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- JELLA
ANSWER KEY ( KUNG WALA SAGOT DITO MAG GOOGLE KA !! )
MINIMUM CORPORATE INCOME TAX – computed as 2% of the total gross income subject to regular income tax.
This is imposed on corporations that incurred net operating loss. This is temporarily reduced to 1% from July 1,
2020 to June 30, 2023.
DUE DATE OF ANNUAL INCOME TAX – 15th day of the fourth month following the taxable year of the taxpayer.
OTHER PERCENTAGE TAX- A consumption tax collected by non-VAT businesses
DONOR'S TAX Tax on gratuitous transfer of property by a living donor
REGRESSIVE TAX Tax that decreases in rates as the amount or value of the tax object increases
INDIRECT TAX Tax collected upon persons who are not the statutory taxpayers
AD VALOREM TAX Tax that is imposed based on the value of the tax object
FISCAL TAX Tax for general purpose
NATIONAL TAX Tax imposed by the national government
EXCISE TAX Tax on sin products or non-essential commodities
ESTATE TAX Imposed on the gratuitous transfer of property upon death
PERSONAL TAX Tax on residents of a country
PROPORTIONAL TAX Tax that remains at flat rate regardless of the value of the tax object
SPECIFIC TAX Tax that is collected on a per unit basis
DIRECT TAX Tax is collected upon the statutory taxpayer
REGULATORY TAX Tax imposed to regulate business or professions
PRIVILEGE TAX Tax upon performance of an act or employment of a privilege
REVENUE It refers to all income collections of the government
TAX It is an imposition for the support of the government 
SPECIAL ASSESSMENT It is imposed upon land adjacent to public improvements
TARIFF It is imposed on imported and exported commodities
LICENSE FEE It is a charge imposed prior to the commencement of business or exercise of a profession.  
TAX It is a post-activity rather than a pre-activity imposition
DEBT It is subject to compensation or set-off
TOLL It is a charge for the use of other’s property
PENALTY It is the imposition intended to discourage an act
DEBT It arises from contracts rather than from law
CHED regulations = Which is not a source of tax law
indirect = When tax is collected upon someone who is effectively reimbursed by another, the tax is regarded as
Poll tax = All are ad valorem taxes except one. Select the exception
as an implement of police power = Taxation power can be used to destroy
It is subject to assignment = Which is not a characteristic of tax
National or local tax = Tax as to source is classified as
Real Property tax = Which of the following is a local tax
Fiscal or regulatory = Tax as to purpose is classified as
Direct or indirect tax = Tax as to incidence is classified as
Professional tax = Which is a local tax
False - A Request for re investigation is a plea for a re-evaluation of an assessment on the basis of existing
records without the need of an additional evidence
false - A Letter of Notice is required under the National Internal Revenue Code prior to the examination of a
taxpayer 
true - The BIR should conduct the audit of a taxpayer within 120 days from issuance of a Letter of Authority  
true - Compromise penalty is a settlement for the government not to enforce criminal prosecution
true- The taxpayer must submit additional relevant evidence within 60 days from the day of filing a protest
under a request for re investigation
true - Collection is enforceable once assessment became final and executory
true - Judicial appeal is a protest on Final Decision on Disputed Assessment by filing a petition for review with
the Court of Appeals
true- A Preliminary Collection Letter is signed by the Revenue District Officer who has jurisdiction over the
taxpayer
true - The government has 10 years from the date of release of the final assessment to the taxpayer to make
collection
true - The taxpayer's reply to Preliminary Assessment Notice (PAN) is an explanation on the matters questioned
by examiner; factual and legal bases supporting the taxpayer’s position and prayer for full or partial cancellation
of the PAN
false - The taxpayer's reply to Preliminary Assessment Notice (PAN) must be made within 30 days upon receipt
of the PAN
true - All relevant documents must be submitted within 60 days from the filing of the request for
reinvestigation 
true - Compromise is the remedy of last resort.
True - Tax remedies are procedures that the government and taxpayers may adopt in order to determine that
tax liabilities of taxpayers are properly determined and paid
False - If the taxpayer files his return before the due date, the prescriptive period of assessment is three years
before the due date
Consideratio
n For the Loss of Return OF Capital Return ON Capital
P 1,000,000 Health 1,000,000,000 0
P500,000 P400,000 car 400,000 100,000
P350,000
P300,000 building 300,000 0
P600,000 Income 0 600,000
P1,200,000 Life 1,200,000 0

Transaction Income Tax Transfer tax

Barter of transaction /
Sale of goods /
rendering of services /
Donation of properties /
Transfer for less than full and adequate
consideration / /

World Philippine
Taxpayer Income Income
Non-resident citizen /
Resident Alien /
Non-resident alien engaged in trade or business /
Resident Foreign Corporation /
Resident Citizen /
Non-resident alien not engaged in business /
Non-resident foreign corporation /
Domestic Corporation /
Taxable Trusts established by a Filipino citizen in the Philippines /
Taxable estate of a non-resident citizen judicially administered
abroad /

FALSE Individuals and corporations are tax-exempt on interest income on long-term deposits
TRUE Generally, interest income from non-bank sources is subject to regular income tax
FALSE Foreign income is subjected to final tax if the taxpayer is taxable on global income
FALSE Items of passive income from abroad are subject to final tax
TRUE Interest income on government securities are subject to final tax
Feedback They are considered deposit substitutes subject to FIT
FALSE All items of passive income are generally subject to final tax
Feedback Generally passive income are subject to final tax but not ALL
TRUE Final tax is collected at source; hence there is no need to file an income tax return
FALSE Corporations are tax-exempt on inter-corporate dividends from any corporation
Feedback Only from domestic corporation
TRUE Dividends from resident corporations are subject to regular tax
FALSE Dividends from Real Estate Investment Trusts are exempt from final tax
Feedback
FALSE Dividends from REIT are generally subject to 10% final tax

FALSE Stock dividends are always except from final tax

FALSE Corporations are subject to final tax on prizes
FALSE The share in the net income of a business partnership is subject to a creditable withholding tax, not to
final tax
FALSE General professional partnerships are subject to final tax but not to regular tax
TRUE All non-residents are exempt from final tax on foreign currency deposits
any corporations The final tax rates on pre-termination of long term deposits are not relevant to
Taxpayers need not file an income tax return Which is correct with regard to the final income taxation?
Final tax applies only on certain passive income earned within the Philippines
Which statement is correct regarding final tax? 
Money market placements Interest Income from which of the following sources is subject to final income tax
Promissory notes The final tax does not apply to interest on ( select the best answer)
P 11,111 Mr. Siegmond, a resident citizen received P100,000 dividend income from Vodka, Inc., a domestic
corporation. How much final tax must have been withheld by Vodka Inc
$ 6,000 Gabriel is a non-resident citizen working abroad. He invested his $1,000,000 personal savings in a FCDU
bank under a joint account with his resident wife. The bank pays 8% annual interest. Compute the final tax to be
withheld in one year
P 60,000 Tuazon Corporation declared P1,000,000 dividends in 2021. 40% of its outstanding shares is held by
its only corporate investor, Abdul Inc. Compute the amount of dividends tax to be withheld on declaration
P 100,000 Tiong Go Department Store conducted a sales promotion where customer purchases exceeding
P1,000 in one transaction shall be entitled to a ticket for a chance to win P500,000 raffle prize. Mr. Shing won the
prize. How much shall Tiong Go withhold from the grand prize
subject to regular tax Tabong, a resident citizen, won $1,000,000 from the US lottery. The lottery winning is
FALSE Capital assets will not become ordinary assets when used in business
TRUE A vacant and unused lot is an ordinary asset to a real estate dealer
TRUE For taxpayers not engaged in business, assets shall cease to be ordinary assets when they are
discontinued from active use for more than two (2) years
TRUE Real and other properties acquired are ordinary assets to banks even if they are not engaged in the realty
business
FALSE The sale of real property capital assets will never be subject to regular income tax
Feedback
Sale of RFC and RIT option on individual sale to government
FALSE Donated assets become ordinary asset even if the donee do not employ the same in business
TRUE An ordinary asset continues to be ordinary asset even if idled for more than two years if the taxpayer is
engaged in realty business
TRUE Dealers in realties are subject to the regular tax on their sale of real properties
TRUE Dealers in securities are not subject to the stock transaction tax but are subject to the regular income tax
on gains realized upon the sale of stocks through the Philippine Stock Exchange.
FALSE The issuance of shares of stock for property is subject to capital gains tax

