Taxation 101: Basic Rules and Principles in Philippine Taxation

What is Taxation?
o It is the inherent power by which the sovereign state imposes fnancial 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!
o "axation is the imposition of fnancial charges or other levies, upon a taxpayer (an
individual or legal entity by a state such that failure to pay is punishable by law!
o It is a mode by which government ma#e exactions for revenue in order to support
their existence and carry out their legitimate ob$ectives ("ax %aw and &urisprudence
by &ustice 'itug, 2000!
o It is the most pervasive and the strongest of all the powers of the government!
"axes are the lifeblood of the government, without which, it cannot subsist!
History of Taxation
"he frst #nown system of taxation was in (ncient )gypt around *000 +C , 2-00 +C in the
frst dynasty of the .ld /ingdom!
In +iblical times, tax is already prevalent! (ccording to Genesis 47:240
"But when the crop comes in, give a ffth of it to Pharaoh. The other four-ffths you
may keep as seed for the felds and as food for yourselves and your households and
your children
)arliest taxes in 1ome are called as portoria were customs duties on imports and exports
(ugustus Caesar introduced the inheritance tax to provide retirement funds for the
military! "he tax was fve percent on all inheritances except gifts to children and spouses!
In )ngland, taxes were frst used as emergency measures!
History of Taxation in the Philippines
"he pre,colonial society, being communitarian, did not have taxes!
2uring the 3panish 4eriod, new income,generating means were introduced by the
government such as the0
5anila,(capulco 6alleon "rade
4olo 7 3ervicio (8orced %abor
+andala
)ncomienda 3ystem
"ribute
Manila-Acapulco alleon Trade was the main source of income for the colony during its early
years!
The alleon trade brought silver from Nueva Castilla and sil# from China by way of 5anila!
Polo ! "er#icio is the forced labor for 90 days, of men ranging from :; to ;0 years of age who
were obligated to give personal services to community pro$ects! .ne 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 8ilipinos! It comes from the "agalog word
mandala which is a round stoc# of rice stal#s to be threshed!
$nco%ienda are large tracts of land given to a person as reward for a meritorious act! "he
encomenderos were given full authority to manage the encomienda by collecting tribute from
the inhabitants and govern people living on it!
Tri&ute was the residence tax during the 3panish times! It may be paid in cash or #ind, partly, or
wholly! +ut in :--9, the tribute was replaced by the cedula personal or personal identity
paper, e<uivalent to the present community tax certifcate!
'id you (no)?
"hat in the :=th century, the >cedula? served as an identifcation card that had to be
carried at all times! ( person who could not present his or her cedula to a guardia civil could then
be detained for being >indocumentado?!
(ndres +onifacio and other /atipuneros tore their cedulas in (ugust :-=;, signaling the
start of the 4hilippine 1evolution!
The 'e#elop%ent of the *o%%unity Tax
"he c+dula was imposed by the (mericans on &anuary :, :=90, when Commonwealth (ct
@o! 9;A went into eBect, mandating the imposition of a base residence tax of ffty centavos and
an additional tax of one peso based on factors such as income and real estate holdings! "he
payment of this tax would merit the issue of a residence certifcate! Corporations were also
sub$ect to the residence tax!
What is a ,cedula-?
(lso #nown as a ,residence certi.cate-/ is a legal identity document in the 4hilippines!
Issued by cities and municipalities to all persons that have reached the age of ma$ority and upon
payment of a community tax, it is considered as a primary form of identifcation in the 4hilippines
and is one of the closest single documents the 4hilippines has to a national system of
identifcation, a#in to a driverCs license and a passport!
Why is ,cedula- i%portant?
( person is re<uired to present a cedula when he or she ac#nowledges a document before
a notary publicD ta#es an oath of oEce upon election or appointment to a government positionD
receives a license, certifcate or permit from a public authorityD pays a tax or feeD receives money
from a public fundD transacts oEcial businessD or receives salary from a person or corporation!
The 0our R1s of Taxation 2four %ain purposes or e3ects4
15 Re#enue
65 Redistri&ution
75 Repricin8
95 Representation
Re#enue - "he taxes raise money to spend on armies, roads, schools and hospitals, and on
more indirect government functions li#e mar#et regulation or legal systems!
Redistri&ution - "his refers to the transferring wealth from the richer sections of society to
poorer sections!
Repricin8 - "axes are levied to address externalitiesD for example, tobacco is taxed to
discourage smo#ing, and a carbon tax discourages use of carbon,based fuels!
Representation - (s what goes with the slogan Fno taxation without representationF , it implies
that0 rulers tax citiGens, and citiGens demand accountability from their rulers as the other part of
this bargain!
Why Tax?
"he main purpose of taxation is to accumulate funds for the functioning of the government
machineries! @o government in the world can run its administrative oEce without funds and it
has no such system incorporated in itself to generate proft from its functioning!
"he governmentHs ability to serve the people depends upon the taxes that are collected!
"axes are indispensable in the government operation and without it, the government will be
paralyGed!
The Philippine Tax "yste%
"ax law in the 4hilippines covers national and local taxes! @ational taxes refer to national
internal revenue taxes imposed and collected by the national government through the +ureau of
Internal 1evenue (+I1 and local taxes refer to those imposed and collected by the local
government! "he :=-I 4hilippine Constitution sets limitations on the exercise of the power to
tax! "he rule of taxation shall be uniform and e<uitable! "he Congress shall evolve a progressive
system of taxation! ((rticle 'I, 3ection 2-, 4aragraph :!
What is Tax $#asion?
"ax evasion happens when there is fraud through pretension and the use of other illegal
devices to lessen oneHs taxes, there is tax evasion, under,declaration of income, and non,
declaration of income and other items sub$ect to tax, Under,appraisal of goods sub$ect to tariB,
and over,declaration of deductions!
The Branches of o#ern%ent #is-:-#is the Tax ;a)
"he *on8ress may, by law, authoriGe the 4resident to fx within specifed limits, and
sub$ect to such limitations and restrictions as it may impose, tariB rates, import and export
<uotas, tonnage and wharfage dues, and other duties or imposts within the framewor# of the
national development program of the 6overnment ((rticle 'I, 3ection 2-, 4aragraph 2!
"he President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariB bill, but the veto shall not aBect the item or items to which he
does not ob$ect ((rticle 'I, 3ection 2I, 4aragraph 2!

