Double Taxation

Double taxation is a taxation principle referring to income taxes paid twice

on the same source of earned income. It can occur when income is taxed at both
the corporate level and personal level. Double taxation also occurs in
international trade when the same income is taxed in two different countries.
Double Taxation of Corporations and Shareholders

Double taxation often occurs because corporations are considered

separate legal entities from their shareholders. As such, corporations pay taxes
on their annual earnings, just like individuals. When corporations pay out
dividends to shareholders, those dividend payments incur income-tax liabilities
for the shareholders who receive them, even though the earnings that provided
the cash to pay the dividends were already taxed at the corporate level.

International Double Taxation

International businesses are often faced with issues of double taxation.
Income may be taxed in the country where it is earned, and then taxed again
when it is repatriated in the business' home country. In some cases, the total tax
rate is so high, it makes international business too expensive to pursue.

To avoid these issues, countries around the world have signed hundreds
of treaties for the avoidance of double taxation, often based on models provided
by the Organization for Economic Cooperation and Development (OECD). In
these treaties, signatory nations agree to limit their taxation of international
business in an effort to augment trade between the two countries and avoid
double taxation.

The Philippine Tax System and Double Taxation

There is said to be double taxation when the same taxable item is taxed more than once by different
government agencies. Double taxation or direct duplicate taxation as described in Philippine
jurisprudence exists when the same property is taxed twice when it should be taxed just once, or the same
person is taxed more than once by the same jurisdiction for the same reason

The Philippine governments imposition of the value added tax (VAT) on professionals in January 2003
has made double taxation an even more interesting issue. Among the questions that have been raised
include the legality and fairness of subjecting a professional employees gross income to two taxes.

There are two forms of double taxation --juridical and economic. The first type, juridical, arises when
comparable taxes are imposed by two or more taxing jurisdictions on the same taxpayer in respect of
the same taxable income or capital. Economic double taxation, on the other hand, happens when more
than one person is taxed on the same item of income. A good example of this is the taxation of
corporate income at the level of the corporation and at the level of the shareholder when distributed in
the form of dividend. Our fundamental law does not specifically forbid double taxation. The 1986
Philippine Constitution, however, implies that double taxation if allowed may violate public policy
against excessive taxes. When double taxation is not generally applied to all subjects, it would go against
the constitutional guarantees of uniformity of taxation and equal protection.

The Philippine Tax System

The National Internal Revenue Code contains the laws governing taxation in the country. Taxation is
administered through the Bureau of Internal Revenue (BIR), an agency under the Department of
Finance. The BIRs chief, the Commissioner, has the exclusive and original jurisdiction to interpret the
provisions of the code and other tax legislation. The countrys primary types of taxation are individual
income tax, passive income tax, corporation tax, and VAT. Other taxes include percentage tax (primarily
for non-VAT registered entities), excise tax, documentary stamp tax, and estate and donors (gift) tax. In
order to maximize the effects of double taxation, the Philippine government has tax treaties with many
countries, including the US. The business profits earned by a resident of another country with whom the
Philippines has a tax treaty are taxable only in the Philippines and only if the resident has a permanent
establishment in the Philippines to which the earnings are attributable. There have been two highly
visible tax reform programs in the country in the last two decades. The 1986 tax reform program was
designed to address the major weaknesses of the existing tax system of that time; weaknesses such as
its unresponsiveness to changes in income aggregates, low tax yield, heavy dependence on indirect
taxes, and a complicated administration structure. The programs primary purpose was to obtain a
simpler, fairer and more efficient tax system
From 1992 to 1998, though, Congress passed into law, measures that narrowed the tax base
through the grant of tax incentives or increasing the level of personal and additional exemptions. Thus,
in 1997, the country was again in need of a fresh tax program. Among the specific objectives of the 1997
tax reform program were to make the tax system more broad-based, simple and with reasonable tax
rates, minimize tax avoidance allowed by existing flaws and loopholes in the system, and encourage
payment by increasing the exemption levels, lowering the tax rate, and simplifying procedures

Double Tax

In the present tax system, there are a number of instances where the national and local governments seem
to practice and tolerate double taxation, specifically in relation to VAT, professional tax and the local
business tax. A professional is liable to pay VAT to the national government and, at the same time,
professional tax to the province. Businesses, meanwhile, are subjected to VAT at the national level and to
a local business tax that is payable to the municipality or city. In these two examples, a tax is imposed on
the same taxable base, for the same reason, and by two sovereign levels of government. The community
tax is another example of double taxation. This type of tax is imposed on income or property value that is
also subject to other forms of taxes such as the income tax and VAT at the national level, and the local
business tax and real property tax at the sub-national level. It is also argued that the taxes imposed on
property such as estate tax, gift tax, capital gains tax and real property tax result in double taxation.
Observers contend that the assets belonging to an estate have already been subject to income tax before
and therefore, should not be taxed again. Another instance of alleged double taxation is on dividends. The
tax on dividends was reintroduced in the 1997 income tax system after it was abolished in 1986 together
with the intercorporate dividends tax. It was earlier argued that there was only one income stream being
subjected to both the corporate tax and the tax on dividends. The Department of Finance, however,
maintains that a tax on dividend promotes progressivity of the tax system since individuals belonging to
the two topmost income classes receive dividend income. The imposition of a VAT on the sale of services
by professionals like doctors, accountants and lawyers, is also deemed as an instance of double taxation.
To professionals, their "value-added" upon which the VAT is levied, is measured by their gross income
that is likewise subject to the income tax. Some believe that this practice of taxing the same income twice
is excessive and burdensome. The 1986 Philippine Constitution requires that the rule of taxation be
uniform and equitable to prevent undue discrimination and the imposition of excessive taxes.
DIFFERENT TAXES IN THE PHILIPPINES
There are many different kinds of taxes in the Philippines. But we can group them into two basic types,
namely, national taxes and local taxes. National taxes are those that we pay to the government through
the Bureau of Internal Revenue. Our national taxation is based on the National Internal Revenue Code of
1997 or the Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997, as amended. The
import and export tariffs levied by the Bureau of Customs under Republic Act No. 1937 otherwise known
as the Tariff and Customs Code of the Philippines (as amended) can also be considered as national
government taxes or duties.

