• 1.

Persons- In taxation, persons refer to both natural and juridical

persons.
• 2. Properties- The term properties, refers to both tangible or
intangible, real or personal, and ordinary or capital asset of a
person.
• 3. Transactions, earnings, or rights-It refers to business transaction,
rights to practice profession.
DEFINITION AND CONCEPT OF TAXATION

Taxation is the power by which the sovereign, through its law-making

body, raises revenue to defray the necessary expenses of
government. It is merely a way of apportioning the costs
of government among those who, in some measure, are privileged to
enjoy its benefits and must bear its burdens (Aban, 2001).

It is a mode by which governments make exactions for revenue in

order to support their existence and carry out their legitimate
objectives. Taxation may refer to either or both the power to tax or
the act or process by which the taxing power is exercised (Vitug,
2006).
• The inherent power of the sovereign exercised through legislature
• To impose burdens
• Upon subjects and objects
• Within its jurisdiction
• For the purpose of raising revenues - To carry out the legitimate
objects of government
• Taxation as a legislative process is imposed on the ff:
• Person
• Properties
• Transactions, earnings, or rights
PURPOSE OF TAXATION
1. Primary or revenue purpose – to raise funds or property to enable the
State to promote the general welfare and protection of the people.
2. Secondary or non-revenue purposes
• a. Promotion of general welfare– taxation may be used as an implement of
police power to promote the general welfare of the people. In the case of
Lutz v. Araneta (G.R. No. L7859, December 22, 1955), the Supreme Court
upheld the validity of the Sugar Adjustment Act, which imposed a tax
on milled sugar since the purpose of the law was to strengthen an industry
that is so undeniably vital to the economy – the sugar industry (Aban,
2001).

• b. Regulation of activities/industries – Taxes may also be imposed for a

regulatory purpose as, for instance, in the rehabilitation and stabilization of
a threatened industry which is affected with public interest, like the oil
industry (Caltex Philippines, Inc. v. Commission on Audit, et al., G.R. No.
92585, May 8, 1992).
• Taxation also has a regulatory purpose as in the case of taxes levied on excises
or privileges like those imposed on tobacco and alcoholic products, or
amusement places like night clubs, cabarets, cockpits, etc (Aban, 2001).
• c. Reduction of social inequality – a progressive system of taxation
prevents the undue concentration of wealth in the hands of few
individuals. Progressivity is based on the principle that those who
are able to pay more should shoulder the bigger portion of the tax
burden.

• d. Encourage economic growth – the grant of incentives or exemptions

encourage investment thereby stimulating economic activity.

• e. Protectionism – Protective tariffs and customs duties are imposed as

taxes in order to protect important sectors of the economy or local
industries, as in the case of foreign importations.
1. National Internal Revenue Code of the Philippines (R.A No. 8424 as amended)

“Income taxes, estate and donor’s taxes, Doc Stamp Tax, Excise Tax, VAT, and percentage
Tax.”

2. Tariff and Customs Code of 1979

“Import & export of goods and duties”

3. Local Government Code (R.A No.7160)

“ Professional tax, RPT, Community tax, Business taxes and other fees and charges.”

4. National Taxes imposed by special laws

“ Travel tax, special education fund taxes, Motor vehicle fee, and taxes on narcotic drugs”
Nature of taxation
• The nature of the State’s power to tax is two-fold. It is both an inherent
and a legislative power.

1. Inherent attribute of sovereignty

• The power to tax is an attribute of sovereignty and is inherent in the State.

It is a power emanating from necessity because it imposes a necessary
burden to preserve the State's sovereignty (Phil. Guaranty Co.
v. Commissioner, L-22074, April 30, 1965).

• It is an essential and inherent attribute of sovereignty, belonging as a

matter of right to every independent government, without
being expressly conferred by the people (Pepsi-Cola Bottling Company of
the Phil. v. Mun. of Tanauan, Leyte, 69 SCRA 460).

• It does not need constitutional conferment. Constitutional provisions do

not give rise to the power to tax but merely impose limitations on what
would otherwise be an invincible power (Churchill and Tait v. Concepcion,
34 Phil. 969).
 • Q: Why is the power to tax considered inherent in a sovereign State?
• A: It is considered inherent in a sovereign State because it is a necessary
attribute of sovereignty. Without this power no sovereign State can exist
or endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity and this power is an essential and inherent attribute
of sovereignty, belonging as a matter of right to every independent state or
government. No sovereign state can continue to exist without the means to
pay its expenses; and that for those means, it has the right to compel all
citizens and property within its limits to contribute, hence, the emergence of
the power to tax (51 Am. Jur., Taxation 40).

2. Legislative in character

• It is inherently legislative in nature and character in that the power of

taxation can only be exercised through the enactment of law. It is
legislative in nature since it involves the promulgation of laws. The
legislature determines the coverage, object, nature, extent and situs
[CONES] of the tax to be imposed. Such power is exclusively vested in
the legislature except where the Constitution provides otherwise (Art. VI,
Sec. 28[2], Art. X, Sec. 5, Constitution)(1 Cooley Taxation, 3rd Ed.).
Scope of legislative power in
taxation
1. The determination of the ff:
• Amount or
• Subjects of taxation (persons, property, occupation, excises or
privileges to be taxed provided they are within the
taxing jurisdiction)
• Kind of tax to be collected
• Method of collection (not exclusive to the Congress)
• Apportionment of the tax (whether the tax shall be of general
application or limited to a particular locality, or partly general
and partly local)
• Purposes for which taxes shall be levied, provided they are public
purposes
• Situs of taxation
2. The grant of tax exemptions and condonations
3. The power to specify or provide for administrative as well as
judicial remedies
THEORY AND BASIS OF
TAXATION
• The theories underlying the power of taxation are:
• Lifeblood theory
• Necessity theory
• Benefits-protection theory (doctrine of symbiotic relationship)
• Jurisdiction over subject and objects
Lifeblood theory
• The government chiefly relies on taxation to obtain the
means to carry on its operations. Taxes are essential to its very
existence. (CIR v. Solidbank Corporation, G.R. No. 148191,
November 25, 2003)
• Manifestations of lifeblood theory:
• Imposition even in the absence of constitutional grant.
• State’s right to select objects and subjects of taxation.
• No injunction to enjoin collection of taxes except for a period of
60 days upon application to the CTA as an incident of its
appellate jurisdiction.
• Taxes could not be the subject of compensation and set-off,
subject to certain exceptions.
• A valid tax may result in destruction of property.
Necessity theory

• The theory behind the exercise of the power to tax emanates

from necessity. Without taxes, the government cannot fulfill
its mandate of promoting the general welfare and wellbeing
of the people (Gerochi v. DOE, 527 SCRA 696, 2007). It is
a necessary burden to preserve the State’s sovereignty and a
means to give the citizenry an army to resist aggression, a
navy to defend its shores from invasion, a corps of civil
servants to serve, public improvements for the enjoyment
of the citizenry, and those which come within the State’s
territory and facilities and protection which a government is
supposed to provide (J.Dimaampao, 2015).
Benefits-protection
theory (doctrine of symbiotic
relationship)
• It involves the power of the State to demand and receive taxes
based on the reciprocal duties of support and protection between
the State and its citizens.

• Taxes are what we pay for a civilized society. Without taxes, the
government would be paralyzed for lack of motive power to activate
and operate it. Hence, despite the natural reluctance to
surrender part of one’s earned income to the taxing authorities,
every person who is able must contribute his share in the running of
the government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their material and
moral values” (CIR v. Algue, G.R. No. L-28896, February 17, 1988).
Jurisdiction over subjects and
objects
• It is the country, state or sovereign that gives protection and
has the right to demand payment of taxes with which to
finance activities so it could continue to give protection.
Taxation is territorial because it is only within the confines of
its territory that a country, state or sovereign may
give protection.
Characteristics of income taxation
in the philippines
1. National tax- Tax is said to be national tax when it covers the
whole country and not only a particular province, city or
municipality. (e.g. Income tax)
2. General purpose- Tax is said to be a general-purpose when it
is levied without any specific or predetermined purpose.
3. Direct tax- When it is payable by the person to whom it is
levied upon or imposed by law.
4. Excise tax- It is a tax imposed on the right or privilege of a
person to earn income. Exercise of profession is subject to
income tax.
5. Progressive tax- The rate of income tax increases as the tax
base increases.
• Similarities among taxation, police power and eminent
domain
• They are inherent powers of the State.
• All are necessary attributes of the sovereign.
• They exist independently of the Constitution.
• They constitute the three methods by which the State interferes
with private rights and property.
• They presuppose equivalent compensation.
• The legislature can exercise all three powers.
DISTINCTIONS AMONG THE THREE INHERENT POWERS OF THE STATE
TAXATION POLICE POWER EMINENT DOMAIN
Authority who Government or its Government or its Government or public service
exercises the political subdivision political subdivision companies and public utilities
power
Purpose To raise revenue in support Promotion of To facilitate the taking
of the Government. general welfare of private property for
Regulation is merely through regulations public purpose
incidental
Persons affected Upon the community Upon the community On an individual as the owner
or class of individuals or class of individuals of a particular property

