Importance of Taxation

Basic Rules and Principles in Philippine Taxation

Sir Arman S. Pascual

11 Feb. 2017
Don’t be anxious, smile.
 What is Taxation?
It is the inherent power by which the
sovereign state imposes financial burden
upon persons and property as a means
of raising revenues in order to defray the
necessary expenses of the government
(Tax Digest by Crescencio Co Untian,
2002).

Taxation is the imposition of financial

charges or other levies, upon a taxpayer
(an individual or legal entity) by a state
such that failure to pay is punishable by
law.
What is Taxation?
It is a mode by which government make exactions
for revenue in order to support their existence and
carry out their legitimate objectives (Tax Law and
Jurisprudence by Justice Vitug, 2000).

It is the most pervasive and the strongest of all the

powers of the government. Taxes are the lifeblood
of the government, without which, it cannot
subsist.
History of Taxation
• The first known system of taxation was in
Ancient Egypt around 3000 BC - 2800 BC in
the first dynasty of the Old Kingdom.

• In Biblical times, tax is already prevalent.

According to Genesis 47:24:
"But when the crop comes in, give a fifth of it to
Pharaoh. The other four-fifths you may keep as
seed for the fields and as food for yourselves and
your households and your children".
History of Taxation

• Earliest taxes in Rome are called as portoria

were customs duties on imports and exports

• Augustus Caesar introduced the inheritance tax

to provide retirement funds for the military.
The tax was five percent on all inheritances
except gifts to children and spouses .

• In England, taxes were first used as emergency

measures.
History of Taxation in the Philippines

The pre-colonial society, being communitarian,

did not have taxes.
History of Taxation in the Philippines
During the Spanish Period, new income-
generating means were introduced by the
government such as the :

• Manila-Acapulco Galleon Trade

• Polo Y Servicio (Forced Labor)
• Bandala
• Encomienda System
• Tribute
History of Taxation in the Philippines

Manila-Acapulco Galleon Trade

was the main source of income
for the colony during its early
years.

The Galleon trade brought silver

from Nueva Castilla and silk from
China by way of Manila.
History of Taxation in the Philippines

Polo Y Servicio is the forced labor for 40 days, of

men ranging from 16 to 60 years of age who were
obligated to give personal services to community
projects. One could be exempted from the polo by
paying a fee called falla (which was worth one and a
half real).

Bandala is one of the taxes collected from the

Filipinos. It comes from the Tagalog word mandala,
which is a round stock of rice stalks to be threshed.
History of Taxation in the Philippines

Encomienda are large tracts of land given to a person

as reward for a meritorious act. The encomenderos
were given full authority to manage the encomienda by
collecting tribute from the inhabitants and govern
people living on it.

Tribute was the residence tax during the Spanish times.

It may be paid in cash or kind, partly, or wholly.

But in 1884, the tribute was replaced by the cedula

personal or personal identity paper, equivalent to the
present community tax certificate.
 Did you know?
That in the 19th century, the
“cedula” served as an identification
card that had to be carried at all
times. A person who could not
present his or her cedula to a
guardia civil could then be detained
for being “indocumentado”.
Andres Bonifacio and other
Katipuneros tore their cedulas in
August 1896, signaling the start of
the Philippine Revolution.
The Development of the Community Tax
The cédula was imposed by the
Americans on January 1, 1940, when
Commonwealth Act No. 465 went into
effect, mandating the imposition of a
base residence tax of fifty centavos and
an additional tax of one peso based on
factors such as income and real estate
holdings.

The payment of this tax would merit the

issue of a residence certificate.
Corporations were also subject to the
residence tax.
A sample cedula in the 1920s.
What is a “cedula”?
Also known as a “residence certificate”, is a
legal identity document in the Philippines.
Issued by cities and municipalities to all
persons that have reached the age of majority
and upon payment of a community tax, it is
considered as a primary form of identification
in the Philippines and is one of the closest
single documents the Philippines has to a
national system of identification, akin to a
driver's license and a passport.
 Why is “cedula” important?
A person is required to present a cedula when
he or she acknowledges a document before a
notary public; takes an oath of office upon
election or appointment to a government
position; receives a license, certificate or
permit from a public authority; pays a tax or
fee; receives money from a public fund;
transacts official business; or receives salary
from a person or corporation.
 The Four R’s of Taxation
Taxation has four main purposes or effects:

1. Revenue
2. Redistribution
3. Repricing
4. Representation
The Four R’s of Taxation

Revenue
The taxes raise money
to spend on armies,
roads, schools and
hospitals, and on more
indirect government
functions like market
regulation or legal
systems.
 The Four R’s of Taxation
Redistribution
This refers to the transferring
wealth from the richer sections
of society to poorer sections.

Repricing
Taxes are levied to address
externalities; for example,
tobacco is taxed to discourage
smoking, and a carbon tax
discourages use of carbon-based
fuels.
What is a “cedula”?
Representation
As what goes with the
slogan "no taxation
without representation"
, it implies that: rulers
tax citizens, and citizens
demand accountability
from their rulers as the
other part of this
bargain.
 Why Tax?
The main purpose of taxation is to accumulate funds for
the functioning of the government machineries. No
government in the world can run its administrative
office without funds and it has no such system
incorporated in itself to generate profit from its
functioning.

