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 in defraying government expenses
  • Non-revenue purposes – taxation may also be used to achieve certain social and economic objectives, such as regulating inflation, minimizing the adverse effects of certain activities, and equitable distribution of wealth
• Nature of Taxation

  • Inherent power- taxation is one of the three inherent powers of a sovereign state
  • 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, subject only to constitutional and inherent limitations
• 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 this power cannot be delegated, except as 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 the 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 institution from 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
• 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 the taxpayers
• 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
  • Property tax- tax imposed on properties based on their value or some other method of apportionment
  • Excise tax- tax imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation
• Classification of taxes as to who bears the burden


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


  • Ad Valorem- tax based on the value of the property
  • Specific- tax based on weight, volume, or other physical unit of measurement
• Classification of taxes as to scope


  • National tax- tax levied by the national government
  • Local tax- tax levied by the local government
• Classification of taxes as to rate or graduation


  • Proportional- tax based on a fixed rate
  • Progressive- tax based on an increasing rate as the taxable amount increases
  • Regressive- tax based on a decreasing rate as the taxable amount increases
• Income tax


  A 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


  A 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- a Filipino citizen residing permanently in the Philippines
  • Non-resident citizen- a Filipino citizen residing permanently abroad or works abroad most of the time
  • Resident alien- a foreigner residing in the Philippines
  • Non-resident alien- a foreigner not residing in the Philippines
• Sources of Income for Different Taxpayer Classifications

  • Resident citizen - Taxed on ALL income they derive from sources within and outside the Philippines

  Nonresident citizen - Taxed only on income they derive within the Philippines

  Resident alien - Taxed only on income they derive within the Philippines

  Non-resident alien - 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, including 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. Therefore, income tax is now imposed on Compensation Income rather than Taxable Income.
• Income Tax Rates (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 Rates (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
• Other Forms of Compensation

  • Fixed or Variable Allowances - e.g. representation allowance, transportation allowance, cost of living allowance (COLA)

  Rules for taxation of allowances:

  I. For government employees, RATA and PERA are exempt, but ACA is taxable

  II. For non-government employees, allowances are taxable unless they represent reimbursement for necessary expenses and are subject to liquidation

  III. Allowances and privileges for the benefit of the employer are exempt

  IV. Benefits given to managerial/supervisory employees on account of their position are subject to fringe benefits tax
• RATA

  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
• For non-government employees, the allowances described above are 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)
• 13th 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
• Christmas Bonus


  Additional compensation provided to the employee at the discretion of the employer
• 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
• Examples of 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
• Overtime pay


  Compensation for worked performed beyond regular working hours
• Hazard pay


  Additional compensation for employees performing dangerous work