Amount of No ceiling except Limited to the cost No imposition, the owner is

monetary inherent limitations of regulation, issuance paid the fair market value of
imposition of license or surveillance his property
Benefits received Protection of a Maintenance of The person receives the fair
secured organized society, healthy economic standard market value of the property
benefits received of society/no direct benefit taken from him/direct benefit
from government/no results
direct benefit
Non-impairment of Tax laws generally do Contracts may be impaired Contracts may be impaired
contracts not impair contracts,
unless the government is
party to contract
granting exemption for
a consideration
Test of validity Must not be contrary Must comply with the Must be for public
to inherent tests on “lawful subjects” purpose and with payment of
and constitutional and “lawful means” just compensation
limitations
1. Levying or Imposition Stage
Involves the passage of tax law and ordinances
2. Assessment and Collection Stage
Assessment- the act of appraising or valuing the subject of
taxation and determining the amount of tax due and payable including
surcharges and interest.
Collection- is the process of obtaining payment of tax that is
due and payable

3. Payment Stage of Taxation

This particular phase of taxation is incidental to the whole
process because it involves the taxpayer’s compliance to the
requirements and employment of available remedies.
4. Refund
PRINCIPLES OF A SOUND TAX
SYSTEM
1. Fiscal adequacy - Revenue raised must be sufficient to
meet government/public expenditures and other public
needs

2. Administrative feasibility- The tax system should be capable

of being effectively administered and enforced with the least
inconvenience to the taxpayer

3. Theoretical justice - Must take into consideration the

taxpayer’s ability to pay
Characteristics of taxes
1. It is levied by the state which has jurisdiction over the person or property
2. It is levied by the state through its law-making body
3. It is an enforced contribution not dependent on the will of the person taxed
4. It is generally payable in money
5. It is proportionate in character
6. It is levied on persons and property
7. It is levied for a public purpose

REQUISITES OF A VALID TAX

1. It should be for a public purpose.

2. It should be uniform.
3. The person or property being taxed should be within the jurisdiction of the
taxing authority.
4. The tax must not impinge on the inherent and constitutional limitations on
the power of taxation.
SCOPE AND LIMITATION OF
TAXATION
1. Inherent limitations
1. Public Purpose
2. Inherently Legislative
3. Territorial
4. International Comity
5. Exemption of government entities, agencies and
instrumentalities
1. Public purpose
• The proceeds of tax must be used (a) for the support of the State or (b)
for some recognized objective of the government or to directly
promote the welfare of the community.
• Tax is considered for public purpose if:

• 1. It is for the welfare of the nation and/or for greater portion of the population;
• 2. It affects the area as a community rather than as individuals; and
• 3. It is designed to support the services of the government for some of its
recognized objects
2. Inherently legislative
Only the legislature has the full discretion as to the persons,
property, occupation or business to be taxed provided these are all within the
State’s territorial jurisdiction. It can also fully determine the amount or rate of
tax, the kind of tax to be imposed and method of collection
XPN’s
• Delegation to Local Government – Refers to the power of LGUs to create its
own sources of revenue and to levy taxes, fees and charges (Art. X, Sec. 5,
1987 Constitution)
• Delegation to the President – The authority of the President to fix tariff
rates, import or export quotas, tonnage and wharfage dues or other duties
and imposts (Art. VI, Sec. 28(2), 1987 Constitution).
• Delegation to administrative agencies – When the delegation relates
merely to administrative implementation that may call for some degree of
discretionary powers under sufficient standards expressed by law
(Cervantes v. Auditor General, G.R. No. L-4043, May 26, 1952) or implied
from the policy and purpose of the act (Maceda v. Macaraig, G.R. No.
88291, June 8, 1993).
3. Territorial
• Taxation may be exercised only within the territorial jurisdiction, the taxing
authority (61 Am. Jur. 88). within the territorial jurisdiction, the taxing
authority may determine the “place of taxation” or “tax situs.”

• GR: The taxing power of a country is limited to persons and property within
and subject to its jurisdiction.

Reasons:
• 1. Taxation is an act of sovereignty which could only be exercised within a country’s
territorial limits.
• 2. This is based on the theory that taxes are paid for the protection and services
provided by the taxing authority which could not be provided outside the territorial
boundaries of the taxing State.

• XPNs:
• Where tax laws operate outside territorial jurisdiction – i.e. Taxation of resident citizens on
their incomes derived abroad.
• Where tax laws do not operate within the territorial jurisdiction of the State.
• a. When exempted by treaty obligations; or
• b. When exempted by international comity.
4. International comity

• It refers to the respect accorded by nations to each other

because they are sovereign equals. Thus, the property or income of
a foreign state may not be the subject of taxation by another State.

• This is a limitation founded on reciprocity designed to maintain

harmonious and productive relationships among the various state.
Under international comity, a state must recognize the generally-
accepted tenets of international law, among which are the
principles of sovereign equality among states and of their freedom
from suit without their consent, that limits that authority of a
government to effectively impose taxes in a sovereign state and its
instrumentalities, as well as in its property held and activities
undertaken in that capacity.
5. Exemption from taxation of government entities

GR: The government is exempt from tax.

XPN: When it chooses to tax itself. Nothing prevents Congress from

decreeing that even instrumentalities or agencies of the
government performing government functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom (MCIAA v. Marcos, G.R.
No. 120082, September 11, 1996).
Double taxation (duplicate
taxation)
• There is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated, such
as the requirement that taxes must be uniform (Villanueva v. City of
Iloilo, 1968).
Two Types:
• As to validity
• A. Direct (strict sense)- Double taxation in the objectionable or prohibited sense since it violates
the equal protection clause of the Constitution.

• Elements of Direct Double Taxation

1. The same property is taxed twice when it should be taxed only once; and
2. Both taxes are imposed
a. on the same subject matter,
b. for the same purpose,
c. by the same taxing authority,
d. within the same jurisdiction,
e. during the same taxing period; and
f. the taxes must be of the same kind or character

• All the elements must be present in order to apply double taxation in its strict sense.

• B. Indirect (broad sense) - It is a permissible double taxation. It is indirect when some elements of
direct double taxation are absent.

• As to scope
A. Domestic Double Taxation - When the taxes are imposed by the local and national government
within the same State.
B. International Double Taxation – Refers to the imposition of comparable taxes in two or more States
on the same taxpayer in respect of the same subject matter and for identical periods (CIR v. SC
Johnson and Son, Inc., G.R. No. 127105, June 25, 1999).
Constitutional limitations of
taxation
1. Provisions directly affecting taxation
a. Prohibition against imprisonment for non-payment of poll tax (Art. III, Sec. 20)
b. Uniformity and equality of taxation (Art. VI, Sec. 28)
c. Grant by Congress of authority to the president to impose tariff rates (Art. VI , Sec. 28)
d. Prohibition against taxation of religious, charitable entities, and educational entities (Art. VI,
Sec. 28)
e. Prohibition against taxation of non-stock, non-profit educational institutions (Art. IX, Sec. 4)
f. Majority vote of Congress for grant of tax exemption (Art. VI, Sec. 28)
g. Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29)
h. President’s veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27)
i. Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30)
j. Grant of power to the LGUs to create its own sources of revenue (Art. IX, Sec. 5)
k. Origin of Revenue and Tariff Bills (Art. VI, Sec. 24)
l. No appropriation or use of public money for religious purposes (Art. VI, Sec. 28)

2. Provisions indirectly affecting taxation (Art. III, 1987 Constitution)

a. Due process (Sec. 1)

b. Equal protection (Sec. 1)
c. Religious freedom (Sec. 5)
d. Non-impairment of obligations of contracts (Sec. 10)
e. Freedom of the press (Sec. 4)
SOURCES OF TAX LAWS

• The following may be said to be the sources of tax laws:

1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances / City or municipal tax codes
6. Tax treaties and international agreements
7. Special laws
8. Court decisions
9. Revenue rules and regulations and administrative rulings and
opinions (Tabag, 2015)
SITUS OF TAXATION
• It is the place or authority that has the right to impose and
collect taxes.
• Factors that determine the situs of taxation
• 1. Residence of the taxpayer
• 2. Citizenship of the taxpayer
• 3. Nature of the tax
• 4. Subject matter of the tax
• 5. Source of income
APPLICATION OF THE SITUS OF TAXATION

SUBJECT OR OBJECT OF TAXATION SITUS OR PLACE OF TAXATION

1. Person Residence of the taxpayer
2. Real Property Location of the property
3. Personal Tangible property Location of the property
4. Personal Intangible property Residence of the owner
5. Income Residence of the taxpayer
Location where the income was earned
Citizenship of the taxpayer
6. Gratuitous transfer of property Residence of the taxpayer
Location of the property
Citizenship of the taxpayer
7. Business Location of the property
8. Occupation Location where occupation was
conducted
CONSTRUCTION AND INTERPRETATIONS OF TAX
LAWS
• GR: Tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer (MCIAA v. Marcos, G.R. No.
120082 September 11, 1996). The imposition of a tax cannot be
presumed.

