Taxation 101 basic rules and principles in philippine taxation

It is the inherent power by which the sovereign state imposes financial

burden upon persons and property as a means of raising revenues in order
to defray the necessary expenses of the government. 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. What is Taxation?

1. 4. It is a mode by which government make exactions for revenue in order

to support their existence and carry out their legitimate objectives. 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.

2. 5.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". History of Taxation 3. 6.

Earliest taxes 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

4. 7. History of Taxation in the Philippines The pre-colonial society, being

communitarian, did not have taxes.
5. 8. 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. History of Taxation in the Philippines

6. 9. Manila-Acapulco Galleon Trade was the main source of income for the
colony during its early years. The Galleon trade brought silver from Nueva
Castilla and silk from China by way of Manila . History of Taxation in the
Philippines

7. 10. 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 from the Tagalog word mandala
, which is a round stock of rice stalks to be threshed.

History of Taxation in the Philippines 8. 11. Encomienda are large tracts of

land given to a person as 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. History
of Taxation in the Philippines 9. 12. That in the 19th 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 other
Katipuneros tore their cedulas in August 1896, signaling the start of the
Philippine Revolution . Did you know?

10. 13. The cédula 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. The Development of
the Community Tax

11. 15. Also known as a “residence certificate”, is a legal identity document

in the Philippines. Issued by cities and municipalities to all persons that
have reached the age of majority and upon payment of a community tax, it
is considered as a primary form of identification in the Philippines and is
one of the closest single documents the Philippines has to a national
system of identification, akin to a driver's license and a passport. What is a
“cedula”?

12. 16. 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 fee ; receives
money from a public fund ; transacts official business ; or receives salary
from a person or corporation . Why is “cedula” important?

13. 17. Taxation has four main purposes or effects:

1. Revenue 2. Redistribution 3. Repricing 4. Representation The Four R’s
of Taxation

14. 18. 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.

15. 19. 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 use of carbon-based fuels.

16. 20. Representation As what goes with the slogan "no taxation
without representation" , it implies that: rulers tax citizens, and
citizens demand accountability from their rulers as the other part of this
bargain.

17. 21. The main purpose of taxation is to accumulate funds for the
functioning of the government machineries . No government in the world
can run its administrative 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 the government operation and
without it, the government will be paralyzed . Why Tax?

18. 22. 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). The Philippine Tax System
 19. 23. Tax evasion happens when there is fraud through pretension and
the use of other illegal devices to lessen one’s taxes, there is tax evasion,
under-declaration of income, and non-declaration of income and other
items subject to tax, Under-appraisal of goods subject to tariff , and over-
declaration of deductions What is Tax Evasion?

20. 24. 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 wharfage dues,
and other duties or imposts within the framework of the national
development program of the Government (Article VI, Section 28, Paragraph
2). The Branches of Government vis-à-vis the Tax Law

21. 25. The President shall have the power to veto any particular item or
items in an appropriation , revenue, or tariff bill , but 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 certiorari , 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 22. 26.

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 that 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. The Forms of Taxes Imposed on Persons and Property

23. 27. 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. The Forms of Taxes Imposed on Persons and Property 24.
28. 4. Capital Gains Tax - 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 on the income of the taxpayers from
whatever sources it is derived. Tax on all yearly profits arising form
property, possessions, trades or offices. The Forms of Taxes Imposed on
Persons and Property 25. 29.
D. Excise or License Taxes - Taxes imposed on the privilege, occupation or
business not falling within the classification of 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. The Forms of Taxes Imposed
on Persons and Property

26. 30. Under these lies two other taxes: 1.Documentary Stamp Tax - a 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 - is imposed on any person who, in the course of trade
or business sells, barters, exchanges, leases, goods or properties, renders
services, or engages in similar transactions. The Branches of Government
vis-à-vis the Tax Law 27. 31. Products like Papawash have value-added
taxes, too. 28. 32. Individuals a. Resident Citizen b. Non-resident Citizen c.
Resident Aliens d. Non-resident Aliens 2. Corporations a. Domestic
Corporations b. Foreign Corporations 3. Estate under judicial settlement 4.
Trusts irrevocable both as to the trust property and as to the income. Who
Should Pay Taxes? 29. 33. The Constitution expressly grants tax
exemption on certain entities/institutions such as: 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). Who (or What) are those
exempted in paying taxes? 30. 34. Who (or What) are those exempted in
paying taxes? 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):Local water
districts Cooperatives duly registered under RA 6938, otherwise known as
the Cooperative Code of the Philippines Non-stock and non-profit hospitals
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