Taxes are forced contributions imposed by a government agency on individuals or corporations, whether municipal, regional, or national. Tax revenues support government functions such as public works and services like roads and schools, as well as programs like Social Security and Medicare.
In economics, taxes are levied on whoever bears the cost of the tax, whether it is the taxing entity, such as a business, or the end users of the business’s products. Payroll taxes, federal and state income taxes, and sales taxes are all factors to consider from an accounting standpoint.
Taxes: An Overview
A government frequently taxes its individual and corporate citizens to help pay for public works and services, as well as to create and maintain the country’s infrastructure. The money raised from the tax is used to improve the economy and the lives of those who live in it.
Income taxes are applied to some sort of money received by a taxpayer in the Philippines and many other countries around the world. The funds could come from a variety of sources, including salary income, capital gains through investment appreciation, dividends or interest received as supplemental income, and payments for products and services.
Tax money is used to fund public services, government operations, as well as Social Security and Medicare. As the massive baby boomer generation has aged, Social Security and Medicare have demanded a progressively big percentage of overall federal tax revenue expenditures.
Tax policy has been a constant topic of political contention in the Philippines throughout its history.
A tax entails taking a percentage of a taxpayer’s earnings or money and remitting it to the government. Payment of taxes at the government’s rates is required, and tax evasion, or the willful omission to pay one’s entire tax liability, is illegal.
(However, tax avoidance tactics that reduce your tax liability and increase your after-tax income are totally lawful.)
Types of Taxes
There are various sorts of taxes that are widely used:
- Income tax is a proportion of income that is paid to the state or federal government.
- Employers withhold a percentage of an employee’s wages and pay it to the government on the employee’s behalf to fund Medicare and Social Security programs.
- A percentage of a company’s profits is taxed by the government to pay federal programs.
- Sales tax is a type of tax that is imposed on specific products and services and varies by jurisdiction.
- Property tax is a type of tax that is based on the value of land and property assets.
- Tariffs are import tariffs established with the goal of bolstering domestic industries.
- The rate of estate tax is applied to the fair market value (FMV) of property in a person’s estate at the time of death; the total estate must exceed state and federal government standards.
Individuals and organizations should carefully research a new location’s tax rules before making revenue or conducting business there.
We’ll look at various tax circumstances in the Philippines in the sections below. In general, the l government collects income, corporate, and payroll taxes; states collect income and sales taxes; while municipalities and other local governments mostly collect property taxes.
The Philippines, like many other countries, has a progressive income tax system in which high-income individuals or corporations pay a higher percentage of tax revenue than low-income persons or corporations. Marginal tax rates are used to apply taxes.
A taxpayer’s marginal tax rate is determined by a number of criteria, including their filing status (married filing jointly, married filing separately, single, or head of household). The filing status a person chooses can have a big impact on how much they pay in taxes.
Taxation is also affected by the source of a taxpayer’s income. It’s critical to understand the terminology associated with the various sorts of income, as this might have an impact on how money is taxed.
Corporate taxes are levied on the taxable income of a firm. The following are the stages to calculating a company’s taxable income:
- Gross profit = sales revenue minus cost of goods sold (COGS).
- Earnings before interest and taxes (EBIT) = gross profit minus operational expenses such as general and administrative expenses (G&A), selling and marketing, research and development (R&D), depreciation, and so on (EBIT)
- taxable income Equals EBIT minus interest expense
In the Philippines, the corporate tax rate is currently set at a flat rate of 21%. The corporation tax rate was 35 percent before the Tax Cuts and Jobs Act (TCJA) of 2017.
The real estate ad valorem tax is a popular property tax in the Philippines. The amount per $1,000 of a property’s assessed value is represented by a millage rate, which is used to compute real estate taxes.
A property assessor chosen by the local government determines the assessed value of the property. Every one to five years, reassessments are usually undertaken.
Property tax rates vary widely by jurisdiction, and many governments also levy taxes on tangible personal property like automobiles and boats.
When a consumer pays for a good or service, sales taxes are charged at the time of sale. The company collects sales tax from customers and sends the money to the government.
Each province has the authority to enact its own sales taxes, which vary by area. There’s even room for towns and counties to set their own rates as long as they follow their state’s taxes standards.
A tariff is a levy imposed on products and services imported from another country by one country. The goal is to increase the cost of goods and services imported from other nations, in order to stimulate domestic consumption.
Fixed fee tariffs, which are assessed as a fixed cost based on the type of item, and ad valorem tariffs, which are assessed as a percentage of the item’s worth, are the two basic types of tariffs (like the real estate tax in the previous section).
Tariffs are difficult politically, with questions about whether they work as intended.
What Is the Purpose of Paying Taxes?
Most governments rely on taxes as their primary source of revenue. This money is used to fund public services such as schools, emergency services, and social programs, as well as to repair and maintain public infrastructure, such as the roads we commute on.
There are numerous different types of taxes that are used in different ways. Taxpayers who understand what causes a tax situation can better manage their money and reduce the impact of taxes.
Annual tax-loss harvesting, which seeks to offset investment gains with investment losses, and estate planning, which works to protect inherited income for heirs, are two techniques that can help.