LESSON 6

TAXATION

Learning Outcomes:
At the end of the lesson, the students should be able to:
 Articulate what tax, taxation and taxpayers are;
 Identify kinds of taxes imposed by the government;
 Identify the classification of taxpayers;
 Analyze the benefits derived from paying taxes; and
 Critique the new tax reform law. (TRAIN)

NATURE OF TAXATION AND TAX

 Taxation is a means for a state, through laws and legislations to obtain income to finance
public expenditures.
 Through taxation, the government is able to provide public education, health
ETHICSservices
(HUM102)and
1 infrastructures that benefit the people. FINALS
 Taxation is an obligation (not an option), so that it requires taxpayers to contribute a
certain proportion of their income or wealth. In this case, taxation is a burden.

Onus is a Latin term for “burden” or “obligation”. So, tax is a fee imposed upon individual,
properties, transactions and business entities to support the necessary expense and services of
government. It is also defined as “an enforced proportional contribution from person and
property levied by the state by virtue of its sovereignty for the support of government and for all
public needs.”
 Tax is not the same as taxation. A tax is a fee whereas taxation is a process. Taxation is a
mandated subject by the Constitution. It is integrated in all social science courses. All enrolled
college students; whether in public or private schools, are required/mandated to study taxation as
an integrated subject in humanities and social sciences.

The Primary Characteristics of tax are:

1. It is an obligatory or a forced contribution to the government.
2. It usually monetary in form
3. It is proportionate in character
4. It is imposed on person and properties
5. It is levied by the state that has jurisdiction over the person or property
6. It is levied by the legislative body of the state
7. It is levied for public purpose

Classification of Taxes

Taxes are classified:

1. According to object
a. Personal tax- tax on like community tax (residence tax)
ETHICS (HUM102)
b. Property tax- tax on properties
2 FINALS
 Example: the real property tax
c. Consumption tax- tax on goods and services that people consume from the
market.
 Example: value-added tax (VAT) and excise tax

2. According to who bears the burden

a. Direct tax
 Example: Income tax, Community tax, Estate tax
b. Indirect tax- paid directly, such as good and services
 Example: VAT, excise tax, and customs duties

3. According to the determination of amount of tax to be paid

a. Specific tax- imposed on goods based on quantity or standards of measurement
b. Ad valorem tax- imposed on goods based on their value or price
 Example: Real estate tax, personal property tax

4. According to Purpose
a. National tax- imposed by the national government such as national revenue tax,
Customs duties and those imposed by special laws.
 b. Local tax- imposed by the municipality, city or barangay as tax, such as
professional tax and community tax.
5. According to tax system
a. Proportional tax- fixed percentage of the taxable object based on market price
 Example: VAT
b. Progressive tax- tax rate increases as the price of the goods or tax increases
 Example: income tax, estate tax, donor’s tax

Kinds of National Taxes

1. Income tax
2. Estate tax
3. Donor’s tax
4. Value-added tax
5. Percentage taxes- hotels, carriers, franchises, finance and insurance companies,
amusements and winnings
6. Excise tax on certain goods
7. Documentary stamp tax
8. Tariffs and custom duties
9. Travel tax ETHICS (HUM102)
3 10. Private motor vehicle tax FINALS
11. Energy tax

 Income taxation refers to the wealth that flow in to the taxpayer other than as mere
return on capital.

 Taxable income refers to the gross income less deduction of personal and additional
exemptions.
 Passive income are those income from interest on banks, deposits, dividends, prizes and
winnings.

