chapter 7 Flashcards
(95 cards)
1
Q
According to WHO, “In this world, nothing can be said to be certain except death and taxes.” This
statement emphasizes the inevitability of two things in life: everyone will eventually die, and everyone is
subject to taxation.
A
Benjamin Franklin
2
Q
WHAT involves compulsory payments by individuals or firms to government.
A
Taxation
3
Q
As Britannica notes, WHAT
is imposed by governments “primarily to raise revenue for government expenditures”.
It is a means for the
government in increasing its revenue under the authority of the law, purposely used to promote welfare and
protection of its citizenry.
It is the inherent power of the state, acting through the legislature, to impose and
collect revenues for the support of the government and its recognized objects.
A
taxation
4
Q
The Department of Finance
reports tax revenues rising to about PHP __ in 2024b, reaching a revenue-GDP ratio of 16.7% (a 27
year high).
A
4.42 trillion
5
Q
taxation is indeed the backbone of government finance: over __% of Philippine
revenues come from national taxes collected by the Bureau of Internal Revenue (BIR).
A
80
6
Q
Why People Pay Taxes?
Taxes are essential for maintaining the functions and stability of a nation. Several theories explain the necessity of taxation:
A
- Necessity Theory.
- Lifeblood Theory.
- Benefits Received Theory.
7
Q
WHAT THEORY?
Governments need funds to operate and fulfill their responsibilities. Taxes provide
the financial resources required for public services and infrastructure.
A
Necessity Theory
8
Q
WHAT THEORY?
Taxation is considered the lifeblood of the government. Without tax revenues, the
government would be unable to function, provide services, or uphold law and order.
A
Lifeblood Theory.
9
Q
WHAT THEORY?
Citizens pay taxes in exchange for the benefits they receive from public
services. This theory is based on a give-and-take relationship: those who benefit from government
services should contribute to their funding to ensure a well-functioning society.
A
Benefits Received Theory.
10
Q
is the
deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the
economy.
A
Discretionary fiscal policy
11
Q
Increase government spending
Decrease taxes
Increase government spending and taxes equally
A
Expansionary Fiscal Policy
12
Q
Decrease government spending
Increase taxes
Decrease government spending and taxes equally
A
Contractionary Fiscal Policy
13
Q
▪ Applied during economic downturns or recessions.
▪ Aims to increase aggregate demand.
▪ Involves increasing government spending, cutting taxes, or both.
▪ Example: Stimulus packages (e.g., post-2008 financial crisis or COVID-19 relief spending).
A
Expansionary Fiscal Policy
14
Q
▪ Used when the economy is overheating or inflation is high.
▪ Aims to reduce aggregate demand.
▪ Involves decreasing government spending, raising taxes, or both.
▪ Example: A government raising VAT to cool consumer demand.
A
Contractionary Fiscal Policy
15
Q
refers to how taxes influence a country’s economic activity, income
distribution, and resource use.
A
economic function of taxation
16
Q
Economic Functions of Taxation
A
- Revenue Generation.
- Income Redistribution.
- Resource Allocation.
- Economic Stabilization.
- Regulatory mechanism.
17
Q
Economic Functions of Taxation
Taxes finance government services like healthcare, education, and
infrastructure.
A
Revenue Generation.
18
Q
Economic Functions of Taxation
Progressive taxes help reduce inequality by shifting resources from higher
to lower-income groups.
A
Income Redistribution.
19
Q
Economic Functions of Taxation
Taxes guide economic behavior, encouraging beneficial activities (e.g., clean
energy) and discouraging harmful ones (e.g., smoking).
A
Resource Allocation.
20
Q
Economic Functions of Taxation
Taxes can help manage inflation or recession by adjusting spending levels.
A
Economic Stabilization.
21
Q
Economic Functions of Taxation
Tax incentives or penalties can promote or discourage specific actions,
such as investing or polluting
A
Regulatory mechanism.
