Chapter 11 & 12: Taxation: Production and Sale Final Quiz 1 Learning Insights

LICEO DE CAGAYAN UNIVERSITY
Rodolfo N. Pelaez Boulevard, Kauswagan

Cagayan de Oro City, Misamis Oriental
Chapter 11 & 12: Taxation: Production and Sale
Final Quiz 1
LEARNING INSIGHTS
Submitted By:
Charrysah T. Tabaosares
BSBA – FM4
Submitted To:
Mario E. Temporada
Date Submitted:
December 4, 2020
Forms of Taxes on Production and Sale
 Scope of coverage of the tax – a tax is considered as general in the sense that
it is levied on the production and sale of all goods and services.
 Location of the tax – Depending on the stage at which the tax is exposed,
taxes on production and sale may fall into 3 general classes:
a) Single-stage tax. It is levied only at one point in the production and
distribution channels.
b) Multi-point, multi-stage or turnover tax. In its pure form, a multi-
point tax is imposed at all levels in production and distribution
channels.
c) Value added tax. A value added tax is an admixture of the single and
multi-stage taxes. This tax is levied, as in the multi-stage tax, on a
number of transactions in the production and distribution channels
but the tax is applied at each stage only on the value added at that
point.
 Computation of the tax – the third point of variation among the taxes on the
production and sale is the manner of computing the tax.
Arguments for Taxes on Production and Sale
 Administrative feasibility- One major point in favor of taxes on production

and sale is the greater ease of administrating these taxes.
 Revenue productivity- measures the amount of income or revenue that a
certain resource produces for a business. There are two ways to measure
revenue productivity: by using the average revenue productivity and by
using the marginal revenue productivity. The two show different ways of
looking at the same business feature.
 Incentive effects- Incentive effects are direct effects resulting from

the incentive system improving performance. They describe
particular incentive systems attract individuals with particular
characteristics.
Arguments Against Sales and Production Taxes
 Equity consideration- Equity Consideration means, with respect to any

Acquisition, as at the date of consummation of such Acquisition, the ratio,
stated as a percentage, of (i) the Equity Interests of any Borrower or any
Subsidiary thereof to be transferred in connection with such Acquisition, to
(ii) the total Equity Interests of such Borrower, plus the Equity Interests of
such Borrower or any Subsidiary thereof to be transferred in connection
with such Acquisition. For purposes of determining the Equity Consideration
for any transaction, the Equity Interests of a Borrower shall be valued in
accordance with GAAP.
 Deflationary effects- Deflation is a fall in the overall level of prices in

an economy and an increase in the purchasing power of the currency. It can
be driven by an increase in productivity and the abundance of goods and
services, by a decrease in total or aggregate demand, or by a decrease in the
supply of money and credit.
 Effect on allocation or resources- A change in the allocation of

resources caused by placing taxes on economic activity. The allocation
effect is typically used when governments seek to discourage the production,
consumption, or exchange of particular goods or activities that are deemed
undesirable (such as tobacco use or pollution).
Tariff Duties
 As a source of revenue- Tariff duties intended mainly as a source of revenue

are generally low so as not to discourage imports.
 As a protective device- On the other hand, protective tariff are usually high
because the objective is to raise the price of imported goods to enable similar
products produced or manufactured locally to compete favorably with such
imports.
 As a vehicle for allocation of resources- The tariff system is also utilized to

achieve the desire pattern and consumption.
 As a bargaining tool- The tariff is also used as bargaining lever in trade

negotiations with other countries.
Nature of the Present Tariff System
A tariff is a tax imposed by a government on imports or exports of goods. Besides being a

source of revenue for the government, import duties can also be a form of regulation of
foreign trade and policy that taxes foreign products to encourage or safeguard domestic
industry. Tariffs are among the most widely used instruments of protectionism, along with
import and export quotas.
Tariffs can be fixed (a constant sum per unit of imported goods or a percentage of the
price) or variable (the amount varies according to the price). Taxing imports means people
are less likely to buy them as they become more expensive. The intention is that they buy
local products instead – boosting the country's economy. Tariffs therefore provide an
incentive to develop production and replace imports with domestic products. Tariffs are
meant to reduce pressure from foreign competition and reduce the trade deficit. They have
historically been justified as a means to protect infant industries and to allow import
substitution industrialization. Tariffs may also be used to rectify artificially low prices for
certain imported goods, due to 'dumping', export subsidies or currency manipulation.
There is near unanimous consensus among economists that tariffs have a negative effect on
economic growth and economic welfare while free trade and the reduction of trade
barriers has a positive effect on economic growth. However, liberalization of trade can
cause significant and unequally distributed losses, and the economic dislocation of workers
in import-competing sectors.
Chapter 12: Taxation: Production and Sale [Other Taxes*]
Specific Taxes
 Specific taxes are indirect taxes which have a fixed amount of tax added on to the
market price of a good or service. Graphically, this will raise the supply curve
vertically by the amount of the tax, and the new curve will be parallel to the original
curve.
 A tax levied as a fixed sum on each physical unit of the good taxed, regardless of its
price. This is in contrast to an ad valorem tax, where the tax is proportional to the
price of the good. Specific taxes have administrative advantages where measuring
quantities is simple, for example in licensing cars or television sets. The
disadvantage of specific taxes is that the real yield of specific taxes is eroded by
inflation.
Development and Nature of Specific Taxes in the Philippines
The policy of taxation in the Philippines is governed chiefly by the Constitution of the