P 28,050 Mr. Dondi sold domestic stocks directly to a buyer at a mark-up on cost of P200,000. He paid P5,000
broker's commission and P8,000 documentary stamp tax on the sale. Compute the capital gains tax.
P 48,000 Mr. Panay Cabig, a non-resident citizen, sold domestic stocks rights directly to a buyer at a gain of
P320,000. Compute the capital gains tax
P 0 Mr. Bigos sold shares of a resident foreign corporation directly to a buyer. The shares were purchased for
P100,000 and were sold at a net selling prices of P210,000. Compute the capital gains tax
P 240,000 On August 15, 2021, Ms. Mones sold a 500-square meter residential house and lot for P3,000,000. The
house was acquired in 2006 at P2,000,000. The assessor's fair market values of the house and lot, respectively
were P1,500,000 and P1,000,000. The zonal value of the lot was P5,000 per square meter. What is the capital
gains tax?
P 0 Puerto Princesa Company sold its parking lot for P2,000,000. The lot has a zonal value of P2,500,000 and
appraised value of P1,800,000. The capital gains tax on the sale of the lot is
FALSE The P250,000 income tax exemption for individuals is designed to be in lieu of their personal and
business enterprise
TRUE There are two types of regular income tax; proportional income tax for corporations and progressive
income tax for individuals
FALSE NRA-NETBs and NRFCs are also subject to regular income tax
FALSE All taxpayers are subject to final tax
TRUE Taxable income is synonymous to net income
TRUE For all taxpayers, taxable income means the pertinent items of gross income not subject to capital gains
tax and final tax less allowable deductions
FALSE All taxpayers are subject to regular income tax 
FALSE Employed taxpayers can claim expenses from their employment as deductions against their
compensation income
TRUE Items of gross income subject to final tax and capital gains tax are excluded in gross income subject to
regular income tax
TRUE Non- taxable compensation are items of compensation that are excluded against gross income.
Passive income Which is not generally subject to regular income tax
regular income taxation The general rule in income taxation is
regular tax Active income is subject to
Either Regular or Final tax Which of the foregoing are passive income subject to
Either regular or capital gains tax Which of the foregoing are capital gains subject to
taxable income The net amount of regular income subject to regular tax is called
business expenses What are allowable deductions against gross income 
taxpayers engaged in business Deductions are allowed to
Non-deductible by any taxpayer Personal expenses are
Final withholding tax Which is not a feature of the regular income tax
P 170,000 Mr. Santos derived the following income in 2021. Compute the total passive income subject to final
tax

P 630,000Using Mr. Santos data above, compute the total

income subject to regular tax
P 40,000Using Mr. Santos data above, compute the capital
gain subject to capital gains tax
P403,000 Mrs. Siplay had a gross taxable compensation
income of P400,000. She also earned an additional P2,000
by investing her money in time deposits plus P3,000 interest
income from lending money to a friend. Compute her taxable income.
P 428,000 Mr. Bangal earned a compensation income of P120,000 and net income from business of P300,000. He
also earned P8,000 prizes from a dancing competition and P45,000 royalties from his musical composition. Mr.
Bangal has P150,000 personal expenses. Compute the taxable income.

CHAPTER 1
WHAT IS TAXATION?
- Taxation may be defined as a State power, a legislative process, and a mode of
government cost distribution.

1. As a state power
- Taxation is an inherent power of the State to enforce a proportional contribution from its subjects for
public purpose.
2. As a process
- Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions
from its subjects for public purpose.
3. As a mode of cost distribution
- Taxation is a mode by which the State allocates its costs or burden to its subjects who are benefited by its
spending.

THE THEORY OF TAXATION

- Every government provides a vast array of public services including defense, public order and safety,
health, education, and social protection among others. A system of government is indispensable to every
society; Without it, the people will not relish the benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding. The government's necessity for funding is the theory
of taxation.
THE BASIS OF TAXATION
- The government provides benefits to the people in the form of public services, and the people provide the
funds that finance the government. This mutuality of support between the people and the government is
referred to as the basis of taxation.
-
Receipt of benefits is conclusively presumed
- Every citizen and resident of the State directly or indirectly benefits from the public services rendered by
the government. These benefits can be in the form of daily free usage of public infrastructures, access to
public health or educational services, the protection and security of person and property, or simply the
comfort of living in a civilized and peaceful society which is maintained by the government.

While most public services are received indirectly, their realization by every citizen and resident is
undeniable. In taxation, the receipt of these benefits by the people is conclusively presumed. Thus,
taxpayers cannot avoid payment of taxes under the defense of absence of benefit received. The direct
receipt or actual availment of government services is not a precondition to taxation.

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people. In distributing the costs or burden, the
government regards the following genera considerations in the exercise of its taxation power:
1. Benefit received theory - The benefit received theory presupposes that the more benefit one receives from the
government, the more taxes he should pay.
2. Ability to pay theory - The ability to pay theory presupposes that taxation should also consider the taxpayer's
ability to pay. Taxpayers should be required to contribute based on their relative capacity to sacrifice for the
support of the government.

In short, those who have more should be taxed more even if they benefit less from the government. Those who
have less shall contribute less even if they receive more of the benefits from the government.
ASPECTS OF THE ABILITY TO PAY THEORY

1. Vertical equity
- Vertical equity proposes that the extent of one's ability to pay is directly proportional to the level of his tax
base.
For example, A has P200,000 income while B has P400,000. In taxing income, the government should tax B
more than A because B has greater income; hence, a greater capacity to contribute.
2. Horizontal equity
- Horizontal equity requires consideration of the particular circumstance of the taxpayer.
For example, Businessmen A and B both have P300,000 income. A incurred P200,000 in business
expenses while B incurred only P50,000 business expenses. The government should tax B more than A
because he has lesser expenses and thus greater capacity to contribute taxes.

Vertical equity is a gross concept while horizontal equity is a net concept.

THE LIFEBLOOD DOCTRINE

- Taxes are essential and indispensable to the continued subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power to activate or operate it. (CIR vs. Algue)

Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious need.
Upon taxation depends the government's ability to serve the people for whose benefit taxes are collected.
(Vera vs. Fernandez)
IMPLICATION OF THE LIFEBLOOD DOCTRINE IN TAXATION:

1. Tax is imposed even in the absence of a Constitutional grant

2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not allowed as it effectively defers the
collection of income tax.
c. A lower amount of deduction is preferred when a claimable expense is subject to limit.
d. A higher tax base is preferred when the tax object has multiple tax bases.

INHERENT POWERS OF THE STATE

- A government has its basic needs and rights which co-exist with its creation. It has rights to sustenance,
protection, and properties. The government sustains itself by the power of taxation, secures itself and the
well-being of its people by police power, and secures its own properties to carry out its public services by
the power of eminent domain,

These rights, dubbed as "powers" are natural, inseparable, and inherent to every government. No
government can sustain or effectively operate without these powers. Therefore, the exercise of these
powers by the government is presumed understood and acknowledged by the people from the very
moment they establish their government. These powers are naturally exercisable by the government even
in the absence of an express grant of power in the Constitution.
The Inherent Powers of the State

1.Taxation power is the power of the State to enforce proportional contribution from its subjects to sustain itself.
2. Police power is the general power of the State to enact laws to protect the well-being of the people.
3. Eminent domain is the power of the State to take private property for public use after paying just compensation.

SIMILARITIES OF THE THREE POWERS OF THE STATE

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3.They are all legislative in nature.
4.They are all ways in which the State interferes with private rights and-properties.
5. They all exist independently of the Constitution and are exercisable by the government even without a
Constitutional grant. However, the Constitution may impose conditions or limits for their exercise.
6.They all presuppose an equivalent form of compensation received by the persons affected by the exercise of the
power.
7. The exercise of these powers by the local government units may be limited by the national legislature.

SCOPE OF THE TAXATION POWER

- The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme.
However, despite the seemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation has its
own inherent limitations and limitations imposed by the Constitution.

THE LIMITATIONS OF THE TAXATION POWER

A. Inherent limitations
1.Territoriality of taxation
2. International comity
3. Public purpose
4.Exemption of the government
5.Non-delegation of the taxing power

B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4.Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6.Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
11. Concurrence of a majority of all members of Congress for the passage of law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives
16. The delegation of taxing power to local government units

INHERENT LIMITATION OF TAXATION

Territoriality of taxation
- Public services are normally provided within the boundaries of the State. Thus, the government can only
demand tax obligations upon its subjects or residents within its territorial jurisdiction. There is no basis in
taxing foreign subjects abroad since they do not derive benefits from our government. Furthermore,
extraterritorial taxation will amount to encroachment of foreign sovereignty.

Two-fold obligations of taxpayers:

1. Filing of returns and payment of taxes
2.Withholding of taxes on expenses and its remittance to the government

These obligations can only be demanded and enforced by the Philippine government upon its citizens and
residents. It cannot enforce these upon subjects outside its territorial jurisdiction as this would result in
encroachment of foreign sovereignty.
Exception to the territoriality principle
1. In income taxation, resident citizens and domestic corporations are taxable on income derived both within and
outside the Philippines.
2. In transfer taxation, residents or citizens such as resident citizens, non-resident citizens and resident aliens are
taxable on transfers of properties located within or outside the Philippines.
International comity
 - In the United Nations Convention, countries of the world agreed to one fundamental concept of co-equal
sovereignty wherein all nations are deemed equal with one another regardless of race, religion, culture,
economic condition or military power.

No country is powerful than the other. It is by this principle that each country observes international
comity or mutual courtesy or reciprocity between them.Hence,
1. Governments do not tax the income and properties of other governments.
2.Governments give primacy to their treaty obligations over their own domestic tax laws.

Embassies or consular offices of foreign governments in the Philippines including international organizations and
their non-Filipino staff are not subject to income taxes or property taxes. Under the National Internal Revenue
Code (NIRC), the income of foreign government and foreign government-owned and controlled corporations are
not subject to income tax. When a state enters into treaties with other states, it is bound to honor the agreements
as a matter of mutual courtesy with the treaty partners even if the same conflicts with its local tax laws.

Public purpose
Tax is intended for the common good. Taxation must be exercised absolutely for public purpose. It cannot be
exercised to further any private interest.

