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Nature and Basis of Taxation

Taxation refers to the act of a taxing authority actually levying tax. Taxation as a term applies to all types of taxes, from income to gift to estate taxes. It is usually referred to as an act; any revenue collected is usually called “taxes.”

Taxation can also refer to taxes as an abstract concept, a actual dollar amount of tax that has been levied or the material funds that have been received as taxes. Although all of these definitions are technically correct, the one listed above is the most common. Taxation is one of the primary powers of government over the people.

Nature of the power of taxation

Nature of the power of taxation as an inherent power
Power to tax, being inherent in an independent state for its existence and survival by thefurtherance of its multifarious functions, the same does not require delegation from thesupreme law of the land. However, exercise of such power upon the inhabitants issubject to limitations imposed by the power, by its very nature, or by the Supreme law of the land, the Philippine Constitution. To tax a subject matter, person, property or excise,there must be a valid law imposing the same. Validity of a tax measure presupposes thefact that it has overcome the test and scrutiny against it. Tax measures duly passed bythe legislative department, the Congress or the local legislative under its delegatedpower, enjoy the presumption of validity and he who controverts has the duty of provingthat the same is otherwise
By nature, power to tax is inherent in a sovereign estate so that the grant of which is notnecessary but the exercise is provided safeguards and limitations. This means that thestate needs not be empowered by its constitution or any mandate for it to be allowed totax. Such power co-exists with the state and thus, grant is not necessary. What arebeing provided by the supreme law of the land, the Constitution, are the guidelines andthe limit on the exercise of the power. It wishes to curtail the exercise in such a way asnot to abuse and misuse said power to the detriment of the majority and to theadvantage of the selected few

Basis of taxation

Charge to tax 

Foreign nationals, whether residents or non-residents, are taxed only on income derived from sources within the Philippines.

Salaries, allowances, benefits and other forms of compensation for labour or personal services performed in the Philippines are treated as Philippine-sourced income, regardless of where the payment is made.

Residence


The Philippines income tax law contains a formal definition of residence which may not necessarily apply under immigration laws. Residence requires physical presence and intent to take up residence. Each case must be determined on its own facts and circumstances. In practice, expatriates with employment contracts with local companies for a two-year stay in the country may qualify for residency for tax purposes.

Income from employment 

Income from employment i.e. compensation income can either be subject to individual income tax or to fringe benefits tax.

Source of employment 

Income from employment ordinarily has its source in the place in which services are performed.

Benefits (in kind)

In general, benefits given under an employer-employee relationship are considered taxable as compensation income. There is a short list of benefits that are exempt from tax.
For fringe benefits given to managerial and supervisory employees, whether in cash or in kind, the fringe benefits tax (FBT) is imposed. The FBT rate is the top marginal rate applicable to the expatriate.
The FBT is a tax on the income received by the employee, but the tax is borne by the employer. It is a direct liability of the employer and is required to be paid on a calendar quarter basis.
Benefits provided to employees which are necessary for the trade or business of the employer, or provided for the convenience of the employer, and certain benefits of small amounts (de minimis benefits) as defined in the regulations are not subject to tax, whether FBT or tax on compensation.

Expatriate concessions 

Expatriates are only taxable on Philippine-sourced income. Concession is by way of tax relief under a tax treaty, or preferential tax rates for expatriates employed by certain entities.

Relief for foreign taxes 

A foreign national, whether resident or non-resident, is only subject to income tax on Philippine sourced income. As such, no credit for income taxes paid on such income to foreign countries is allowed against Philippine income tax payable.

Deductions against income 

Foreign nationals subject to the graduated rates on compensation income are entitled to deduct from gross income personal exemptions and health/hospitalisation premium payments. There are no other deductions allowable from compensation income. No such deductions are allowed to foreign nationals subject to the 25% and 15% tax.

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