• XPN: Unless a statute imposes a tax clearly, expressly and

unambiguously, what applies is the equally well-settled rule that the
imposition of a tax cannot be presumed. Where there is doubt, tax laws
must be construed strictly against the government and in favor of the
taxpayer. This is because taxes are burdens on the taxpayer, and should
not be unduly imposed or presumed beyond what the statutes
expressly and clearly import (CIR v. The Philippine American Accident
Insurance, Inc., 453 SCRA 668, G.R. No. 141658 March 18, 2005).

• The rule that, in case of doubt of legislative intent, the doubt must be
liberally construed in favor of taxpayer does not extend to cases
involving the issue of the validity of the tax law itself which, in every
case, is presumed valid.
Escape from taxation
• 1. Shifting of tax burden
• Shifting is the transfer of the burden of tax by the original payer or the one on whom the
tax was assessed or imposed to another or someone else without violating the law.

• Examples of taxes when shifting may apply are VAT, percentage tax, excise tax on
excisable articles, ad valorem tax that oil companies pay to BIR upon removal of petroleum
products from its refinery.

• Ways of shifting the tax burden

• 1. Forward shifting – When the burden of tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate
purchaser or consumer.

• 2. Backward shifting – When the burden is transferred from the consumer through the
factors of distribution to the factors of production.

• 3. Onward shifting – When the tax is shifted two or more times either forward or backward.

• NOTE: Only indirect taxes may be shifted. In case of direct taxes, the shifting of burden
can only be made via contractual provision.
• 2. Tax avoidance / tax minimization

• Tax avoidance is a scheme where the taxpayer uses legally permissible alternative
method of assessing taxable property or income, in order to avoid or reduce tax liability.
• It is a tax saving device within the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arm’s length (CIR v. The Estate of Benigno Toda
Jr., G.R. No. 30554, February 28, 2004).

• 3. Tax evasion / tax dodging

• Tax evasion is a scheme where the taxpayer uses illegal or fraudulent means to defeat
or lessen payment of a tax.

• It is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities (CIR v. The Estate
of Benigno Toda Jr. G.R. No. 30554, February 28, 2004).

• Elements to be considered in determining that there is tax evasion

1. Course of action is unlawful;
2. Accompanying state of mind which is described as being evil, in bad faith, willful or
deliberate and not accidental; and
3. End to be achieved, i.e., payment of less than that known by the taxpayer to
be legally due, or non-payment of tax when it is shown that the tax is due.
Distinguish tax avoidance from tax evasion

TAX TAX EVASION

AVOIDANCE

Validity Legal and not subject to criminal penalty Illegal and subject to criminal penalty

Effect Minimization of taxes Almost always results in absence of tax

payment.

Evidence that may be used to prove tax evasion

1. Failure of taxpayer to declare for taxation purposes his true and actual income
derived from business for two (2) consecutive years (Republic v. Gonzales, G.R.
No. L-17744, April 30, 1965).
2. Substantial under declaration of income in the income tax return for four (4)
consecutive years coupled by intentional overstatement of deductions (Perez v.
CTA, G.R. No. L-10507, May 30, 1958).
4. Tax exemption
• It is the grant of immunity, express or implied, to particular persons
or corporations, from a tax upon property or an excise tax which
persons or corporations generally within the same taxing districts
are obliged to pay.

• It is the legislature, unless limited by a provision of the state

constitution, which has full power to exempt any person or
corporation or class of property from taxation, its power to exempt
being as broad as its powerto tax. Other than Congress, the
Constitution may itself provide for specific tax exemptions, or local
governments may pass ordinances on exemption only from local
taxes (John Hay Peoples Alternative Coalition et al. v. Lim et. al., G.
R. No. 119775, October 24, 2003).
Tax Amnesty distinguished from Tax Exemption

TAX AMNESTY TAX

EXEMPTION

Scope of immunity Immunity from all criminal, civil Immunity from civil
and administrative liability only
obligations
arising from non-payment of taxes

Grantee General pardon given to all erring A freedom from a charge

taxpayers or burden to which others are
subjected

How applied Applied Applied

retroactively prospectively

Presence of actual There is revenue loss since there None, because there was
revenue loss was actually taxes due but collection no actual taxes due as
was waived by the government the person or transaction
is protected by tax exemption
KINDS OF TAXES

• As to object:
• 1. Personal/poll or capitation tax – A fixed amount imposed upon all
persons, or upon all persons of a certain class, residents within a
specified territory, without regard to their property or occupation.
(e.g. community tax)
• 2. Property tax – Tax imposed on property, whether real or personal,
in proportion either to its value, or in accordance with some
other reasonable method of apportionment.(e.g. real property tax)
• 3. Privilege/excise tax – A charge upon the performance of an act,
the enjoyment of a privilege, or the engaging in an occupation.
An excise tax is a tax that does not fall as property tax. (e.g. income
tax, estate tax, donor’s tax, VAT)
KINDS OF TAXES
• As to burden or incidence:
• 1. Direct -are demanded from the very person who, as intended,
should pay the tax which he cannot shift to another.

• 2. Indirect -are demanded in the first instance from one person

with the expectation that he can shift the burden to someone
else, not as a tax but as a part of the purchase price.

• Income tax, estate and donor's tax are considered as direct

taxes. On the other hand, value-added tax, excise tax, other
percentage taxes, and documentary stamp tax are indirect
taxes.
KINDS OF TAXES
• As to tax rates:
• 1. Specific – tax of a fixed amount imposed by the head or number, or by some standard
of weight or measurement. (e.g. excise tax on cigar, cigarettes and liquors)
• 2. Ad valorem – tax based on the value of the property with respect to which the tax
is assessed. It requires the intervention of assessors or appraisers to estimate the value
of such property before the amount due can be determined. (e.g. real estate tax, income
tax, donor’s tax and estate tax)
• 3. Mixed – a choice between ad valorem and/or specific depending on the condition
attached.
• As to purposes:
• 1. General/fiscal or revenue – tax imposed solely for the general purpose of the
government. (e.g. income tax and donor’s tax)
• 2. Special/regulatory or sumptuary – tax levied for specific purpose, i.e. to achieve some
social or economic ends. (e.g. tariff and certain duties on imports)
• As to scope or authority to impose:
• 1. National tax – Tax levied by the National Government. (e.g. income tax, estate
tax, donor’s tax, VAT, other percentage taxes and documentary stamp taxes)
• 2. Local or municipal – Tax levied by a local government. (e.g. real estate tax
and community tax)
• As to graduation:
• 1. Progressive – A tax rate which increases as the tax base or bracket increases. (e.g.
income tax, estate tax and donor’s tax)
• 2. Regressive – The tax rate decreases as the tax base or bracket increases.
• 3. Proportionate – A tax of a fixed percentage of amounts of the base (value of the
property, or amount of gross receipts etc.). (e.g. VAT and other percentage taxes)
Administrative Provisions on Income Taxation
Stages of Taxation
1st Stage

