Professional Documents
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Taxation-is the process or means by which the sovereign, through its lawmaking body, raises income to defray
the necessary expenses of the government.
Purpose of taxation:
To provide funds and property with which to promote general welfare and protection of its citizens
and to enable to finance its multifarious activities.
To strengthen anemic enterprises by giving tax exemptions
To protect local industries against foreign competition through the imposition of high custom duties on
imported goods.
To reduce inequalities in wealth and income by imposing progressively higher tax rates and
To prevent inflation by increasing taxes or ward off depression by decreasing them.
Fiscal adequacy-The sources of revenue should be sufficient to meet the demands of public
expenditures.
Equality or theoretical justice (ability to pay principle)-the tax burden should be proportionate to the
taxpayer ability to pay.
Administrative Feasibility-The tax laws should be capable of convenient, just and effective
administration.
3.) Subject to constitutional and inherent limitations- taxation is not an absolute power that can be
exercised by the legislature anyway it pleases.
Aspects of Taxation:
1.) Levy- deals with the provision of law which determines the persons or property to be taxed, the sum or
sums of money to be raised and the rate thereof and the time and manner of levying, receiving and
collecting taxes.
2.) Collection-constituted of the provisions of law which prescribe the manner of enforcing the obligation
on the part of those taxed to pay demand thus created.
B. Taxes- the enforced proportional contributions from persons and property levied by the lawmaking body
on the state by virtue of its sovereignty for the support of the government and all public needs.
Essential elements of a tax
Enforced contribution
Generally payable in money
Proportionate in character
Levied on person, property or the exercise of a right or privilege.
Levied by the state which jurisdiction over the subject or object of taxation
Levied by the lawmaking body of the state.
Levied for public purposes
Classification of taxes:
As to subject matter or object:
a. Personal, poll or capitation-tax of a fixed amount imposed of individuals whether citizen of not
residing within a specified territory without regard to their property or the occupation in which they
may be engaged. (community tax)
b. Property Tax- tax imposed on property whether real or personal (real property tax)
c. Excise (privileged tax)-a tax imposed upon performance of an act the enjoyment of a privileged or the
engaging in an occupation.
As to who bears the burden:
a. Direct-A tax that is demanded from the person who also shoulders the burden of the tax.(Income,
donors tax)
b. Indirect-A tax demanded from one person in expectation and intention that he shall indemnity himself
at the expense of other. (Value added tax, percentage tax)
As to the amount:
a. Specific- tax of fixed amount imposed y the head or number, or by some standard of weight or
measurement it requires no assessment other than a listing of classification on the subjects to be
taxed. (excise tax on cigars)
b. Ad Valorem- tax of fixed proportion of the value of the property with respect to which tax is assessed.
(Real Estate Tax)
As to purpose:
a. General, fiscal or revenue- tax that is imposed solely to raise revenue for the government
expenditures. (Income Tax)
b. Special or regulatory- Tax imposed for special purpose ( Sugar adjustment taxes)
As to authority imposing the same
a. National- Tax imposed by the national government.(custom duties, internal revenue tax)
b. Municipal or local tax- tax imposed by municipal corporations. (occupation tax)
As to graduation or rate
a. Proportional-tax based on fixed percentage of the amount of the property, receipts or other basis to
be tax.
b. Progressive-Tax rate of which increases as the tax base or bracket increases.
c. Regressive- tax rate of which decreases as the tax base increases.
Three inherent power of the government:
1. Eminent Domain
2. Police power
3. Power of taxation
Permit or license fee- is a charge imposed under the police power for purpose of regulation
Toll-is a sum of money for the use of something.
Special Assessment- is enforced proportional contribution from owners of lands for special benefits resulting
from the public improvements.
Custom duties are tax levied upon commodities, imported into or exported across national boundaries.
Double taxation-Taxing twice for the same purpose, by the same taxing authority, in the same jurisdiction, in
the same period.
Estate tax-property or obligations that are not extinguish by death.
Revenue- refers to all funds or income derived by the government, whether from tax or any other source.
Situs of Taxation-means place of taxation.
Situs of taxation shall be followed:
1. Business, occupation or transaction- place where the business is conducted, place where occupation is
practiced, place where transaction took place.
2. Real and tangible personal property- Location of the property.
3. Intangible personal property-domicile of the owner unless the property has acquired a business situs
in another jurisdiction.
Constitution
Statutory enactments-tax law passed by congress.
Administrative rulings and regulations-(BIR RULINGS)
Judicial Decisions- this refers to decisions of the court of tax appeals and the supreme court applying or
interpreting tax laws.
Operations Group
Information system group
Research management group
Legal and enforcement group
Despite such prohibition, however, the commissioner is authorized to inquire bank deposits in the following
instances:
To determine gross estate of the decedent
When the tax payer applies compromise of his tax liability by reason of financial incapacity.
