INCOME TAXATION

• 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 - the primary purpose of taxation is to raise revenue that will be used to defray government expenses.
  • Non-revenue purposes - taxation may also be used to achieve certain social and economic objectives (such as the ff: regulate inflation, minimize adverse effects of certain activities, equitable distribution of wealth)
• Nature of Taxation


  • Inherent power- taxation is one of the three inherent powers of a sovereign state (eminent domain, police power, and taxation)
  • Legislative - tax laws must first be enacted before taxes can be imposed
  • Subject to constitutional and inherent limitations - the power of taxation is considered plenary and subject only to constitutional and inherent limitations. This means that the the government can tax anything or anyone within its jurisdiction
• Inherent limitations on the power of taxation


  • Purpose- Taxes can only be levied for public purposes
  • Territorial jurisdiction- The government may levy taxes only on person and properties within its jurisdiction
  • non-delegation of legislative power to tax- The power to create tax laws rests with the Congress and cannot be delegated, except expressly allowed by law
  • Tax exemption of government entities
  • International Comity- 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
  • A law granting any tax exemption needs the concurrence of majority of the members of the congress
  • Supreme Court's power to make final judgment on tax cases
  • Non-imprisonment for non-payment of poll tax
  • Exemption of religious, charitable, or educational entities, non-profit cemeteries and churches 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, specifying the object and amount of taxation are enacted
  • Collection - tax laws are implemented and administered
  • BIR or Bureau of Internal Revenue - tasked in collecting national taxes and administering the provisions of national tax laws
  • Local Government - tasked in collecting local taxes and administering local tax laws
• 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, avoiding unnecessary inconvenience and confusion on the part of tax payers
• 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 - a fixed amount charged to all persons residing within a specified territory irrespective of their occupation or property (community tax or cedula)
  • Property tax - tax imposed properties based on their value or some other method of apportionment (real estate tax)
  • Excise tax - tax imposed upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation (donor's tax)
• Classification of taxes (as to who bears the burden)

  • Direct tax - tax which the taxpayer must pay and cannot shift to another (income tax)
  • Indirect tax - tax which the taxpayer can shift to another (VAT)
• Classification of taxes (as to determination of the amount)

  • Ad Valorem - tax based on the value of the property (real estate tax)
  • Specific - tax based on weight, volume, and physical unit of measurement (excise tax on wines)
• Classification of taxes (as to scope)

  • National tax - tax levied by the national government (income tax and VAT)
  • Local tax - tax levied by the local government (community tax and real estate tax)
• Classification of taxes (as to rate or graduation)

  • Proportional - tax based on fixed rate (VAT)
  • Progressive - tax based on increasing rate as the taxable amount increases (income tax)
  • Regressive - tax based on decreasing rate as the taxable amount increases
• 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

  tax on income

  a person who has earned income is liable to pay income tax
• Business Tax


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

  tax on business

  a person who engages in business is liable to pay business tax whether or not he/she earned income therefrom
• Classification of Individual Income Taxpayers

  • Resident citizen - a filipino citizen residing in the PH
  • Non-resident citizen- a filipino residing permanently abroad or works abroad most of the time ( at least 183 days during taxable year)
  • Resident alien - a foreigner residing in PH
  • Non-resident alien - a foreigner not residing in PH
• Resident citizens


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


  are aliens that taxed only on income they derive within the Philippines
• Gross Income


  All income derived from whatever source, including (not limited to): compensation income, business income including income from practice of profession, and passive income such as interest income and prizes and winnings
• Compensation Income


  Income that is typically derived from employment, such as salaries and wages

  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
• The personal exemption (50,000), additional exemption per dependent child (25,000), and premium for health and hospitalization insurance per year (2,400) had been removed under the TRAIN Law (tax reform acceleration and inclusions law)

  the income tax is not imposed anymore on taxable income but on compensation income
• Income Tax Table (2018-2022)