Legislative Aspect Levying of Tax

2nd Stage

Administrative Aspect Assessment & Collection

3rd Stage

Payment Stage

4th Stage

Refund
• Tax Assessment
• It refers to the valuation and appraisal of the subject of taxation. It is an
official action of an officer authorized by the law to determine the
amount of tax due, surcharges, penalties and interest.
Two instances where assessment is required:
1. When the tax period or deadline has been terminated by the BIR
Commissioner
2. When the tax deficiency has been determined because of failure to file
a return or a fraudulent return or has been filed.
Instances that warrants the termination of tax period thus, immediate
payment of tax is required:
1. Taxpayer is retiring from business subject to taxation
2. Taxpayer is leaving the territorial jurisdiction of the PH
3. Taxpayer is removing his/her property in the PH
4. Deliberately concealing his/her property
5. Taxpayer is doing acts amounting to obstruction of the proceeding on
tax collection
• Tax Deficiency
• Means that the amount of tax levied is more than what the taxpayer
paid as shown on his/her return
• Deficiency Assessment
• An assessment made after the examination, inspection, or
independent investigation by a revenue office of the taxpayer’s
records where deficiency had been found
• Fraud Assessment
• An assessment arising from false or fraudulent findings determined
by a revenue officer during the conduct of tax examination and
evaluation of a taxpayer’s records.
• Authority to make assessment
• The authority to make tax assessment is vested in the BIR Commissioner, or
it can be delegated to his/her authorized representative. However, the final
assessment can never be delegated to any subordinate officials of the BIR
Commissioner.
• Prescribed period of assessment
• The period of assessment refers to the time allowed by the law to
appraise and determine the total value or amount of the subject of
taxation
• Assessment period under the NIRC
1. Three years from the date of filing the return
a. If the return was filed before the last date of filing, the 3 year period will be
reckoned from the last day of filing.
b. If the return was filed after the last date of filing, the 3 years period will be
reckoned from the actual date of filing.
2. Ten years from the date of discovery or omission.
a. Failure to file a return
b. Return filed was false or fraudulent with intention to evade the tax
3. Agreement on the assessment period
1. Before the expiration of the 3 year period, the BIR Commissioner and the
taxpayer may agree in writing the period of assessment.
Compromise of Tax Cases
• What is compromise of Tax Cases?
• It is a contract whereby the parties involved, by reciprocal concessions, avoid
litigation or put an end to one already commence. Only the BIR Commissioner
vested with power to enter into a compromise agreement relating to taxes.
• Instances of tax liability that can be compromised:
• Involving Civil Cases:
a. A reasonable doubt as to the validity of the claim againts the taxpayer exists ; or
b. The financial position of the taxpayer demonstrates a clear inability to pay the assess
tax.
1. For financial incapacity
a. the minimum compromise rate of 10% of the basic assessed tax shall be
observed.
b. 20% of the basic assessed tax
• Taxpayer is dissolved corporation
• Company non-operation for a period of less than three years
• Taxpayer is declared insolvent, bankrupt, unless the taxpayer falls under any situation
above.
c. 40% of the basic assessed tax where the taxpayer has surplus or earnings deficit
resulting in impairment in the original capital by at least 50%.
2. For cases of doubtful validity of assessment is 40% of the basic assessed
tax.
• Involving Criminal Cases:
• Except in cases involving the commission of fraud or before
the criminal complaint has been filed in court, all criminal
violations may be compromised.
• The following cases may be compromised.
a. Delinquent accounts;
b. Pending cases under administrative cases;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts; and
e. Criminal violations other than those already filed in the court or those
involving criminal tax fraud.
• The following cases cannot be compromised.
a. Withholding tax cases;
b. Criminal tax fraud cases;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved schedule of installment
payments;
e. Cases where final reports of reinvestigation or reconsideration have
been issued where the taxpayer is agreeable;
f. Cases that became final and executory after final judgment of a court,
where compromised is requested on the ground of doubtful validity of
the assessment; and
g. Estate tax cases where compromise is requested on the ground of
financial incapacity of the taxpayer
• Informer’s reward:
• 10% based on revenues and surcharge imposed or collected for giving
of voluntary sworn statement information to the BIR.
• 10% based on tax imposed including surcharges and penalties or P1M
whichever is lower, for violations of the Tax Code.
• 10% based on fair market value or P1M, whichever is lower, for the
discovery and seizure of smuggled goods
The cash reward of informers shall be subject to income tax, collected as
final withholding tax, at the rate of 10%.
• Imposition of Surcharges and Penalties
• Surcharges arises because of late filing of the return and delinquency in
payment of tax liabilities
1. 25% surcharge on the following cases:
a. Late filing of the return
b. Late payment of the tax due
c. Filing in a wrong revenue office
d. Failure to pay deficiency tax assessment on the prescribed time

2. 50% surcharge on the following cases:

a. Willful neglect to file the return
b. False or fraudulent return filed

3. 20% interest per annum from the date of payment is due up to the date
of full payment based on the basic tax due and payable.
 INCOME TAXATION
• Income taxation is in the nature of an excise taxation system, or taxation on the
exercise of privilege, the privilege to earn yearly profits from various sources. It is
a system that does not provide for the taxation of property
• Income
• Income refers to all wealth which flows into the taxpayer other than as mere
return of capital. It includes the forms of income specifically described as gains
and profits, including gains derived from the sale or other disposition of capital
assets (R.R. No. 2, Sec. 36).
• Income tax systems
1. Global tax system – System employed where the tax system views
indifferently the tax base and generally treats in common all categories
of taxable income of the individual.
2. Schedular tax system – System employed where the income tax treatment
varies and is made to depend on the kind or category of taxable income of
the taxpayer.
3. Semi-schedular or semi-global tax system – All compensation income,
business or professional income, capital gain, passive income, and
other income not subject to final tax are added together to arrive at the
gross income. After deducting the allowable deductions and exemptions
from the gross income, the taxable income is subjected to one set of
graduated tax rate for individual or normal corporate income tax rate for
corporation.
• When income is taxable
• Existence of income
• There must be income before there could be income taxation
• Realization of income
• Revenue is generally recognized when both of the ff. conditions are met:
• The earning process is complete or virtually complete
• An exchange has taken place
• Recognition of income
• For tax purposes, income considered received:
• If actually or physically received by the taxpayer
• If constructively received by the taxpayer
• Features of the Philippine Income Tax Law
1. indirect tax is a tax demanded in the first instance from one person in
the expectation and intention that he can shift the burden to
someone else (i.e. value-added tax [“VAT”], where the seller is liable to
pay the output VAT, but shifts the burden to the buyer).
2. Progressive tax– Tax base increases as the tax rate increases. It is
founded on the “ability to pay” principle.
3. Comprehensive – It adopted the citizenship principle, the residence
principle and the source principle.
4. Semi-schedular or semi-global tax system
• Test in determining whether income is earned for tax purposes:
• Realization test
• There is no taxable income unless income is realized. Revenue is recognized
when the ff. conditions are met:
• The earning process is complete or virtually complete
• An exchange has taken place
• Claim of right doctrine
• A taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite unconditional obligation to
return to or repay.
• Economic Benefits test
• Income realized is taxable only to the extent that the taxpayer is
economically benefited.
• Severance Test
• Income is considered realized when there is separation of something which
is of exchangeable value.
 • Criteria in imposing Philippine income tax
1. Citizenship or nationality principle– A citizen of the Philippines is subject to
Philippine income tax
a. a. On his worldwide income, if he resides in the Philippines;
b. b. Only on his income from sources within the Philippines, if he qualifies as
a non-resident citizen.
2. Residence or domicile principle–A resident alien is liable to pay Philippine
income tax on his income from sources within the Philippines but is exempt
from tax on his income from sources outside the Philippines.
3. Source principle – An alien is subject to Philippine income tax because he
derives income from sources within the Philippines. A non resident alien or non-
resident foreign corporation is liable to pay Philippine income tax on income
from sources within the Philippines, despite the fact that he has not set foot in
the Philippines

INCOME RC NRC RA NRA DC FC

W/IN Y Y Y Y Y Y
W/OUT Y N N N Y N
 • Taxable Period
• Taxable period is a period within which the net income is computed as a whole
for income tax purposes.
• Kinds of taxable periods
1. Calendar period
• The 12 consecutive months starting from January 1 and ending December
31.
• Instances when calendar year shall be the basis for computing net income
• When the taxpayer is an individual
• When the taxpayer does not keep books of account
• When the taxpayer has no annual accounting period
• When the taxpayer is an estate or a trust
• NOTE: Taxpayers other than a corporation are required to use only the
calendar year.
• The final adjustment return shall be filed on or before the fifteenth (15th)
day of April.
2. Fiscal period
• It is a period of 12 months ending on the last day of any month other than
December (NIRC, Sec. 22 [Q]).
• NOTE: The final adjustment return shall be filed on or before the fifteenth
(15th) day of the fourth (4th) month following the close of the fiscal year.
3. Short period
• GR: The taxable period, whether it is a calendar year or fiscal year always
consists of 12 months.

• XPN: Instances when the taxpayer may have a taxable period of less than
12 months:
a. When the corporation is newly organized and commenced operations on
any day within the year
b. When the corporation changes its accounting period
c. When a corporation is dissolved
d. When the Commissioner of Internal Revenue, by authority, terminates
the taxable period of a taxpayer (NIRC, Sec. 6[D]).
e. In case of final return of the decedent and such period ends at the time of
his death
INCOME TAXATION FOR INDIVIDUAL TAX
PAYER

Individual Taxpayer

Gross Taxable Income

1. Compensation
2. Business/Profession
3. Passive Income
4. Income from dealings of property
5. Other taxable income

Type of Income Tax

1. Basic or Regular tax
2. Final Tax
3. CGT
 INCOME TYPE INCOME TAX RATE
Purely Compensation Income Regular/Basic tax rates (graduated) Sec.24(A)(2)(a)
of NIRC, as amended

Purely business or professional income • Total gross sales or gross receipts do not
exceed VAT threshold (P3M)- Taxpayer has the
option to be taxed @ 8% tax rate on gross
sales/receipts & other non-operating income in
excess of P250k in lieu of basic tax rates and
percentage tax
• Total gross sales or gross receipts exceed VAT
threshold (P3M)-regular/basic tax rates

Mixture of the ff: • Regular/Basic tax rates (graduated)

1. Compensation Sec.24(A)(2)(a) of NIRC, as amended
2. business/profession, • Total gross sales or gross receipts do not
3. passive income, gains from dealings of exceed VAT threshold (P3M)- Taxpayer has the
property and other income option to be taxed @ 8% tax rate on gross
sales/receipts & other non-operating income in
lieu of basic tax rates and percentage tax
• Total gross sales or gross receipts exceed VAT
threshold (P3M)-regular/basic tax rates
• Regular/Basic tax rates (graduated)
Sec.24(A)(2)(a) of NIRC, as amended,Final Tax
rate, CGT and varying taxes
INCOME TAX FOR CORPORATE TAXPAYER