Compromise-is a contract whereby the parties by reciprocal concessions avoid litigation or put an end to one
already commenced.
Grounds for compromise
Reasonable doubt as to the validity of the claim against the taxpayer exists.
The financial position of the taxpayer demonstrates clear inability to pay assessed tax.
A national tax
A excise tax
A direct tax
A general tax
Compensation paid in Promissory Note-Promissory note received in payment of services constitutes income
to the extent of their FMV at the time of receipt.
Tips and Gratuities-paid directly to the employee by a customer of the employer which is not accounted for by
the employee to the employer are considered taxable income of the employee but not subject to withholding
tax.
Transportation, representation and other allowances-In general it is taxable as compensation income but
expenses which are reasonably expected to be incurred by the employee in the performance of his duties are
not compensation. The excess advances made over actual expenses shall constitute taxable income if such is
not returned to the employer.
Vacation and sick leave allowances-the monetized value of unutilized vacation leave credits of ten days or
less which are paid to the employee during the year are not subject to income tax. Thus, the salaries of an
employee on vacation or on sick leave which are paid notwithstanding his absence from work constitute
compensation.
Forgiveness of indebtedness-if the creditor condones the indebtedness of the debtor the following rules shall
apply:
On account of the debtors services to the creditor, the same is taxable income to the debtor.
If no service was rendered but creditors simply condone the debt, it is taxable gift not income.
If the creditor is a corporation and the debtor is a stockholder the forgiveness of indebtedness has
effect of payment of dividend.
If the creditor is the stockholder and the debtor is the corporation the forgiveness of indebtedness
shall be considered as an additional investment.
Remuneratory Donations- are those remunerate past services which do not constitute demandable debts
(source of gratitude, utang na loob) is a taxable income.
Recovery of bad debts previously deducted- bad debts ascertained to be worthless and charged off
during the year are allowed deductions in gross income. Tax Benefit Rule in case of recovery of bad
debts previously allowed as deduction in the preceding year shall be included as part of the gross
income in the year of recovery to the extent of the income tax benefit of the said deduction.
Refund of tax- is taxable if tax was previously deducted as an expense in computing the tax during the
previous year.
Taxes that is not deductible:
Donors tax
Income tax
Special Assessments
Estate tax
Refund on Indirect Tax-the proper party to question, or seek a refund of an indirect tax is the statutory
taxpayer---the person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another.
Receipt of Dividends- the term dividends means any distribution made by a corporation to its shareholders
out of its earnings or profits and payable to its shareholders, whether in money or in property.
Common Forms of Dividends:
Cash Dividends- form of dividends which paid in cash to shareholders. Income is measured on the
amount of cash received.
Stock Dividends- It is a distribution by a corporation to its shareholders of the corporations own
stock.(generally not taxable)
- These shares are later redeemed for a consideration by a corporation
- The recipient is other than stockholders
- A change in the stockholders equity results by virtue of the stock dividends issuance.
*A stock dividend that is taxable is measured by FMV of the stocks received.
Property Dividend- it is a dividend paid in shares of common stock of another corporation or other
property of the corporation.(FMV)
*A distribution of treasury stock is taxable as a distribution of property dividend.
Intercorporate Dividend
Dividends received by a domestic corporation from another domestic corporation shall not be subject
to tax.
Dividends received by a resident foreign corporation from a domestic corporation shall not be subject
to tax.
A domestic corporation to non-resident foreign corporation shall be subject to 15% final withholding
tax.
Tax informers reward:
An amount equivalent to ten percent, but not exceeding 1,000,000.
The giving of reward does not apply to an external revenue official or employee or other public official
or employee or his relative within sixth degree of consanguinity.
Leasehold Improvements:
A lease contract is a consensual, bilateral, onerous and commutative contract by which one person binds
himself to grants temporarily the use of the thing or rendering some service to another who undertakes to pay
some rent, compensation or price.
When lessee makes useful improvements to the leased premises following rules shall apply if the said
improvements are relinquished to the lessor without demanding reimbursement of its value:
1. The consideration for the use of property paid by the lessee is taxable income to the lessor.
2. Taxes paid by the lessee in behalf of the lessor for a business property are additional rent and
constitute income taxable to the lessor.
3. When a lessee makes improvements on leased premises and said improvements will belong to the
lessor upon the termination of the lease the lessor may at his option report income as follows.
Outright Method-report as income the fair market value of the improvements in the year of
completion.
Spread out Method-spread over the remaining term of the lease the book value of such
improvements at the termination of the lease computed as follows:
Cost of leased improvements
Less: accumulated Depreciation
Book value, end of the lease
Divide by the remaining term of the lease
Annual income
4. Deduction of lessee-the lessee may claim depreciation of the improvements over the remaining term
of the lease or the life of improvements whichever is shorter.
5. Premature termination of lease- Income shall be reported by the lessor as follows.