorial Jurisdiction (Inherent Limitation of Taxation)

The government may levy taxes only on persons and properties within its jurisdiction.

Non-delegation of Legislative Power to Tax

The power to create tax laws rests with the Congress and this power cannot be delegated, except as expressly allowed by law.

International Comity (Inherent Limitation of Taxation)

The government may not tax the property belonging to a foreign government.

Due Process and Equal Protection of the Laws (Constitutional Limitation of Taxation)

Protects the taxpayer from the promulgation of tax laws that are unconstitutional, unjust, or unreasonable.

Rule of Uniformity and Equity in Taxation (Constitutional Limitation of Taxation)

Protects the taxpayer from the promulgation of tax laws that are unconstitutional, unjust, or unreasonable.

Aspects of Taxation

Levy (tax laws are enacted) and Collection (tax laws are implemented and administered).

Fiscal Adequacy (Principle of a Sound Tax System)

Revenues should be sufficient to defray expenditures.

Theoretical Justice (Principle of a Sound Tax System)

Taxes are proportionate to the taxpayer’s ability to pay.

Administrative Feasibility (Principle of a Sound Tax System)

Tax laws can be implemented efficiently and effectively, avoiding unnecessary inconvenience and confusion on the part of the taxpayers.

Taxes

Mandatory contributions imposed upon persons and property for the support of the government.

Personal, Capitation, or Poll Tax

A fixed amount charged to all persons residing within a specified territory irrespective of their occupation or property (e.g., community tax or cedula).

Property Tax

Tax imposed on properties based on their value or some other method of apportionment (e.g., real estate tax).

Excise Tax

Tax imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation (e.g., donor’s tax).

Direct Tax

Tax which the taxpayer must pay and cannot shift to another (e.g., income tax).

Indirect Tax

Tax which the taxpayer can shift to another (e.g., VAT).

Ad Valorem Tax

Tax based on the value of the property (e.g., real estate tax).

Specific Tax

Tax based on weight, volume, or other physical unit of measurement (e.g., excise tax on wines).

National Tax

Tax levied by the national government (e.g., income tax, VAT).

Local Tax

Tax levied by the local government (e.g., community tax, real estate tax, etc.).

Proportional Tax

Tax based on a fixed rate (e.g., VAT).

Progressive Tax

Tax based on an increasing rate as the taxable amount increases (e.g., income tax).

Income Tax

Tax on a person’s income derived from employment, business, trade, practice of profession, or from property, after excluding the deductions allowed under the law.

Business Tax

Tax on the production, sale, or consumption of goods and services, leasing of property, or other business activities.

Resident Citizen

A Filipino citizen residing permanently in the Philippines.

Non-Resident Citizen

A Filipino citizen residing permanently abroad or works abroad most of the time (i.e., at least 183 days during the taxable year).

Resident Alien

A foreigner residing in the Philippines.

Non-Resident Alien

A foreigner not residing in the Philippines.

Gross Income

Refers to all income derived from whatever source, including compensation income, business income, and passive income.

Compensation Income

Income that is typically derived from employment.

Salaries

Compensation that is normally quoted on a per month basis and is paid periodically for the performance of a regular work.

Wages

Compensation that is quoted on a per hour basis and is paid based on the number of hours worked.

Fixed or Variable Allowances

e.g., representation allowance, transportation allowance, cost of living allowance (COLA), and the like.

13th Month Pay

Additional compensation mandated by law to be given to rank-and-file employees (i.e., non-managers). Thirteenth month pay is equal to an employee’s one (1) month basic salary. However, if the employee has not worked for the entire year, this amount is prorated. NOT taxable up to P90,000 under TRAIN Law.

Christmas Bonus

Additional compensation provided to the employee at the discretion of the employer. Most often than not, the timing of payment of 13th month pay and Christmas bonus coincide.

De Minimis Benefits

Other forms of benefit that are of relatively small value and are given to employees (rank-and-file and managerial or supervisory) to promote health, goodwill, contentment, and work efficiency. NOT taxable up to the prescribed limits.

Overtime Pay

Compensation for worked performed beyond regular working hours.

Hazard Pay

Additional compensation for employees performing dangerous work.

Commission

e.g., percentage of sales made by a salesman

Fees

Additional compensation received by an employee for service rendered (e.g., director’s fees).

Honoraria

Payment for a service which normally has no set price (e.g., honorarium given to a guest speaker).

Vacation and Sick Leaves

Paid vacation and sick leaves used by the employee are TAXABLE. Unused vacation and/or sick leaves that are MONETIZED (i.e., converted into cash) are considered de minimis benefits and subject to the limits.

Retirement Pay

Compensation paid to a retiring employee. Retirement pay is generally TAXABLE, except in certain instances (SSS, GSIS or USVA, private employer with BIR approved plan where employee is at least 50 years old and has 10 years of service, availed for the first time).

Separation Pay

Compensation paid in exchange for the termination of an employee’s employment other than from retirement. TAXABLE if availed voluntarily and NOT taxable if availed involuntarily.

Compensation Paid In Kind

Compensation is normally in the form of cash. However, there may be instances where the employee receives non-cash items as compensation for services rendered. Generally, non-cash items are taxed based on their fair market value.

Annual Income Tax Return (ITR)— BIR Form No. 1700

The annual income tax return applicable to individual taxpayers who are earning purely compensation income, including non-business or non-profession income.