  • P250,000 and below - None
  • More than P250,000 to P400,000 - 20% of excess over P250,000
  • More than P400,000 to P800,000 - P30,000 + 25% of excess over P400,000
  • More than P800,000 to P2,000,000 - P130,000 + 30% of excess over P800,000
  • More than P2,000,000 to P8,000,000 - P490,000 + 32% of excess over P2,000,000
  • More than P8,000,000 - P2.41 million + 35% of excess over P8,000,000
• Income Tax Table (2023 onwards)


  • P250,000 and below - None
  • More than P250,000 to P400,000 - 15% of excess over P250,000
  • More than P400,000 to P800,000 - P22,500 + 20% of excess over P400,000
  • More than P800,000 to P2,000,000 - P102,500 + 25% of excess over P800,000
  • More than P2,000,000 to P8,000,000 - P402,500 + 30% of excess over P2,000,000
  • More than P8,000,000 - P2,202,500 + 35% of excess over P8,000,000
• Fixed or Variable Allowances

  
  

  • non-government employees - the allowances are typically taxable except: allowance represents reimbursement for necessary expenses incurred in pursuit of trade, business, profession and allowance subject to a liquidation
  • government employees- RATA and PERA (personal relief economic allowance)are considered reimbursements for expenses incurred while performing government duties and therefore exempted from taxation. However, ACA (additional compensation allowance) received by government employee is included in other benefits and is taxable but subject to a limit
• 13th month pay


  Additional compensation mandated by law to be given to rank-and-file employees (i.e., non-managers)

  It is equal to an employee's one (1) month basic salary

  if the employee has not worked for the entire year, this amount is prorated

  Not taxable up to 90,000 under TRAIN Law and any excess over this is taxable
• Christmas Bonus


  Additional compensation provided to the employee at the discretion of the employer

  the timing of 13th month pay and this coincide
• Christmas Bonus

  • It is split into the ff:
  • Non-performance based bonus (known as "Other benefits")
  • Performance based bonus
• The non-performance based ("Other Benefits") portion of the Christmas Bonus is COMBINED with the 13th month pay and subjected to the total limit of P90,000, any excess over this amount is taxable
• The performance-based

  if received under collective bargaining agreement (CBA) and productivity incentive schemes, is NOT taxable up to a limit of P10,000
• De minimis Benefits


  • Monetized unused vacation leave credits of private employees not exceeding 10 days during a year
  • Monetized value of vacation and sick leave credits paid to government officials and employees
  • Medical cash allowance to dependents of employees not exceeding 1,500 per semester or 250.00 per month
  • Rice subsidy of 2, 000.00 or one sack of 50 kg. rice per month
  • Uniform and clothing allowance not exceeding 6, 000 per year
  • Actual medical assistance e.g. medical allowance to cover medical and healthcare needs, annual medial/executive check-up, maternity assistance, and routine consultations, not exceeding 10, 000 per year
  • Laundry allowance not exceeding 300 per month
  • Employees achievement awards, e.g. for a length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding 10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees
  • Gifts are given during Christmas and major anniversary celebrations not exceeding 5, 000 per employee per year
  • Daily meal allowance for overtime work and nigh/graveyard shift not exceeding 25% of the basic minimum wage on per region basis
  • Benefits received by an employee by a collective bargaining annual monetary value received from both CBA and productivity incentive schemes combined do not exceed 10, 000 per employee per taxable year
• De minimis benefits are NOT taxable up to the prescribed limits stated above
• Any excess de minimis benefits is considered "Other benefits" and is included in the "13th month pay and Other Benefits" and is SUBJECT to the P90,000 limit, any excess is taxable
• Overtime pay


  Compensation for worked performed beyond regular working hours
• Meal allowance given to the employee for overtime work is NOT taxable if it does not exceed 25% of the basic minimum wage
• Reimbursement for transportation cost incurred by the employee in relation to overtime work is NOT taxable
• Hazard pay


  Additional compensation for employees performing dangerous work
• Commission


  Percentage of sales made by a salesman
• Fees


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