Corporate Taxpayer

Gross Taxable Income

1. Business Income
2. Passive Income
3. Income from dealings of property
4. Other taxable income

Type of Income Tax

1. Corporate tax
2. Final Tax
3. CGT
 INCOME TYPE INCOME TAX RATE
Business Income • Basic tax rate of 30% of net taxable income
or 2% of the gross taxable income,
whichever is higher
• Basic tax rate of 10% for proprietary
educational institution and hospitals
Passive Income, gains from dealings in Basic tax rate of 30%, final tax rate, or CGT at
properties, and other income varying tax rates.
GROSS INCOME
Except when otherwise provided, gross income means all income derived from whatever
source, including but not limited to the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions and similar items
2. Gross income derived from the conduct of trade or business or the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner’s distributive share from the net income of the general professional partnership (NIRC, Sec. 32
[A])
Two kinds of Gross Income
1. Taxable- Compensation, Business Income, Gains from property, Passive income, & other taxable
income
2. Non-Taxable-Life insurance proceeds, return of premium, gifts, bequest, devises, compensation on
injuries, retirement benefits, and non-taxable income.
• GROSS COMPENSATION INCOME

• Compensation income includes all remuneration for services rendered by an employee for his employer
unless specifically excluded under the NIRC

1. Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions and similar items
2. Commission
3. Honoraria
4. Allowances
5. 13th month pay and other benefit
6. Holiday pay, overtime pay, night shift differential, and hazard/emergency
pay
7. Separation pay
8. Retirement pay
9. Sick & Vacation leave
10. Fringe benefits

• An employee refers to an individual performing a service under an employer-employee relationship.

• An employer refers to any person for whom an individual performs or performed any service, of whatever
nature, under an employer-employee relationship.
• Salary, wage, or fee
• Salary is generally earnings paid on regular interval
• Wage is paid on an hourly or daily basis.
• Fee implies payment to an individual who is of authority such as
director’s fee, legal fee, accountant’s fee or fee for the conduct of
religious ceremony
• Commission
• It refers to payment made based on a certain percentage of output.
• Honoraria
• Are earnings derived from services usually undertaken by individuals
considered experts in a particular field. (Ex. Board exam reviewer)
• Allowances
• May either be fixed or variable.
• Fixed- when it is attached to the position or office
• Variable- when it changes accordingly as influenced by certain factors such
as number or visitors, distance of travels, and seminars.
• 13th month
• It is equivalent to the mandatory one-month basic salary.
• It is computed by dividing the total basic salary during the year by 12
months.
• Other benefits include Christmas bonus, incentive bonus, gifts in cash
or kind, and other benefits of similar nature.
• What is De minimis benefits
• They are those given by an employer to its employees on top of their
regular salaries for the general welfare of the latter. They are usually of
relative small value; hence, they are non-taxable.
• General Rule
• De minimis, 13th month, gifts, and bonuses not exceeding P90k are not
taxable nor be subject to withholding tax.
• XPn
• When it exceeds the threshold of P90k, the excess shall be subject to tax
and will be part of the taxable income
DE MINIMIS BENEFITS
1. Convertible unused vacation leave credits of private employees not exceeding ten days
during a year.
2. The convertible value of vacation and sick leave credits paid to government officials and
employees
3. Medical cash allowance to dependents of employees not exceeding 1,500 per semester
(before it was 750.00) or 250.00 per month (before 125.00)
4. Rice subsidy of 2 000.00 (replaced the amount of 1500.00) or one sack of 50 kg. Rice per
month amount to not over 2, 000.00
5. Uniform and clothing allowance not exceeding 6 000 per year (replaced the amount of 5
000)
6. Actual medical assistance, e.g., a therapeutic benefit to cover medical and healthcare
needs, annual medical/executive check-ups, maternity assistance, and routine
consultations, not exceeding 10 000 yearly.
7. Laundry allowance not exceeding 300 per month
8. Employees’ achievement awards, e.g., for a length of service or safety achievement,
employees’ achievement awards must be as tangible personal property other than cash
or gift certificates. It has an annual monetary value not exceeding 10,000 received by
the employee under an established written plan. This benefit does not discriminate in
favor of highly paid employees.
9. Any gifts received during Christmas and major anniversary celebrations not exceeding
5000 per employee once a year.
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of
the basic minimum wage on per region basis
11. Last, benefits received by an employee by a collective bargaining annual monetary value
received from both this and productivity incentive schemes combined do not exceed 10
000 per employee per taxable year.
• Hazard pay
• It means the amount paid by the employer to employees who were
actually assigned to danger or strife-torn areas, disease-infested places,
or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril of life.
• Night shift differential pay
• Addt’l 10% of the basic hourly pay when an employee works @
10:00pm to 6:00 am.
• Holiday and overtime pay is taxable
• Separation pay
• Taxable if the employee voluntary separates himself from employment
• Non-Taxable (Involuntary) of the ff:
• Prolonged sickness
• Disability
• Death
• Reorganization of the company
• Bankruptcy
• Retirement pay
• General Rule: Taxable
• XPN
• The retirement plan of the company has been approved by the
Commissioner of the BIR
• The retiree should have been connected with the company for at least 10
years.
• The retire should be at least 50 years old
• First time availment by the retiree
• It must be fair and equitable to all employees regardless of position
• Sick and Vacation Leave
• General Rule:
• The salary of an employee on Sick or vacation leave is taxable
• XPn
• Cash value of unutilized vacation leave of 10 days or less are not taxable
(part of de minimis benefits)
• Fringe Benefits
• Defined as any goods, services, or other benefits furnished or granted in cash or in kind by an employer to an individual employee,
except rank and file employees, such as, but not limited to, the following:
• Housing.
• Expense account.
• Vehicles of any kind.
• Household personnel (e.g. maid, driver).
• Interest on a loan at less than the market rate (currently set at 12%) to the extent of
the difference between the market rate and the actual rate granted.
• Membership fees, dues, and other expenses borne by the employer for the
employee in social and athletic clubs and similar organizations.
• Expenses for foreign travel.
• Holiday and vacation expenses.
• Educational assistance to the employee and dependents.
• Premiums for life insurance, health and other non-life insurance, and similar amounts
in excess of what the law allows.

• The following fringe benefits are not taxable:

• Fringe benefits required by the nature of or necessary to the trade, business, or
profession or for the convenience or advantage of the employer.
• Benefits authorized by and exempted from tax under special laws.
• Employer contributions for the benefit of the employee to retirement, insurance, and
hospitalization benefit plans.
• Benefits given to rank and file employees, whether or not granted under a collective
bargaining agreement. However, these are subject to WHT on compensation, unless
otherwise tax exempt.
• De minimis (small value) benefits as defined and enumerated in the rules and
regulations.
• Professional Income
• It refers to the fees received by a profession from the practice of his profession,
provided that there is no employer-employee relationship between him and his
clients. (E.g. Physician, CPA, and Lawyers).
• Business Income
• it represents gain or profit derived from the investment of money, goods,
services, or their equivalent

• Gross income derived from business

• Gross income derived from business shall be equivalent to gross sales less sales
return, discount and allowances and cost of good sold. For the sale of service, “gross
income” means gross receipts less sales return, allowances and discount.

• Cost of good sold

• It includes all business expenses directly incurred to produce the merchandise, to
bring them to their present location and use of such as invoice cost of the goods sold,
for a trading concern, or cost of production for a manufacturing concern.
• Cost of services
• All direct cost and expenses necessarily incurred to provide the service required by
the customer and clients including:
• Salaries and employee benefits of personnel, consultant, and
specialist directly rending the service
• Cost of facilities directly utilized in providing the service.
• Methods of Accounting
• Accounting methods for tax purposes comprise a set of rules for determining how to report income
and deductions.
• The law does not provide for a specific method of accounting to be employed by Taxpayer except for
the ff:
• The taxpayer does not employ a method for computing income
• The taxpayer’s method for accounting does not clearly reflect the income.
• Kinds of accounting method
• Cash method
• The income, profits, and gains are reported as gross income when received, and expenses are
deductible when paid.

• The following individuals usually report their income under the cash basis.
• Taxpayers who do not keep book of accounts and other accounting records
• Taxpayers who employ the cash receipts and disbursement method
• Taxpayers with inadequate accounting records
• Example
Total in the cash receipt book 250,000.00
Account receivables 10,000.00
Account payables 15,000.00
Total Cash disbursement 80,000.00
Rent payables 5,000.00
Unpaid utilities 2,000.00

Cash Method
Total in the cash receipt book 250,000.00
Less: Cash disbursement 80,000.00
Gross taxable Income 170,000.00
• Accrual method
• Income is recognized in the period it is earned, regardless of
whether it has been received or not. Same with the treatment of
expenses.
• E.g.
• At the end of 2023, Pasto Company reported the ff:

Sales on account P2,000.00

Cash sales P1,500.00
Cost of sales P1,000.00
Salaries P100.00

• In 2023, the company collected 30% of the sales on account

• Sales (P2,000.00+ P1,500.00) P3,500.00

• Less: Cost of sales P1,000.00
• Gross Income P2,500.00

• Installment method
• Gross income is recognized and reported in proportion to the
collection from the installment sales
• Percentage of completion ( in long-term contracts)
• The estimated gross income from construction is reported based on
the percentage of completion of the construction project.