"he "upre%e *ourt has the power to0 review, revise, reverse, modify, or aErm on appeal
or certiorari, as the law or the 1ules of Court may provide, fnal $udgments 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? ((rticle 'III, 3ection A, 4aragraph 2b!
The 0or%s of Taxes <%posed on Persons and Property
A5 Personal/ capitation or poll taxes
"hese are taxes of fxed amount upon residents or persons of a certain class without
regard to their property or business!

B5 Property taxes
15 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 aExed
or attached to real property!
65 $state Tax 2<nheritance Tax4 - 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 ta#e eBect upon death!
75 ift or 'onor1s Tax - a tax on the privilege of transmitting oneHs property or property
rights to another or others without ade<uate and full valuable consideration!
95 *apital ains Tax , tax imposed on the sale or exchange of property ! "hose imposed
are presumed to have been realiGed by the seller for the sale, exchange or other disposition of
real property located in the 4hilippines, classifed as capital assets!
*5 <nco%e Taxes
"axes imposed on the income of the taxpayers from whatever sources it is derived! "ax on
all yearly profts arising form property, possessions and trades or oEces!
'5 $xcise or ;icense Taxes
"axes imposed on the privilege, occupation or business not falling within the classifcation
of poll taxes or property taxes! "hese are imposed on alcohol productsD on tobacco productsD on
petroleum products li#e lubricating oils, grease, processed gas etcD on mineral products such as
coal and co#e and <uarry resourcesD on miscellaneous articles such as automobiles!
The Branches of o#ern%ent #is-:-#is the Tax ;a)
=nder these lie t)o other taxes:
15 'ocu%entary "ta%p Tax - a tax imposed upon documents, instruments, loan agreements
and papers and upon acceptance of assignments, sales and transfers of obligation and etc!
65 >alue 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!
Who "hould Pay Taxes?
15 <ndi#iduals
a! 1esident CitiGen
b! @on,resident CitiGen
c! 1esident (liens
d! @on,resident (liens
65 *orporations
a! 2omestic Corporations
b! 8oreign Corporations
75 $state under ?udicial settle%ent
95 Trusts irre#oca&le &oth as to the trust property and as to the inco%e5
Who 2or )hat4 are those exe%pted in payin8 taxes?
"he Constitution expressly grants tax exemption on certain entitiesJinstitutions such as0
:! Charitable institutions, churches, parsonages or convents appurtenant thereto, mos<ues, and
nonproft cemeteries and all lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes ((rticle 'I, 3ection 2-, 4aragraph *!
2! @on,stoc# non,proft educational institutions used actually, directly, and exclusively for
educational purposes! ((rticle K'I, 3ection 9 (*!
)xempted to tax as stated in the (rticle 2-* of 1ules and 1egulations Implementing %ocal
6overnment Code of :==: (1( I:;00
%ocal water districts
Cooperatives duly registered under 1( ;=*-, otherwise #nown as the Cooperative Code of
the 4hilippines
@on,stoc# and non,proft hospitals and educational institutions
4rinter andJor publisher of boo#s or other reading materials prescribed by 2)C3 (now
2ep)d as school texts or references, insofar as receipts from the printing and J or
publishing thereof are concerned!
Top *ele&rity Taxpayers in 6010