22
Q
Objectives of the Taxation Laws
Taxes are primary revenue yielding tools of the Government of modern ages. The government levies taxes
in order to achieve following objectives:
A
- For collection of revenue to run and administer the Government;
- To use as a tool for implementation of its policies; and
- For fair distribution of wealth.
23
Q
Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry
out the national objective of social and economic development.
A
- To strengthen business enterprises by granting them tax exemptions or other conditions or incentives
for growth; - To protect local industries against foreign competition by increasing local import taxes;
- As a bargaining tool in trade negotiations with other countries;
- To counter the effects of inflation or depression;
- To reduce inequalities in the distribution of wealth;
- To promote science and invention, finance educational activities or maintain and improve the
efficiency of local forces; - To implement laws which eliminate discrimination among various elements in the markets /
businesses. - To discourage certain undesirable sectors and activities
24
Q
Objectives of Taxation
Taxation has the following four major objectives:
A
- For production of goods and services.
- For protection.
- For redistribution.
- For sumptuary.
25
Objectives of Taxation
There are goods and services needed by the people and
are provided by the government. Aside from this, taxes collected are also used in order to support
the government’s social and economic policies.
For production of goods and services.
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Objectives of Taxation
Imported goods are subjected to tax in order to reduce competition with locally
produced products. This is one way of protecting local industries through the imposition of taxes.
For protection.
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Objectives of Taxation
Taxes are used to redistribute income or wealth to prevent social inequalities.
This is the rationale for the imposition of progressive taxes on income and property.
For redistribution.
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Objectives of Taxation
Taxes are used to regulate the spending of money by reducing consumption of
goods that are considered harmful to the people’s health. This explains the imposition of sin taxes on
cigarettes, liquor and other alcoholic beverages.
For sumptuary.
29
Principles of a Good Tax System
1. Efficient.
2. Understandable.
3. Equitable.
4. Benefit Principle.
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Principles of a Good Tax System
A tax system should raise enough revenue such that government projects can be
adequately sponsored, without burdening the economy too much (not particularly the tax payer), as
not to become a disincentive for performance (internal and external investment, work returns and
savings).
Efficient.
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Principles of a Good Tax System
The system should not be incomprehensible to the layperson, nor should it appear
unjust or unnecessary complex. This is to minimize discontent and costs.
Understandable.
32
Principles of a Good Tax System
Taxation should be governed by people's ability to pay, that is, wealthier individuals or
firms with greater incomes should pay more in tax while those with lower incomes should pay
comparatively less.
Equitable.
33
Principles of a Good Tax System
Those that use a publicly provided service (which is funding primarily through
taxation) should pay for it! However, conflicts in principle may and often do arise between this and
principle
Benefit Principle.
34
Principles for Levying Taxes
The following are some broad principles for levy of taxes:
1. The Benefit Principle.
2. The Ability-to-Pay Principle.
3. The Equal-Distribution Principle.
35
Principles for Levying Taxes
This principle holds that the individuals should be taxed in proportion to the
benefits they receive from the governments and that taxes should be paid by those people who
receive the direct benefit of government programs and projects out of the taxes paid.
The Benefit Principle.
36
Principles for Levying Taxes
This principle holds that taxes should relate with the person’s income
or the ability to pay, that is, those with greater income or wealth who can afford to pay should be
taxed. Similarly, even rate of tax could increase with higher income.
The Ability-to-Pay Principle.
37
Principles for Levying Taxes
Income, wealth, and transaction may be taxed at a fixed
percentage; that is, people who earn more and spend more should pay more taxes, but not pay a
higher rate of tax
The Equal-Distribution Principle.
38
Structure of Taxes
.
1. Proportional tax.
2. Regressive tax.
3. Progressive tax
39
Structure of Taxes
A tax system that requires the same percentage of income from all taxpayers,
regardless of their earnings. A ___ applies the same tax rate across low-, middle- and
high-income taxpayers. The ____ is in contrast to a progressive tax, where taxpayers with
higher incomes pay higher tax rates than taxpayers with lower incomes. A ____ is also
called a flat tax. The rate of tax remains constant over the tax base (sales tax);
Proportional tax.