Exemption of the government

The taxation power is broad. The government can exercise the power upon anything including itself. However, the
government normally does not tax itself as this will not raise additional funds but will only impute additional costs.

Under the NIRC, government properties and income from essential public functions are not subject to taxation.
However, the income of the government from its properties and activities conducted for profit, including income
from
government-owned and controlled corporations is subject to tax.

Non-delegation of the taxing power

The legislative taxing power is vested exclusively in Congress and is non-delegable, pursuant to the doctrine of
separation of the branches of the government to ensure a system of checks and balances.

The power of lawmaking, including taxation, is delegated by the people to the. legislature. So as not to spoil the
purpose of delegation, it is held that what has been delegated cannot be further delegated.

Exceptions to the rule of non-delegation

1. Under the Constitution, local government units are allowed to exercise the power to tax to enable them to
exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President is empowered to fix the amount of tariffs to be flexible to trade
conditions.
3 Other cases that require expedient and effective administration and implementation of assessment and collection
of taxes.

CONSTITUTIONAL LIMITATIONS OF TAXATION

Observance of due process of law
- No one should be deprived of his life, liberty, or property without due process of law. Tax laws should
neither be harsh nor oppressive.

Aspects of Due Process

1.Substantive due process

Tax must be imposed only for public purpose, collected only under authority of a valid law and only by the taxing
power having jurisdiction. An assessment without a legal basis violates the requirement of due process.
2.Procedural due process
There should be no arbitrariness in assessment and collection of taxes, and the government shall observe the
taxpayer's right to notice and hearing. The law established procedures which must be adhered to in making
assessments and in
enforcing collections.

Under the NIRC, assessments shall be made within three years from the due date of filing of the return or from the
date of actual filing, whichever is later. Collection shall be made within five years from the date of assessment. The
failure of the government to observe these rules violates the requirement of due process.

Equal protection of the law

No person shall be denied the equal protection of the law. Taxpayers should be treated equally both in terms of
rights conferred and obligations imposed.

This rule applies where taxpayers are under the same circumstances and conditions. This requirement would
mean Congress cannot exempt sellers of "balot" while subjecting sellers of "penoy" to tax since they are essentially
the same goods.

Uniformity rule in taxation

The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar circumstances should not be taxed
the same. Taxpayers should be classified according to commonality in attributes, and the tax classification to be
adopted should be based on substantial distinction. Each class is taxed differently, but taxpayers falling under the
same class are taxed the same. Hence, uniformity is relative equality.

Progressive system of taxation

Congress shall evolve a progressive system of taxation. Under the progressive system, tax rates increase as the tax
base increases. The Constitution favors progressive tax as it is consistent with the taxpayer's ability to pay.
Moreover, the progressive system aids in an equitable distribution of wealth to society by taxing the rich more
than the poor.

Non-imprisonment for non-payment of debt or poll tax

As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere inability to
pay debt.

However, this Constitutional guarantee applies only when the debt is acquired by the debtor in good faith. Debt
acquired in bad faith constitutes estafa, a criminal offense punishable by imprisonment.

Is non-payment of tax equivalent to non-payment of debt?

Tax arises from law and is a demand of sovereignty. It is distinguished from debt which arises from private
contracts. Non-payment of tax compromises public interest while the non-payment of debt compromises private
interest. The non-payment of tax is similar to a crime. The Constitutional guarantee on non-imprisonment for non-
payment of debt does not extend to non payment of tax, except poll tax.

Poll, personal, community or residency tax

Poll tax has two components:
a.Basic community tax
b. Additional community tax

The constitutional guarantee of non-imprisonment for nonpayment of poll tax applies only to the basic community
tax. Non-payment of the additional community tax is an act of tax evasion punishable by imprisonment.

Non-impairment of obligation and contract

The State should set an example of good faith among its constituents. It should not set aside its obligations from
contracts by the exercise of its taxation power. Tax exemptions granted under contract should be honored and
should not be cancelled by a unilateral government action.

Free worship rule

The Philippine government adopts free exercise of religion and does not subject its exercise to taxation.
Consequently, the properties and revenues of religious institutions such as tithes or offerings are not subject to tax.
This exemption, however, does not extend to income from properties or activities of religious institutions that are
proprietary or commercial in nature.

Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosques, lands,
buildings, and improvements from property taxes

The Constitutional exemption from property tax applies for properties actually, directly, and exclusively (i.e.
primarily) used for charitable, religious, and educational purposes.

In observing this Constitutional limitation, the Philippines follows the doctrine of use wherein only properties
actually devoted for religious, charitable, or educational activities are exempt from real property tax.

Under the doctrine of ownership, the properties of religious, charitable, or educational entities whether or not used
in their primary operations are exempt from real property tax. This, however, is not applied in the Philippines.

Non-appropriation of public funds or property for the benefit of any church, sect, or system of religion
This constitutional limitation is intended to highlight the separation of religion and the State. To support freedom
of religion, the government should not favor any particular system of religion by appropriating public funds or
property in support thereof.

It should be noted, however, that compensation to priests, imams, or religious ministers working with the
military, penal institutions, orphanages, or leprosarium is not considered religious appropriation.
Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations, or contributions for educational purposes
The Constitution recognizes the necessity of education in state building by granting tax exemption on revenues and
assets of non-profit educational institutions. This exemption, however, applies only on revenues and assets that
are actually, directly, and exclusively devoted for educational purposes.

Consistent with this constitutional recognition of education as a necessity, the NIRC also exempts government
educational institutions from income tax and subjects private educational institutions to a minimal income tax.

Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
Tax exemption law counters against the lifeblood doctrine as it deprives the government of revenues. Hence, the
grant of tax exemption must proceed only upon a valid basis. As a safety net, the Constitution requires the vote of
the majority of all members of Congress in the grant of tax exemption.

In the approval of an exemption law, an absolute majority or the majority of all members of Congress, not a relative
majority or quorum majority, is required. However, in the withdrawal of tax exemption, only a relative majority is
required.

Non-diversification of tax collections

Tax collections should be used only for public purpose. It should never be diversified or used for private purpose.

Non-delegation of the power of taxation

The principle of checks and balances in a republican state requires that taxation power as part of lawmaking be
vested exclusively in Congress. However, delegation may be made on matters involving the expedient and effective
administration and implementation of assessment and collection of taxes. Also, certain aspects of the taxing
process that are non-legislative in character are delegated.

Hence, implementing administrative agencies such as the Department of Finance and the Bureau of Internal
Revenue (BIR) issues revenue regulations, rulings, orders, or circulars to interpret and clarify the application of the
law. But even so, their functions are merely intended to interpret or clarify the proper application of the law. They
are not allowed to introduce new legislations within their quasi-legislative authority.

Non-impairment of the jurisdiction of the Supreme Court to review tax cases

Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all cases involving taxes can be
raised to and be finally decided by the Supreme Court of the Philippines.

Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
Laws that add income to the national treasury and those that allows spending therein must originate from the
House of Representatives while Senate may concur with amendments. The origination of a bill by Congress does
not necessarily mean that the House bill must become the final law. It was held constitutional by the Supreme
Court when Senate changed the entire house version of a tax bill.

Each local government unit shall exercise the power to create its own sources of revenue and shall have a
just share in the national taxes
This is a constitutional recognition of the local autonomy of local governments and an express delegation of the
taxing power.
STAGES OF THE EXERCISE OF TAXATION POWER
1. Levy or imposition
2. Assessment and collection

Levy or imposition
This process involves the enactment of a tax law by Congress and is called impact of taxation. It is also referred to
as the legislative act in taxation.

Congress is composed of two bodies:

1.The House of Representatives, and
2.The Senate

As mandated by the Constitution, tax bills must originate from the House of Representatives. Each may, however,
have their own versions of a proposed law which is approved by both bodies, but tax bills cannot originate
exclusively from the Senate.

Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3.Determining the purpose for the levy which must be public use
4.Kind of tax to be imposed
5.Apportionment of the tax between the national and local government
6. Situs of taxation
7.Method of collection

Assessment and Collection

The tax law is implemented by the administrative branch of the government. Implementation involves assessment
or the determination of the tax liabilities of taxpayers and collection. This stage is referred to as incidence of
taxation or the administrative act of taxation.

SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object. Situs
rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of the
taxing authority.

Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in the place where the business is conducted.

Illustration
A taxpayer is involved in car dealership abroad and restaurant operation in the Philippines.

The restaurant business will be subject to business tax in the Philippines since the business is conducted herein,
but the car dealing business is exempt because the business is conducted abroad.
2. Income tax situs on services: Service fees are subject to tax where they are rendered.

Illustration
A foreign corporation leases a residential space to a non-resident Filipino citizen
abroad.

The rent income will be exempt from Philippine taxation as the leasing service is
rendered abroad.

3. Income tax situs on sale of goods: The gain on sale is subject to tax in the place of sale.

Illustration
While in China, a non-resident OFW citizen agreed with a Chinese friend to sell his
diamond necklace to the latter. They stipulated that the delivery of the item and
the payment will be made a week later in the Philippines. The sale was
consummated as agreed.

The contract of sale is consensual and is perfected by the meeting of the minds of
the contracting parties. The perfection of the contract of sale is in China. The situs
of taxation is China. The gain on the sale of the necklace will be taxable abroad and
exempt in the Philippines.

4. Property tax situs: Properties are taxable in their location.

Illustration
An overseas Filipino worker has a residential lot in the Philippines.
He will still pay real property tax despite his absence in the Philippines because
his property is located herein.