All kinds of income are taxable, even those derived from gambling:
Gross income are those-
1. Compensation for services- fees, salaries, wages, commissions, etc.
2. Conduct of trade or business or the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
 7. Dividends
8. Prizes and winnings
9. Pensions
10. Partner’s share from the net income of the general partnerships

Net income is a gross income less allowance deductions

Excluded from gross income are:
1. Life insurance
2. Gifts, requests
3. Compensation for injuries, pensions, gratuities such as tips, amount received by the
insured as returns of premium

Purpose of Income tax

Why are income of individual’s tax?
1. To provide revenues
2. To offset sales and consumption taxes
3. To mitigate the evils arising from the inequalities in then distribution ofETHICS
income(HUM102)
and
4 wealth which are considered deterrents to social progress FINALS

Classification of Taxpayers
Taxpayers are classified into:
1. Individuals
a. Citizens- resident and non-resident
b. Aliens- resident and non-resident (those engaged in trade or business in the
Philippines ad those who are not engaged in trade and business.

2. Corporations
a. Domestic or those incorporated under Philippine laws
b. Foreign or those incorporated under the Philippine laws

3. General Partnership
a. General professional partnership- partners are liable for income tax based on their
perspective shares in the profits of the partnership
b. General co-partnership- the purpose is to engage in business

The taxable income declared by the partnership is subject to corporate income tax.
 Who are required to file for income tax return
1. Every resident citizen
2. Every non-resident citizen and resident aliens
3. Every non-resident alien engaged in business

PRINCIPLES OF TAXATION

The 18th century economist and philosopher Adam Smith attempted to systematized the
rules that should govern a rational system of taxation. In the Wealth of Nations (Book V,
Chapter 2) he set down four general canons;

I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is in proportion to the
revenue which they respectively enjoy under the protection of the state…

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The
time of payment, the manner of payment, the “quantity to be paid, ought all to be clear
ETHICS (HUM102)
and plain to the contributor and to every other person…
5 FINALS

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be
convenient for the contributor to pay it…

IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the
state…

The Burden of Taxation

A. Taxation is the primary method by which government finance “themselves”.

Essentially all taxes transfer resources from the private to public sector, where government
decision makers (both elected and unelected) will choose how these resources will be allocated
between services and redistribution. All taxes shift resources to the government by threatening
current resource holders (property owners, labor, international trading firms, etc.) with
punishments of various sorts if they do not “give” their resources to the government’s tax
collectors.
a. In this sense, all taxes are coercive at the point of collection.
 b. This contrasts with government bonds and ordinary fees for services, because such
transactions are voluntary at the point of collection.

B. The burden of taxation can be measured in two ways:

1. It can be calculated as cash payment

- In much the same way that payments for ordinary goods are
calculated.
a. This is the most widely used measure by macro-economists, accountants
and newspaper reporters.
b. It is also be used in many international comparisons of income tax ad
VAT tax rates.
c. However, it turns out that the burden of a tax is not always mainly borne
by the person who “writes the check” to pay it.

2. It can be calculated by determining the losses imposed on taxpayers as a

consequence of the tax
- That is to say the opportunity cost of the tax.
a. The burden of the excise or income tax can be measured ETHICS
as the reduction
(HUM102)
6 of consumer surplus and profits induced by the tax. FINALS
b. This measure of burden is the most widely used among microeconomists
and public economists.
c. This differs a bit from the money paid to the government, because the
existence of a tax often reduces the extent of market transactions.

The advantage of calculating the total burden of a tax as the change in surplus generated
by the tax rather than tax payments is that tax payments are often made by persons or
firms who are little affected by a given tax.
 BENEFITS OF PAYING THE RIGHT TAXES
(Source: Maria Lourdes M. Yanuaria, CPA)

Paying the right amount of tax has been one of the serious topics concerning most income
earners in the Philippines. Many if not all, wants to as much as possible reduce the amount of tax
they will have to pay to the BIR. As such, they engage to all kinds of ways to reduce their tax
obligations, such as tax amnesties, tax avoidance and even tax evasion.

1. No/ Minimal BIR Audit

Oftentimes, the reason you or your business receives letter of notice from
the BIR, is caused by the following:
 Failure to file and pay tax return, or
 The BIR is questioning the amount of tax paid or both
By filing and paying the right amount of tax, it will minimize the instances that
BIR will audit your accounting records.

