lecture notes xiii selected topics on philippine taxation

Lecture Notes XIII Selected Topics on Philippine TaxationJai Leonard I. Carinan

Lecture Notes XIIISelected Topics on Philippine Taxation

I. Sources of Revenue from Internal Revenue Tax

Internal Revenue Taxes are taxes that are specifically provided by R.A 8424- The National Internal Revenue Code of the Philippines

Section 21 of the NIRC provides the following taxes, fees and charges that are deemed to be National Internal Revenue Taxes:

1. Income tax is the right to earn an income by engaging in an occupation, the basis of which is the net taxable income.

2. Business tax is the right to make an onerous transfer in the normal conduct of business, the basis of which is the net sale or gross receipts.

a. General Consumption tax or other percentage taxes- refers to percentage taxes on sales or gross receipts of non- VAT business. Percentage taxes are basically levied on the retail sales before consumption

b. Value-added tax- is levied on the consumption of goods and utilization of services in the Philippines

- The value added tax is applied on every stage of distribution of materials, supplies and services purchased.

c. Excise tax- This is commonly levied on production and importation of products that are generally harmful to health

-"sin products," these are collected with excise tax. Under the Tax Code, sin products include tobacco, alcohol and luxury items, among others.

-Not all production and importation are subject to excise tax. Only those goods that are either harmful or wasteful are subject to excise tax to discourage their consumptions and usage

Note: In general, income tax is paid only when there is net income. When there are losses, income tax is not to be paid, except when the income of a corporation is subject to minimum corporate income tax (MCIT). However, the business is required to pay business tax whether there is net income or loss because the basis of business tax is net sales or gross receipts.


3. Transfer tax is the right to make casual and gratuitous transfer of one's property to the other person.

a. Estate tax- The transfer could be upon the death of the previous owner which would be subject to estate tax

- It is levied on the decedent’s estate and not on the heir receiving the property.

- The object of estate tax is to tax the transfer of economic benefits and enjoyment of property from a decedent person to the heir.

b. Donor's tax- “Gift Tax” the transfer could be during the lifetime of the donor (donation inter-vivos), which would be subject to donor's tax.

- Is an excise tax imposed on the right to transfer gratuitously, directly or indirectly, real and personal properties, tangible or intangible out of the owner’s liberality in favor of another that accepts the gift.

- Donor’s tax is not imposed on the donor, donee or property donated but upon the right of the donor to donate

4. Documentary stamp tax- is the tax on the right to enter into a transaction that is described in the document needed to be filed in any government office.

II. Personal Income Tax

Income- Income means all wealth, which flows into the taxpayer other than as a mere return of capital.

Gross Income- Gross income means all income derived from whatever sourceGross income means all income derived from whatever source

Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar item

Gross income derived from the conduct of trade or business or the exercise of profession

Gains derived from dealings in property Interest Rents Royalties Dividends Annuities Prizes and winnings Pensions Partner's distributive share from the net income of the general

professional partnerships

Exclusions from gross income


Life insurance Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities, etc. Miscellaneous items income derived by foreign government income derived by the government or its political subdivision prizes and awards in sport competition prizes and awards which met the conditions set in the Tax Code 13th month pay and other benefits- Gross benefits received by

officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000), in excess of this amount is subject for taxation

GSIS, SSS, Medicare and other contributions gain from the sale of bonds, debentures or other certificate of

indebtedness gain from redemption of shares in mutual fund

Taxable Income- means the pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special laws.

Republic Act No. 9504 AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE OF 1997

Salient points of Republic Act No. 9504

a. Those minimum wage earners shall be exempt from the payment of income tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

b. One of the highlights of RA 9504 is the increase in tax exemption, how much is the new annual personal and additional tax exemption as compared to the exemptions in the old tax exemption law?

NEW OLDPersonal Exemption Single 50,000.00 20,000.00 Head of the Family 50,000.00 25,000.00 Married 50,000.00 32,000.00 Additional Exemption For every Qualified Dependent 25,000.00 8,000.00

There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50, 000) for each individual taxpayer.


"In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

"Additional Exemption for Dependents. - There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4).

"The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.

"In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children:

"dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

ANNUAL WITHHOLDING TAX TABLE If Taxable Income is: Tax Due is: 1 Not Over 10,000 = 5%

2 Over 10,000 but not over 30,000 = 500 +

10% of the excess over 10,000

3 Over 30,000 but not over 70,000 = 2,500 +


4 Over 70,000 but not over 140,000 = 8,500 +


5 Over 140,000 but not over 250,000 = 22,500 +


6 Over 250,000 but not over 500,000 = 50,000 +


7 Over 500,000 = 125,000 +


Sample Tax Computation:

Step 1: Determine your total Gross Income


Step 2: Compute for the Taxable IncomeStep 3: Compute for the Tax Due

Note: Make sure that items prior to this are reviewed and understood

Given 1: A single employee with an annual gross income of P160, 000, how much is the annual tax due

Items Notes

Gross Income 160,000

Less: Personal & Additional Exemption 50,000

Taxable Income 110,000Over 70,000 but not over 140,000 = 8,500 20% of the excess over 70,000

Tax Due 16500 8500+ .20(110,000-70,000)

Given 2: Married employee with 3 children all under the age of 21, with a spouse that is currently not working on that taxable year. With a monthly salary of P46, 000 and received a 13th month pay of worth P 46,000. At the same time earned a total of P20, 000 on interest bearing account. How much is the annual tax due?