5.Personal tax situs: Persons are taxable in their place of residence.

Illustration
Ahmed Lofti is a Sudanese studying medicine in the Philippines.
Ahmed will pay personal tax in the Philippines even if he is an alien because he is
residing in the Philippines.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine -"The power to tax involves the power to destroy. " Taxation power can be used as an
instrument of police power. It can be used to discourage or prohibit undesirable activities or occupation. As such,
taxation power carries with it the power to destroy.
However, the taxation power does not include the power to destroy if it is used solely for the purpose of raising
revenue. (Roxas vs. CTA)

2. Holme's Doctrine- "Taxation power is not the power to destroy while the court sits. Taxation power may be
used to build or encourage beneficial activities or industries by the grant of tax incentives.

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 the imposition
of excessive tax on cigarettes while applications of the Holme's Doctrine include the creation of Ecozones with tax
holidays and provision of incentives, such as the Omnibus Investment Code (E.0. 226) and the Barangay Micro
Business Enterprise (BMBE) Law.

3. Prospectivity of tax laws

Tax laws are generally prospective in operation. An ex post facto law or a law that retroacts is prohibited by the
Constitution.

Exceptionally, income tax laws may operate retrospectively if so intended by Congress under certain justifiable
conditions. For example, Congress can levy tax on income earned during periods of foreign occupation even after
the war.

4.Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation. The taxpayer cannot delay payment of tax to wait for
the resolution of a lawsuit involving his pending claim against the government. Tax is not a debt; hence, it is not
subject to set-off. This rule is important to allow the government sufficient period to evaluate the validity of the
claim. (See Philex Mining Corporation vs. CIR, G.R. 125704)

Exceptions:
a.Where the taxpayer's claim has already become due and demandable such as when the government already
recognized the same and an appropriation for refund was made
b. Cases of obvious overpayment of taxes
C.Local taxes

5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by contract. Contracts executed by the taxpayer
to such effect shall not prejudice the right of the government to collect.

6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to the passage of time. When one sleep on his right over an unreasonable
period of time, he is presumed to be waiving his right. The government's right to collect taxes does not prescribe
unless the law itself provides for such prescription.

Under the NIRC, tax prescribes if not collected within 5 years from the date of its assessment. In the absence of an
assessment, tax prescribes if not collected by judicial action within 3 years from the date the return is required to
be filed. However, taxes due from taxpayers who did not file a return or those who filed fraudulent returns do not
prescribe.

7. Doctrine of estoppel
Under the doctrine of estoppel, any misrepresentation made by one party toward another who relied therein in
good faith will be held true and binding against that person who made the misrepresentation.

The government is not subject to estoppel. The error of any government employee does not bind the government.
It is held that the neglect or omission of government officials entrusted with the collection of taxes should not be
allowed to bring harm or detriment to the interest of the people. Also, erroneous applications of the law by public
officers do not block the subsequent correct application of the same.
8. Judicial Non-interference
Generally, courts are not allowed to issue injunction against the government's pursuit to collect tax as this would
unnecessarily defer tax collection. This rule is anchored on the Lifeblood Doctrine.

9. Strict Construction of Tax Laws

When the law clearly provides for taxation, taxation is the general rule unless there is a clear exemption. Hence the
maxim, "Taxation is the rule, exemption is the exception.

When the language of the law is clear and categorical, there is no room for interpretation. There is only room for
application. However, when taxation laws are vague, the doctrine of strict legal construction is observed.

Vague tax laws

Vague tax laws are construed against the government and in favor of the taxpayers. A vague tax law means no tax
law. Obligation arising from law is not presumed. The Constitutional requirement of due process requires laws to
be sufficiently clear and expressed in their provisions.

Vaque exemption laws

Vague tax exemption laws are construed against the taxpayer and in favor of the government. A vague tax
exemption law means no exemption law. The claim for exemption is construed strictly against the taxpayer in
accordance with the lifeblood doctrine.

The right of taxation is inherent to the State, It is a prerogative essential to the perpetuity of the government. He
who claims exemption from the common burden must justify his claim by the clearest grant of organic or statute
law. (Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260, February 27, 2009)

When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A
well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly
of any other construction that the proposition can be supported. (Ibid)

Tax exemption cannot arise from vague inference. Tax exemption must be clear and unequivocal. A taxpayer
claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain
terms, exemption from a common burden. Any doubt whether a tax exemption exists resolved against the
taxpayer. (see Digital Telecommunications, Inc. vs. City Government of Batangas, et al)

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
Elements of double taxation
1. Primary element: Same object
2.Secondary elements:
a.Same type of tax
b. Same purpose of tax
C.Same taxing jurisdiction
d.Same tax period

Types of Double Taxation

1. Direct double taxation
This occurs when all the element of double taxation exists for both
impositions.
Examples:
a. amp income tax of 10% on monthly sales and a 2% income tax on the annual sales (total of monthly sales)
b.A 50j tax on bank reserve deficiency and another 1% penalty per day as a consequence of such reserve deficiency

2.Indirect double taxation

This occurs when at least one of the secondary elements of double taxation is not common for both impositions.
Examples:
a.The national government levies business tax on the sales or gross receipts of business while the local government
levies business tax upon the same sales or receipts.
b. The national government collects income tax from a taxpayer on his income while the local government collects
community tax upon the same income.
C. The Philippine government taxes foreign income of domestic corporations and resident citizens while a foreign
government also taxes the same income (international double taxation).

Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is prevalent in practice.
However, direct double taxation is discouraged because it is oppressive and burdensome to taxpayers. It is also
believed to counter the rule of equal protection and uniformity in the Constitution.

How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a combination of the following:
a. Provision of tax exemption - only one tax law is allowed to apply to the tax object while the other
tax law exempts the same tax object
b. Allowing foreign tax credit - both tax laws of the domestic country and a foreign country tax the tax
object, but the tax payments made in the foreign tax law are deductible against the tax due of the
domestic tax law
c. Allowing reciprocal tax treatment - provisions in tax laws imposing a reduced tax rates or even
exemption if the country of the foreign taxpayer also gives the same treatment to Filipino non-
residents therein
d. Entering into treaties or bilateral agreements - countries may stipulate for a lower tax rates for
their residents if they engage in transactions that are taxable by both of them.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax evasion, also known as tax dodging, refers to any act or trick that tends to illegally reduce or avoid the
payment of tax.
Examples:
a. This can be achieved by gross understatement of income, non-declaration of income, overstatement of
expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take advantage of lower taxes.
2. Tax avoidance, also known as tax minimization, refers to any act or trick that reduces or totally escapes taxes
by any legally permissible means.
Examples:
a. Selection and execution of transaction that would expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or tax credits
c. Careful tax planning

3. Tax exemption, also known as tax holiday, refers to the immunity, privilege or freedom from being subject to a
tax which others are subject to. Tax exemptions may be granted by the Constitution, law, or contract.

All forms of tax exemptions can be revoked by Congress except those granted by the Constitution and those
granted under contracts.

B. Those that do not result to loss of government revenue

1. Shifting - This is the process of transferring tax burden to other taxpayers.

Forms of shifting
a. Forward shifting -This is the shifting of tax which follows the normal flow of distribution (i.e. from
manufacturer to wholesalers, retailers to consumers). Forward shifting is common with essential
commodities and services such as food and fuel.
b. Backward shifting - This is the reverse of forward shifting. Backward shifting is common with non-
essential commodities where buyers have considerable market power and commodities with numerous
substitute products.
c. Onward shifting - This refers to any tax shifting in the distribution channel that exhibits forward shifting
or backward shifting.

Shifting is common with business taxes where taxes imposed on business revenue can be shifted or passed-on
to customers.
2. Capitalization - This pertains to the adjustment of the value of an asset caused by changes in tax rates.

For instance, the value of a mining property will correspondingly decrease when mining output is subjected to
higher taxes. This is a form of backward shifting of tax.

3.Transformation - This pertains to the elimination of wastes or losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.

Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give them a chance to reform and
enable them to have a fresh start to be part of a society with a clean slate. It is an absolute forgiveness or waiver by
the government on its right to collect and is retrospective in application.

Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. This is
also referred to as tax remission. Because they deprive the government of revenues, tax exemption, tax refund, tax
amnesty, and tax condonation are construed against the taxpayer and in favor of the government.
Tax Amnesty vs. Tax Condonation
Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of the taxpayer.

Amnesty operates retrospectively by forgiving past violations. Condonation applies prospectively to any unpaid
balance of the tax; hence, the portion already paid by the taxpayer will not be refunded. Amnesty is also conditional
upon the taxpayer paying the government a portion of the tax whereas condonation requires no payment.

CHAPTER 2

TAXATION LA W
Taxation law refers to any law that arises from the exercise of the taxation power of the State.

Types of taxation laws

1. Tax laws - These are laws that provide for the assessment and collection of taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
C.The Local Tax Code
d.The Real Property Tax Code

2. Tax exemption laws- These are laws that grant certain immunity from taxation.
Examples:
a. The Minimum Wage Law
b.The Omnibus Investment Code of 1987 (E.0. 226)
C. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act

Sources of Taxation Laws

1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and Conventions with foreign countries
8. Revenue Regulations

Types of Administrative Issuances

1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings
Revenue Regulations are issuances signed by the Secretary of Finance upon recommendation of the Commissioner
of Internal Revenue (CIR) that specify, prescribe, or define rules and regulations for the effective enforcement of
the provisions of the National Internal Revenue Code (NIRC) and related statutes.

