EXPLORE AND EXPLAIN
TAXATION
1. What is Taxation?
Taxation refers to compulsory or coercive money collection by a levying authority, usually a
government. The term "taxation" applies to all types of involuntary levies, income to capital gains to
estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting
revenue is usually called “taxes.” (Investopedia, 2016)
Taxation refers to the practice of a government collecting money from its citizens to pay for
public services. Without taxation, there would be no public libraries or parks.
One of the most frequently debated political topics is taxation. Taxation is the practice of
collecting taxes (money) from citizens based on their earnings and property. The money raised from
taxation supports the government and allows it to fund police and courts, have a military, build and
maintain roads, along with many other services. Taxation is the price of being a citizen, though politicians
and citizens often argue about how much taxation is too little or too much. (Vocabulary, n.d.)
Taxation is different from other forms of payment, like payment for a purchase of goods or
services, because taxation does not require consent from the payor and the payment is not directly tied to
any goods bought or services rendered. The government compels taxation through an implicit or explicit
threat of force — through penalties and/or imprisonment. Taxation is legally different than extortion or a
protection racket because the imposing institution is a government, not private actors.
Tax systems have varied considerably across jurisdictions and time. In most modern systems,
taxation occurs on both physical assets, such as property, and specific events, such as a sales transaction.
The formulation of tax policies is one of the most critical and contentious issues in modern politics.
(Investopedia, 2016)
2. What are taxes?
According to the Department of Finance, Republic of the Philippines, taxes are mandatory
contributions of everyone 4 to raise revenue for nation-building. The revenue is used to pay for our
doctors, teachers, soldiers, and other government personnel and officials, as well as for building schools,
hospitals, roads, and other infrastructure. It is our duty to pay our taxes.
3. Why does the government collect taxes?
The government collects taxes go provide basic services such as education, health, infrastructure, and
other social services for all. These taxes are used to pay for our doctors, teachers, soldiers, and other
government personnel and officials. These are also used to build schools, hospitals, roads, and various
infrastructure for connectivity, and industrial and agricultural facilities.
4. Who pays taxes?
We all pay taxes, either directly or indirectly. We pay taxes according to our income and/or level
of consumption.
Income tax is based on the ability-to-pay principle wherein people with higher income should
pay more.
Consumption tax is based on the amount of goods and services utilized such that the more you
consume, the higher the tax you pay.
Filipinos residing in the Philippines are taxed based on income earned here and abroad. In the
case of Filipinos living abroad, they are only taxed based on their income earned in the Philippines.
Similarly, resident aliens and non-resident aliens in the Philippines are taxed based on their income earned
in the country.
5. Where do our taxes go?
Taxes are used to fund social services and investment in infrastructure and human capital
development. Part of our taxes gets directly transferred to the poorest through targeted transfers (e.g.
4Ps, pension to qualified senior citizens, allowance for PWDs, and PhilHealth).
LEGAL BASES OF PHILIPPINE TAXATION
The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines and
three Republic Acts.
a. Constitution
Article VI, Section 28 of the Constitution states that “the rule of taxation shall be
uniform and equitable” and that “Congress shall evolve a progressive system of taxation.”
Find a copy of the original document at this site:
http://WWw.officialgazette.gov.ph/constitutions/the1987-constitution-of-the-repubbc-of-the-
philippines/ https://www.lawphil.net/consti/cons1987.html
b. National Law
1. National Internal Revenue Code – enacted as Republic Act. No. 8424 or the Tax Reform
Act of 1997. Find a copy of the original document at this site:
http://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
2. Subsequently amended by Republic Act No. 10963 or the Tax Reform for Acceleration
and Inclusion Act of 2017; Find a copy of the original document this site:
http://www.officialgazette.gov.ph/2017/12/27/repubIic-act-no10963/
3. Republic Act No. 7160 or the Local Government Code of 1991, and those sourced from
the proceeds collected by virtue of a local ordinance. Find a copy of the original document at these
sites: https://www.lawphi/.net/statutes/repacts/ra1.991/ra_7160 1991.html and
http://www.officialgazette.gov.ph/1991/10/10/republic-act-no-7160/
Taxes imposed at the national level are collected by the Bureau of Internal Revenue (BIR), while those
imposed at the local level (i.e., provincial, city, municipal, barangay) collected by a local treasurer's
office.
