Taxation may be defined as a State power, a legislative be required to contribute based on their relative capacity to

process, and a mode of government cost distribution. sacrifice for the support of the government.

1. As a state power In short, those who have more should be taxed more even if
Taxation is an inherent power of the State to enforce a they benefit less from the government. Those who have less
proportional contribution from its subjects for public shall contribute less even if they receive more of the
purpose. benefits from the government.
2. As a process
Taxation is a process of levying taxes by the legislature
of the State to enforce proportional contributions from Aspects of the Ability to Pay Theory
its subjects for public purpose. 1. Vertical equity
3. As a mode of cost distribution Vertical equity proposes that the extent of one's ability
Taxation is a mode by which the State allocates its proportional to the level of his tax base. to pay is directly
costs or burden to its subjects who are benefited by its
spending 2. Horizontal equity
Horizontal equity requires consideration of the particular
The Theory of Taxation circumstance of the taxpayer.
Every, government-provides a vast array of public services
including defense, public order and safety, health, Vertical equity is a gross concept while horizontal equity
education, and social protection among others. is a net concept.

A system of government is indispensable to every society. The Lifeblood Doctrine

Without it, the people will not relish the benefits of a
civilized and orderly society. However, a government Taxes are essential and indispensable to the continued
cannot exist without a system of funding. The government's subsistence of the government. Without taxes, the
necessity for funding is the theory of taxation. government would be paralyzed for lack of motive power to
activate or operate it. (CIR vs. Algue)
The Basis of Taxation
The government provides benefits to the people in the form Taxes are the lifeblood of the government, and their prompt
of public services, and the people provide the funds that and certain availability are an imperious need. Upon
finance the government. This mutuality support between taxation depends the government's ability to serve the
the people and the government is referred to as the basis people for whose benefit taxes are collected. (Veru vs
taxation. Fernandez)

Receipt of benefits is conclusively presumed Implication of the lifeblood doctrine in taxation:

Every citizen and resident of the State directly or indirectly 1. Tax is imposed even in the absence of a Constitutional
benefits from public services rendered by the government. grant.
These benefits can be in the form daily free usage of public 2. Claims for tax exemption are construed against
infrastructures, access to public health or education taxpayers
services, the protection and security of person and 3. The government reserves the right to choose the
property, or simply comfort of living in a civilized and objects of taxation.
peaceful society which is maintained by government. 4. The courts are not allowed to interfere with the
collection of taxes.
While most public services are received indirectly, their 5. In income taxation:
realization by every citizen and resident is undeniable. In a) Income received in advance is taxable upon receipt.
taxation, the receipt of these benefits by a people is b) Deduction for capital expenditures and
conclusively presumed. Thus, taxpayers cannot avoid prepayments is not allowed as effectively defers
payment of tax under the defense of absence of benefit the collection of income tax.
received. The direct receipt or actual availment of c) A lower amount of deduction is preferred when a
government services is not a precondition to taxation. claimable expense subject to limit.
d) A higher tax base is preferred when the tax object
Theories of Cost Allocation has multiple tax baser
Taxation is a mode of allocating government costs or INHERENT POWERS OF THE STATE
burden to the people. By distributing the costs or burden, A government has its basic needs and rights which co-exist
the government regards the following general with its creation. It he rights to sustenance, protection, and
consideration in the exercise of its taxation power: properties. The government sustains itself; the power of
taxation, secures itself and the well-being of its people by
1. Benefit Received Theory pol power, and secures its own properties to carry out its
2. Ability to pay theory public services by power of eminent domain.

Benefit Received Theory These rights, dubbed as "powers" are natural, inseparable,
The benefit received theory presupposes that the more and inherent to eve government. No government can
benefit one receives from the government, the more taxes sustain or effectively operate without these powers.
he should pay. Therefore, the exercise of these powers by the government
is presumed to understood and acknowledge by the people
Ability to Pay Theory from the very moment they established their government.
The ability to pay theory presupposes that taxation should These powers are naturally exercisable by the government
also consider the taxpayer's ability to pay. Taxpayers should
even in the absence of an express grant of power in the 11. Concurrence of a majority of all members of
Constitution. Congress for the passage of law granting tax
exemption
The Inherent Powers of the State 12. Non-diversification of tax collections
1. Taxation power is the power of the State to enforce 13. Non-delegation of the power of taxation
proportional contributions from its subjects to sustain 14. Non-impairment of the jurisdiction of the Supreme
itself. Court to review ta cases
15. The requirement that appropriations, revenue, or
2. Police power is the general power of the State to enact tariff bills shall originate exclusively in the House of
laws to protect t well-being of the people. Representatives
16. The delegation of taxing power to local government
3. Eminent domain is the power of the State to take private
units
property for put in use after paying just compensation.
INHERENT LIMITATION OF TAXATION
Similarities of the three powers of the State
Territoriality of taxation Public services are normally
1. They are all necessary attributes of sovereignty.
provided within the boundaries of the State. Thus, the
2. They are all inherent to the State.
government can only demand tax obligations upon its
3. They are all legislative in nature.
subjects or residents within its territorial jurisdiction.
4. They are all ways in which the State interferes with
There is no basis in taxing foreign subjects abroad since
private rights and properties.
they do not derive benefits from our government.
5. They all exist independently of the Constitution and are
Furthermore, extraterritorial taxation will amount to
exercisable by the government even without a
encroachment of foreign sovereignty.
Constitutional grant. However, the Constitution may
impose conditions or limits for their exercise. Two-fold obligations of taxpayers:
6. They all presuppose an equivalent form of compensation
received by the persons affected by the exercise of the 1. Filing of returns and payment of taxes
power. 2. Withholding of taxes on expenses and its
7. The exercise of these powers by the local government remittance to the government
units may be limited by the national legislature. These obligations can only be demanded and enforced by
the Philippine government upon its citizens and residents.
SCOPE OF THE TAXATION POWER It cannot enforce these upon subjects outside its territorial
jurisdiction as this would result in encroachment of foreign
The scope of taxation is widely regarded as comprehensive, sovereignty.
plenary, unlimited, and supreme.
Exception to the territoriality principle

1. In income taxation, resident citizens and domestic

However, despite the seemingly unlimited nature of corporations are taxable on income derived both
taxation, it is not absolute unlimited. Taxation has its own within and outside the Philippines.
inherent limitations and limitations imposed the 2. In transfer taxation, residents or citizens such as
Constitution. resident citizens, non- resident citizens and
resident aliens are taxable on transfers of
THE LIMITATIONS OF THE TAXATION POWER
properties located within or outside the
A. Inherent limitations Philippines.

1. Territoriality of taxation International comity

2. International comity
In the United Nations Convention, countries of the world
3. Public purpose
agreed to one fundamental concept of co-equal sovereignty
4. Exemption of the government
wherein all nations are deemed equal with one another
5. Non-delegation of the taxing power
regardless of race, religion, culture, economic condition or
B. Constitutional Limitations military power.

1. Due process of law No country is powerful than the other. It is by this principle
2. Equal protection of the law that each country observes international comity or mutual
3. Uniformity rule in taxation courtesy or reciprocity between them. Hence,
4. Progressive system of taxation
1. Governments do not tax the income and properties
5. Non-imprisonment for non-payment of debt or poll
of other governments.
tax
2. Governments give primacy to their treaty
6. Non-impairment of obligation and contract
obligations over their own domestic tax laws.
7. Free worship rule
8. Exemption of religious or charitable entities, non- Embassies or consular offices of foreign governments in the
profit cemeteries churches and mosque from Philippines including international organizations and their
property taxes non-Filipino staff are not subject to income taxes or
9. Non-appropriation of public funds or property for property taxes. Under the National Internal Revenue Code
the benefit of any church, sect or system of religion (NIRC), the income of foreign government and foreign
10. Exemption from taxes of the revenues and assets of government-owned and controlled corporations are not
non-profit, non-stock educational institutions subject to income tax.
When a state enters into treaties with other states, it is Under the NIRC, assessments shall be made within three
bound to honor the agreements as a matter of mutual years from the due date of filing of the return or from the
courtesy with the treaty partners even if same conflicts with date of actual filing, whichever is later. Collection shall be
its local tax laws. made within five years from the date of assessment. The
failure of the government to observe these rules violates the
Public purpose requirement of due process.
Tax is intended for the common good. Taxation must be
exercised absolutely for public purpose. It cannot be Equal protection of the law
exercised to further any private interest. No person shall be denied the equal protection of the law.
Taxpayers should be treated equally both in terms of rights
Exemption of the government conferred and obligations imposed.
The taxation power is broad. The government can exercise
the power up anything including itself. However, the This rule applies where taxpayers are under the same
government normally does not tax itself this will not raise circumstances and conditions. This requirement would
additional funds but will only impute additional costs. mean Congress cannot exempt sellers of "baloť" while
subjecting sellers of "penoy" to tax since they are essentially
Under the NIRC, government properties and income from the same goods.
essential pub functions are not subject to taxation.
However, the income of the government from its properties Uniformity rule in taxation
and activities conducted for profit, including income from The rule of taxation shall be uniform and equitable.
government-owned and controlled corporations is subject Taxpayers under dissimilar circumstances should not be
to tax. taxed the same. Taxpayers should be classified according to
commonality in attributes, and the tax classification to be
Non-delegation of the taxing power adopted should be based on substantial distinction. Each
The legislative taxing power is vested exclusively in class is taxed differently, but taxpayers falling under the
Congress and is n delegable, pursuant to the doctrine of same class are taxed the same. Hence, uniformity is relative
separation of the branches of government to ensure a equality.
system of checks and balances.
Progressive system of taxation
The power of lawmaking, including taxation, is delegated by Congress shall evolve a progressive system of taxation.
the people tot legislature. So as not to spoil the purpose of Under the progressive system, tax rates increase as the tax
delegation, it is held that what been delegated cannot be base increases. The Constitution favors progressive tax as it
further delegated. is consistent with the taxpayer's ability to pay. Moreover,
the progressive system aids in an equitable distribution of
Exceptions to the rule of non-delegation wealth to society by taxing the rich more than the poor.
1. Under the Constitution, local government units are
allowed to exercise power to tax to enable them to Non-imprisonment for non-payment of debt or poll tax
exercise their fiscal autonomy. As a policy, no one shall be imprisoned because of his
2. Under the Tariff and Customs Code, the President poverty, and no one shall imprisoned for mere inability to
is empowered to fix the amount of tariffs to be pay debt.
flexible to trade conditions.
3. Other cases that require expedient and effective However, this Constitutional guarantee applies only when
administration a implementation of assessment the debt is acquired the debtor in good faith. Debt acquired
and collection of taxes. in bad faith constitutes estafa, a criminal offense punishable
by imprisonment.
CONSTITUTIONAL LIMITATIONS OF TAXATION
Is non-payment equivalent non-payment of debt? Tax
Observance of due process of law arises front of taxes a demand of sovereignty. It is
No one should be deprived of his life, liberty, or property distinguished from debt which arises from private
without due process law. Tax laws should neither be harsh contracts. Non-payment of tax compromises pub interest
nor oppressive. while the non-payment of debt compromises private
interest. The non- payment of tax is similar to a crime. The
Aspects of Due Process Constitutional guarantee on ne imprisonment for non-
1. Substantive due process payment of debt does not extend to non-payment of except
Tax must be imposed only for public purpose, poll tax.
collected only under authority of a valid law and
only by the taxing power having jurisdiction. An Poll, personal, community or residency tax
assessment without a legal basis violates the Poll tax has two components:
requirement of due process. a. Basic community tax
b. Additional community tax
2. Procedural due process
There should be no arbitrariness in assessment and The constitutional guarantee of non-imprisonment for non-
collection of taxes, and the government shall payment of poll applies only to the basic community tax.
observe the taxpayer's right to notice and hearing. Non-payment of the addition community tax is an act of tax
The law established procedures which must be evasion punishable by imprisonment.
adhered to in making assessments and in enforcing
collections. Non-impairment of obligation and contract
The State should set an example of good faith among its Tax exemption law counters against the lifeblood doctrine
constituents. It should set aside its obligations from as it deprives the government of revenues. Hence, the grant
contracts by the exercise of its taxation power. Tax of tax exemption must proceed only upon a valid basis. As a
exemptions granted under contract should be honoured safety net, the Constitution requires the vote of the majority
and should not be cancelled by a unilateral government of all members of Congress in the grant of tax exemption.
action.
In the approval of an exemption law, an absolute majority
Free worship rule or the majority of all members of Congress, not a relative
The Philippine government adopts free exercise of religion majority or quorum majority, is required. However, in the
and does not subject its exercise to taxation. Consequently, withdrawal of tax exemption, only a relative majority is
the properties and revenues of religion institutions such as required.
tithes or offerings are not subject to tax. This exemption
however, does not extend to income from properties or Non-diversification of tax collections
activities of religion institutions that are proprietary or Tax collections should be used only for public purpose. It
commercial in nature. should never be diversified or used for private purpose