Revenue regulations are formal pronouncements intended to clarify or explain the tax law and carry into effect its
general provisions by providing details of administration and procedure. Revenue regulation has the force and
effect of a law, but is not intended to expand or limit the application of the law; otherwise, it is void.

Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions; prescribe guidelines;
and outline processes, operations, activities, workflows, methods, and procedures necessary in the implementation
of stated policies, goals, objectives, plans, and programs of the Bureau in all areas of operations except auditing.

Revenue Memorandum Rulings (RMs) are rulings, opinions and interpretations of the CIR with respect to the
provisions of the Tax Code and other tax laws as applied to a specific set of facts, with or without established
precedents, and which the CIR may issue from time to time for the purpose of providing taxpayers guidance on the
tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMs; otherwise, the
Rulings are null and void ab initio.

Revenue Memorandum Circulars (MCs) are issuances that publish pertinent and applicable portions as well as
amplifications of laws, rules, regulations, and precedents issued by the BIR and other agencies/offices.

Revenue Bulletins (RB) refer to periodic issuances, notices, and official announcements of the Commissioner of
Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or
administration in relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the guidance
of the public.

BIR Rulings are official positions of the Bureau to queries raised by taxpayers and other stakeholders relative to
clarification and interpretation of tax laws. Rulings are merely advisory or a sort of information service to the
taxpayer such that none of them is binding except to the addressee and may be reversed by the BIR at anytime.

Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings

Generally Accepted Accounting Principles (GAP) vs. Tax Laws

Generally accepted accounting principles or GAP are not laws, but are mere conventions of financial reporting.
They are benchmarks for the fair and relevant valuation and recognition of income, expense, assets, liabilities, and
equity of a reporting entity for general purpose financial reporting. GAP accounting reports are intended to meet
the common needs of a vast number of users in the general public.

Tax laws including rules, regulations, and rulings prescribe the criteria for tax reporting, a special form of financial
reporting which is intended to meet specific needs of tax authorities. Taxpayers normally follow GAP in recording
transactions in their books. However, in the preparation and filing of tax returns, taxpayers are mandated to
follow the tax law in cases of conflict with GAAP.
NATURE OF PHILIPPINE TAX LAWS
Philippine tax laws are civil and not political in nature. They are effective even during periods of enemy occupation.
They are laws of the occupied territory and not by the occupying enemy. Tax payments made during occupations of
foreign enemies are valid.

Our internal revenue laws are not penal in nature because they do not define
crime. Their penalty provisions are merely intended to secure taxpayers' compliance.

TAX
Tax is an enforced proportional contribution levied by the lawmaking body of the State to raise revenue for public
purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxing power having jurisdiction over the object of Taxation.
2. Tax must not violate Constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.

Classification of Taxes
A. As to purpose
1.Fiscal or revenue tax - a tax imposed for general purpose
2.Regulatory - a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary - a tax levied to achieve some social or economic objectives

B. As to subject matter
1. Personal, poll or capitation - a tax on persons who are residents of a particular territory
2. Property tax - a tax on properties, real or personal
3. Excise or privilege tax - a tax imposed upon the performance of an act, enjoyment of a privilege or engagement in
an occupation

C. As to incidence
1. Direct tax - When both the impact and incidence of taxation rest upon the same taxpayer, the tax is said to be
direct. The tax is collected from the person who is intended to pay the same. The statutory taxpayer is the
economic taxpayer.
2. Indirect tax - When the tax is paid by any person other than the one who is intended to pay the same, the tax is
said to be indirect. This occurs in the case of business taxes where the statutory taxpayer is not the
economic taxpayer.

The statutory taxpayer is the person named by law to pay the tax. An economic taxpayer is the one who actually
pays the tax.
D. As to amount
1. Specific tax - a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or meter, etc.
2.Ad valorem - a tax of a fixed proportion imposed upon the value of the tax object

E. As to rate
1. Proportional tax - This is a flat or fixed rate tax. The use of proportional tax emphasizes equality as it subjects all
taxpayers with the same rate without regard to their ability to pay.
2.Progressive or graduated tax - This is a tax which imposes increasing rates as the tax base increase. The use of
progressive tax rates results in equitable taxation because it gets more tax to those who are more capable. It aids in
lessening the gap between the rich and the poor.
3. Regressive tax- This tax imposes decreasing tax rates as the tax base increase. This is the total reverse of
progressive tax. Regressive tax is regarded as anti-poor. It directly violates the Constitutional guarantee of
progressive taxation.
4. Mixed tax - This tax manifest tax rates which is a combination of any of the above types of tax.

F. As to imposing authority
1. National tax - tax imposed by the national government
Examples:
a. Income tax - tax on annual income, gains or profits
b.Estate tax - tax on gratuitous transfer of properties by a decedent
upon death
C. Donor's tax - tax on gratuitous transfer of properties by a living donor
D. Value Added Tax- consumption tax collected by VAT business taxpayers
e. Other percentage tax- consumption tax collected by non-VAT business taxpayers
f. Excise tax - tax on sin products and non-essential commodities such as alcohol, cigarettes and metallic minerals.
This should be differentiated with the privilege tax which is also called excise tax.
8.Documentary stamp tax - a tax on documents, instruments, loan agreements, and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right or property incident thereto.

2. Local tax - tax imposed by the municipal or local government

Examples:
a.Real property tax
b.Professional tax
C.Business taxes, fees, and charges
D. Community tax
E. Tax on banks and other financial institutions

DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs. Revenue

Tax refers to the amount imposed by the government for public purpose. Revenue refers to all income collections
of the government which includes taxes, tart licenses, toll, penalties and others. The amount imposed is tax but the
amount collected is revenue.
Tax vs. License fee
Tax has a broader subject than license. Tax emanates from taxation power and is imposed upon any object such as
persons, properties, or privileges to raise revenue.

License fee emanates from police power and is imposed to regulate the exercise of a privilege such as the
commencement of a business or a profession.

Taxes are imposed after the commencement of a business or profession whereas license fee is imposed before
engagement in those activities. In other words, tax is a post-activity imposition whereas license is a pre-activity
imposition.

Tax vs. Toll

Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of other's property;
hence, it is a demand of ownership.

The amount of tax depends upon the needs of the government, but the amount of toll is dependent upon the value
of the property leased.

Both the government and private entities impose toll, but private entities cannot impose taxes.

Tax vs. Debt

Tax arises from law while debt arises from private contracts. Non-payment of tax leads to imprisonment, but non-
payment of debt does not lead to imprisonment. Debt can be subject to set-off but tax is not. Debt can be paid in
kind (dacion en pago) but tax is generally payable in money.

Tax draws interest only when the taxpayer is delinquent. Debt draws interest When it is so stipulated by the
contracting parties or when the debtor incurs à legal delay.

Tax vs. Special Assessment

Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied by the government
on lands adjacent to a public improvement. It is imposed on land only and is intended to compensate the
government for a part of the cost of the improvement.

The basis of special assessment is the benefit in terms of the appreciation in land value caused by the public
improvement. On the other hand, tax is levied without expectation of a direct proximate benefit.

Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of the land owner.
Therefore, the non-payment of special assessment will not result to imprisonment of the owner (unlike in non
payment of taxes).

Tax vs. Tariff

Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or properties. Tariff is
the amount imposed on imported or exported 'commodities.

Tax vs. Penalty

Tax is an amount imposed for the support of the government. Penalty is an amount imposed to discourage an act.
Penalty may be imposed by both the government and private individuals. It may arise both from law or contract
whereas tax arises from law.
TAX SYSTEM
The tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. It includes all the tax
laws and regulations, the means of their enforcement, and the government offices, bureaus and withholding agents
which are part of the machineries of the government in tax collection. The Philippine tax system is divided into
two: the national tax system and the local tax system.

Types of Tax Systems According to Imposition

1.Progressive - employed in the taxation of income of individuals, and certain local business taxes
2.Proportional - employed in taxation of corporate income and business
3.Regressive - not employed in the Philippines

Types of Tax System According to Impact

1.Progressive system- A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted.
Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be efficient. This type of
tax system impacts more upon the rich.
2. Regressive system- A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by
businesses to consumers; hence, the impact of taxation rests upon the bottom end of the society. In effect, a
regressive tax system is anti poor.

It is widely believed that despite the Constitutional guarantee of a progressive taxation, the Philippines has a
dominantly regressive tax system due to the prevalence of business taxes.

TAX COLLECTION SYSTEMS

A. Withholding system on income tax - Under this collection system, the payor
of the income withholds or deducts the tax on the income before releasing the same to the payee and remits the
same to the government. The following are the withholding taxes collected under this system:
1. Creditable withholding tax
a.Withholding tax on compensation - an estimated tax required by the government to be withheld (i.e. deducted) by
employers against the compensation income to their employees
b.Expanded withholding tax - an estimated tax required by the government to be deducted on certain income
payments made by taxpayers engaged in business The creditable withholding tax is intended to support the self-
assessment method to lessen the burden of lump sum tax payment of taxpayer and also provides for a possible
third-party check for the BIR of non-compliant taxpayers.
2.Final withholding tax - a system of tax collection wherein payors are required to deduct the full tax on certain
income payments

The final withholding tax is intended for the collection of taxes from income with high risk of non-compliance.