The powers and duties of the Bureau of Internal Revenue are:
1. Reduction and collection of all internal revenue taxes, fees and charges; and
2. Enforcement of all forfeitures, penalties, and fines connected therewith including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts;
3. It shall also give effect to the administer supervisory and police powers conferred to it by the
National Internal Revenue Code and special laws.
KINDS OF TAXES
According to the Department of Finance, Republic of the Philippines, taxes can either be
direct or indirect.
Direct taxes are those that are paid from your income and properties. Examples include
personal and corporate income taxes, property and capital taxes.
Indirect taxes are collected based on consumption. Examples include excise taxes VAT,
percentage tax, and documentary stamp tax (DST).
a. DIRECT TAXES
1. Income Tax
Income tax is a direct tax paid by an individual or organization imposed on:
• Compensation Income - Salaries, wages, taxable bonuses, fringe benefits and other allowances
• Business Income - Practice of profession, trades, gains from sale of assets and other income not
covered by compensation
• Passive Income - Tax on deposits, royalties, and dividends
Compensation and self-employment income
Individuals earning compensation income are taxed based only on income individuals on
the income tax schedule for individuals. On the other hand, self-employed individuals and professionals
are based on the income tax schedule for individuals, applicable percentage taxes, tax (VAT). However, if
their gross sales (or gross receipts plus other income) does not exceed the VAT threshold, they have the
option to be taxed either on the basis of the income tax schedule for individuals and the applicable
percentage taxes, or just with a flat tax rate of 8% on their gross sales (or gross receipts plus other
operating income).
Income tax schedule for individuals effective FY 2018 until FY 2022
Annual Taxable Income Tax to pay
Over But not over
P0 P 250,000 0%
P 250,000 P 400,000 20 % of the excess over P 250,000
P 400,000 P 800,000 P 30,000 + 25 % of the excess over P 400,000
P 800,000 P 2,000, 000 P 130,000 + 30 % of the excess over 800,000
P 2,000, 000 P 8,000,000 P 490,000 + 32% of the excess over 2,000,000
P 8,000,000 P2, 410,000 + 35 % of the excess over P8,000,000
Interest, royalties, prizes and other winnings
Interest income from bank deposits, deposit substitutes, trust funds similar products (except for its
long-term variants) is taxed at the rate of 20%.
Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%.
Prizes and winnings from Philippine Charity Sweepstakes excess of P10, 000 (upon which
individual prizes and winnings P10, 000 or below are taxed on the basis of the income tax schedule for
individuals) are taxed at the rate of 20%.
Interest income from a depository bank under the expanded foreign currency deposit system is
taxed at the rate of 15%.
Income from the long-term deposits and investments, when pre-terminated in less than three years
after making such deposit or investment, is taxed at the rate of 20%; less than four years, 12%; and, less
than five years, 5%.
Dividends
Cash and property dividends are taxed at the rate of 10%.
Capital gains
Capital gains from the sale of shares of stock not traded in stock exchange are at the rate of 15%.
Capital gains from the sale of real property arc taxed at the rate of 6 %. except such proceeds would be
used to construct a new property within eighteen months after the sale had occurred.