Exemption of religious, charitable or educational entities, Non-delegation of the power of taxation

non-prof cemeteries, churches and mosques, lands, The principle of checks and balances in a republican state
buildings, and improvement from property taxes requires that taxation power as part of lawmaking be vested
exclusively in Congress.
The Constitutional exemption from property tax applies for
properties actually directly, and exclusively (i.e. However, delegation may be made on matters involving the
primarily) used for charitable, religious, an educational expedient and effective administration and implementation
purposes. of assessment and collection of taxes. Also, certain aspects
of the taxing process that are non-legislative in character
In observing this Constitutional limitation, the Philippines are delegated.
follows the doctrine of use wherein only properties actually
devoted for religious, charitable, or educational activities Hence, implementing administrative agencies such as the
are exempt from real property tax. Department and the Bureau of Internal Revenue (BIR)
issues revenue regulations, ruling orders, or circulars to
Under the doctrine of ownership, the properties of interpret and clarify the application of the law. But even so,
religious, charitable, educational entities whether or not their functions are merely intended to interpret or clarify
used in their primary operations are exempt from real the proper application of the law. They are not allowed to
property tax. This, however, is not applied in the introduce new legislations within their quasi- legislative
Philippines. authority.

Non-appropriation of public funds or property for the Non-impairment of the jurisdiction of the Supreme
benefit of any church, sect, or system of religion Court to review tax case
This constitutional limitation is intended to highlight the Notwithstanding the existence of the Court of Tax Appeals,
separation of religion and the State. To support freedom of which is a special court, all cases involving taxes can be
religion, the government should not favor any particular raised to and be finally decided by the Supreme Court of the
system of religion by appropriating public funds or Philippines.
property in support thereof.
Appropriations, revenue, or tariff bills shall originate
It should be noted, however, that compensation to priests, exclusively in the House of Representatives, but the
imams, or religious ministers working with the military, Senate may propose or concur with amendments.
penal institutions, orphanages, or leprosarium is not Laws that add income to the national treasury and those
considered religious appropriation. that allows spending therein must originate from the House
of Representatives while Senate may concur with
Exemption from taxes of the revenues and assets of amendments. The origination of a bill by Congress does not
non-profit, non-stock educational institutions necessarily mean that the House bill must become the final
including grants, endowments, donations, or law. It was held constitutional by the Supreme Court when
contributions for educational purposes Senate changed the entire house version of a tax bill.
The Constitution recognizes the necessity of education in
state building by granting tax exemption on revenues and Each local government unit shall exercise the power to
assets of non-profit educational institutions. This create its own sources of revenue and shall have a just
exemption, however, applies only on revenues and assets share in the national taxes
that are actually, directly, and exclusively devoted for This is a constitutional recognition of the local autonomy of
educational purposes. local governments and an express delegation of the taxing
power.
Consistent with this constitutional recognition of education
as a necessity, the NIRC also exempts government STAGES OF THE EXERCISE OF TAXATION POWER
educational institutions from income tax and subjects 1. Levy or imposition
private educational institutions to a minimal income tax. 2. Assessment and collection

Concurrence of a majority of all members of Congress Levy or imposition

for the passage of a law granting tax exemption
This process involves the enactment of a tax law by payment will be made week later in the Philippines. The sale
Congress and is called impact of taxation. It is also referred was consummated as agreed.
to as the legislative act in taxation.
The contract of sale is consensual and is perfected by the
Congress is composed of two bodies: meeting of the minds of the contracting parties. The
1. The House of Representatives, and perfection of the contract of sale is in China. The s of taxation
2. The Senate is China. The situs of taxation is China. The gain on the sale
of the necklace will be taxable abroad exempt in the
As mandated by the Constitution, tax bills must originate Philippines.
from the House of Representatives. Each may, however, 4. Property tax situs: Properties are taxable in their
have their own versions of a proposed law which is location.
approved by both bodies, but tax bills cannot originate
exclusively from the Senate. Illustration: An overseas Filipino worker has a residential
lot in the Philippines.
Matters of legislative discretion in the exercise of
taxation He will still pay real property tax despite his absence in the
Philippines because his property is located herein.
1. Determining the object of taxation
2. Setting the tax rate or amount to be collected 5. Personal tax situs: Persons are taxable in their
3. Determining the purpose for the levy which must place of residence.
be public use
Illustration: Ahmed Lofti is a Sudanese studying medicine in
4. Kind of tax to be imposed
the Philippines.
5. Apportionment of the tax between the national and
local government Ahmed will pay personal tax in the Philippines even if he is
6. Situs of taxation an alien because he residing in the Philippines.
7. Method of collection

Assessment and Collection

The tax law is implemented by the administrative branch of OTHER FUNDAMENTAL DOCTRINES IN TAXATION
the government. Implementation involves assessment or
1. Marshall Doctrine - "The power to tax involves the
the determination of the tax liabilities of taxpayers and
power to destroy." Taxation power can be used as an
collection. This stage is referred to as incidence of taxation
instrument of police power. It can be used discourage or
or the administrative act of taxation.
prohibit undesirable activities or occupation. As such,
taxation power carries with it the power to destroy.
SITUS OF TAXATION
However, the taxation power does not include the power to
Situs is the place of taxation. It is the tax jurisdiction that
destroy if it used solely for the purpose of raising revenue.
has the power to levy taxes upon the tax object. Situs rules
(Roxas vs. CTA)
serve as frames of reference in gauging whether the tax
object is within or outside the tax jurisdiction of the taxing 2. Holme's Doctrine - "Taxation power is not the power to
authority. destroy while t court sits." Taxation power may be used to
build or encourage beneficial activities or industries by the
grant of tax incentives.
Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in

the place where the business is conducted. While the Marshall Doctrine and the Holme's Doctrine
appear to contradict each other, both are actually employed
in practice. A good manifestation of the Marshall Doctrine is
Illustration: A taxpayer is involved in car dealership abroad the imposition of excessive tax on cigarettes while
and restaurant operation in the Philippines. applications of the Holme's Doctrine include the creation of
Ecozones with tax holidays and provision of incentives,
The restaurant business will be subject to business tax in such as the Omnibus Investment Code (E.O. 226) and the
the Philippines since the business is conducted herein, but Barangay Micro-Business Enterprise (BMBE) Law.
the car dealing business is exempt because the business is
conducted abroad. 3.Prospectivity of tax laws - Tax laws are generally
prospective in operation. An ex post facto law or a law that
2. Income tax situs on services: Service fees are retroacts is prohibited by the Constitution.
subject to tax where they are rendered.
Exceptionally, income tax laws may operate retrospectively
Illustration: corporation leases a residential space to a non- if so intended by Congress under certain justifiable
resident Filipino citezen abroad. conditions. For example, Congress can levy tax on income
earned during periods of foreign occupation even after the
The rent income will be exempt from Philippine taxation as
war.
the leasing service rendered abroad.
4. Non-compensation or set-off - Taxes are not subject to
3. Income tax situs on sale of goods: The gain on
automatic set-off or compensation. The taxpayer cannot
sale is subject to tax in place of sale.
delay payment of tax to wait for the resolution of a lawsuit
Illustration: While in China, a non-resident OFW citizen involving his pending claim against the government. Tax is
agreed with a Chinese friend to sell diamond necklace to the not a debt; hence, it is not subject to set-off. This rule is
latter. They stipulated that the delivery of the item the important to allow the government sufficient period to
evaluate the validity of the claim. (See Philex vs. CIR, G.R. exemption is construed strictly against the taxpayer in
125704) accordance with the lifeblood doctrine.

Exceptions:
The right of taxation is inherent to the State. It is a
a. Where the taxpayer's claim has already become prerogative essential to the perpetuity of the government.
due and demandable such as when the government He who claims exemption from the common burden must
already recognized the same and an appropriation justify his claim by the clearest grant of organic or statute
for refund was made law (Iloilo, et al. vs. Smart Communications, Inc., G.R. No.
b. Cases of obvious overpayment of taxes 167260, February 21 2009)
c. Local taxes
When exemption is claimed, it must be shown indubitably
5. Non-assignment of taxes - Tax obligations cannot be to exist. At the outset, every presumption is against it. A
assigned or transferred to another entity by contract. well-founded doubt is fatal to the claim; it is only when the
Contracts executed by the taxpayer to such effect shall not terms of the concession are too explicit to admit fairly of any
prejudice the right of the government to collect. other construction that the proposition can be supported.
6. Imprescriptibility in taxation - Prescription is the (Ibid)
lapsing of a right due to the passage of time. When one sleep Tax exemption cannot arise from vague inference. Tax
on his right over an unreasonable period of time, he is exemption must be clear and unequivocal. A taxpayer
presumed to be waiving his right. The government's right to claiming a tax exemption must point to a specific provision
collect taxes does not prescribe unless the law itself of law conferring on the taxpayer, in clear and plain terms,
provides for such prescription. exemption from a common burden. Any doubt whether a
Under the NIRC, tax prescribes if not collected within 5 tax exemption exists is resolved against the taxpayer. (see
years from the date of its assessment. In the absence of an Digital Telecommunications, Inc. vs. City Government of
assessment, tax prescribes if not collected by judicial action Batangas, et al)
within 3 years from the date the return is required to be DOUBLE TAXATION
filed. However, taxes due from taxpayers who did not file a
return or those who filed fraudulent returns do not Double taxation occurs when the same taxpayer is taxed
prescribe. twice by the same tax jurisdiction for the same thing.