Philippines and three Republic Acts.
 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".
 national law: National Internal Revenue Code—enacted as Republic Act No. 8424 or
the Tax Reform Act of 1997 and subsequent laws amending it; the law was most
recently amended by Republic Act No. 10963 or the Tax Reform for Acceleration and
Inclusion Act; and,
 local laws: major sources of revenue for the local government units (LGUs) are the
taxes collected by virtue of Republic Act No. 7160 or the Local Government Code of
1991, and those sourced from the proceeds collected by virtue of a local ordinance.
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) are
collected by a local treasurer's office.
Interests, royalties, prizes and other winnings
Interest income from bank deposits, deposit substitutes, trust funds, and other 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 Office (PCSO) Lotto in 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 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%.
Capital gains
Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the
rate of 15%.
Capital gains from the sale of real property are taxed at the rate of 6%, except when such
proceeds would be used to construct a new principal residence within eighteen months
after the sale of a previous principal residence had occurred.
Sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services.
Usually laws allow the seller to collect funds for the tax from the consumer at the point of
purchase. When a tax on goods or services is paid to a governing body directly by a
consumer, it is usually called a use tax. Often laws provide for the exemption of certain
goods or services from sales and use tax, such as food, education, and medicines. A value-
added tax (VAT) collected on goods and services is related to a sales tax. See Comparison
with sales tax for key differences.
Tax rate
In a tax system, the tax rate is the ratio at which a business or person is taxed. There are
several methods used to present a tax rate: statutory, average, marginal, and effective.
These rates can also be presented using different definitions applied to a tax base: inclusive
and exclusive.
Tax Base and Taxpayer
Itemized deductions and expenses reduce AGI to calculate the tax base, and the personal
tax rates are based on the total taxable income.
An individual taxpayer’s tax base can change as a result of the alternative minimum tax
(AMT) calculation. Under AMT, the taxpayer is required to make adjustments to his initial
tax calculation so additional items are added to the return and the tax base and the related
tax liability both increase.1 As an example, interest on some tax-exempt municipal bonds is
added to the AMT calculation as taxable bond income. If AMT generates a higher tax
liability than the initial calculation, the taxpayer pays the higher amount.
Other taxes
 Amusement taxes
 Broker’s tax
 Tax on cinematographic film Owners, lessors and distributors
 Compensating tax
 Contractor’s tax
 Tax on dealers in securities and lending investors
 Fixed taxes on business and occupation
 Tax on Finance companies
 Franchise tax
 Tax on insurance premiums
 Miller’s tax
 Taxes on natural resources and other minor taxes
 Affluent tax

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LICEO DE CAGAYAN UNIVERSITY

Rodolfo N. Pelaez Boulevard, Kauswagan

Chapter 11 & 12: Taxation: Production and Sale

Arguments for Taxes on Production and Sale

 Administrative feasibility- One major point in favor of taxes on production

 Incentive effects- Incentive effects are direct effects resulting from

 Equity consideration- Equity Consideration means, with respect to any

 Deflationary effects- Deflation is a fall in the overall level of prices in

 Effect on allocation or resources- A change in the allocation of

 As a source of revenue- Tariff duties intended mainly as a source of revenue

 As a vehicle for allocation of resources- The tariff system is also utilized to

 As a bargaining tool- The tariff is also used as bargaining lever in trade

Nature of the Present Tariff System

A tariff is a tax imposed by a government on imports or exports of goods. Besides being a

Development and Nature of Specific Taxes in the Philippines

The policy of taxation in the Philippines is governed chiefly by the Constitution of the

 Constitution: Article VI, Section 28 of the Constitution states that "the rule of

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