Similarities of final tax and creditable withholding tax

a. In both cases, the income payor withholds a fraction of the income and remits the same to the government.
b. By collecting at the moment cash is available, both serve to minimize cash flow problems to the taxpayer and
collection problems to the government.

B. Withholding system on business tax - when the national government agencies and instrumentalities including
government-owned and controlled corporations (GOCCs) purchase goods or services from private suppliers, the
law requires withholding of the relevant business tax (i.e. VAT or percentage tax). Business taxation is discussed
under Business and Transfer Taxation by the same author.
C. Voluntary compliance system - Under this collection system, the taxpayer himself determines his income,
reports the same through income tax returns and pays the tax to the government. This system is also referred to as
the "Self-assessment method."

The tax due determined under this system will be reduced by:
a.Withholding tax on compensation withheld by employers
b. Expanded withholding taxes withheld by suppliers of goods or services The taxpayer shall pay to the
government any tax balance after such credit or claim refund or tax credit for excessive tax withheld.

D. Assessment or enforcement system- Under this collection system, the government identifies non-compliant
taxpayers, assesses their tax dues including penalties, demands for taxpayer's voluntary compliance or enforces
collections by coercive means such as a summary proceeding or judicial proceedings when necessary.

PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles Or canons to evolve a sound tax
system:
1. Fiscal adequacy- Fiscal adequacy requires that the sources of government funds must be sufficient to cover
government costs. The government must not incur a deficit. A budget deficit paralyzes the government's ability to
deliver the essential public services to the people. Hence, taxes should increase in response to increase in
government spending.
2. Theoretical justice- Theoretical justice or equity suggests that taxation should consider the taxpayer's ability to
pay. It also suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory.
3. Administrative feasibility- Administrative feasibility suggests that tax laws should be capable of efficient and
effective administration to encourage compliance. Government should make it easy for the taxpayer to comply by
avoiding administrative bottlenecks and reducing compliance costs.

The following are applications of the principle of administrative feasibility:

1.E-filing and -payment of taxes
2.Substituted filing system for employees
3.Final withholding tax on non-resident aliens or corporations
4.Accreditation of authorized agent banks for the filing and payment of taxes

TAX ADMINISTRATION
Tax administration refers to the management of the tax system. Tax administration of the national tax system in
the Philippines is entrusted to the Bureau of Internal Revenue which is under the supervision and administration
of the Department of Finance,

Chief Officials of the Bureau of Internal Revenue

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a.Operations group
b.Legal Enforcement group
C.Information Systems Group
d.Resource Management Group

POWERS OF THE BUREAU OF INTERNAL REVENUE

1.Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines, and judgments in all cases decided in its favor by the courts
3.Giving effect to, and administering the supervisory and police powers conferred to it by the NIRC and other laws
Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials
6. issuance of receipts and clearances
7.Submission of annual report, pertinent information to Congress and reports to the Congressional Oversight
Committee in matters of taxation

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE

1.To interpret the provisions of the NIRC, subject to review by the Secretary of Finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals, such as:
a.Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
C.Penalties imposed
d.Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine, and take testimony of
persons to effect tax collection
Purpose; For the CIR to ascertain:
a.The correctness of any tax return or in making a return when none has
been made by the taxpayer
b.The tax liability of any person for any internal revenue tax or in correcting
any such liability
C.Tax compliance of the taxpayer

Authorized acts:
a.To examine any book, paper, record or other data relevant to such inquiry
b. To obtain on a regular basis any information from any person other than the person whose internal revenue tax
liability is subject to audit
C. To summon the person liable for tax or required to file a return, his employees, or any person having possession
and custody of his books of accounts and accounting records to produce such books, papers, records or other data
and to give testimony
D To take testimony of the person concerned, under oath, as may be
relevant or material to the inquiry
E.To cause revenue officers and employees to make canvass of any revenue district
4.To make an assessment and prescribe additional requirement for tax administration and enforcement
5. To examine tax returns and determine tax due thereon The CIR or his duly authorized representatives may
authorize the examination of any taxpayer and the assessment of the correct amount of tax, notwithstanding any
law requiring the prior authorization of any government agency or instrumentality. Failure to file a return shall not
prevent the CIR from authorizing the examination.

Tax or deficiency assessments are due upon notice and demand by the CIR or his representatives.

Returns, statements or declarations shall not be withdrawn but may be modified, changed and amended by the
taxpayer within 3 years from the date of filing, except when a notice for audit or investigation has been actually
served upon the taxpayer.

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 available.
In case a person fails to file a required return or other documents at the time prescribed by law or willfully files a
false or fraudulent return or other documents, the CIR shall make or amend the return from his own knowledge
and from such information obtained from testimony. The return shall be presumed prima facie correct and
sufficient for all legal purposes.

6.To conduct inventory taking or surveillance

7To prescribe presumptive gross sales and receipts for a taxpayer when:
a.The taxpayer failed to issue receipts; or
b.The CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration in the
return.

The presumptive gross sales or receipt shall be derived from the performance of similar business under similar
circumstances adjusted for other relevant information.

8.To terminate tax period when the taxpayer is:

a.Retiring from business
b.intending to leave the Philippines
C.Intending to remove, hide, or conceal his property
D.Intending to perform any act tending to obstruct the proceedings for the collection of the tax or render the same
ineffective

The termination of the taxable period shall be communicated through a notice to the taxpayer together with a
request for immediate payment. Taxes shall be due and payable immediately.
9.To prescribe real property values
The CIR is authorized to divide the Philippines into zones and prescribe real property values after consultation
with competent appraisers. The values thus prescribed are referred to as zonal value.

Zonal values are subject to automatic adjustment once every 3 years through rules and regulations issued by the
Secretary of Finance based on the current Philippine valuation standards. However, no adjustment in zonal
valuation shall be valid unless published in a newspaper of general circulation in the province, city or municipality
concerned, or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in 2 other
conspicuous public places therein. Furthermore, the basis of any valuation, including the records of consultations
done, shall be public records open to the inquiry of any taxpayer.

For purposes of internal revenue taxes, fair value of real property shall mean whichever is higher of:
a.Zonal value prescribed by the Commissioner
b. Fair market value as shown in the schedule of market values of the Provincial and City Assessor's Office

The NIRC previously used the assessed value which is merely a fraction of the fair market value. Assessed value is
the basis of the real property tax in local taxation. The value to use now is the full fair value of the property.
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a.Determination of the gross estate of a decedent
b.To substantiate the taxpayer's claim of financial incapacity to pay tax in an application for tax compromise In
cases of financial incapacity, inquiry can proceed only if the taxpayer waives his privilege under the Bank Deposit
Secrecy Act.
12. To accredit and register tax agents
The denial by the CIR of application for accreditation is appealable to the Department of Finance. The failure of the
Secretary of Finance to act on the appeal within 60 days is deemed an approval.

13. To refund or credit internal revenue taxes

14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary requirements
16. To delegate his powers to any subordinate officer with a rank equivalent to a division chief of an office

Non-delegated power of the CIR

The following powers of the Commissioner shall not be delegated:
1. The power to recommend the promulgation of rules and regulations to the
Secretary of Finance.
2.The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of the Bureau.
3. The power to compromise or abate any tax liability

Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the following:
a. Assessments are issued by the regional offices involving basic deficiency tax of P500,000 or less, and
b. Minor criminal violations discovered by regional and district officials Composition of the Regional Evaluation
Board
a.Regional Director as chairman
b. Assistant Regional Director
C.Heads of the Legal, Assessment and Collection Division
d.Revenue District Officer having jurisdiction over the taxpayer
4.The power to assign and reassign internal revenue officers to establishments where articles subject to excise tax
are produced or kept.

Rules in assignments of revenue officers to other duties

1.Revenue officers assigned to an establishment where excisable articles are kept shall in no case stay there for
more than 2 years.
2.Revenue officers assigned to perform assessment and collection function shall not remain in the same
assignment for more than 3 years.
3. Assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year.

Agents and Deputies for Collection of National Internal Revenue Taxes

The following are constituted agents for the collection of internal revenue taxes:
1. The Commissioner of Customs and his subordinates with respect to collection of national internal revenue taxes
on imported goods.
2.The head of appropriate government offices and his subordinates with respect to the collection of energy tax.
3. Banks duly accredited by the Commissioner with respect to receipts of payments of internal revenue taxes
authorized to be made thru banks. These are referred to as authorized government depositary banks (AGDB).

OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES RELATED FUNCTIONS
1. Bureau of Customs
2. Board of Investments
3. Philippine Economic Zone Authority
4.Local Government Tax Collecting Unit
5.Fiscal Incentives Review Board
Bureau of Customs (BOC)
Aside from its regulatory functions, the Bureau of Customs is tasked to administer collection of tariffs on imported
articles and collection of the Value Added Tax on importation. Together with the BIR, the BOC is under the
supervision of the Department of Finance.

The Bureau of Customs is headed by the Customs Commissioner and is assisted by five Deputy Commissioners and
14 District Collectors. Board of Investments (BON)

The BOI is tasked to lead the promotion of investments in the Philippines by assisting Filipinos and foreign
investors to venture and prosper in desirable areas of economic activities. It supervises the grant of tax incentives
under the Omnibus Investment Code. The BOI is an attached agency of the Department of Trade and Industry
(D'TI).

