EXAM FABM

• Taxation


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


  • Revenue purpose - to raise revenue that will be used to defray government expenses
  • Non-revenue purposes - to achieve certain social and economic objectives (regulate inflation, minimize adverse effects of certain activities, equitable distribution of wealth)
• Nature of Taxation


  • Inherent power of a sovereign state
  • Legislative - tax laws must first be enacted before taxes can be imposed
  • Subject to constitutional and inherent limitations - the government can tax anything or anyone within its jurisdiction
• Inherent limitations on the power of taxation

  • Taxes can only be levied for public purposes
  • The government may levy taxes only on person and properties within its jurisdiction
  • The power to create tax laws rests with the Congress and cannot be delegated
  • Tax exemption of government entities
  • The government may not tax the property belonging to a foreign government
• Constitutional limitations on the power of taxation

  • Due process and equal protection of the laws
  • Rule of uniformity and equity in taxation
  • President's power to veto tax bills
  • Concurrence of majority of Congress for tax exemption laws
  • Supreme Court's power to make final judgment on tax cases
  • Non-imprisonment for non-payment of poll tax
  • Exemption of religious, charitable, educational, non-profit entities from property taxation
  • Exemption of revenues and assets of non-stock, non-profit educational institutions from taxation
• Theory and basis of Taxation

  • Reciprocal duties of protection and support - the government protects the welfare of its people, in return, the people support the government
  • Benefits received principle - taxes are used for the benefit of the public
• Aspects of Taxation


  • Levy - tax laws are enacted
  • Collection - tax laws are implemented and administered
• Principles of a sound tax system

  • Fiscal Adequacy - revenues should be sufficient to defray expenditures
  • Theoretical Justice - taxes are proportionate to the taxpayer's ability to pay
  • Administrative Feasibility - tax laws can be implemented efficiently and effectively
• Taxes


  Mandatory contributions imposed upon persons and property for the support of the government
• Characteristics of Tax


  • It is mandatory
  • It is levied by the lawmaking body
  • It is imposed primarily to raise revenues for the government
  • It is generally payable in money
  • It is proportionate in character
  • It is levied on persons and property over which the taxing authority has jurisdiction
  • It is levied for public purposes
• Classification of taxes (as to subject matter)

  • Personal, capitation or poll tax
  • Property tax
  • Excise tax
• Classification of taxes (as to who bears the burden)

  • Direct tax
  • Indirect tax
• Classification of taxes (as to determination of the amount)

  • Ad Valorem
  • Specific
• Classification of taxes (as to scope)

  • National tax
  • Local tax
• Classification of taxes (as to rate or graduation)

  • Proportional
  • Progressive
  • Regressive
• 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
• Classification of Individual Income Taxpayers

  • Resident citizen
  • Non-resident citizen
  • Resident alien
  • Non-resident alien
• Resident citizens


  Taxed on ALL income they derive from sources within and outside the Philippines
• Nonresident citizens and aliens

  Taxed only on income they derive within the Philippines
• Gross Income


  All income derived from whatever source, including compensation income, business income, and passive income
• Compensation Income


  Income that is typically derived from employment, such as salaries and wages
• The personal exemption, additional exemption per dependent child, and premium for health and hospitalization insurance had been removed under the TRAIN Law
• Financial Statement Analysis


  A process of evaluating and interpreting an entity's financial statements to assess its health for the purpose of making better economic decisions
• Other Forms of Compensation

  • Fixed or Variable Allowances (representation, transportation, COLA, etc.)
  • Rules for taxation of allowances for government and non-government employees
• Primary objective of Financial Statement Analysis

  To assess the overall performance of the business for a given period of time
• RATA


  Reimbursements for expenses incurred while performing government duties
• PERA


  Reimbursements for expenses incurred while performing government duties
• RATA and PERA are considered reimbursements for expenses incurred while performing government duties and therefore EXEMPT from taxation
• ACA


  Additional compensation allowance received by a government employee
• ACA is included in "Other Benefits" and is TAXABLE but subject to a limit
• Allowances for non-government employees

  Typically TAXABLE, except when: the allowance represents reimbursement for necessary expenses incurred in the pursuit of trade, business, or profession; and the allowance is subject to liquidation
• Allowances and other privileges given to the employee for the benefit of the employer are typically EXEMPT from taxation
• Benefits given to managerial or supervisory employees on account of their position are subject to fringe benefits tax (e.g., house/housing assistance, car, maid, driver and the like)
• 13th month pay


  Additional compensation mandated by law to be given to rank-and-file employees (i.e., non-managers), equal to an employee's one (1) month basic salary
• Aspects that may be analyzed in a financial statement analysis

  • Industry and economic trend
  • Solvency and capital structure
  • Operational efficiency
  • Profitability
• If the employee has not worked for the entire year, the 13th month pay amount is prorated
• Industry and economic trend analysis

  • Analyzes the economic environment where the business operates, as the ability of a business to thrive is affected by various external factors such as economic climate, competition, demand and supply, market rates, government regulations, technological changes, and the like
• 13th month pay is NOT taxable up to P90,000 under TRAIN Law, any excess over this amount is TAXABLE
• Solvency


  The ability of the business to pay its debts and remain as a going concern