ETHICS (HUM102)
7 2. Peace of Mind FINALS

Being audited by BIR may cause high amount of stress especially to

taxpayers who intentionally or illegally decreases their tax payments. If you pay
the right amount of tax, you can eliminate stresses and anxieties. You will have
more peace of mind and you can focus in growing your business or doing your
work.

3. Truthful income tax return

Some taxpayers, who do not file the correct amount of tax encounters
problems when they need to generate an Income Tax Return for purpose of VISA
and Loan Applications. As such, they resort to preparing inaccurate income tax
returns in order to produce the said requirements. The risk of producing
inaccurate tax return is high because if the agency verifies it to the BIR, it will
cause big trouble.
However, if you are diligently filing and paying the right amount of tax,
its easy to produce accurate income tax return without any risk.
 4. Good Credit Rating

Paying the right amount of tax provides good credit rating to financial
institutions and agencies. The higher the income and tax you declare, the higher
the credit rating. You can use your good credit rating when getting a loan for
additional funds for expansion of your business or for future purposes.

5. Good Investor Value

In order for your business to grow, at some point you need people or
institutions with money that are willing to invest in your company. These
investors will look into your financial and tax records to support their investment
decisions.

Maintaining a truthful and accurate accounting and tax records will boost
confidence of investors.

6. Social Responsibility and Contribution to the Country

ETHICS (HUM102)
8 FINALS
Paying the right tax is a social responsibility to the country. The taxes we
pay will go to the government funds that will be used in developing and
improving the government facilities and life of Filipinos, inside and outside the
country.
 THE TAX REFORM LAW OF 2018 OR THE TAX REFORM FOR ACCELERATION
AND INCLUSION (TRAIN)

The Tax Reform for Acceleration and Inclusion (TRAIN) is the first package
comprehensive tax reform program (CTRP) envisioned by President Duterte’s administration,
which seeks to correct a number of deficiencies in the tax system to make it simpler, fairer, and
more efficient.

What is TRAIN?
The goal of the first package of the Comprehensive Tax Reform Program (CTRP) or
TRAIN is to create more just, simple and more effective system of tax collection, as per the
Constitution, where the rich will have bigger contribution and the poor will benefit more from
government programs and services.
 Lowering the personal income tax (pit)
 Simplifying the estate and donor’s tax
 Expanding the value-added tax (vat) base
 Increasing the excise tax of petroleum products
 Increasing the excise tax of automobiles ETHICS (HUM102)
9  Introducing the increase the tax of sugar-sweetened beverages. FINALS

January 1, 2018- state of the implementation of train

THE VISION OF TRAIN

The tax reform aims to achieve the following:
By 2020
1. Poverty rate reduced from 26 to 17% ( for some 10 million Filipinos uplifted from
poverty)
2. Law abiding country
3. Peace within the country and with our neighbors
4. Achieve high middle- income status, where per capita gross national income
(GNI) increases from USD 3,000 to USD 4,100 by 2022 in today’s money
 By 2040
1. Extreme poverty eradicated
2. Inclusive economic and political institutions where everyone has equal opportunities
3. Achieve high income status, where per capita gross national income (GNI) increases
from USD 3,000 to USD 12,000 by 2040 in today’s money

Achieving the VISION

For us to be able to achieve the vision of TRAIN, we need to lead the investment growth
of 7 to 10 percent. Over the long-term all these investments require additional funds or around 1
trillion pesos per year in 2016 prices, on top of the current 1.7 trillion pesos. Over the medium
term, the government will need to raise some 366 billion per year between 2016 and 2022 (or
2.2 trillion pesos in total).

Ways to Raise Investments

1. Sustainable borrowings
2. Budget Reforms
3. Tax and Custom Administration Reforms
ETHICS (HUM102)
4. Tax Policy Reform
10 FINALS

Complementary Economic Reforms

1. Secure Property Rights
2. Enhance Competition
3. Improve Food Security
4. Simplify Regulations