The BOI is composed of five full-time governors, excluding the DTI secretary as its
chairman. The President of the Philippines shall appoint a vice chairman of the
board who shall act as the BOl's managing head.

Philippine Economic Zone Authority (PEZA)

The 'PERA is created to promote investments in export- oriented manufacturing. industries in the Philippines and,
among other myriads of functions, supervise the grant of both fiscal and non-fiscal incentives. PEZA registered
enterprises enjoy tax holidays for certain years, exemption from import and export taxes including local taxes. The
PEZA is also an attached agency of the DTI.

The PEZA is headed by a director general and is assisted by three deputy directors.

Local Government Tax Collecting Units

Provinces, municipalities, cities and barangays also imposed and collect various local taxes, fees and charges to
rationalize their fiscal autonomy.

The special tax treatments of BOI-registered or PEZA-registered enterprises including the local taxes imposed by
local governments will be discussed under Local & Preferential Taxation by the same author.

Fiscal Incentive Review Board (FIRB)

FIRB has oversight function on the administration and grant of tax incentives by the Investment Promotion
Agencies and other government agencies administering tax incentives. It approves or disapproves grant of tax
incentives to private entities and tax subsidies to government-owned and controlled corporations, government
instrumentalities, government commissaries, state universities and colleges.

TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

For purposes of effective and efficient tax administration, taxpayers are classified
into:
1. Large taxpayers - under the supervision of the Large Taxpayer Service (LTS) of the BIR National Office.
2.Non-large taxpayers - under the supervision of the respective Revenue District Offices (RDOs) where the
business, trade or profession of the taxpayer is situated
Criteria for Large Taxpayers:
A. As to payment
1. Value Added Tax - At least P200,000 per quarter for the preceding year
2.Excise Tax - At least P1,000,000 tax paid for the preceding year
3.Income Tax - At least P1,000,000 annual income tax paid for the preceding year
4. Withholding Tax - At least P1,000,000 annual withholding tax payments or remittances from all types of
withholding taxes
5. Percentage tax - At least P200,000 percentage tax paid or payable per quarter for the preceding year
6. Documentary stamp tax - At least P1,000,000 aggregate amount per year

B. As to financial conditions and results of operations

1. Gross receipts or sales - P1,000,000,000 total annual gross sales or receipts
2. Net worth - P300,000,000 total net worth at the close of each calendar or fiscal year
3.Gross purchases - P800,000,000 total annual purchases for the preceding year
4. Top corporate taxpayer listed and published by the Securities and Exchange Commission

Automatic classification of taxpayers as large taxpayers

The following taxpayers shall be automatically classified as large taxpayers upon notice in writing by the CIR:
1.All branches of taxpayers under the Large Taxpayer's Service
2.Subsidiaries, affiliates, and entities of conglomerates or group of companies of a large taxpayer
3. Surviving company in case of merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of spin-off of any large taxpayer
5. Corporation with an authorized capitalization of at least P300,000,000 registered with the SEC
6. Multinational enterprises with an authorized capitalization or assigned capital of at least P300,000,000
7. Publicly listed corporations
8. Universal, commercial, and foreign banks (the regular business unit and foreign currency deposit unit shall be
considered one taxpayer for purposes of classifying them as large taxpayer)
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking, insurance, telecommunication,
utilities, petroleum, tobacco, and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals

CHAPTER 3

THE CONCEPT OF INCOME

Why is income subject to tax?

Income is regarded as the best measure of taxpayers' ability to pay tax. It is an excellent object of taxation in the
allocation of government costs.

What is income for taxation purposes?

The tax concept of income is simply referred to as "gross income" under the NIRC. A taxable item of income is
referred to as an "item of gross income" or "inclusion in gross income".

Gross income simply means taxable income in layman's term. Under the NIRC however, the term "taxable income"
refers to certain items of gross income less deductions and personal exemptions allowable by law. Technically,
gross income is broader to pertain to any income that can be subjected to income tax.
Gross income is broadly defined as any inflow of wealth to the taxpayer from whatever source, legal or illegal, that
increases net worth. It includes income from employment, trade, business or exercise of profession, income from
properties, and other sources such as dealings in properties and other regular or casual transactions.

ELEMENTS OF GROSS INCOME

1. It is a return on capital that increases net worth.
2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.

RETURN ON CAPITAL
Capital means any wealth or property: Gross income is a return on wealth or property that increases the taxpayer's
net worth.

The return on capital that increases net worth is income subject to income tax, Return of capital merely maintains
net worth; hence, it is not taxable. An improvement in net worth indicates an ability to pay tax.

Capital items deemed with infinite value

There are capital items that have infinite value and are incapable of pecuniary valuation. Anything received as
compensation for their loss is deemed a return of capital.
Examples:
1. Life
2. Health
3. Human reputation

Life
The value of life is immeasurable by money. Under Sec. 32 of the NIRC, the proceeds of life insurance policies paid
to the heirs or beneficiaries upon death of the insured, whether in a single sum or otherwise, are exempt from
income tax.

The proceeds of a life insurance contract collected by an employer as a beneficiary from the life insurance of an
officer or any person directly interested with his trade are likewise exempt. These proceeds are viewed as
advanced recovery of future loss.

However, the following are taxable return on capital from insurance policies:
a.Any excess amount received over premiums paid by the insured upon surrender or maturity of the policy (i.e. the
insured outlives the policy.)
b. Gain realized by the insured from the assignment or sale of his insurance policy
C. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premium payments by an assignee of a life
insurance policy
Health
Any compensation received in consideration for the loss of health such as compensation for personal injuries or
tortuous acts is deemed a return of capital.

Human Reputation
The value of one's reputation cannot be measured financially. Any indemnity received as compensation for its
impairment is deemed a return of capital exempt from income tax.
Examples include moral damages received from:
a.Oral defamation or slander
b.Alienation of affection
C.Breach of promise to marry

Recovery of lost capital vs. Recovery of lost profits

The loss of capital results in decrease in net worth while the loss of profits does not decrease net worth. The
recovery of lost capital merely maintains net worth while the recovery of lost profits increases net worth.
Therefore, the recovery of lost profits is a return on capital.

Taxable recovery of lost profits

The recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a taxable return on
capital.

The following are taxable recoveries of lost profits:

a.Proceeds of crop or livestock insurance
b.Guarantee payments
C.Indemnity received from patent infringement suit

REALIZED BENEFIT
What is meant by realized benefit?

The "benefit" concept

The term "benefit" means any form of advantage derived by the taxpayer. There is benefit when there is an
increase in the net worth of the taxpayer. An increase in net worth occurs when one receives income, donation or
inheritance.

The following are not benefits, hence, not taxable:

a.Receipt of a loan - properties increase but obligations also increase resulting in an offsetting effect in net worth.
b. Discovery of lost properties - under the law, the finder has an obligation to return the same to the owner.
C. Receipt of money or property to be held in trust for, or to be remitted to. another person. If the taxpayer is
entitled to keep for his account portion of a receipt, only that portion is a benefit.

The "realized" concept

The term realized means earned. It requires that there is a degree of undertaking or sacrifice from the taxpayer to
be entitled of the benefit.

Requisites of a realized benefit:

1. There must be an exchange transaction.
2.The transaction involves another entity.
3. It increases the net worth of the recipient

Types of Transfers
1. Bilateral transfers or exchanges, such as:
a. Sale
b. Barter
These are referred to as "onerous transactions"
2.Unilateral transfers, such as:
a.Succession - transfer of property upon death
b.Donation
These are also referred to as "gratuitous transactions"

Under current usage, unilateral transfers are simply referred to as"transfers" while bilateral transfers are called
"exchanges." Benefits derived from onerous transactions are "earned or realized"; hence, they are subject to
income tax. Benefits derived from gratuitous transactions are not realized because of the absence of an earning
process. Benefits derived from gratuitous transactions are subject to transfer tax, not income tax.

3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are commonly referred to as "transfers for
less than full and adequate consideration". The gratuitous portion of the transaction is subject to transfer tax while
the benefit from the onerous portion is subject to income tax.

What is meant by another entity?

Every person, natural or juridical, is an entity. Natural persons are living persons while juridical persons are those
created by law such as partnerships and corporations. An entity may be a taxable entity or an exempt entity. A
taxable item of gross income arises from transactions which involve another natural or juridical entity.

Gains or income derived between relatives, corporations, and between a partner and the partnership are taxable
since it is made between separate entities. Likewise, the income between affiliated companies such as between a
holding or parent company and its subsidiaries and between sister companies are taxable because each
corporation is a separate entity. This applies regardless of the underlying economic relationship.

However, the sales of a home office to its branch office are not taxable because they pertain to one and the same
taxable entity. Furthermore, the income between businesses of a proprietor should not be taxed since
proprietorship businesses are taxable upon the same owner. Note that a proprietorship business is not a juridical
entity.

Benefits in the absence of transfers

The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his properties or
decrease in the value of his obligations in the absence of a sale or barter transaction is not taxable.

These are referred to as unrealized gains or holding gains because they have not yet materialized in an exchange
transaction.