On the other hand, the local government taxation in the Philippines are based on Republic Act 7160 or
otherwise known as the Local Government Code of 1991, as amended. These taxes, fees or charges are
imposed by the local government units, such as provinces, cities, municipalities, and barangays, who
have been given the power to levy such taxes by the code.

Business owners, professionals, employees, consumers, and every taxpayer should be aware of the
different kinds of taxes in the Philippines. The following are some of the common national and local
taxes in the Philippines:

National Taxes in the Philippines

Capital Gains Tax is 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, including pacto de retro
sales and other forms of conditional sale.

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.

Donors 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. Donors tax is based on a
graduated schedule of tax rate.
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.

Income Tax is a tax on all yearly profits arising from property, profession, trades or offices or as a tax
on a persons 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 tax in based
on a fixed rate prescribe by the tax law or special law.

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.

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.

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.

Withholding Tax on Compensation is the tax withheld from individuals receiving purely compensation
income. This tax is what employers withheld in their employees compensation income and remit to the
government through the BIR or authorized accrediting agent.

Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and
is creditable against the income tax due of the payee for the taxable quarter year. Examples of the
expanded withholding taxes are those that are withheld on rental income and professional income.

Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not
creditable against the income tax due of the payee for the taxable year. Income Tax withheld constitutes
the full and final payment of the Income Tax due from the payee on the said income. An example of final
withholding tax is the tax withheld by banks on the interest income earned on bank deposits.

Withholding Tax on Government Money Payments is the withholding tax withheld by government
offices and instrumentalities, including government-owned or -controlled corporations and local
government units, before making any payments to private individuals, corporations, partnerships and/or
associations.
Local Taxes in the Philippines

Tax on Transfer of Real Property Ownership tax imposed on the sale, donation, barter, or on any
other mode of transferring ownership or title of real property.

Tax on Business of Printing and Publication tax on the business of persons engaged in the printing
and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and
others of similar nature.

Franchise Tax tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.

Tax on Sand, Gravel and Other Quarry Resources tax imposed on ordinary stones, sand, gravel, earth,
and other quarry resources, as defined under the National Internal Revenue Code, as amended,
extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public
waters within its territorial jurisdiction.

Professional Tax an annual professional tax on each person engaged in the exercise or practice of his
profession requiring government examination.

Amusement Tax tax collected from the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other places of amusement.

Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of,
Dealers, or Retailers in, Certain Products an annual fixed tax for every truck, van or any vehicle used
by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled
spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined
by the sangguniang panlalawigan, to sales outlets, or consumers, whether directly or indirectly, within
the province.

Tax on Business taxes imposed by cities, municipalities on businesses before they will be issued a
business license or permit to start operations based on the schedule of rates prescribed by the local
government code, as amended. Take note that the rates may vary among cities and municipalities. This
is usually what businesses pay to get their Business Mayors Permit.

Fees for Sealing and Licensing of Weights and Measures fees for the sealing and licensing of weights
and measures at such reasonable rates as shall be prescribed by the sangguniang bayan of the
municipality or city.
Fishery Rentals, Fees and Charges rentals, fees or charges imposed by the municipality/city to
grantees of fishery privileges in the municipal/city waters, e.g., fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or bangus fry areas and others as mentioned in the local
government code, as amended.

Community Tax tax levied by cities or municipalities to every inhabitant of the Philippines eighteen
(18) years of age or over who has been regularly employed on a wage or salary basis for at least thirty
(30) consecutive working days during any calendar year, or who is engaged in business or occupation, or
who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more,
or who is required by law to file an income tax return. Community tax is also imposed on every
corporation no matter how created or organized, whether domestic or resident foreign, engaged in or
doing business in the Philippines.

Taxes that may be levied by the barangays on stores or retailers with fixed business
establishments with gross sales of receipts of the preceding calendar year of Fifty thousand pesos
(P50,000.00) or less, in the case of cities and Thirty thousand pesos (P30,000.00) or less, in the case of
municipalities, at a rate not exceeding one percent (1%) on such gross sales or receipts.

Service Fees or Charges fees or charges that may be collected by the barangays for services rendered
in connection with the regulations or the use of barangay-owned properties or service facilities, such as
palay, copra, or tobacco dryers.

Barangay Clearance a reasonable fee collected by barangays upon issuance of barangay clearance a
document required for many government transactions, such as when applying for business permit with
the city or municipality.