40
A proportional tax is also
called a
flat tax.
41
Structure of Taxes
A tax that takes a larger percentage from high-income earners than it does from
low-income earners. In other words, the more one earns, the more tax he would have to pay. The tax
amount is proportionately equal to someone’s status in the society. A rich man should pay more than
a poor man. Tax rates increase as the tax base grows larger (Federal income, gift & estate tax)
Progressive tax.
42
Structure of Taxes
A tax that takes a larger percentage from a person’s low-income than from another
person’s high-income. A ____ is generally a tax that is applied uniformly. This means that it
hits lower-income individuals harder. Tax rates decrease as the tax base grows larger (Federal
employment taxes)
Regressive tax.
43
Characteristics of Tax Laws
The following are major characteristics of a taxation system:
1. Tax is an enforced contribution. Tax payment is not voluntary in nature, and the imposition is not
dependent upon the will of the person taxed.
2. Tax is generally payable in cash. This means that payment by cheques, promissory notes, or in
kind is not accepted.
3. Tax is proportionate in character. Payment of taxes should be based on the ability to pay principle;
higher income of the tax payer, the bigger amount of the tax paid.
4. Tax is levied (to impose; collect) on income, transactions or property. There are taxes that are
imposed or levied on acts, rights or privileges.
5. Tax is levied by the state which has jurisdiction over the person or property. As a general rule,
only persons, properties, acts, right or transaction within the jurisdiction of the taxing state are
subjects for taxation.
6. Tax is levied by the law-making body of the state. This means that law must be enacted first by
the Congress of the Philippines.
7. Tax is levied for public purposes. Taxes are imposed to support the government in implementation
of projects and programs.
8. Fiscal adequacy. The sources of revenue taken as a whole should be sufficient to meet the
expenditures of the government, regardless of business, export taxes, trade balances, and problems
of economic adjustments. Revenues should be capable of expanding or contracting annually in
response to variations in public expenditures.
44
Strategies for Taxation Management
Tax practitioners and taxpayer normally adopts any of the following technique to lessen tax burden:
1. Tax avoidance
2. Tax evasion
45
Is generally the legal exploitation of the tax regime to one’s own advantage, to attempt
to reduce the amount of tax that is payable by means that are within the law whilst making a full
disclosure of the material information to the tax authorities.
Examples of ___ involve using
tax deductions, changing one’s business structure through incorporation or establishing an offshore
company in a tax haven.
tax avoidance
46
is the general term for efforts by individuals, firms, trusts and other entities to evade the
payment of taxes by illegal means.
____ usually entails taxpayers deliberately misrepresenting
or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and
includes, in particular, dishonest tax reporting (such as under declaring income, profits or gains; or
overstating deductions).
Tax evasion
47
Taxation systems in the world are classified into two broad categories, viz.,
direct and indirect taxes.
48
are paid by taxation on the income of the wage earner. This form of taxation
is unavoidable, and for simplicity usually collected before the worker collect his/her wages.
Direct (income) taxes
49
is often avoidable and is not taken from wages. An example of
indirect taxation is VAT (Value Added Tax) or sales tax placed on goods and services. This is tax, but
not all people have to pay it, and can choose not to.
Indirect (consumption) taxation
50
Taxes may be classified according to
subject,
purpose,
scope or authority imposing the tax,
determination of
amount,
who bears the burden
graduation or rate.
51
Classifications of Taxes
1. As to subject matter or object:
a. Personal, poll or capitation.
b. Property.
c. Excise.