7. Doctrine of of estoppel - Under the doctrine any Elements of double taxation

misrepresentation made by one part toward another who
relied therein in good faith will be held true and against that 1. Primary element: Same object
person who made the misrepresentation. Binding against 2. Secondary elements:
that person who made misrepresentation. a. Same type of tax
b. Same purpose of tax
The government is not subject to estoppel. The error of any c. Same taxing jurisdiction
employee does not bind the government. It is held that the d. Same tax period
neglect or omission of government officials entrusted with
the collection of taxes should not be allowed to bring harm Types of Double Taxation
or detriment to the interest of the people. Also, erroneous 1. Direct double taxation - This occurs when all the
applications of the law by public officers do not block the element of double taxation exists for both impositions.
subsequent correct application of the same. Examples:
8. Judicial Non-interference - Generally, courts are not a. An income tax of 10% on monthly sales and a 2% income
allowed to issue injunction against the government pursuit tax on the annual sales (total of monthly sales)
to collect tax as this would unnecessarily defer tax b. A 5% tax on bank reserve deficiency and another 1%
collection. This rule is anchored on the Lifeblood Doctrine. penalty per day as a consequence of such reserve deficiency

9. Strict Construction of Tax Laws - When the law clearly 2. Indirect double taxation - This occurs when at least one
provides for taxation, taxation is the general rule unless of the secondary elements of double taxation is not common
there is a clear exemption. Hence the maxim, "Taxation is for both impositions.
the rule, exemption of the exception." Examples:
a. The national government levies business tax on the sales
When the language of the law is clear and categorical, there or gross receipts of business while the local government
is no room for interpretation. There is only room for levies business tax upon the same sales or receipts.
application. However, when taxation laws are vague, the b. The national government collects income tax from a
doctrine of strict legal construction is observed. taxpayer on his income while the local government collects
Vague tax laws community tax upon the same income.
Vague tax laws are construed against the government and c. The Philippine government taxes foreign income of
in favor of the taxpayers. A vague tax law means no tax law. domestic and resident citizens while a foreign government
Obligation arising from law is not presumed. The also taxes the same (international double taxation).
Constitutional requirement of due process requires laws to
be sufficiently clear and expressed in their provisions. Nothing in our law expressly prohibits double taxation. In
fact, indirect double taxation is prevalent in practice.
Vague exemption laws However, direct double taxation is discouraged because it is
Vague tax exemption laws are construed against the oppressive and burdensome to taxpayers. It is also believed
taxpayer and in favor of the government. A vague tax counter the rule of equal protection and uniformity in the
exemption law means no exemption law. The claim for Constitution.
 manufacturer to wholesalers, retailers to consumers).
How can double taxation be minimized? Forward shifting is common with essential commodities
and services such as food and fuel.
The impact of double taxation can be minimized by any one
or a combination the following: b. Backward shifting - This is the reverse of forward
shifting. Backward shifting is common with non-essential
a. Provision of tax exemption - only one tax law is allowed commodities where buyers have considerable market
to apply to the object while the other tax law exempts the power and commodities with numerous substitute
same tax object products.
b. Allowing foreign tax credit - both tax laws of the c. Onward shifting - This refers to any tax shifting in the
domestic country and foreign country tax the tax object, but distribution channel that exhibits forward shifting or
the tax payments made in the fore tax law are deductible backward shifting.
against the tax due of the domestic tax law
Shifting is common with business taxes where taxes
c. Allowing reciprocal tax treatment-provisions in tax imposed on business revenue can be shifted or passed-on to
laws imposing a reduced tax rates or even exemption if the customers.
country of the foreign taxpayer also gives the same
treatment to Filipino non-residents therein 2. Capitalization - This pertains to the adjustment of
the value of an asset caused by changes in tax rates.
d. Entering into treaties or bilateral agreements -
countries may stipulate for lower tax rates for their For instance, the value of a mining property will
residents if they engage in transactions that taxable by both correspondingly decrease when mining output is subjected
of them to higher taxes. This is a form of backward shifting of tax.

ESCAPES FROM TAXATION 3. Transformation - This pertains to the elimination

of wastes or losses by the taxpayer to form savings
Escapes from taxation are the means available to the to compensate for the tax imposition or increase in
taxpayer to limit or ev avoid the impact of taxation. taxes.
Categories of Escapes from Taxation Tax Amnesty
A. Those that result to loss of government revenue Amnesty is a general pardon granted by the government for
erring taxpayers to give them a chance to be part of society
1. Tax evasion, also known as tax dodging, refers to with a clean slate. It is an absolute forgiveness or waiver by
any act or trick th tends to illegally reduce or avoid the government on its right to collect and is retrospective in
the payment of tax. application.
Examples:
Tax Condonation
a. This can be achieved by gross understatement of income,
Tax condonation is forgiveness of the tax obligation of a
no declaration of income, overstatement of expenses or tax
certain taxpayer under certain justifiable grounds. This is
credit.
also referred to as tax remission.
b. Misrepresenting the nature or amount of transaction to
ta advantage of lower taxes.
Because they deprive the government of revenues, tax
exemption, tax refund, tax amnesty, and tax condonation
2. Tax avoidance, also known as tax minimization,
are construed against the taxpayer and in favor of the
refers to any act or trick that reduces or totally
government.
escapes taxes by any legally permissible means.
Examples:
Tax Amnesty vs. Tax Condonation
a. Selection and execution of transaction that would expose
Amnesty covers both civil and criminal liabilities, but
taxpayer to lower taxes.
condonation covers only civil liabilities of the taxpayer.
b. Maximizing tax options, tax carry-overs or tax credits
C. Careful tax planning
Amnesty operates retrospectively by forgiving past
violations. Condonation applies prospectively to any unpaid
3. Tax exemption, also known as tax holiday, refers
balance of the tax; hence, the portion already paid by the
to the immunity, privilege or freedom from being
taxpayer will not be refunded.
subject to a tax which others are subject to. Tax
exemptions may be granted by the Constitution,
Amnesty is also conditional upon the taxpayer paying the
law, or contract.
government a portion of the tax whereas condonation
All forms of tax exemptions can be revoked by Congress
requires no payment.
except those granted by the Constitution and those granted
under contracts.
Taxation Law – refers to any law arises from the exercise
B. Those that do not result to loss of government of the taxation power of the State.
revenue Types of taxation laws
1. Tax Laws – laws that provide for assessment and
1. Shifting - This is the process of transferring tax collection of taxes.
burden to other taxpayers. a. The National Internal Revenue Code
b. The Tariff and Customs Code
Forms of shifting
c. The Local Tax Code
a. Forward shifting -This is the shifting of tax which d. The Real Property Tax Code
follows the normal flow of distribution (i.e. from
 2. Tax exemption laws – laws that grant certain BIR Rulings are official positions of the Bureau to queries
immunity from taxation raised by taxpayers and other stakeholders relative to
a. The Minimum Wage Law clarification and interpretation of tax laws.
b. The Omnibus Investment Code of 1987
c. Barangay Micro-Business Enterprises Law Rulings are merely advisory or a sort of information service
d. Cooperative Development Act to the taxpayer such that none of them is binding except to
the addressee and may be reversed by the BIR at anytime.
Sources of Taxation Laws Types of rulings
1. Constitution 1. Value Added Tax (VAT) rulings
2. Statutes and Presidential Decrees 2. International Tax Affairs Division (ITAD) rulings
3. Judicial Decisions or case law 3. BIR rulings
4. Executive Orders and Batas Pambansa 4. Delegated Authority (DA) rulings
5. Administrative Issuances
6. Local Ordinances Generally Accepted Accounting Principles (GAAP) vs.
7. Tax Treaties and Conventions with foreign Tax Laws
countries Generally accepted accounting principles or GAAP are not
8. Revenue Regulations laws, but are mere conventions of financial reporting. They
are benchmarks for the fair and relevant valuation and
Types of Administrative Issuances recognition of income, expense, assets, abilities, and equity
1. Revenue regulations of a reporting entity for general purpose financial reporting.
2. Revenue memorandum orders GAAP accounting reports are intended to meet the common
3. Revenue memorandum rulings needs of a vast number of users in the general public.
4. Revenue memorandum circulars
5. Revenue bulletins Tax laws including rules, regulations, and rulings prescribe
6. BIR rulings the criteria for tax reporting, a special form of financial
reporting which is intended to meet specific needs of tax
Revenue Regulations are issuances signed by the Secretary authorities
of Finance upon recommendation of the Commissioner of Taxpayers normally follow GAAP in recording transactions
Internal Revenue (CIR) that specify, prescribe, or define in their books However, in the preparation and filing of tax
rules and regulations for the effective enforcement of the returns, taxpayers are mandated to follow the tax law in
provisions of the National Internal Revenue Code (NIRC) cases of conflict with GAAP.
and related statutes.
NATURE OF PHILIPPINE TAX LAWS
Revenue regulations are formal pronouncements intended
to clarify or explain the tax law and carry into effect its Philippine tax laws are civil and not political in nature. They
general provisions by providing details of administration are effective even during periods of enemy occupation.
and procedure. Revenue regulation has the force and effect They are laws of the occupied territory and not by the
of a law, but is not intended to expand or limit the occupying enemy. Tax payments made during occupations
application of the law; otherwise, it is void. of foreign enemies are valid.

Revenue Memorandum Orders (RMOs) are issuances that

provide directives or instructions; prescribe guidelines; and
Our internal revenue laws are not penal in nature because
outline processes, operations, activities workflows,
they do not define crime. Their penalty provisions are
methods, and procedures necessary in the implementation
merely intended to secure taxpayers compliance.
of stated policies, goals, objectives, plans, and programs of
the Bureau in all areas of operations except auditing. Tax is an enforced proportional contribution levied by the
lawmaking body of the State to raise revenue for public
Revenue Memorandum Rulings (RMRs) are rulings,
purpose.
opinions and interpretations of the CIR with respect to the
provisions of the Tax Code and other tax laws as applied to Elements of a Valid Tax
a specific set of facts, with or without established
precedents, and which the CIR may issue from time to time 1. Tax must be levied by the taxing power having
for the purpose of providing taxpayers guidance on the tax jurisdiction over the object of taxation.
consequences in specific situations. BIR Rulings, therefore, 2. Tax must not violate Constitutional and inherent
cannot contravene duly issued RMRs; otherwise, the limitations.
Rulings are null and void ab initio. 3. Tax must be uniform and equitable.
4. Tax must be for public purpose
Revenue Memorandum Circulars (RMCs) are Issuances 5. Tax must be proportional in character.
that publish pertinent and applicable portions as well as 6. Tax is generally payable in money.
amplifications of laws, rules, regulations, and precedents
issued by the BIR and other agencies/offices. Classification of Taxes
A. As to purpose
Revenue Bulletins (RB) refer to periodic issuances, notices, 1. Fiscal or revenue tax-a tax imposed for general
and official announcement of the Commissioner of Internal purpose
Revenue that consolidate the Bureau of Internal Revenue's 2. Regulatory transactions a tax imposed to regulate
position on certain specific issues of lawor administration business, conduct, acts or
in relation to the provisions of the Tax Code, relevant tax 3. Sumptuary-a tax levied to achieve some social or
laws, and other Issuances for the guidance of the public. economic objective
B. As to subject matter g. Documentary stamp tax a tax on documents,
1. Personal, poll or capitation - a tax on persons who instruments, loan agreements, and papers
are residents of a particular territory evidencing the acceptance, assignment, sale or
2. Property tax-a tax on properties, real or personal transfer of an obligation, right or property incident
3. Excise or privilege tax a tax imposed upon the thereto.
performance of an act, enjoyment of a privilege or
engagement in an occupation 2. Local tax-tax imposed by the municipal or local
government
C. As to incidence Examples:
1. Direct tax-When both the impact and incidence of a. Real property tax
taxation rest upon the same taxpayer, the tax is said b. Professional tax
to be direct. The tax is collected from the person c. Business taxes, fees, and charges
who is intended to pay the same. The statutory d. Community tax
taxpayer is the economic taxpayer. e. Tax on banks and other financial Institutions
2. Indirect tax-When the tax is paid by any person
other than the one who is intended to pay the same, DISTINCTION OF TAXES WITH SIMILAR ITEMS
the tax is said to be indirect. This occurs in the case Tax vs. Revenue
of business taxes where the statutory taxpayer is Tax refers to the amount imposed by the government for
not the economic taxpayer. public purpose. Revenues refers to all income collections of
the government which includes taxes, tariff licenses, toll,
D. As to amount penalties and others. The amount imposed is tax but the
1. Specific tax - a tax fixed amount imposed on a per amount collected is revenue.
unit basis such as per kilo, liter or meter.
2. Ad valorem - a tax of a fixed proportion imposed Tax vs. License fee
upon the value of the tax object Tax has a broader subject than license. Tax emanates from
E. As to rate taxation power and Imposed upon any object such as
persons, properties, or privileges to raised revenue.
1. Proportional tax - This is a flat or fixed rate tax.
The use of proportional tax emphasizes equality as License fee emanates from police power and is imposed to
it subjects all taxpayers with the same rate without regulate the exercise a privilege such as the commencement
regard to their ability to pay. of a business or a profession.