• There are two methods used in a long-term construction contract.

• Percentage completion method reports income based on the progress of work.

• Completed contract method reports income only upon completion of the project

• Spread-out Method and outright method

• it is used to report income earned from leasehold improvements
where the lessee introduced such improvements, and these
improvements have formed part of the property of the lessor at the
end of the lease term.
• Deferred payment
• A method of recognizing income is a variation of the installment method because properties are
sold on an installment basis, but the initial payment exceeds the selling price by 25%. If the initial
payment, therefore, is not more than 25% of the selling price, then the installment method shall
be used.
• The amount of income usually recognized in the deferred payment method is the difference
between the selling price and the cost of the property.

• E.g
• In 2023, a real estate dealer sold a real estate costing P1.5M for P3.5M on an installment
plan. The buyer made a down payment of P2M and the balance is payable in two equal
installments.

• The sale is without a mortgage to be assumed by the buyer, hence, the selling price is equal
to the contract price. The percentage of the initial payment to the selling price is
57.1%(P2M/P3.5M); hence, the taxpayer is not eligible for the installment method.

• The gross profit is computed as follows:

Sales P3.5M
Less: cost P1.5M
Gross Profit P2.0M
• The annual installment collection will be:
Selling price P3.5M
Less: DP P2.0M
Bal P1.5M
Divide by # instalmnt 2
Annual collection P750.00
• Income to be reported under the deferred payment method
2023(P2M-P1.5M) P500k
2024 collection P750K
2025 collection P750k
Total Income P2.0M
• Computation of gross business income
• The basic rule is that the taxpayer shall adopt a method of computing
income provided that the method employed reflects the true results of
the operation

• The following business entities are classified according to their nature:

• Merchandising
• Service
• Manufacturing
• Agriculture
• Construction
• Gross income for Merchandising and manufacturing business
Gross sales XXX
Less: Sales discount XXX
Sales ret & all. XXX XXX
Net Sales XXX
Less: Cost of Sales XXX
Gross Income XXX

Cost of Sales computation for Merchandising business

Merchandise Inventory, Beg XXX
Add: Purchase XXX
Freight in XXX
Total XXX
Less: Purchase discount XXX
Purchase ret & all. XXX XXX XXX
Total goods available for sale XXX
Less: Ending Inventory XXX
Cost of sales XXX
• Cost of sales for Manufacturing Business
Raw mats. inventory Beg XXXX
Add: Raw mats purchases XXXX
Raw Mats available for use XXXX
Less: raw mats inventory, ending XXXX
Raw Mats used XXXX
Add: Direct labor XXXX
Factory Overhead XXXX XXXX
Total Manufacturing XXXX
Add: work in process, beg XXXX
Total work in process XXXX
Less: work in process, end XXXX
Cost of goods manufactured XXXX
Add: Finished goods, Beg XXXX
Total Available goods for sale XXXX
Less: Finished goods, Ending XXXX
Cost of sales XXXX
• Gross income for Service/Professional Income

Gross receipts XXXX

Less: Sales Discounts XXXX
Net Sales XXXX
Less: Cost of Services XXXX
Gross Income XXXX

Cost of Services Computation

W & S of personnel XXXX

Cost of supplies XXXX
Honorarium of specialist XXXX
Depreciation of equipment XXXX
Rental payment XXXX
Cost of Services XXXX
• PASSIVE INVESTMENT INCOME
• Passive income refers to income derived from any activity in which the
taxpayer has no active participation or involvement
• An income subject to final tax refers to an income wherein the tax due
is fully collected through the withholding tax system. Under this
procedure, the payor of the income withholds the tax and remits it to
the government as a final settlement of the income tax due on said
income. The recipient is no longer required to include the item of
income subjected to final tax as part of his gross income in his income
tax return
 Other taxable income
• Interest income
• Rental income
• Dividend income
• Annuities
• Prizes and winnings
• Recovery of account written off
• Tax refund

• INTEREST INCOME
• It is the amount of compensation paid for the use of money or forbearance
from such use.
• Tax exempt interest income
1. From bank deposits. The recipient must be any following tax-exempt recipients
a) Foreign government
b) Financing institution owned , controlled, or finance by foreign government
2. Regional or international financing institution established by foreign govt.
3. On loans extended by any of the above-mentioned entities
4. On bonds, debentures, and other certificate of indebtedness received by any
of the above-mentioned entities(NRA & NRC only).
5. On bank deposit maintained under the expanded foreign currency deposit.
6. From long term investment or deposit with a maturity period of 5 years or
more
• Rental Income
• Is a fixed sum, either in cash or in property equivalent, to be paid
at a definite period for the use or enjoyment of a thing or right.
All rentals derived from lease of real estate or personal property,
of copyrights, trademarks, patents and natural resources under
lease.
• the amount of taxable rent income shall be the sum of the
following:
• Current rent or lease payment
• Advance rent payment or security deposit without restriction
• Payment of the lessee to third parties such as interest, taxes, loans,
and insurance premium in behalf of the lessor
• Uncollected rent income earned already(accruals) at the end of the
period
• Income from leasehold improvement
• Leasehold improvement income
• Leasehold improvements are additions, improvement, major
renovations or completely new structures to the existing property in
order to improve its present condition, appearance or working
capacity.
• Dividend Income
• Is any distribution made by a corporation to its shareholders out
of its earning or profits and payable to its shareholders, whether
in money or in other property
• Kinds of dividends
1. Cash dividend- paid in given sum of money
2. Property dividend- one paid in corporate property such as
bonds, securities, or stock investment held by the corporation,
not its own stock. They are taxable to the extent of the fair
market value of the property received at the time of
distribution.
3. Stock dividend- one paid by a corporation with its own stock
4. Scrip dividend- a form of dividend payment through the
issuance of a promissory note.
5. Liquidating dividend- one resulting from the distribution by a
corporation of all its property or assets in complete liquidation
or dissolution.
• Dividends received from DC
• Dividends received by a DC and RFC from a domestic corp shall
not be subject to tax
• Dividends received by a NRFC from DC shall be subject to 15%
FWT known as Tax sparing rule.

Tax Sparing Rule

The dividends received shall be subject to 15% FWT, provided that the
country in which the corporation is domiciled either (1) allows a tax
credit of 15% against the taxes due from foreign corp. for taxes deemed
paid; or (2) does not impose income tax on such dividends; otherwise,
the dividend shall be subject to 30%.
• Dividends received from Foreign Corp.
• Dividends received by a DC from foreign corp. shall be subject to
30% NCIT;
• Dividends received by RFC and NRFC from a foreign corp. shall be
subject to 30% NCIT, if the income of the foreign corp. is derived
from sources within the Ph; If the said income is derived from
sources outside the PH, the dividends received shall be exempt
from tax.
• ANNUITIES AND PROCEEDS FROM LIFE INSURANCE OR
OTHER TYPES OF INSURANCE.
• It refers to the periodic installment payment of income or
pension by insurance companies during the life of a person or for
a guaranteed period of time, whichever is longer, in consideration
of capital paid by him.
• The portion representing return of premium is not taxable while
that portion that represents interest is taxable.
• Illustration:
• X purchase a life annuity for P200k which will pay him P20k a year.
The life expectancy of X is 12 years. How much excluded from the
gross income of X?
• Ans. The P200k is excluded from the gross income of X since it
represents a return of premiums which is not income but a return of
capital.
• PRIZES AND AWARDS
• It refers to amount of money in cash or in kind received by
chance or through luck and is generally taxable except if
specifically mentioned under the exclusion from computation of
gross income under Sec. 32(B) of NIRC.

1. Prizes, awards, and winnings shall be included in the

computation of the gross income if:
a) Received by an individual from PH sources, and the amount of
prizes or winnings is P10,000.00 or less. Except winning from
PCSO, which are tax-exempt.
GAINS FROM DEALINGS IN PROPERTIES
• They are income derived from the sale or exchange of assets,
whether ordinary or capital.

• Gains represents the excess of the selling prices over cost or

other determinable value. Meanwhile, losses are the excess of
costs and related expenses over the selling price.
• Gain from dealings in property is one of the major items
comprising the gross taxable income.
• The basic principle is that gains derived from dealings in
property, by way of sale or exchange, are taxable, and losses
incurred thereof are deductible.
• DETERMINATION OF GAIN/LOSS

• Sale of Property
• Selling price XXX
• Less: Cost XXX
• Gain/Loss XXX

• Exchange of Property
• Fair Market Value XXX
• Less: Cost XXX
• Gain/Loss XXX
TYPES OF PROPERTIES FROM WHICH INCOME MAY BE DERIVED

1. Ordinary Assets- refer to properties held by the taxpayer

used in connection with his trade or business which includes
the following:
a) Stock in trade of the taxpayer or other property of a kind which
would property be included in the inventory of the taxpayer if
on hand at the close of the taxable year;
b) Property held by the taxpayer primarily for sale to customers in
the ordinary course of trade or business;
c) Property used in the trade or business of a character which is
subject to the allowance for depreciation provided in the NIRC;
or
d) Real property used in the trade or business of the taxpayer
• EXAMPLES OF ORDINARY ASSETS

1. Motor vehicles of a person engaged in transportation business

2. Machinery and equipment of a manufacturing concern subject
to depreciation
3. Condominium building owned by a realty company, the units of
which are rent or for sale
4. Merchandise inventory of the business
5. Real property acquired by a real estate developer
6. Real property acquired by a real estate dealer
7. Real property for lease/rent of a real estate lessor
• Capital Assets- Include property held by the taxpayer (whether
or not connected with his trade or business) other than
enumerated under Ordinary Assets.