The government’s ability to serve the people depends

upon the taxes that are collected. Taxes are
indispensable in the government operation and without
it, the government will be paralyzed.
The Philippine Tax System
Tax law in the Philippines covers national and
local taxes. National taxes refer to national
internal revenue taxes imposed and collected by
the national government through the Bureau of
Internal Revenue (BIR) and local taxes refer to
those imposed and collected by the local
government. The 1987 Philippine Constitution
sets limitations on the exercise of the power to
tax. The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation. (Article VI,
Section 28, Paragraph 1).
 What is Tax Evasion?
Tax evasion happens when
there is fraud through
pretension and the use of other
illegal devices to lessen one’s
taxes, there is tax evasion,
under-declaration of income,
and non-declaration of income
and other items subject to tax,
Under-appraisal of goods
subject to tariff , and over-
declaration of deductions
The Branches of Government vis-à-vis the Tax Law

The Congress may, by law, authorize the

President to fix within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government (Article VI, Section 28, Paragraph 2).
The Branches vis-à-vis the Tax Law
The President shall have the power to veto any
particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the
item or items to which he does not object (Article VI,
Section 27, Paragraph 2).
The Supreme Court has the power to: review, revise,
reverse, modify, or affirm on appeal or certiorari, as the
law or the Rules of Court may provide, final judgments
and orders of lower courts in “all cases involving the
legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto” (Article VIII,
Section 5, Paragraph 2b).
The Forms of Taxes Imposed on Persons and Property

A) Personal, capitation or poll taxes

These are taxes of fixed amount upon
residents or persons of a certain class without
regard to their property or business
B) Property taxes
1. Real Property Tax - an annual tax that may
be imposed by a province or city or a
municipality on real property such as land,
building, machinery and other improvements
affixed or attached to real property.
The Forms of Taxes Imposed on Persons and Property

2. Estate Tax (Inheritance Tax) - a tax on the right

of transmitting property at the time of death
and on the privilege that a person is given in
controlling to a certain extent the disposition
of his property to take effect upon death.
3. Gift or Donor’s Tax - a tax on the privilege of
transmitting one’s property or property rights
to another or others without adequate and
full valuable consideration.
The Forms of Taxes Imposed on Persons and Property
4. Capital Gains Tax - tax imposed on
the sale or exchange of property .
Those imposed are presumed to
have been realized by the seller for
the sale, exchange or other
disposition of real property located
in the Philippines, classified as
capital assets.
C. Income Taxes - Taxes imposed on
the income of the taxpayers from
whatever sources it is derived. Tax
on all yearly profits arising form
property, possessions, trades or
 The Forms of Taxes Imposed on Persons and
Property
D. Excise or License Taxes - Taxes
imposed on the privilege, occupation or
business not falling within the
classification of poll taxes or property
taxes. These are imposed on alcohol
products; on tobacco products; on
petroleum products like lubricating oils,
grease, processed gas etc; on mineral
products such as coal and coke and
quarry resources; on miscellaneous
articles such as automobiles.
The Branches of Government vis-à-vis the Tax Law

Under these lies two other taxes:

1.Documentary Stamp Tax - a tax imposed upon
documents, instruments, loan agreements and
papers and upon acceptance of assignments, sales
and transfers of obligation and etc.
2. Value added tax- is imposed on any person
who, in the course of trade or business sells,
barters, exchanges, leases, goods or properties,
renders services, or engages in similar
transactions.
Products like Papawash have value-added taxes, too.
 Who Should Pay Taxes?
1. Individuals
a. Resident Citizen
b. Non-resident Citizen
c. Resident Aliens
d. Non-resident Aliens
2. Corporations
a. Domestic Corporations
b. Foreign Corporations
3. Estate under judicial settlement
4. Trusts irrevocable both as to the
trust property and as to the
income.
Who (or What) are those exempted in
paying taxes?
The Constitution expressly grants tax
exemption on certain
entities/institutions such as:

1. Charitable institutions, churches,

parsonages or convents appurtenant
thereto, mosques, and nonprofit
cemeteries and all lands, buildings and
improvements actually, directly and
exclusively used for religious, charitable
or educational purposes (Article VI,
Section 28, Paragraph 3).
Who (or What) are those exempted in paying taxes?
2. Non-stock non-profit educational institutions used actually,
directly, and exclusively for educational purposes. (Article XVI,
Section 4 (3)).
Exempted to tax as stated in the Article 283 of Rules and
Regulations Implementing Local Government Code of 1991 (RA
7160):
• Local water districts
• Cooperatives duly registered under RA 6938, otherwise known
as the Cooperative Code of the Philippines
• Non-stock and non-profit hospitals and educational
institutions
• Printer and/or publisher of books or other reading materials
prescribed by DECS (now DepEd) as school texts or references,
insofar as receipts from the printing and / or publishing thereof
are concerned.
Top Celebrity Taxpayers in 2010
Maraming Salamat Po!