2. Progressive or graduated tax - This is a tax which Taxes are imposed after the commencement of a business
imposes increasing rates as the tax base Increase. or profession whereas license fee is imposed before
The use of progressive tax rates results in equitable engagement in those activities. In other words, tax i a post-
taxation because it gets more tax to those who are activity imposition whereas license is a pre-activity
more capable. It aids in lessening the gap between imposition.
the rich and the poor.
Tax vs. Toll
3. Regressive tax - This tax imposes decreasing tax Tax is a levy of government; hence, it is a demand of
rates as the tax base increase. This is the total sovereignty. Toll is a charge for the use of other's property;
reverse of progressive tax. Regressive tax is hence, it is a demand of ownership.
regarded as anti-poor. It directly violates the
Constitutional guarantee of progressive taxation The amount of tax depends upon the needs of the
government, but the amount of toll is dependent upon the
4. Mixed tax-This tax manifest tax rates which is a value of the property leased.
combination of any of the above types of tax.
Both the government and private entities Impose toll, but
F. As to imposing authority private entities cannot impose taxes.
1. National tax-tax imposed by the national
government Tax vs. Debt
Tax arises from law while debt arises from private
Examples: contracts. Non-payment of tax leads to imprisonment, but
non-payment of debt does not lead to Imprisonment Debt
a. Income tax-tax on annual income, gains or profits
can be subject to set-off but tax is not. Debt can be paid in
b. Estate tax- tax on gratuitous transfer of properties
kind (dacion en pago) but tax is generally payable in money.
by a decedent upon death
c. Donor's tax-tax on gratuitous transfer of
Tax draws interest only when the taxpayer is delinquent.
properties by a living donor
Debt draws interest when it is so stipulated by the
d. Value Added Tax taxpayers consumption tax
contracting parties or when the debtor incurs a legal delay.
collected by VAT business
e. Other percentage tax business taxpayers
consumption tax collected by non-VAT Tax vs. Special Assessment
f. Excise tax - tax on sin products and non-essential Tax is an amount imposed upon persons, properties, or
commodities such as alcohol, cigarettes and privileges. Special assessment is levied by the government
metallic minerals. This should be differentiated or lands adjacent to a public improvement. It is imposed on
with the privilege tax which is also called excise tax.
land only and is intended to compensate the government for
a part of the cost of the improvement. 1. Creditable withholding tax
a. Withholding tax on compensation - an
The basis of special assessment is the benefit in terms of the estimated tax required by the government to be
appreciation in land value caused by the public withheld (i.e. deducted) by employers against
improvement. On the other hand, tax is levied without the compensation income to their employees
expectation of a direct proximate benefit. b. Expanded withholding tax an estimated tax
required by the government to be deducted on
Unlike taxes, special assessment attaches to the land. It will certain income payments made by taxpayers
not become a personal obligation of the land owner. engaged in business
Therefore, the non-payment of special assessment will not
result to imprisonment of the owner (unlike in non- The creditable withholding tax is intended to support the
payment of taxes). self-assessment method to lessen the burden of lump sum
Tax vs. Tariff tax payment of taxpayer and also provides for a possible
Tax is broader than tariff. Tax is an amount imposed upon third-party check for the BIR of non-compliant taxpayers.
persons, privilege, transactions, or properties. Tariff is the
amount imposed an imported or exported commodities. 2. Final withholding tax a system of tax collection
wherein payors are required to deduct the full tax
Tax vs. Penalty on certain income payments
Tax is an amount imposed for the support of the
government. Penalty is an amount imposed to discourage The final withholding tax is intended for the collection of
an act. Penalty may be imposed by both the government and taxes from Income with high risk of non-compliance.
private individuals. It may arise both from law or contract
whereas tax arises from law. Similarities of final tax and creditable withholding tax
a. In both cases, the income payor withholds a
TAX SYSTEM fraction of the income and remits the same to the
The tax system refers to the methods or schemes of government.
imposing, assessing, and collecting taxes. It includes all the b. By collecting at the moment cash is available, both
tax laws and regulations, the means of their enforcement, serve to minimize cash flow problems to the
and the government offices, bureaus and withholding taxpayer and collection problems to the
agents which are part of the machineries of the government government
in tax collection. The Philippine tax system is divided into
two: the national tax system and the local tax system. Differences between FWT and CWT (book)

Types of Tax Systems According to Imposition B. Withholding system on business tax - when the
1. Progressive employed in the taxation of income of national government agencies and instrumentalities
individuals, and certain local business taxes including government-owned and controlled corporations
2. Proportional-employed in taxation of corporate (GOCCs) purchase goods or services from private suppliers,
income and business the law requires withholding of the relevant business tax
3. Regressive-not employed in the Philippines (Le. VAT or percentage tax). Business taxation is discussed
under Business and Transfer Taxation by the same author.
Types of Tax System According to Impact
1. Progressive system C. Voluntary compliance system - Under this collection
A progressive tax system is one that emphasizes system, the taxpayer himself determines his income,
direct taxes. A direct tax cannot be shifted. Hence, reports the same through income tax returns and pays the
it encourages economic efficiency as it leaves no tax to the government. This system is also referred to as the
other resort to taxpayers than to be efficient. This "Self-assessment method."
type of tax system impacts more upon the rich.
The tax due determined under this system will be reduced
2. Regressive system by:
A regressive tax system is one that emphasizes a. Withholding tax on compensation withheld by
Indirect taxes. Indirect taxes are shifted by employers
businesses to consumers; hence, the impact of b. Expanded withholding taxes withheld by suppliers
taxation rests upon the bottom end of the society. of goods or services
In effect, a regressive tax system is anti- poor.
The taxpayer shall pay to the government any tax balance
It is widely believed that despite the Constitutional after such credit or claim refund or tax credit for excessive
guarantee of a progressive taxation, the Philippines has a tax withheld.
dominantly regressive tax system due to the prevalence of
business taxes. D. Assessment or enforcement system - Under this
collection system, the government identifies non-compliant
TAX COLLECTION SYSTEMS taxpayers, assesses their tax dues including penalties,
A. Withholding system on income tax - Under this demands for taxpayer's voluntary compliance collections
collection system, the payor of the income withholds or by coercive means such as a summary proceeding
deducts the tax on the income before releasing the same to proceedings when necessary. or enforces or judicial
the payee and remits the same to the government. The
following are the withholding taxes collected under this PRINCIPLES OF A SOUND TAX SYSTEM
system:
According to Adam Smith, governments should adhere to 7. Submission of annual report, pertinent information
the following principles or canons to evolve a sound tax to Congress and reports to the Congressional
system: Oversight Committee in matters of taxation
1. Fiscal adequacy
2. Theoretical justice POWERS OF THE COMMISSIONER OF INTERNAL
3. Administrative feasibility REVENUE
1. To interpret the provisions of the NIRC, subject to
Fiscal adequacy review by the Secretary of Finance
Fiscal adequacy requires that the sources of government 2. To decide tax cases, subject to the exclusive
funds must be sufficient to cover government costs. The appellate jurisdiction of the Court of Tax Appeals,
government must not incur a deficit. A budget deficit such as:
paralyzes the government's ability to deliver the essential a. Disputed assessments
public services to the people. Hence, taxes should increase b. Refunds of internal revenue taxes, fees, or
in response to increase in government spending. other charges
c. Penalties imposed
Theoretical justice d. Other NIRC and special law matters
Theoretical justice or equity suggests that taxation should administered by the BIR
consider the taxpayer's ability to pay. It also suggests that 3. To obtain information and to summon, examine,
the exercise of taxation should not be oppressive, unjust, or and take testimony of persons to effect tax
confiscatory. collection

Administrative feasibility Purpose: For the CIR to ascertain:

Administrative feasibility suggests that tax laws should be a. The correctness of any tax return or in making a
capable of efficient and effective administration to return when none has been made by the taxpayer
encourage compliance. Government should make it easy for b. The tax liability of any person for any internal
the taxpayer to comply by avoiding administrative revenue tax or in correcting any such liability
bottlenecks and reducing compliance costs. c. Tax compliance of the taxpayer

The following are applications of the principle of Authorized acts:

administrative feasibility: a. To examine any book, paper, record or other data
1. E-filing and e-payment of taxes relevant to such inquiry
2. Substituted filing system for employees b. To obtain on a regular basis any information from
3. Final withholding tax on non-resident aliens or any person other than the person whose Internal
corporations revenue tax liability is subject to audit
4. Accreditation of authorized agent banks for the c. To summon the person liable for tax or required to
filing and payment of taxes file a return his employees, or any person having
possession and custody of his books of accounts
TAX ADMINISTRATION and accounting records to produce such books,
Tax administration refers to the management of the tax papers, records or other data and to give testimony
system. Tax administration of the national tax system in the d. To take testimony of the person concerned, under
Philippines is entrusted to the Bureau of Internal Revenue oath, as may be relevant or material to the inquiry
which is under the supervision and administration of the e. To cause revenue officers and employees to make
Department of Finance. canvass of any revenue district

Chief Officials of the Bureau of Internal Revenue 4. To make an assessment and prescribe additional
1. 1 Commissioner requirement for tax administration and
2. 4 Deputy Commissioners, each to be designated to the enforcement
following: 5. To examine tax returns and determine tax due
a. Operations group thereon
b. Legal Enforcement group
c. Information Systems Group The CIR or his duly authorized representatives may
d. Resource Management Group authorize the examination of any taxpayer and the
assessment of the correct amount of tax, notwithstanding
POWERS OF THE BUREAU OF INTERNAL REVENUE any law requiring the prior authorization of any
1. Assessment and collection of taxes government agency or instrumentality. Failure to file a
2. Enforcement of all forfeitures, penalties and fines, return shall not prevent the CIR from authorizing the
and judgments in all cases decided in its favor by examination. Tax or deficiency assessments are due upon
the courts notice and demand by the CIR or his representatives.
3. Giving effect to, and administering the supervisory
and police powers conferred to it by the NIRC and Returns, statements or declarations shall not be withdrawn
other laws but may be modified, changed and amended by the taxpayer
4. Assignment of internal revenue officers and other within 3 years from the date of filing, except when a notice
employees to other duties for audit or investigation has been actually served upon the
5. Provision and distribution of forms, receipts, taxpayer.
certificates, stamps, etc. to proper officials
6. Issuance of receipts and clearances When a return shall not be forthcoming within the
prescribed deadline or when there is a reason to believe
that the return is false, incomplete or erroneous, the CIR
shall assess the proper tax on the basis of best evidence minimum rates, the compromise shall be subject to
available. the approval of the Evaluation Board which shall be
composed of the Commissioner and the four
In case a person fails to file a required return or other Deputy Commissioners
documents at the time prescribed by law or willfully files a 11. To inquire into bank deposits, only under the
false or fraudulent return or other documents, the CIR shall following instances:
make or amend the return from his own knowledge and a. Determination of the gross estate of a decedent
from such information obtained from testimony. The return b. To substantiate the taxpayer's claim of
shall be presumed prima facie correct and sufficient for all financial incapacity to pay tax in an application
legal purposes. for tax compromise