• EXAMPLES
1. Residential houses and land owned and used as such;
2. Stock and securities held by taxpayers other than dealers of
securities
3. Automobiles not used in the business
4. Jewelry not used for trade or business
• DISTINGUISH CAPITAL ASSET VS. ORDINARY ASSET

“ Capital assets” include property held by the taxpayer whether or

not connected with trade or business, but the term does not
include any of the following considered as “ordinary assets”.(SOUR)
a) Stock in trade of the taxpayer or other property of a kind which
would property be included in the inventory of the taxpayer if
on hand at the close of the taxable year;
b) Property held by the taxpayer primarily for sale to customers in
the ordinary course of trade or business;
c) Property used in the trade or business of a character which is
subject to the allowance for depreciation provided in the NIRC;
or
d) Real property used in the trade or business of the taxpayer
• Computation of the amount of Gain or Loss
Gains derived from dealings in property means all income derived
from disposition of property whether real, personal, or mixed for:
1. money, in case of sale
2. Property, in case of exchange
3. Combination of both sales and exchanges which resulted in
gain.

Gain is the difference between the proceeds of the sale or

exchange and the acquisition value of the property disposed by the
taxpayer.
• ORDINARY AND CAPITAL GAIN/LOSS
a) Ordinary gain- refers to the excess of the selling price over the
cost of an ordinary asset.
b) Ordinary loss- is the excess of the costs over the selling price of
an ordinary asset being sold or exchanged.
c) Capital loss- is the excess of the cost over the selling price of a
capital asset.
d) Capital gain- refers to the excess of the selling price over cost or
other determinable value of a capital asset.
e) Net capital gain- is the excess of capital gains from capital
losses in the disposition or exchange of capital assets
f) Net capital loss- is the excess of capital losses over capital gains
in the sales or exchange of capital assets

The rationale in determining whether the capital asset is ordinary

or capital asset is they are subject to different rules. There are
special rules that apply only to capital asset transactions to wit:
1. Holding period
2. Capital loss limitation
3. Net capital loss carry-over (NELCO)
• What is a holding period?
• It refers to the percentage of the gain or loss taken into account
in computing the net capital gain, net capital loss and net income.

The allowable percentage are as follows:

1. 100% if the capital assets are held one year or less (short-term)
2. 50% if the capital assets are held more than one year (long-term)
• The holding period is applicable only to individual taxpayer.

• What is a “net capital loss carryover?

• It means that if any taxpayer, other than a corporation sustains in
any taxable year a net capital loss, such loss shall be treated in
the succeeding taxable year as a loss from the sale or exchange
of a capital asset held for not more than 12 months
• Preferential Tax Treatment

1. Ordinary losses are deductible from capital gains

2. Net capital losses are deductible from capital gains
3. Capital losses are deductible only from capital gains
4. A holding period is taken into account in computing capital gain
or loss. The allowable percentage are as follows:
1. 100% if the capital assets are held one year or less
2. 50% if the capital assets are held more than one year
5. Net capital loss carry over is allowed under the following
conditions:
1. The amount of net capital loss to be applied does not exceed the
net income before exemption on the year when the capital loss
was incurred.
2. Taxpayer is an individual taxpayer
3. The holding period is not more than 12 months.
• EXAMPLE 1
• The following data during the taxable period of Mr. Pogi.

• Gross income from business 1,500,000.00

• Short-term capital gain 70,000.00
• Short-term capital loss 60,000.00
• Long-term capital gain 50,000.00
• Long-term capital loss 35,000.00

• Mr. Pogi’s gross taxable income is

• Gross income from business 1,500,000.00
• Add: capital gain
• Long-term capital gain(50k x 50%) 25,000.00
• Short-term capital gain(70k x 100%) 70,000.00
• Total capital gain 95,000.00
• Less: capital loss
• Long-term( 35k x 50%) 17,500.00
• Short-term(60k x 100%) 60,000.00
• Total capital loss 77,500.00 17,500.00
• Gross taxable income 1,517,500.00
• EXAMPLE 2
LAST YEAR CURRENT YEAR
• Gross income from business 30,000.00 300,000.00
• Short-term gain 40,000.00
• Short-term loss 80,000.00
• Long-term gain 320,000.00
• Long-term loss 40,000.00

LAST YEAR CURRENT YEAR

• Gross income from business 30,000.00 300,000.00
• Add: capital gain
• Long-term gain 160,000.00
• Short-term gain 40,000.00
• Total capital gain 40,000.00 160,000.00
• Less: capital loss
• Long-term loss (20,000.00)
• Short-term loss (80,000.00)
• Capital loss carryover (30,000.00)
• Total capital loss (40,000.00) 110,000.00
• Gross taxable income 30,000.00 190,000.00
• BASIC RULES OF ORDINARY GAINS AND LOSSES
1. If there is only an ordinary gain, it is included in the gross
taxable income
2. If there is only an ordinary loss, it is included as part of the
allowable deduction
3. If there is an ordinary gain and ordinary loss, the ordinary loss
is deducted from the ordinary gain, and the difference is
treated as follows:
1. If the difference is net ordinary gain, it is part of the gross taxable
income
2. If the difference is net ordinary loss, it will be treated as allowable
deduction in the gross taxable income.
 TRANSACTION TAX RATE
1.Sale of real property in PH not CGT-6% based on the gross selling price or FMV
considered as principal residence whichever is higher
2.Sale of real property in PH considered as Tax-exempt provided compliance with the requirements
principal residence
3. Sale of real property outside the PH by Subject to basic tax rate
RC and DC
4. Sale of real property in the PH by NRC Selling Price-Final tax of 35%
5. Sale of share of stock held as capital Tax-exempt for income tax but the sale is subject to
asset of DC through local stock exchange percentage tax of 6/10 of 1% based on gross selling price
or initial public offering or gross value in money
6. Sales of share of stock held as capital Net capital gain is subject to 15% final tax.
asset of DC outside of local stock exchange
7. Sale of other capital asset other than 1. If there is only capital gain-part of gross taxable
above mentioned income.
2. If only is capital loss-not deductible in gross taxable
income
3. If there is capital gain and loss:
1. If result in net capital gain-part of GTI.
2. If result in net capital loss-not deductible in GTI
3. If taxpayer is NRA-NETB-can be carried over to
ff. year as deduction to capital gains to the
extent of the capital gain
• What is real property?

• Those are assets with the following attributes: a permanent

structure, immovable, usually attached to the soil, and with a
lifespan extending beyond one year. They may be subject to
depreciation or not.
• Examples.
• Building
• Lands
• Machineries and equipment attached to the land or building
SALE OF HOUSING UNIT TO THE GOVERNMENT
The tax option by the taxpayer if a housing unit is
sold to the government or its political subdivision are the
following:
1. Be subject to 6% final tax

“The basis of 6% final tax will be the selling price or

the zonal value, whichever is higher.”

2. Be subject to normal or basic tax

“The sale proceeds are withheld by 6% tax and the

amount of withholding tax is credited against the basic
tax upon filing the income tax system.”
EXAMPLE
• a real estate developer develop 15 lots with constructed
houses and sold for 3.5M each with a total cost of 2.8M. The
zonal value of the H&L was 3M. The company spent 7m for its
operating cost during the taxing period.
• 2 H&L were sold to the LGU and the remaining 13 H&L were
sold to the private individuals

Compute the tax on the following options:

1. Seller opted for 6% final tax

a) 2 units were sold to LGU
(2 unitx x 3.5M) 7M
Multiply by: Final Tax 6%
FINAL TAX 420K
b) 13 units were sold to private individual

Sales (13 units X 3.5M) 45,500,000.00

Less: Cost of lots (13 x 2.8M) 36,400,000.00
Gross Income 9,100,000.00
Less: Operating expenses 7,000,000.00
Net Taxable Income 2,100,000.00
Multiply by: Corporate tax 30%
Income Tax Due 630,000.00

Total tax paid

Final Tax 420K
Income Tax Due 630K
Total Tax 1,050,000.00
2. The seller opted for a normal tax
a) 2 units were sold to LGU
(2 unitx x 3.5M) 7,000,000.00
Multiply by: Final Tax 6%
Creditable withholding tax 420,000.00

b) 13 units sold to the private individuals

Sales (13 units X 3.5M) 45,500,000.00
Less: Cost of lots (13 x 2.8M) 36,400,000.00
Gross Income 9,100,000.00
Add: Gains from the sale to LGU
(3.5M-2.8M) X 2 units 1,400,000.00
Total Gross Income 10,500,000.00
Less: Operating Expenses 7,000,000.00
Net Taxable Income 3,500,000.00
Multiply by: Corp. Tax 30%
Income Tax Due 1,050,000.00
Less: Creditable withholding tax 420,000.00
Total Income tax payable 630,000.00
• COST OF A NEW PRINCIPAL RESIDENCE
The cost of a new principal may either be higher or lower than the
proceeds from the disposal.