52
A tax imposed on individual residing within a specified territory,
regardless of property or occupation. (Example – community tax)
Personal, poll or capitation
53
A tax imposed on property whether real or personal. The amount paid is in proportion
to its value or some reasonable method of apportionment. (Example – real estate tax)
Property
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Any tax which does not fall within the classification of a poll tax or a property tax. It is a
charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in
an occupation. (Examples – estate, donor’s, and income taxes; VAT, and practically all business
taxes)
Excise
55
Classifications of Taxes
As to determination of amount:
Specific.
Ad valorem.
56
Classifications of Taxes
As to who bears the burden:
Direct.
Indirect.
57
Classifications of Taxes
As to graduation or rate:
a. Proportional.
b. Progressive or graduated.
c. Regressive.
58
Classifications of Taxes
As to purpose:
General, fiscal, or revenue.
Special or regulatory.
59
Classifications of Taxes
As to scope (or authority imposing the tax):
a. National.
b. Municipal or local.
60
This is a tax of a fix amount imposed by the head or number, or by some standard of
weight or measurement; it requires no assessment (valuation) other than a listing or classification
of the subjects to be taxed. (Examples – excise taxes on distilled wines, cigars and cigarettes,
gasoline)
Specific.
61
. This is a tax of a fixed proportion of the value of the property with respect to which
the tax is assessed; it requires the intervention of assessors. (Examples – real estate tax,
percentage taxes, excise taxes on automobiles)
Ad valorem
62
This is a tax which is demanded from the person who also absorbs or shoulders the burden of
the tax; it cannot be shifted to another. (Example – community tax, corporate and individual income
taxes)
Direct.
63
This is a tax which the taxpayer can shift to another. Hence, the amount is paid by the person
other than the one on whom it is legally imposed. (Examples – all business taxes, such as VAT,
percentage taxes; customs duties)
b. Indirect.
64
These are taxes imposed for the general purposes of the
government, i.e. to raise revenue.
General, fiscal, or revenue
65
These are taxes imposed for a special purpose, i.e., to achieve some
social or economic ends like the protection of local industries from foreign competition.
Special or regulatory.
66
These are taxes imposed by the national government. (Examples – national internal
revenue taxes, customs duties, national taxes imposed by special laws)
National
67
These are taxes imposed by municipal or local governments. (Examples – real
estate taxes)
Municipal or local.
68
. This is a tax based on a fixed percentage of the amount of the property, income or other
basis to be taxed. (Examples – real property tax; sales tax all percentage taxes)
Proportional
69
This is a tax the rate of which increases as the tax base or bracket
increases. (Examples – income tax; estate tax; donor’s tax)
Progressive or graduated.
70
. This is a tax the rate of which decreases as the tax base or bracket increases.
Regressive
71
two basic types of taxes in the Philippines are
local taxes and national taxes.
72
include the
taxes, fees, and other charges that may be levied by the local government units (i.e., provinces, municipalities,
cities, and barangays) to individuals or juridical persons (e.g., corporations and partnerships) in the
Philippines.
Local taxes
73
The local government taxation in the Philippines is based on Republic Act 7160 or otherwise
known as the __, as amended.
Local Government Code of 1991
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are imposed by the national government through the
Bureau of Internal Revenue (BIR).
national taxes
75
The national taxation in our country is governed by ___
or the National Internal Revenue Code of 1997, as amended by new and subsequent tax laws and tax
regulations enacted by our government.
Republic Act No. 8424
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Under Section 23 of the National Internal Revenue Code of the Philippines (NIRC), as amended, the general
principles of income taxation concerning individuals are as follows:
1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines;
2. A non-resident citizen is taxable only on income derived from sources within the Philippines;
3. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines:
4. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker; and
5. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines.
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refers to the pertinent items of gross income, less
the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the
NIRC or other special laws.
Taxable Income
78
means all income derived from whatever source, including (but not
limited to) the following items:
▪ Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
▪ Gross income derived from the conduct of trade or business or the exercise of a
profession;
▪ Gains derived from dealings in property;
▪ Interests;
▪ Rents;
▪ Royalties;
▪ Dividends;
▪ Annuities;
▪ Prizes and winnings;
▪ Pensions; and
▪ Partner's distributive share from the net income of the general professional partnership
Gross Income
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Philippine Taxes
▪ Sales Taxes/VALUE ADDED Tax (VAT).