6. To conduct inventory taking or surveillance In cases of financial incapacity, inquiry can proceed only if
7. To prescribe presumptive gross sales and receipts the taxpayer waives his privilege under the Bank Deposit
for a taxpayer when: Secrecy Act.
a. The taxpayer failed to issue receipts; or 12. To accredit and register tax agents
b. The CIR believes that the books or other The denial by the CIR of application for accreditation is
records of the taxpayer do not correctly reflect appealable to the Department of Finance. The failure of the
the declaration in the return. Secretary of Finance to act on the appeal within 60 days is
deemed an approval.
The presumptive gross sales or receipt shall be derived 13. To refund or credit internal revenue taxes
from the performance of similar business under similar 14. To abate or cancel tax liabilities in certain cases
circumstances adjusted for other relevant information. 15. To prescribe additional procedures or
8. To terminate tax period when the taxpayer is: documentary requirements
a. Retiring from business 16. To delegate his powers to any subordinate officer
b. Intending to leave the Philippines with a rank equivalent to a division chief of an office
c. Intending to remove, hide, or conceal his
property Non-delegated power of the CIR
d. Intending to perform any act tending to The following powers of the Commissioner shall not be
obstruct the proceedings for the collection of delegated:
the tax or render the same ineffective 1. The power to recommend the promulgation of
The termination of the taxable period shall be rules and regulations to the Secretary of Finance.
communicated through a notice to the taxpayer together 2. The power to issue rulings of first impression or to
with a request for immediate payment. Taxes shall be due reverse, revoke or modify any existing rulings of
and payable immediately. the Bureau.
9. To prescribe real property values 3. The power to compromise or abate any tax liability
Exceptionally, the Regional Evaluation Boards may
The CIR is authorized to divide the Philippines into zones compromise tax liabilities under the following:
and prescribe real property values after consultation with a. Assessments are issued by the regional offices
competent appraisers. The values thus prescribed are involving basic deficiency tax of P500,000 or less,
referred to as zonal value. and
b. Minor criminal violations discovered by regional
Zonal values are subject to automatic adjustment once and district officials
every 3 years through rules and regulations issued by the
Secretary of Finance based on the current Philippine Composition of the Regional Evaluation Board
valuation standards. However, no adjustment in zonal a. Regional Director as chairman
valuation shall be valid unless published in a newspaper of b. Assistant Regional Director
general circulation in the province, city or municipality c. Heads of the Legal, Assessment and Collection
concerned, or in the absence thereof, shall be posted in the Division
provincial capital, city or municipal hall and in 2 other d. Revenue District Officer having jurisdiction over
conspicuous public places therein. Furthermore, the basis the taxpayer
of any valuation, including the records of consultations
done, shall be public records open to the inquiry of any 4. The power to assign and reassign internal revenue
taxpayer. officers to establishments where articles subject to
excise tax are produced or kept.
For purposes of internal revenue taxes, fair value of real Rules in assignments of revenue officers to other duties
property shall mean whichever is higher of: 1. Revenue officers assigned to an establishment
a. Zonal value prescribed by the Commissioner where excisable articles are kept shall in no case
b. Fair market value as shown in the schedule of stay there for more than 2 years.
market values of the Provincial and City Assessor's 2. Revenue officer's assigned to perform assessment
Office and collection function shall not remain in the same
assignment for more than 3 years.
The NIRC previously used the assessed value which is 3. Assignment of internal revenue officers and
merely a fraction of the fair market value. Assessed value is employees of the Bureau special duties shall not
the basis of the real property tax in local taxation. The value exceed 1 year.
to use now is the full fair value of the property.
10. To compromise tax liabilities of taxpayers Where Agents and Deputies for Collection of National Internal
the basic tax involved exceeds P1,000.000 or where Revenue Taxes
the settlement offered is less than the prescribed
The following are constituted agents for the collection of Fiscal Incentive Review Board (FIRB)
internal revenue taxes: FIRB has oversight function on the administration and grant
1. The Commissioner of Customs and his of tax incentives by the Investment Promotion Agencies and
subordinates with respect to collection of national other government agencies administering tax incentives. It
internal revenue taxes on imported goods. approves or disapproves grant of tax incentives to private
2. The head of appropriate government offices and entities and tax subsidies to government-owned and
his subordinates with respect to the collection of controlled corporations government instrumentalities,
energy tax. government commissaries, state universities and colleges.
3. Banks duly accredited by the Commissioner with
respect to receipts of payments of internal revenue TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX
taxes authorized to be made thru banks. These are ADMINISTRATION
referred to as authorized government depositary For purposes of effective and efficient tax administration,
banks (AGDB). taxpayers are classified into:
1. Large taxpayers - under the supervision of the
OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR Large Taxpayer Service (LTS) of the BIR National
TAX INCENTIVES RELATED FUNCTIONS Office.
1. Bureau of Customs 2. Non-large taxpayers - under the supervision of the
2. Board of Investments respective Revenue District Offices (RDOs) where
3. Philippine Economic Zone Authority the business, trade or profession of the taxpayer Is
4. Local Government Tax Collecting Unit situated
5. Fiscal Incentives Review Board
Criteria for Large Taxpayers:
Bureau of Customs (BOC) A. As to payment
Aside from its regulatory functions, the Bureau of Customs 1. Value Added Tax - At least P200,000 per quarter
is tasked to administer collection of tariffs on imported for the preceding year
articles and collection of the Value Added Tax on 2. Excise Tax-At least P1,000,000 tax paid for the
Importation. Together with the BIR, the BOC is under the preceding year
supervision of the Department of Finance. 3. Income Tax-At least P1,000,000 annual Income tax
paid for the preceding year
The Bureau of Customs is headed by the Customs 4. Withholding Tax - At least P1,000,000 annual
Commissioner and is assisted by five Deputy withholding tax payments or remittances from all
Commissioners and 14 District Collectors. types of withholding taxes
5. Percentage tax - At least P200,000 percentage tax
Board of Investments (BOI) paid or payable per quarter for the preceding year
The BOI is tasked to lead the promotion of investments in 6. Documentary stamp tax - At least P1,000,000
the Philippines by assisting Filipinos and foreign investors aggregate amount per year
to venture and prosper in desirable areas of economic
activities. It supervises the grant of tax incentives under the B. As to financial conditions and results of operations
Omnibus Investment Code. The BOI is an attached agency of 1. Gross receipts or sales - P1,000,000,000 total
the Department of Trade and Industry (DTI). annual gross sales or receipts
2. Net worth-P300,000,000 total net worth at the
The BOI is composed of five full-time governors, excluding close of each calendar or fiscal year
the DTI secretary as chairman. The President of the 3. Gross purchases P800,000,000 total annual
Philippines shall appoint a vice chairman of board who shall purchases for the preceding year
act as the BOI's managing head. 4. Top corporate taxpayer listed and published by
the Securities and Exchange Commission
Philippine Economic Zone Authority (PEZA)
The PEZA is created to promote investments in export-
oriented manufacturing industries in the Philippines and, Automatic classification of taxpayers as large taxpayers
among other myriads of functions, supervise that grant of The following taxpayers shall be automatically classified as
both fiscal and non-fiscal incentives. large taxpayers upon notice in writing by the CIR:
1. All branches of taxpayers under the Large
PEZA registered enterprises enjoy tax holidays for certain Taxpayer's Service
years, exemption from import and export taxes including 2. Subsidiaries, affiliates, and entities of
local taxes. The PEZA is also an attached agency of the DTI. conglomerates or group of companies of a large
taxpayer
The PEZA is headed by a director general and is assisted by 3. Surviving company in case of merger or
three deputy directors. consolidation of a large taxpayer
Local Government Tax Collecting Units 4. A corporation that absorbs the operation or
Provinces, municipalities, cities and barangays also business in case of spin-off of any large taxpayer 5.
imposed and collect various local taxes, fees and charges to Corporation with an authorized capitalization of at
rationalize their fiscal autonomy. least P300,000,000 registered with the SEC
5. Corporation with an authorized capitalization of at
The special tax treatments of BOI-registered or PEZA- least P300,000,000 registered with the SEC
registered enterprises including the local taxes imposed by 6. Multinational enterprises with an authorized
local governments will be discussed under Local & capitalization or assigned capital of at least
Preferential Taxation by the same author. P300,000,000
7. Publicly listed corporations
 8. Universal, commercial, and foreign banks (the The proceeds of a life Insurance contract collected by an
regular business unit and foreign currency deposit employer as a beneficiary from the life Insurance of an
unit shall be considered one taxpayer for purposes officer or any person directly interested with his trade are
of classifying them as large taxpayer) likewise exempt. These proceeds are viewed as advanced
9. Corporate taxpayers with at least P100,000,000 recovery of future loss.
authorized capital in banking, insurance,
telecommunication, utilities, petroleum, tobacco, However, the following are taxable return on capital from
and alcohol industries insurance policies:
10. Corporate taxpayers engaged in the production of a. Any excess amount received over premiums paid by
metallic minerals the insured upon surrender or maturity of the policy
(I.e. the insured outlives the policy.)
THE CONCEPT OF INCOME b. Gain realized by the insured from the assignment or
Why is income subject to tax? sale of his insurance policy
Income is regarded as the best measure of taxpayers' ability c. Interest income from the unpaid balance of the
to pay tax. It is an excellent object of taxation in the proceeds of the policy
allocation of government costs. d. Any excess of the proceeds received over the
acquisition costs and premium payments by an
What is income for taxation purposes? assignee of a life Insurance policy
The tax concept of income is simply referred to as "gross
income" under the NIRC. A taxable item of income is Health
referred to as an "item of gross income" or "inclusion in Any compensation received in consideration for the loss of
gross income". health such as compensation for personal injuries or
tortuous acts is deemed a return of capital.
Gross Income simply means taxable income in layman's
term. Under the NIRC however, the term "taxable income" Human Reputation
refers to certain items of gross income less deductions and The value of one's reputation cannot be measured
personal exemptions allowable by law. Technically, gross financially. Any indemnity received as compensation for its
income is broader to pertain to any income that can be impairment is deemed a return of capital exempt from
subjected to income tax. income tax.
Examples include moral damages received from:
Gross Income is broadly defined as any inflow of wealth to a. Oral defamation or slander
the taxpayer from whatever source, legal or illegal, that b. Alienation of affection
increases net worth. It includes income from employment, c. Breach of promise to marry
trade, business or exercise of profession, income from
properties, and other sources such as dealings in properties Recovery of lost capital vs. Recovery of lost profits
and other regular or casual transactions. The loss of capital results in decrease in net worth while the
loss of profits does not decrease net worth. The recovery of
ELEMENTS OF GROSS INCOME lost capital merely maintains net worth while the recovery
1. It is a return on capital that increases net worth. of lost profits increases net worth. Therefore, the recovery
2. It is a realized benefit. of lost profits is a return on capital.
3. It is not exempted by law, contract, or treaty.
Taxable recovery of lost profits
RETURN ON CAPITAL The recovery of lost profits through insurance, indemnity
Capital means any wealth or property. Gross income is a contracts, or legal suits constitutes a taxable return on
return on wealth property that increases the taxpayer's net capital.
worth. (Illustration page 64) The following are taxable recoveries of lost profits:
a. Proceeds of crop or livestock insurance
The return on capital that increases net worth is income b. Guarantee payments
subject to income tax. Return of Capital merely maintains c. Indemnity received from patent infringement suits
net worth hence, it is not taxable. And improvement in net
worth indicates an ability to pay tax. Illustration 1 – 3 page 65