There shall be no tax implication if the cost of the new principal

residence is higher than the proceeds from the disposal of an old
residence.

However, if the cost of the new principal residence is less than the
proceeds from sale of the old one, the unutilized portion is subject to
6% final tax.

The formula:

Taxable Income = (Unutilized portion of the SP/ GSP of old residence)X

GSP or Zonal Value whichever is higher
• INSTALLMENT PAYMENT OF CAPITAL GAINS TAX

• Sec. 49 of the Tax Code allows option to pay capital gains tax
in installment subject to the ff. conditions:
1. The taxpayer is an individual taxpayer.
2. The initial payment does not exceed 25% of the GSP

If the capital assets are sold on a cash basis, the installment method
of paying capital gains tax cannot be availed.

The basic formula to compute the amount of capital gain tax due on
every installment is:

Installment amount of CGT= (Collection/Contract Price) X CGT

 EXCLUSION FROM GROSS INCOME
Refers to the flow of wealth to the taxpayers which are
not considered part of gross income for purposes of computing
the taxpayer’s taxable income due to the ff:
It is exempted by the fundamental law or by statue;
It does not come within the definition of income
The exclusion of income should not be confused with the
reduction of gross income by application of allowable
deductions. Exclusions are not taken into account in
determining gross income, however, deductions are subtracted
from the gross income.
• Exclusion under the Constitution

• Income derived by the government or its political subdivisions

from the exercise of any essential government function
• Income is exempt from gross income, if the source of income is
from any public utility or from the exercise of any essential
governmental functions.
• EXCLUSION UNDER THE NIRC

Items that are excluded in gross income and exempt from gross
income taxation:
1. Gifts, bequests and devises
2. Retirement benefits, pension, gratuities
3. Proceeds of life insurance policies
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Amount received by insured as return of premium
7. Miscellaneous tiems
1. 13th month pay and other benefits
2. Prizes and awards in sport competition
3. Prizes and awards
4. Income derived by foreign government
5. Income derived by the government or its political subdivision
6. GSIS, SSS, Medicare and other contributions
7. Gains from sale of bonds, debentures or other certificate of
indebtedness
8. Gains from redemption of shares in mutual fund
GIFTS, BEQUESTS AND DEVISES
The value of property acquired by gift, bequest, devise, or
descent is excluded from gross income. Provided, however, that
income from such property, as well as gift, bequest, devise or
descent of income from any property, in cases of transfer of
divided interest, shall be included in gross income.

Gift- is any transfer not in the ordinary course of business which

is not made for full and adequate consideration in money or
money’s worth. The giver is called the donor and the recipient is
called the donee.

Question: If A gave a gift to B. what are the tax implications?

Answer: A alone will be subject to donor’s tax under PD 69. The
value of the gift is not included in the gross income.
BEQUEST AND DEVISE
• Bequest- is a gift of personal property
• Devise- is gift of real property

Both are donations mortis causa and the giver is either known
as the testator or decedent while the recipient may by the heirs
or beneficiaries.

What is the tax implication of Bequest and Devise?

The estate of the testator or decedent is subject to estate
tax.
RETIREMENT BENEFITS, PENSION, GRATUITIES.

1. Retirement benefits under RA. 7641

2. SSS
3. GSIS Benefits
4. Separation pay
5. Benefits from the US Veterans Administration
6. Social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or non-resident
citizens or resident alien from Foreign government agencies
and other institutions, private or public.
7. Retirement received by officials and employees of private
firms, whether individual or corporate, in accordance with a
reasonable private benefits plan maintained by the
employer.
PROCEEDS OF A LIFE INSURANCE POLICIES
It is an insurance on human life and insurance
appertaining thereto or connected therewith.( IC, Sec. 179)

Requisites for the exclusion of the proceeds from gross

income
1. Proceeds of life insurance policies
2. Upon the death of the insured
3. Paid to the heirs or beneficiaries
4. Whether in a single sum or otherwise
• Guideline to be observed in handling the life insurance
proceeds policy:
1. As a general rule, proceeds of life insurance policies received by
the heirs or beneficiaries are not taxable
2. If the proceeds of the policy are being held by the insurer with
the agreement that an interest is to be paid thereon, the
interest received shall be excluded in the gross taxable income
3. If the insured personally received the proceeds or outlived the
policy, the proceeds are partly taxable and partly not. The
amount corresponding to the return of premium are not
taxable, and the excess amounts of premium are taxable
4. The proceeds are subject to tax if the beneficiary is the insured
himself or his estate subject to estate tax
5. If the insured transfers the life insurance to another person
with consideration and the proceeds upon the death of the
insured are paid to the transferee, the proceeds are taxable to
the extent that exceeds the consideration made
• COMPENSATION FOR INJURIES OR SICKNESS
this is the amount received, through accident or health
insurance or under Workmen’s Compensation Act, as
compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.

Kinds of compensation for injuries or sickness that may be

excluded from the gross income
1. Amounts received through accident or health insurance or
Workmen’s Compensation Act as the compensation for
personal injuries or sickness
2. Amounts of any damages received whether by suit or
agreement on account of such injuries or sickness
• Damages compensation that are not taxable:
1. Exemplary damages
2. Moral damages
3. Actual or liquidated damages for injuries
4. Damages for loss of earning capacity and for loss of goods or
belongings
• INCOME EXEMPT UNDER TAX TREATY
Income of any kind, to the extent required by any treaty obligation
binding upon the Government is exempt from tax

Reasons for grating tax exemption through a treaty

1. Reciprocity
2. To lessen the rigors of international juridical double taxation

Examples
1. RP- Japan Tax Treaty
2. RP-France Tax Treaty
3. RP-US Tax Treaty
RETURN OF PREMIUM PAID
Conditions for the exclusion of the return of premium
paid from the gross income
1. Amounts received by insured
2. As a return of premium paid by him
3. Under a life insurance, endowment or annuity contract
4. Either:
a) During the term
b) At the maturity of the term mentioned in the contract
c) Upon surrender of the contract
• FRINGE BENEFITS TAX

Treatment of Fringe benefits

1. If the employee receiving the fringe benefit is a rank- and-file

employee, the amount of the fringe benefit or its
corresponding monetary value shall be included in the gross
taxable compensation income
2. If the recipient of the fringe benefit are the supervisory or
managerial employees, the amount or the monetary value of
the fringe benefit shall be subject to fringe benefit tax.
FRINGE BENEFIT TAX COMPUTATION
FBT-Fringe Benefit Tax
FBTR-Fringe Benefit Tax Rate
GUMV- Grossed-up monetary value
GUMR- Grossed-up monetary rate
TAXPAYER CLASSIFICATION GUMR
RC, RA, NRC, NRA-ETB 65%
NRA-NETB 75%
1. Alien employed-Region or area HQ, Offshore 85%
banking, Service contract in petroleum
operation
2. Filipino employee occupying position held by
alien
Employee in Special economic zone, including Clark- 68%, 75%, 85%
SEZ, Subic –SEZ, and Free Trade Zone as the case may
be
 TAXPAYER CLASSIFICATION FBTR
RC, RA, NRC, NRA-ETB 35%
NRA-NETB 25%
1. Alien employed-Region or area 15%
HQ, Offshore banking, Service
contract in petroleum operation
2. Filipino employee occupying
position held by alien
Employee in Special economic zone, 35%, 25%, 15% as the case may be
including Clark-SEZ, Subic –SEZ, and
Free Trade Zone

FORMULA
Step 1: GUMV= Monetary Value/GUMR
Step 2: FBT= GUMV X FBTR
GROSSED-UP MONETARY VALUE CONSIST OF:

1. The net amount of money or net monetary value of

property received
2. The amount of fringe benefit tax due and paid thereon by
the employer for and in behalf of the employee.
SPECIFIC TYPES OF FRINGE BENEFITS
1. HOUSING PRIVILEGE
2. MOTOR VEHICLES

HOUSING PRIVILEGE FORMULA

Rules:
1. Employer leases a housing unit for the use of employee

Monetary value= Rental payment x 50%

2. The employer has its own residential property and assigned it for the use
of the employee

Monetary value= 50%(5% X FMV or ZV, whichever is higher)

3. Purchase of a property on an installment basis for the use of the employee

Monetary Value= 50% X ( 5% X Acquisition Cost)

4. Purchase of a residential property and transfer its ownership to the

employee

Monetary Value- 100% of FMV or ZV whichever is higher