▪ Capital gain Tax.
▪ Fringe Benefits Tax.
▪ Donor’s Tax.
▪ Income tax.
▪ Withholding tax.
▪ Local Taxes.
▪ Percentage Taxes.
▪ Initial Public Offering (IPO) Tax.
▪ Excise Taxes.
▪ Documentary Stamp Tax.
▪ Real Property Tax.
80
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 a indirect tax, thus, it can be passed on the
buyer. A 12% value added tax (VAT) of the gross selling price or gross value in money of the goods
is imposed to all importation, sale, barter, exchange or lease of goods or properties and sale of
services.
Sales Taxes/VALUE ADDED Tax (VAT).
81
A tax imposed on the gains presumed to have been realized by the seller from the
sale, exchange, or other disposition of capital assets located in the Philippines.
Capital gain Tax.
82
furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees) are taxed at the rate of 32% based on the grossed-up
monetary value of the fringe benefits.
Fringe Benefits Tax.
83
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.
84
A tax imposed on all yearly profits arising from property, profession, trades or offices or
as a tax on a person’s income and profits.
Income tax.
85
A tax withheld from individuals receiving purely compensation income.
Withholding tax.
86
There are no local taxes other than local authority rates and local (business) taxes and
permit fees.
Local Taxes.
87
are imposed on carriers (domestic or international), franchises,
banks, financial intermediaries, finance companies, life insurance companies, agents of foreign
insurance companies, overseas communications, amusement, winnings and stock transactions.
Percentage Taxes.
88
Sale, barter, exchange or other disposition through initial public
offering of shares of stock in closely held corporations is taxed at the rates provided below based on
the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or
otherwise disposed of in accordance with the total outstanding shares of stock after the listing in local
stock exchange
Initial Public Offering (IPO) Tax.
89
are imposed on alcohol and tobacco products, petroleum and mineral
products, automobiles and certain non-essential goods.
Excise Taxes.
90
is imposed on certain documents including
shares certificates, bank cheques, bonds, sales documents of real properties and mortgages.
Documentary stamp tax
91
is imposed on owners of real property and is calculated on the
assessed value of the property.
Real property tax
92
officially cited as Republic Act No. 10963,
is
the initial package of the Comprehensive Tax Reform Program (CTRP) signed into law by
President Rodrigo Duterte on December 19, 2017 and took effect on January 1, 2018.
Tax Reform for Acceleration and Inclusion (TRAIN) Act,
93
The TRAIN Act aims to address the reputed weaknesses of the Tax Code, specifically through the following
objectives:
a. First, it intends to simplify the previous system to make it more straightforward and intuitive.
b. Second, it intends to create a more "just" taxation scheme, wherein taxation is staggered and
distributed on the basis of financial capability and the underprivileged are able to reap more
advantages.
c. Third, it intends to improve the efficiency by which tax is collected, particularly tackling issues of
compliance.
d. Fourth, it increases the tax burden felt by the general population thus increasing the overall inflation
rate.
94
Key Features of the TRAIN Law
1. Lower Personal Income Taxes. Individuals earning ₱250,000 and below annually are exempt from
income tax. New tax brackets were introduced, reducing the tax burden for most workers.
2. Higher Excise Taxes. Increased taxes on petroleum products, sugar-sweetened beverages,
automobiles, tobacco, and cosmetic procedures. These aim to raise government revenue and promote
health and environmental goals.
3. Broadening the VAT Base. Fewer exemptions, which improves efficiency and increases tax
collection.
4. Simplified Estate and Donor’s Tax. Fixed rate of 6% for both estate and donor’s taxes, easing
compliance.
5. Improved Tax Administration. Measures were included to strengthen enforcement and reduce
evasion.
95