Capital items deemed with infinite value The recovery of lost income or profits is not intended to
There are capital items that have infinite value and are compensate for the loss of capital. It is as good as realization
incapable of pecuniary valuation. Anything received as of income; hence, it is an item of gross income.
compensation for their loss is deemed a return of capital.
Examples: REALIZED BENEFIT
1. Life
2. Health What is meant by realized benefit?
3. Human reputation The "benefit" concept
The term "benefit" means any form of advantage derived by
Life the taxpayer. There is benefit when there is an increase in
The value of life is immeasurable by money. Under Sec. 32 the net worth of the taxpayer. An increase in net worth
of the NIRC, the proceeds of life insurance policies paid to occurs when one receives income, donation or inheritance.
the heirs or beneficiaries upon death of the insured, The following are not benefits, hence, not taxable:
whether in a single sum or otherwise, are exempt from a. Receipt of a loan - properties increase but
income tax obligations also increase resulting in an offsetting
effect in net worth
 b. Discovery of lost properties - under the law, the holding r parent company and its subsidiaries and between
finder has an obligation to return the same to the sister companies are taxable because each corporation is a
owner. separate entity. This applies regardless of the underlying
c. Receipt of money or property to be held in trust economic relationship.
for, or to be remitted to another person.
However, the sales of a home office to its branch office are
If the taxpayer is entitled to keep for his account portion of not taxable because they pertain to one and the same
a receipt, only that portion is a benefit. taxable entity. Furthermore, the income between
businesses of a proprietor should not be taxed since
Illustration page 66 proprietorship businesses are taxable upon the same
owner. Note that a proprietorship business is not a juridical
The "realized" concept entity.
The term realized means earned. It requires that there is a
degree of undertaking or sacrifice from the taxpayer to be Benefits in the absence of transfers
entitled of the benefit. The Increase in wealth of the taxpayer in the form of
appreciation or increase in the value of his properties or
Requisites of a realized benefit: decrease in the value of his obligations in the absence of a
1. There must be an exchange transaction sale or barter transaction is not taxable.
2. The transaction involves another entity.
3. It increases the net worth of the recipient. These are referred to as unrealized gains or holding gains
because they have not yet materialized in an exchange
Types of Transfers transaction.
1. Bilateral transfers or exchanges, such as:
a. Sale Examples of unrealized gains or holding gains:
b. Barter a. Increase in value of investments in equity or debt
These are referred to as "onerous transactions". securities
b. Increase in value of real properties held (revaluation
2. Unilateral transfers, such as: increment)
a. Succession transfer of property upon death c. Increase in value of foreign currencies held or
b. Donation receivable
These are also referred to as "gratuitous transactions". d. Decrease in value of foreign currency denominated
debt by virtue of favorable fluctuation in exchange
Under current usage, unilateral transfers are simply rates
referred to as "transfers" while bilateral transfers are called e. Birth of animal offspring, accruals of fruits in an
"exchanges." Benefits derived from onerous transactions orchard or growth of farm vegetables
are "earned or realized"; hence, they are subject to income f. Increase in value of land due to the discovery of
tax. Benefits derived from gratuitous transactions are not mineral reserves
realized because of the absence of an earning process.
Benefits derived from gratuitous transactions are subject to Rendering of services
transfer tax, not income tax. The rendering of services for a consideration is an exchange
but does not cause a loss of capital. Hence, the entire
3. Complex transactions consideration received from rendering of services such as
Complex transactions are partly gratuitous and compensation income or service fees is an item of gross
partly onerous. These are commonly referred to as income.
"transfers for less than full and adequate
consideration". The gratuitous portion of the Illustration page 69
transaction is subject to transfer tax while the
benefit from the onerous portion is subject to Basis of Exemption of Unrealized Income
income tax. Normally, taxpayers will have the ability to pay tax when
their income materializes in an exchange transaction since
Illustration page 67 tax is generally payable in money.

The excess of fair value over selling price is a gratuity or gift This does not mean, however, that only income realized in
whereas the excess of selling price over the cost is an item cash is subject to tax. Income realized in non-cash
of gross income, properties are, in effect, received in cash but the taxpayer
used the same to acquire the non-cash property. Income
What is meant by another entity? received in non- cash considerations is taxable at the fair
Every person, natural or juridical, is an entity. Natural value of the property received. Moreover, exempting
persons are living person while juridical persons are those income realized in non-cash considerations would open a
created by law such as partnerships corporations. An entity wide avenue for tax evasion since taxpayers can easily
may be a taxable entity or an exempt entity. A taxis item of divert their income in the form of non- cash consideration.
gross income arises from transactions which involve
another natural juridical entity. Mode of Receipt/Realization Benefits
Taxable items of income may be realized by the
Gains or income derived between relatives, corporations, taxpayer in two ways:
and between a partner and the partnership are taxable 1. Actual receipt
since it is made between separate entities Likewise, the Actual receipt involves actual physical taking of the
income between affiliated companies such as between a income in the form of cash or property.
 2. Constructive receipt INDIVIDUAL INCOME TAXPAYERS
Constructive receipt involves no actual physical Citizens
taking of the income but the taxpayer is effectively Under the Constitution, citizens are:
benefited a. Those who are citizens of the Philippines at the time
Examples: of adoption of the Constitution on February 2, 1987
a. Offset of debt of the taxpayer in consideration for b. Those whose fathers or mothers are citizens of the
the sale of goods service Philippines
b. Deposit of the income to the taxpayer's checking c. Those born before January 17, 1973 of Filipino
account mothers who elected Filipino citizenship upon
c. Matured detachable interest coupons on coupon reaching the age of majority
bonds not yet encashed by the taxpayer d. Those who are naturalized in accordance with the
d. Increase in the capital of a partner from the profit law
of the partnership
Classification of citizens:
Inflow of wealth without increase in net worth A. Resident citizen - A Filipino citizen residing in the
The inflow of wealth to a person that does not increase his Philippines
net worth is an Income due to the total absence of benefit.
Examples: B. Non-resident citizen includes:
a. Receipt of property in trust 1. A citizen of the Philippines who establishes to the
b. Borrowing of money under an obligation to return satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention
In law, the proceeds of embezzlement or swindling where to reside therein;
money is taken without an original intention to return are 2. A citizen of the Philippines who leaves the
considered as income because of the increase in net worth Philippines during the taxable year to reside
of the swindler. abroad, either as an immigrant or for an
employment on a permanent basis;
NOT EXEMPTED BY LAW, CONTRACT, OR TREATY 3. A citizen of the Philippines who works and derives
An item of gross Income is not exempted by the Income from abroad and whose employment
Constitution, law, contracts or treaties from taxation. thereat requires him to be physically present
abroad most of the time during the taxable year;
The following items of income are exempted by law from 4. A citizen who has been previously considered as
taxation; hence, they are not considered items of gross non-resident citizen and who arrives in the
income: Philippines at anytime during the taxable year to
1. Income of qualified employee trust fund reside permanently in the Philippines shall
2. Revenues of non-profit, non-stock educational likewise be treated as a non-resident citizen for the
institutions taxable year in which he arrives in the Philippines
3. SSS, GSIS, Pag-IBIG, or PhilHealth benefits with respect to his income derived from sources
4. Salaries and wages of minimum wage earners and abroad until the date of his arrival in the
qualified senior citizen Philippines
5. Regular income of Barangay Micro-business
Enterprises (BMBEs) Filipinos working in Philippine embassies or Philippine
6. Income of foreign governments and foreign consulate offices are n considered non-resident citizens.
government-owned and controlled corporations
7. Income of international missions and organizations Alien
with income tax immunity A. Resident alien - an individual who is residing in the
Philippines but is not a citizen thereof, such as:
Items of gross income that are exempted from taxation are 1. An alien who lives in the Philippines without
discussed extensively under Exclusions in Gross Income in definite intention as to his stay; or
Chapter 8. 2. One who comes to the Philippines for a definite
purpose which in its nature would require an
TYPES OF INCOME TAXPAYERS extended stay and to that end makes his home
A. Individuals temporarily in the Philippines, although it may be
1. Citizen his intention at all times to return to his domicile
a. Resident citizen abroad;
b. Non-resident citizen An alien who has acquired residence in the Philippines
2. Alien retains his status as such until he abandons the same or
a. Resident alien actually departs from the Philippines
b. Non-resident alien
i. engaged in trade or business B. Non-resident alien - an individual who is not residing in
ii. not engaged in trade or business the Philippines and who is not a citizen thereof
3. Taxable estates and trusts 1. Non-resident aliens engaged in business (NRA-
ETB)- aliens who stayed In the Philippines for an
B. Corporations aggregate period of more than 180 days during the
1. Domestic corporation year
2. Foreign corporation 2. Non-resident aliens not engaged in business (NRA-
a. Resident foreign corporation NETB) – include: a. Aliens who come to the
b. Non-resident foreign corporation Philippines for a definite purpose which in its
 nature may be promptly accomplished; b. Aliens 2. Trust
who shall come to the Philippines and stay therein A trust is an arrangement whereby one person (grantor or
for an aggregate period of not more than 180 days trustor) transferor (Le. donates) property to another
during the year person (beneficiary), which will be held under the
management of a third party (trustee or fiduciary).
THE GENERAL CLASSIFICATION RULE FOR
INDIVIDUALS A trust that is irrevocably designated by the grantor is
treated in taxation as it is an Individual taxpayer. The
1. Intention income of the property held in trust is taxable to the trust.
The intention of the taxpayer regarding the nature of his Trusts that are designated as revocable by the grantor are
stay within or outside the Philippines shall determine his ne taxable entities and are not considered as individual
appropriate residency classification. The taxpayer shall taxpayers. The income o properties held under revocable
submit to the CIR of the BIR documentary proofs such as trusts is taxable to the grantor not to the trust.
visas, work contracts and other documents indicating such
intention. When the trust agreement is silent as to revocability of the
trust, the trust is presumed to be revocable.
Documents purporting short term stay such as tourist visa
shall not result in the reclassification of the taxpayer's CORPORATE INCOME TAXPAYERS
normal residency Documents purporting a long-term stay The term 'corporation' shall include one person
such as immigration visa or working visa for an extended corporations (OPC) partnerships, no matter how created or
period would result in the automatic reclassification of the organized, Joint-stock companies, join accounts,
taxpayers residency. association, or insurance companies, except general
professional partnerships and a joint venture or consortium
Examples: formed for the purpose of undertaking construction
a. An alien is normally non-resident. An alien who projects or engaging in petroleum, coal, geothermal, and
come to the Philippines with a tourist visa would other energy operations pursuant to an operating
still be classified as non-resident alien. consortium agreement under a service contract with the
b. A citizen is normally resident. A citizen who would government.
go abroad under a tourist visa would still be
considered a resident citizen. Hence, the term corporation includes profit-oriented and
c. An alien who come to the Philippines with an non-profit institutions such as charitable institutions,
immigration visa would be reclassified as a cooperatives, government agencies and instrumentalities,
resident alien upon his arrival. associations, leagues, civic or religious and other
d. A citizen who would go abroad with a two-year organizations.
working visa would be reclassified as a non-
resident citizen upon his departure. Domestic Corporation
A domestic corporation is a corporation that is organized in
2. Length of stay accordance with Philippine laws. It includes one person
In default of such documentary proof, the length of stay of corporations (OPC) owned and registered by resident
the taxpayer is considered: citizens in the Philippines
a. Citizens staying abroad for a period of at least 183
days are considered non-resident. Foreign Corporation
b. Aliens who stayed in the Philippines for more than A foreign corporation is one organized under a foreign law.
1 year as of the end of the taxable year are
considered resident. Types of foreign corporations:
c. Aliens who are staying in the Philippines for not 1. Resident foreign corporation (RFC) - a foreign
more than 1 year but more than 180 days are corporation which operates and conducts business in
deemed non-resident aliens engaged in business. the Philippines through a permanent establishment
d. Aliens who stayed in the Philippines for not more (l.e. a branch).
than 180 days are considered non-resident aliens 2. Non-resident foreign corporation (NRFC) - a
not engaged in trade or business. foreign corporation which does not operate or
conduct business in the Philippines
Illustration 1 – 3 page 73!!
Note:
Taxable Estates and Trusts 1. A corporation that incorporates in the Philippines is a
1. Estate domestic corporation under the Incorporation Test even
Estate refers to the properties, rights, and obligations of a if the same is controlled by foreigners
deceased person not extinguished by his death. 2. A foreign corporation that transacts business with
residents through a resident branch is taxable on such
Estates under judicial settlement are treated as individual transactions as a resident foreign corporation through
taxpayers. The estate is taxable on the income of the its branch. However, if it transacts directly to residents
properties left by the decedent. Estate under extrajudicial outside its branch, it is taxable as a non-resident foreign
settlement are exempt entities. The income of properties of corporation on the direct transactions.
the estate under extrajudicial settlement is taxable to the 3. An individual that establishes a one-person corporation
heirs (OPC) shall be taxable as a corporate taxpayer for the
business transactions of the OPC but he shall be subject
to tax as an individual for his personal transactions.
Special Corporations engaging in petroleum, coal, geothermal and other
Special corporations are domestic or foreign corporations energy operations pursuant to an operating
which are subject to special tax rules or preferential tax consortium agreement under a service contract
rates. with the Government.