Income tax for corporations
The income tax rate for corporations is 30%.
b. Indirect Taxes
1. Value-Added Tax
\
Value-Added Tax is a type of indirect tax imposed on goods and services. It is typically
passed on to the buyer as part of the selling price. The value-added tax (VAT) rate since 2006 is
12%. Both imported and domestic goods and services are covered by VAT, but there are many
exemptions. The list of exemptions can be found in Section 109 of the Tax Code
2. Percentage tax
Percentage tax is a business tax imposed on persons or entities/ transactions: who
sell or lease goods, properties or services in the course of trade or business and are exempt from value-
added tax (VAT) under Section 109 (w) of the National Internal Revenue Code, as amended, whose
gross annual sales and/or receipts do not exceed Php 1,919,500 and who are not VAT-registered; and,
engaged in businesses specified in Title V of the National Internal Revenue Code.
3. Excise tax
Excise tax is an indirect tax on selected goods that have negative externalities and are
non-essentials. Excise tax can be either, specific or ad valorem.
• Specific is based on weight, volume capacity, or any other physical unit of measurement.
• Ad valorem (literally meaning “according to value”) is based on selling price or other
specified value. This is a measure to discourage too much consumption of scarce resources
and limit the bad effects of some products.
These are the commodities subject to excise taxes: Sin products (alcohol and tobacco), petroleum,
miscellaneous articles (automobiles, jewelry, perfume, and toilet waters, yachts, and other vessels
intended for pleasure or sports), and mineral products.
Taxes can also be classified as to who imposes them, either the national Government or
the Local Government (LGU)
c. NATIONAL TAXES
The taxes imposed by the national government of the Philippines include, but are not limited to:
• Income tax – is a tax on all yearly profits arising from property, profession, trades or offices or as
a tax on a person’s income, emoluments, profits and the like. Self-employed individuals and
corporate taxpayers pay quarterly income taxes from 1st quarter to 3rd quarter. And instead of
filing quarterly income tax on the fourth quarter, they file and pay their annual income tax return
for the taxable year. Individual income tax is based on graduated schedule of tax rate, while
corporate income taxes in based on a fixed rate prescribe by the tax law or special law.
• Estate tax – is a tax on the right of the deceased person to transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death and on certain transfers which are made by law as
equivalent to testamentary disposition. Estate tax is also based on a graduated schedule of tax rate.
• Donor's tax – is a tax on a donation or gift, and is imposed on the gratuitous transfer of property
between two or more persons who are living at the time of the transfer. Donor’s tax is based on a
graduated schedule of tax rate.
• Value-added tax – is a business tax imposed and collected from the seller in the course of trade or
business on every sale of properties (real or personal) lease of goods or properties (real or
personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer, causing
this to increase the prices of most goods and services bought and paid by consumers. VAT returns
are usually filed and paid monthly and quarterly.
• Percentage tax – is a business tax imposed on persons or entities who sell or lease goods,
properties or services in the course of trade or business whose gross annual sales or receipts do not
exceed the amount required to register as VAT-registered taxpayers. Percentage taxes are usually
based on a fixed rate. They are usually paid monthly by businesses or professionals. However,
some special industries and transactions pay percentage tax on a quarterly basis.
• Excise tax – is a tax imposed on goods manufactured or produced in the Philippines for domestic
sale or consumption or any other disposition. It is also imposed on things that are imported.
• Documentary Stamp tax – is a tax on documents, instruments, loan agreements and papers
evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property
incident thereto. Examples of documentary stamp tax are those that are charged on bank
promissory notes, deed of sale, and deed of assignment on transfer of shares of corporate stock
ownership.
d. LOCAL TAXES
One of main sources of revenues of the local government units is the real property tax, which is
a tax imposed on all types of real properties including lands, buildings, Improvements, and machinery.
Another source of revenue are local ordinances such as parking fees and the like.
References:
Solmerano, E., Palencia. M., & Galicia, R. (2018). Readings in Philippine History. Sampaloc,
Manila, Philippines. Fastbooks Educational Supply, Inc.
Zaide, G., & Zaide S. (2007). Philippine History and Government. Quezon City,
Philippines. All-Nations Publishing.
Bureau of Internal Revenue, Department of Republic Act No. 8424 (as amended), and Republic
Act 7160 (as amended), Republic Act No. 1937 (as amended).