Items Notes

Gross Income 588,000Sum of the different income sources covered by Tax code

Salary and Wages 552000 annual income is 46,000 * 12 months Interest income 20000 interest from the savings

13th Month pay 16000In excess of 30,000 is taxable so 46000-30000 is taxable

Less: Personal & Additional Exemption 125,000 Sum of the exemptionsPersonal Exemption 50,000 The normal exemptionAdditional Exemption 75000 qualified dependents 25,000*3 children

Taxable Income 463,000Over 250,000 but not over 500,000 = 50,000 30% of the excess over 250,000

Tax Due 113900 50000+ .30(463,000-250,000)

III. Value Added tax

VAT is a consumption tax imposed on the sale or importation of goods and services in the ordinary course of business.


VAT passes several distribution stages - from the distributor to the wholesaler to the retailer and finally to the ultimate consumer.

At each stage, the seller (except for the ultimate consumer) adds a mark-up to his purchase cost to make profit. The seller shifts the VAT burden to the buyer. Consequently, this tax finally accumulates and to be borne by the ultimate consumer.

What are the sal ient features of the RA 9337 The Reformed Value Added Tax Law?

The 10% VAT rate is retained; however, the President shall increase the VAT rate to 12% starting January 1, 2006 if any of the conditions imposed by RA 9337 is satisfied.

The following goods and services are now subject to VAT: Petroleum products and other indigenous fuels

Power and electric cooperatives Services rendered by doctors Services rendered by lawyers Domestic carriage of passengers by air and sea Non-food agricultural products Works of art, literary works, musical compositions

VAT exemption of basic commodities

a. Agricultural and marine food products in original state such as vegetables, meat, fish, f eggs and rice;

b. Educational services rendered by both public private educational institutions;

c. Books, newspapers and magazines;

d. Lease of residential houses not exceeding P10, monthly;

e. Sale of low-cost house and lot not exceeding 2.5 million; and

f. Sales of persons and establishments earning not more than P1.5 million annually which could include sari-sari store, carinderias, and street vendors.

Why should the VAT rate be increased from 10% to 12 %?


This is part of a bigger effort to address the country's budget deficit. We need to increase our tax collection to sustain the government's delivery of basic services. While we can conceptually reduce government expenditures, we can only reduce it by so much because the public relies on government for these basic services, which include education and medical services.

If we increase the VAT rate from 10% to 12% in 2006, we can raise as much as P35.12 billion more. On the other hand, if this measure is coupled with the repeal of the VAT exemptions mentioned above and other provisions of the VAT bill, we can raise up to P81.41 billion assuming a 70% collection efficiency.

Raising these additional revenues is expected to translate to the strengthening of the Peso-Dollar exchange rate and better interest rates arising from improved investor perception of the Philippines.

Non-VAT reform measures (Income Tax):

a. Increases corporate income tax rate to 35% up to the end of 2008; the rate will be automatically 30% by 2009

b. Increases gross receipts tax from 5% to 7% on royalties, rentals of property - real or personal profits form exchange and all other items treated as gross income, of banks and non-bank financial intermediaries

c. Removal of PAGCOR's income tax exemption

Incremental revenue earmarking

a. 50% of local government units' share in incremental VAT collection was earmarked for the following purposes:

1. Public elementary and secondary education. finance construction of school buildings, furniture and in-service training of teachers

2. Health premiums of enrolled indigents

3. Environmental conservation

4. Agricultural modernization to finance construction of farm-to-market roads and irrigation facilities

Who wil l bear the heavier burden of VAT?

Since VAT is a consumption tax, its burden is heavier on those who consume more VATable goods and services.

Most of the goods consumed by lower income families are VAT exempt. Based on the spending profiles of Filipino families across income classes, those

families spending not more than P60, 000 annually spend only 0.2% of their expenditures on taxes (VAT, excise and other taxes). This is largely because of their purchases of VAT-exempt goods (such as foodstuffs consumed at home,


which constitute more than 60% of their purchases). On the other extreme, those families spending upwards of P250, 000 annually

spend at least 4.10% of their expenditures on taxes, largely because they consume more VATable goods and services.

What is the government doing to address corruption and tax evasion?

Operation: RATE (Run After Tax Evaders) was launched to prosecute tax evaders, while Operation: RATS (Run After the Smugglers) was launched to prosecute smugglers. RIPS (Revenue Integrity Protection Service) was also launched to prosecute corrupt revenue officers and employees.

It is also important that citizens help ensure that the VAT they paid will go to the government. One way of doing this is by asking for official receipts every time payment is made for VATable goods and services.

Benefits from VAT

National Progress

The VAT system will support economic and public service infrastructure.

The VAT system will sustain economic growth:a. I t provides an opportunity to foster global competitiveness of the Philippine export products;

b. It provides an opportunity to build up the country's dollar reserves.

Curving Tax Evasion and Fraud

The VAT system encourages the issuance of receipts which is necessary to accumulate input tax credits that will minimize output tax liability.

The receipts will leave an audit trail or evidence for monitoring purposes and effective tax administration

Higher Government Revenues

The VAT system has a wider tax base that will enable the government to generate much needed revenues to support and enhance public service. It will also support a more efficient public administration.

References:


Valencia, Edwin G. and Gregorio F. Roxas. Transfer and Business Taxation Principles and Laws with Accounting Applications. Baguio City: Valencia Educational Supply, 2009.

Bureau of Internal Revenue, www.bir.gov.ph/ tax info/ tax _ income .html

Department of Finance. What you need to know about RA 9337 The Reformed Value Added Tax Law. www.vatreform.gov.ph

Republic Act 9504, The Reformed Value Added Tax Law www.lawphil.net/statutes/rep act s/.../ ra _ 9504 _2008.html

http://www.lawphil.net/statutes/repacts/.../ra_9504_2008.html

http://www.bir.gov.ph/taxinfo/tax_income.html

lecture notes xiii selected topics on philippine taxation

Documents