OTHER CORPORATE TAXPAYERS Similar to a GPP, this type of joint venture is not treated as
1. One-person corporation a corporation and is tax-exempt on its regular income, but
A one-person corporation is a corporation with a single their ventures are taxable their share in the net income of
stockholder who may be a natural person, trust or an estate. the joint venture.
b. Taxable joint ventures All other joint ventures are
Banks and quasi-banks, preneed, trust, insurance, public taxable as corporations.
and publicly-listed companies, and non-chartered GOCCs
may not incorporate as One-person corporations. A natural 4. Co-ownership - is joint ownership of a property
person who is licensed to exercise a profession may not formed for the purpose of preserving the same
organize as a One Person Corporation for the purpose of and/or dividing its income.
exercising such profession except as otherwise provided
under special laws. A co-ownership that is limited to property preservation or
income collection is not a taxable entity and is exempt but
2. Partnership the co-owners are taxable on their share on the income of
A partnership is a business organization owned by two or the co-owned property.
more persons who contribute their industry or resources to
a common fund for the purpose of dividing the profits from However, a co-ownership that reinvests the income of the
the venture. co-owned property to other income-producing properties
or ventures will be considered an unregistered partnership
Types of partnership taxable as a corporation.
a. General professional partnership (GPP)
A GPP is a partnership formed by persons for the THE GENERAL RULES IN INCOME TAXATION page 77!!
sole purpose exercising a common profession, no
part of the income of which is derives from The Residency and Citizenship Rule
engaging in any trade or business. Taxpayers who are residents and citizens of the Philippines
such as resident citizen and domestic corporations are
A GPP is not treated as a corporation and is not a taxable on all income from sources within and without the
taxable entity. It exempt from income tax, but the Philippines. A corporation is a citizen of the country of
partners are taxable in their individual capacity Incorporation. Thus, a domestic corporation is a citizen of
with respect to their share in the income of the the Philippines.
partnership.
Basis of the extraterritorial taxation
b. Business partnership Resident citizens and domestic corporations derive most of
A business partnership is one formed for profit. It the benefits from the Philippine government compared to
is taxable as corporation. all other classes of taxpayers by virtue of their proximity to
the Philippine government.
Examples:
a. A partnership between Atty. Mendoza, a lawyer, Under our laws, resident citizens and domestic
and Mark Santos, a accountant, to practice in corporations enjoy preferential privileges over aliens. Also,
taxation advisory services would be a business between resident and non-resident citizens, resident
partnership since the two partners are not in the citizens have full access of the public services of our
same profession government because they are In the country. The taxation
b. A partnership between accountants Khim and of foreign income of resident citizens and domestic
Vhinson to venture into beauty parlor would be a corporations properly reflects this difference in benefits
business partnership since the venture is not i consistent with the Benefit Received Theory.
practice of a common profession.
c. A partnership between accountants Juan and The extra-territorial tax treatment of resident citizens and
Miguel to venture into audit services would be a domestic corporations is also intended as a safety net to the
general professional partnership potential loss of tax revenues brought by situs relocation or
d. Dentists Wency and Andy partnered to operate a the practice of executing or structuring transactions such
dental clinic. During slack season, they are that income will be realized abroad to avoid Philippine
converting their clinic into a beauty salon. Their income taxes.
partnership is a business partnership since it is
earning income from business. The issue of international double taxation
The rule on extraterritorial taxation on resident citizens
3. Joint venture and domestic corporations exposes these taxpayers to
A joint venture is a business undertaking for a double taxation. However, the NIRC allows a tax credit for
particular purpose. It may be organized as a taxes paid in foreign countries. In fact, resident citizens and
partnership or a corporation. domestic corporations pay minimal taxes in the Philippines
on their foreign income because of the tax credit.
Types of joint ventures:
a. Exempt joint ventures - those formed for the
purpose of undertaking construction projects or
SITUS OF INCOME Mutually exclusive coverage
The situs of income is the place of taxation of income. It is The tax schemes are mutually exclusive. An item of gross
the jurisdiction that has the authority to impose tax upon income that is subject to tax in one scheme will not be taxed
the income. by the themes. Similarly, items of income that are exempted
in one scheme are not taxable by the other schemes.
Situs of income vs. source of income
Situs of income should be differentiated from the source of CLASSIFICATION OF ITEMS OF GROSS INCOME
income. The latter pertains to the activity or property that Because of the different tax schemes, items of gross income
produces the income. can be classified as follows:
1. Gross income subject to final tax
Situs is important in determining whether or not an income 2. Gross income subject to capital gains tax
is taxable in the Philippines. Situs is particularly important 3. Gross income subject to regular tax
to taxpayers taxable only on income within. However, it is
also important to taxpayers taxable on global income for Readers are advised to master the coverage of both final
purposes of the computation of the foreign tax credit. income tax and capital gains tar. A thorough understanding
of these exceptional tax treatments is very essential to your
INCOME SITUS RULES page 78!! mastery of Income Taxation.
Illustration page 79!!
FINAL INCOME TAXATION
OTHER INCOME SITUS RULES Final income taxation is characterized by final taxes
A. Gain on sale of properties wherein full taxes are withheld by the income payor at
1. Personal property source. The recipient income taxpayer receives the income
- Domestic securities - presumed earned within the net of taxes. The payor is the one required by law to remit
Philippines the tax to the government. Consequently, the recipient
- Other personal properties - earned in the place income taxpayer does not need to file income tax returns
where the property is sold because the withheld tax constitutes the full tax due and are
therefore deemed final payments. This system of taxation is
2. Real property - earned where the property is referred to as the final withholding tax system.
located
Illustration page 79!! Final taxation is applicable only on certain passive income
listed by the law. Not all items of passive income are subject
B. Dividend Income from: to final tax.
1. Domestic corporation - presumed earned within
2. Foreign corporation - situs depends on pre- Passive income vs. active income
dominance test Passive incomes are earned with very minimal or even
without active involvement of the taxpayer in the earning
The pre-dominance test process.
If the ratio of the Philippine gross income over the world Examples of passive income:
gross income of the resident foreign corporation in the 1. Interest income from banks
three-year period preceding the year dividend declaration, 2. Dividends from domestic corporations
or for such part of the period as the corporation has been 3. Royalties
existence, is:
Active or regular income arises from transactions
At least 50%, the portion of the dividend corresponding to requiring a considerable degree of effort or undertaking
the Philippines gross income ratio that is earned within Less from the taxpayer. It is the direct opposite of passive
than 50%, the entire dividends received is deemed earned Income.
abroad Examples of active Income:
1. Compensation income
Dividends from non-resident foreign corporations will least 2. Business Income
likely pass the test due to their absence of Philippine 3. Professional income
operations. Hence, dividends from nor resident foreign
corporations are generally presumed earned abroad. CAPITAL GAINS TAXATION
(Illustration page 80!!) Capital gains tax is imposed on the gain realized on the sale,
exchange and other dispositions of certain capital assets.
C. Merchandising Income - earned where the property is
sold (Illustration) Capital assets are assets not used in business, trade or
profession. Capital assets are the opposites of ordinary
D. Manufacturing Income - earned where the goods are assets. Ordinary assets are assets used in business trade or
manufactured and sold profession such as inventory, supplies or property, plant
(Illustration) and equipment.

INCOME TAXATION SCHEMES Also, not all capital gains are subject to capital gains tax.
There are three income taxation schemes under the NIRC: Most of them are subject to regular income tax.
a. Final income taxation
b. Capital gains taxation The NIRC identifies capital gains tax as a final tax but they
c. Regular income taxation are hybrid forms of final taxes since it also employs self-
An item of gross income is taxable in any of these tax assessment method. The taxpayer still file capital gains tax
schemes. (Graph) returns to report the gain and pay the tax to the
government. Capital gains taxation applies only to two types Illustration (page 103)
of capital assets: domestic stocks and real property.
3. Change of accounting period by corporate
REGULAR INCOME TAXATION taxpayers - The accounting period covers the start
The regular income tax is the general rule in income of the previous accounting period up to the
taxation and covers all other Income such as designated year-end of the new accounting period.
1. Active income Note that BIR approval is required in changing an
2. Other income accounting period. It is not automatic. (Illustration
a. Gains from dealings in properties, not subject 1 -2 page 104)
to capital gains tax
b. Other passive income not subject to final tax 4. Death of the taxpayer - The accounting period
covers the start of the calendar year until the death
Items of gross income from these sources are valued or of the taxpayer. (Illustration)
measured using an accounting method, accumulated over
an accounting period, and reported to the government 5. Termination of the accounting period of the
through an Income tax return. Regular Income taxation taxpayer by the Commissioner of internal
makes use of the self-assessment method. Revenue The accounting period covers the start of
current year until the date of the termination of the
ACCOUNTING PERIOD accounting period (Illustration)
Accounting period is the length of time over which income
is measured and reported. ACCOUNTING METHODS
Accounting methods are accounting techniques used to
Types of Accounting Periods measure income.
1. Regular accounting period - 12 months in length
a. Calendar Types of Accounting Methods
b. Fiscal 1. The general methods
2. Short accounting period-less than 12 months a. Accrual basis
b. Cash basis
Calendar year 2. Installment and deferred payment method
The calendar accounting period starts from January 1 and 3. Percentage of completion method
ends December 31. This counting period is available to both 4. Outright and spread-out method
corporate taxpayers and individual taxpayers. 5. Crop year basis

Under the NIRC, the calendar year shall be used when the: General Methods for income from sale of goods or
1. taxpayer's annual accounting period is other than a service
fiscal year (Le. longer than 12 months in length) 1. Accrual basis
2. taxpayer has no annual accounting period (i.e. less Under the accrual basis of accounting, income is
than 12 months in length) recognized when earned regardless of when
3. taxpayer does not keep books received. Expense is recognized when incurred
4. taxpayer is an individual regardless of when paid

Fiscal year Income is said to have accrued when the right to

A fiscal accounting period is any 12-month period that ends receive is established or when an enforceable right
on any day other than December 31. The fiscal accounting to secure payment is created against the
period is available only to corporate income taxpayers and counterparty.
is not allowed to individual Income taxpayers.
2. Cash basis
Deadline of Filing the Income Tax Return Under the cash basis of accounting, income is
Under the NIRC, the return is due for filing on the fifteenth recognized when received and expense is
day of the fourth month following the close of the taxable recognized when paid.
year of the taxpayer. The regular tax due is payable upon
filing of the income tax return. Tax and accounting concepts of accrual basis and cash
Illustration: Due date of the annual income return basis distinguished
1. Taxpayers under the calendar year must file their
annual income tax return for the current period not The financial accounting concept of accrual basis and cash
later than April 15 of the following year. basis are similar to their tax counterparts, except only for
2. A corporate taxpayer with fiscal year ending June the following tax rules:
30, 2021 must file its annual income tax return not 1. Advanced income is taxable upon receipt
later than October 15, 2021. Income received in advance is taxable upon receipt
in pursuant to the Lifeblood Doctrine and the
INSTANCES OF SHORT ACCOUNTING PERIOD Ability to Pay Theory. The subsequent taxation of
1. Newly commenced business - The accounting advanced income in the period earned will expose
period covers the date of the start of the business the government to risks on non-collection. This
until the designated year-end of the business. rule is applicable on the sale of services not on
Illustration (page 103) goods.
2. Dissolution of business - The accounting period 2. Prepaid expense is non-deductible
covers the start of the current year to the date of Prepaid expenses are advanced payment for
dissolution of the business. expenses of future taxable periods. These are not
 deductible against gross income in the year paid. The sale of goods with extended payment terms may be
They are deducted against income in the future reported using the accrual basis, installment method, or
period they expire or are used to the business, deferred payment method.
trade or profession of the taxpayer. Normally, the
expensing of prepayments does not properly Installment method
reflect the income of the taxpayer. It also Under the installment method, gross Income is recognized
contradicts the Lifeblood Doctrine as it effective and reported in proportion to the collection from the
defers the recognition of income. installment sales.

3. Special tax accounting requirement must be Installment method is available to the following
followed. taxpayers:
There are cases where the tax law itself provides 1. Dealers of personal property on the sale of
for a specific accounting treatment of an income or properties they regularly sell
expense. The specified method must be observed 2. Dealers of real properties, only if their initial
even if it departs from the basis regularly employed payment does not exceed 25% of the selling price
by the taxpayer from keeping his books. 3. Casual sale of non-dealers in property, real or
Illustration (page 106) personal, when their selling price exceeds P1,000
and their initial payment does not exceed 25% of
Points to consider in converting GAAP Accrual Basis to the selling price
Tax Accrual Basis
1. In accounting accrual basis, income is recognized Initial payment
when earned even if not yet received. Advanced Initial payment means total payments by the buyer, in cash
Income is inherently not included in net income. or property, in the taxable year the sale was made. The term
For purposes of taxation, advanced income is "initial payment is broader than downpayment. It also
taxable. Hence, it must be added to accrual basis includes the installment payments in the year of sale.
gross income
2. In accounting, expense is recognized when accrued Selling price
even if not yet paid. Prepaid expenses are Selling price means the entire amount for which the buyer
inherently not deducted. Hence, no adjustment for is obligated to the seller. It is computed as follows: page 109
prepayments is necessary under accrual basis.
Contract price
Points to consider in converting GAAP cash basis to Tax The contract price is the amount receivable in cash or other
cash basis property from the buyer. It is usually the selling price in the
1. Under the accounting cash basis, income is absence of an agreement whereby the debtor assumes
recognized when received not when it is earned. indebtedness on the property. (Illustration 109-112)
Advanced income is inherently recognized as
income. Hence, no adjustment is necessary income. Deferred payment method
2. Under accounting cash basis, expense is deducted The deferred payment method is a variant of the accrual
when paid including prepaid expenses. Hence, the basis and is used in reporting income when a non-interest
deducted prepaid expenses must be reversed for bearing note is received as consideration in a sale.
purposes of taxation.
Under the deferred payment method, the gross income is
Sellers of goods computed based on the present value (discounted value) of
The gross income of taxpayers selling goods is determined a note receivable from the contract. The discount interest
as follows: page 108 on the note is amortized (1.e., spread) as interest income
over the Installment term. Illustration (113)
The expensing of the purchase cost of goods does not
properly and fairly reflect the income of the taxpayer The Percentage of Completion Method for Construction
particularly when there are significant fluctuations in Contracts
inventory levels between accounting periods. This could Under the percentage of completion method, the estimated
expose the taxpayer to risk of BIR assessment. The use of gross income from construction is reported based on the
the accrual method is suggested but of course subject to percentage of completion of construction project.
practical and cost considerations.
There are several methods of estimating project completion
Hybrid basis in practice, but the output method based on engineering
The hybrid basis is any combination of accrual basis, cash survey is prescribed by the NIRC. (Illustration)
basis, and/or other methods of accounting. It is used when
the taxpayer has several businesses which employ different Income from Leasehold Improvement
accounting methods. (Illustration) Leasehold improvements are tangible improvements made
by the lessee to the property of the lessor. Improvements
The gross income as determined by cash basis in the service will benefit the lessor when their useful life extends beyond
business and the gross income as determined by the accrual the lease term. This benefit is referred to as income from
basis in the trading business are simply combined There is no leasehold improvement.
requirement to measure the income of different businesses
under a single accounting method. Under Revenue Regulations No. 2, the income from
leasehold improvement can be reported using cither of the
Sale of goods with extended payment terms following method at the option of the taxpayer:
1. Outright method
 The lessor may report as income the fair market reported using the different methods. There is no need to
value of such building or improvements subject to restate the income to a common accounting method.
the lease at the time when such buildings or However, the methods applied to each business should be
improvements are completed. applied consistently from period to period.
2. Spread-out method
The lessor may spread over the life of the lease the Selection of an Accounting Method
estimated depreciated value of such buildings or The NIRC allows taxpayers to determine the most
improvements at the termination of the least and appropriate accounting method that apply to themselves.
report as income for each year of the lease an The BIR cannot impose an accounting method to be used.
aliquot part thereof. Computed as: (Book and Illus)
The CIR may only prescribe an accounting method if:
Note to Readers a. The taxpayer did not use an accounting method, or
The taxation of leasehold improvement is an old regulation b. The accounting b method selected does not clearly
and is absent in the current tax code. As such, its legitimacy reflect the income of the taxpayer.
is questioned for lack of legal basis and is viewed as an
improper introduction of legislation. Moreover, it has no Change in Accounting Period
sense after all since the income from the leasehold The change in accounting period requires prior BIR notice.
Improvement will be claimed by the lessor as depreciation The following documentations are required:
expense throughout the remaining life of the Improvement. 1. A letter of request addressed to the RDO having
In effect the government is taking advanced tax money Jurisdiction over the place of business of the
which it will later return through tax deduction or tax shield taxpayer showing:
to the taxpayer. a. The original and the proposed new accounting
period
If our tax administrators would still implement this rule, b. The reason for desiring to change the
declaring the value of the Improvement as income may be accounting period
perceived by taxpayers as unjust and abusive as it could 2. Certified true copy of the SEC approved amended
unnecessarily cause cash flow problems. This is by-laws showing change in accounting period
unnecessarily strangling the goose that lay the golden egg. 3. Sworn statement of non-forum shopping stating
It would be more logical and acceptable if depreciated value chat such request has been previously acted upon
of the improvement at the termination of the lease is Jo by the BIR National Office
income under the outright method. 4. Duly filed up BIR Form 1905
5. A sworn undertaking by an officer of the taxpayer
Note that regardless of whether the value of the to file a separate find adjustment return for the
improvement or the depreciated value of the period between the close of the original accounting
improvement is declared as income under the outright period and the date designated as the close of the
method, net effect to the tax revenue the government would new accounting period
be the same except only there are changes in the income tax
rates during the life of the improvement. The request for approval of the change in accounting period
shall be filed any time not less than 60 days prior to the
Agricultural or Farming Income beginning of the new accounting per The certification
Farming income is commonly measured using the cash approving the adoption of a new accounting period mast
basis or accrual basis, such as in the following: released within 30 days from the date of receipt of the
a. Animal husbandry complete documentary requirements.
b. Short-term crops
Illustration TAX REPORTING
Types of Returns to the Government
The accounting for long-term crops depends on the 1. Income tax returns - provide details of the taxpayer's
harvesting frequency: income, expense, tax due, tax credit and tax still due
a. Perennial crops - those that yield harvests the government.
through years 2. Withholding tax returns - provide reports of income
b. One-time crops-those that are harvested once payments subjected to withholding tax by the
after several years taxpayer-withholding agent. Information returns 3.
The initial farm development costs of perennial crops like 3. Information Returns
mangoes, mangosteen, coconut and banana are capitalized
and amortized over the expected years of harvest. The Information Returns
harvests are accounted for using cash basis or accrual basis. Certain taxpayers are also required to file information
One-time crops are accounted for using the crop year basis. returns. Information returns do not involve any payment or
withholding of tax but are essential tot government in its tax
Crop year basis mapping efforts and in its evaluation of tax compliance.
Under the crop year basis, farming income is recognized as
the difference between the proceeds of harvest and The non-filing of income tax returns, withholding tax
expenses of the particular crop harvested. The expenses of returns, or information returns is subject to penalties, fines,
each crop are accumulated and deducted under crop hast of and or imprisonment.
the crop. Illustration
MODE OF FILING INCOME TAX RETURNS
Use of different accounting methods 1. Manual Filing System
Taxpayers with more than one type of business using The traditional manual system of filing income tax
different accounting methods can consolidate the income return is by paper documents where taxpayers fill
 up BIR forms to report income, expenses, or any PENALTIES FOR LATE FILING OR PAYMENT OF TAX
declaration required to be filed with the BIR. The late filing and payment of taxes is subject to the
following additional charges:
Under the NIRC, the income tax return shall be filed to the 1. Surcharge-
following descending order of priority, within the revenue a. 25% of the basic tax for failure to file or pay
district office where the taxpayer is registered or required deficiency tax on time
to register: b. 50% for willful neglect to file and pay taxes
1. An authorized agent bank (AAB)
2. Revenue Collection Officer The non-filing is considered 'willful neglect if the BIR
3. Duly authorized city or municipal treasurer, if discovered the non-filing first. This is the case when the
there is no BIR office in the locality taxpayer received a notice from the BIR to file return prior
to his actual filing. If the taxpayer filed a return before the
2. e-BIR Forms receipt of such notice, the same is considered simple neglect
The BIR Introduced the e-BIR Forms with an offline subject to the 25% surcharge.
or online version. Taxpayers fill up their income tax
returns in electronic spreadsheets without the Separate penalties are also imposed for each of the
need of writing on papers returns. The system following incidence:
ensures completeness of data on the return and is a. Wrong venue filing -25% of the basic tax
capable of online submission. If there are no b. Filing of fraudulent return -50% of the basic tax
penalties that require BIR assessments, taxpayers
would have to print a hard copy of the filled tax 2. Interest - The interest shall be double of the legal
returns and proceed directly to the bank for interest rate for loans or forbearance of any
payment. money in the absence of any express stipulation.
Since the legal interest is currently set at 6%, the
3. Electronic Filing and Payment System (eFPS) interest penalty is therefore 12% per annum
The eFPS is a paperless tax filing system developed computed on the basic tax over the actual days of
and maintained by the BIR. Taxpayers file tax delay divided 365 days.
returns including attachments in electronic format
and pay the tax through the Internet. Note that a month normally has 30 days except the
following:
Taxpayers mandated to use the eFPS 31-day months - January, March, May, July, August, October,
1. Large taxpayers duly notified by the BIR December
2. Top 20,000 private corporations duly notified by 28 or 29-day month - February
the BIR
3. Top 5,000 individual taxpayers duly notified by the The best way to put this in mind is that 31-day and 30-day
BIR months are alternating from January to July, but the
4. Taxpayers who wish to enter into contracts with sequence is reset in August. Also put in mind that February
government offices is a 28-day month, except on the leap year.
5. Corporations with paid-up capital of P10,000,000
6. PEZA-registered entities and those located within How to identify a leap year?
Special Economic Zones A year divisible by 4 with a whole number quotient without
7. Government offices, in so far as remittance of a decimal is a leap year. Years 2020, 2024, 2028 and so on
withheld VAT and business tax are concerned are leaps years. Leap years revolves around the sun in 365
8. Taxpayers included in the Taxpayer Account days in February making it 29 days. Our planet revolves
Management Program (TAMP) around the sun in 365 ¼ days. Hence, there is an extra one
9. Accredited importers, including prospective complete day in every four calendar years making a leap
importers required to secure the Importers year to have 366 days rather than the usual 365 days.
Clearance Certificate (ICC) and Custom brokers Illustration
Clearance Certificate (BCC) in case of unavailability
of the eFPS during maintenance or instances of 3. Compromise penalty-
technical errors, eFPS enrolled taxpayers may file Compromise penalty is an amount paid in lieu of
manually. criminal prosecution over tax violation. The
schedules of compromise penalty related to income
Grouping of Taxpayers under EFPS (page 119-120) taxes are included in Appendix 4 for your reference.
Illustration
PAYMENT OF INCOME TAXES
The general rule is "pay as you file". The capital gains tax PENALTIES FOR NON-FILING OR LATE FILING OF
and regular income tax are paid as the taxpayer files his INFORMATION RETURN
return. Installment payment of income tax is allowed on For each failure to file a separate information return,
certain conditions. statement or list, or keep any record, or supply any
Taxpayers under the eFPS system shall e-pay their tax information required by the Code or by the Commissioner
online through internet banking service. The account of the on the date prescribe therefor, unless it is shown that such
taxpayer will be auto-debited for the amount of taxes to be failure is due to reasonable cause not to willful neglect, shall
paid. be subject t to a penalty off P1,000 for each such failure.
Provided that the amount imposed for all such failure
BASIC COMPARISON OF FILING AND PAYMENT during a calendar year shall not exceed P25,000
SYSTEMS (Illustration)