Examples of unrealized gains or holding gains:

a.Increase in value of investments in equity or debt securities
b. Increase in value of real properties held (revaluation increment)
C.Increase in value of foreign currencies held or receivable
d.Decrease in value of foreign currency denominated debt by virtue of favorable fluctuation in exchange rates
e. Birth of animal offspring, accruals of fruits in an orchard or growth of farm vegetables
f. Increase in value of land due to the discovery of mineral reserves
Rendering of services
The rendering of services for a consideration is an exchange but does not cause à loss of capital. Hence, the entire
consideration received from rendering of services such as compensation income or service fees is an item of gross
income.

Note:
1. Gains from gambling and the forgiveness of debt in consideration of services or properties received are
realized gains from exchanges.
2. The forgiveness of debt out of affection or mere generosity of the creditor is a gratuitous transfer subject to
transfer tax.
3. The loan received from a bank constitutes a transfer but is not a benefit.

Basis of Exemption of Unrealized Income

Normally, taxpayers will have the ability to pay tax when their income materializes in an exchange transaction
since tax is generally payable in money.

This does not mean, however, that only income realized in cash is subject to tax. Income realized in non-cash
properties are, in effect, received in cash but the taxpayer used the same to acquire the non-cash property. Income
received in non- cash considerations is taxable at the fair value of the property received. Moreover, exempting
income realized in non-cash considerations would open a wide avenue for tax evasion since taxpayers can easily
divert their income in the form of non- cash consideration.

Mode of Receipt/Realization Benefits

Taxable items of income may be realized by the taxpayer in two ways:
1.Actual receipt- Actual receipt involves actual physical taking of the income in the form of cash or property.
2. Constructive receipt- Constructive receipt involves no actual physical taking of the income but the taxpayer is
effectively benefited.
Examples:
a. Offset of debt of the taxpayer in consideration for the sale of goods or service
b. Deposit of the income to the taxpayer's checking account
c. Matured detachable interest coupons on coupon bonds not yet encashed by the taxpayer
d. Increase in the capital of a partner from the profit of the partnership

Inflow of wealth without increase in net worth

The inflow of wealth to a person that does not increase his net worth is not income due to the total absence of
benefit.

Examples:
a.Receipt of property in trust
b.Borrowing of money under an obligation to return

In law, the proceeds of embezzlement or swindling where money is taken without an original intention to return
are considered as income because of the increase in net worth of the swindler.

NOT EXEMPTED BY LAW, CONTRACT, OR TREATY

An item of gross income is not exempted by the Constitution, law, contracts or treaties from taxation.
The following items of income are exempted by law from taxation; hence, they are
not considered items of gross income:
1. Income of qualified employee trust fund
2.Revenues of non-profit, non-stock educational institutions
3. SSS, GSIS, Pag-IBIG, or PhilHealth benefits
4. Salaries and wages of minimum wage earners and qualified senior citizen
5. Regular income of Barangay Micro-business Enterprises (BMBEs)
6. Income of foreign governments and foreign government-owned and controlled corporations
7. Income of international missions and organizations with income tax immunity Items of gross income that are
exempted from taxation are discussed extensively under Exclusions in Gross Income in Chapter 8.

TYPES OF INCOME TAXPAYERS

A. Individuals
1. Citizen
a. Resident citizen
b.Nonresident citizen
2.Alien
a.Resident alien
b.Nonresident alien
 engaged in trade or business
 not engaged in trade or business
3.Taxable estates and trusts

B.Corporations
1. Domestic corporation
2. Foreign corporation
a.Resident foreign corporation
b.Nonresident foreign corporation

INDIVIDUAL INCOME TAXPAYERS

Citizens
Under the Constitution, citizens are;
a.Those who are citizens of the Philippines at the time of adoption of the Constitution on February 2, 1987
b. Those whose fathers or mothers are citizens of the Philippines
C. Those born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the age
of majority
d. Those who are naturalized in accordance with the law

Classification of citizens:
A. Resident citizen - A Filipino citizen residing in the Philippines
B. Non-resident citizen includes:
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein;
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for an employment on a permanent basis;
3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires
him to be physically present abroad most of the time during the taxable year;
4. A citizen who has been previously considered as non-resident citizen and Who arrives in the Philippines at
anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-
resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines

Filipinos working in Philippine embassies or Philippine consulate offices are not considered nonresident citizens.

ALIEN
A. Resident alien - an individual who is residing in the Philippines but is not a citizen thereof, such as:
1. An alien who lives in the Philippines without definite intention as to his stay; or
2. One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and
to that end makes his home temporarily in the Philippines, although it may be his intention at all times to return to
his domicile abroad; An alien who has acquired residence in the Philippines retains his status as such until he
abandons the same or actually departs from the Philippines.
B. Non-resident alien - an individual who is not residing in the Philippines and who is not a citizen thereof
1. Non-resident aliens engaged in business (NRA-ETB)- aliens who stayed in the Philippines for an aggregate
period of more than 180 days during the year
2. Non-resident aliens not engaged in business (NRA-NETB) - include;
a. Aliens who come to the Philippines for a definite purpose which in its nature may be promptly accomplished;
b. Aliens who shall come to the Philippines and stay therein for an aggregate period of not more than 180 days
during the year

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention
The intention of the taxpayer regarding the nature of his stay within or outside the Philippines shall determine his
appropriate residency classification. The taxpayer shall submit to the CIR of the BIR documentary proofs such as
visas, work contracts and other documents indicating such intention,

Documents purporting short term stay such as tourist visa shall not result in the reclassification of the taxpayer's
normal residency. Documents purporting a long-term stay such as immigration visa or working visa for an
extended period would result in the automatic reclassification of the taxpayer's residency.

Examples:
a. An alien is normally non-resident. An alien who come to the Philippines with a tourist visa would still be
classified as non-resident alien.
b. A citizen is normally resident. A citizen who would go abroad under a tourist visa would still be considered a
resident citizen.
c. An alien who come to the Philippines with an immigration visa would be reclassified as a resident alien upon his
arrival.
d. A citizen who would go abroad with a two-year working visa would be reclassified as a non-resident citizen
upon his departure.
2. Length of stay In default of such documentary proof, the length of stay of the taxpayer is
considered:
a. Citizens staying abroad for a period of at least 183 days are considered non-resident.
b. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year are considered
resident.
c. Aliens who are staying in the Philippines for not more than 1 year but more than 180 days are deemed non-
resident aliens engaged in business.
d. Aliens who stayed in the Philippines for not more than 180 days areconsidered non-resident aliens not
engaged in trade or business.

Taxable Estates and Trusts

1. Estate
Estate refers to the properties, rights, and obligations of a deceased person not extinguished by his death.

Estates under judicial settlement are treated as individual taxpayers. The estate is taxable on the income of the
properties left by the decedent. Estates under extrajudicial settlement are exempt entities. The income of the
properties of the estate under extrajudicial settlement is taxable to the heirs.

2. Trust
A trust is an arrangement whereby one person (grantor or trustor) transfers (i.e. donates) property to another
person (beneficiary), which will be held under the management of a third party (trustee or fiduciary).

A trust that is irrevocably designated by the grantor is treated in taxation as if it is an individual taxpayer. The
income of the property held in trust is taxable to the trust. Trusts that are designated as revocable by the grantor
are not taxable entities and are not considered as individual taxpayers. The income of properties held under
revocable trusts is taxable to the grantor not to the trust.

When the trust agreement is silent as to revocability of the trust, the trust is presumed to be revocable.

CORPORATE INCOME TAXPAYERS

The term 'corporation' shall include one person corporations (OPCs), partnerships, no matter how created or
organized, joint-stock companies, joint accounts, association, or insurance companies, except general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium
agreement under a service contract with the government.

Hence, the term corporation includes profit-oriented and nonprofit institutions such as charitable institutions,
cooperatives, government agencies and instrumentalities, associations, leagues, civic or religious and other
organizations.

Domestic Corporation
A domestic corporation is a corporation that is organized in accordance with Philippine laws. It includes one-
person corporations (OPC) owned and registered by resident citizens in the Philippines.

Foreign Corporation
A foreign corporation is one organized under a foreign law.
Types of foreign corporations:
1.Resident foreign corporation (RFC) - a foreign corporation which operates and conducts business in the
Philippines through a permanent establishment (i.e. a branch).
2 Non-resident foreign corporation (NRC) - a foreign corporation which does not operate or conduct business in
the Philippines

Note:
1.A corporation that incorporates in the Philippines is a domestic corporation under the Incorporation Test even if
the same is controlled by foreigners.
2. A foreign corporation that transacts business with residents through a resident branch is taxable on such
transactions as a resident foreign corporation through its branch. However, if it transacts directly to residents
outside its branch, it is taxable as a non-resident foreign corporation on the direct transactions.
3. An individual that establishes a one-person corporation (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
Special corporations are domestic or foreign corporations which are subject to special tax rules or preferential tax
rates.

OTHER CORPORATE TAXPAYERS

1.One-person corporation
A one-person corporation is a corporation with a single stockholder who maybe a natural person, trust or an
estate.

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-chartered GOCCs
may not incorporate as One-person corporations. A natural person who is licensed to exercise a profession may
not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise
provided under special laws.

2. Partnership
A partnership is a business organization owned by two or more persons who contribute their industry or
resources to a common fund for the purpose of dividing the profits from the venture.

Types of partnership
a) General professional partnership (GPP)
A GPP is a partnership formed by persons for the sole purpose of exercising a common profession, no part of the
income of which is deriver from engaging in any trade or business.

A GPP is not treated as a corporation and is not a taxable entity, It is exempt from income tax, but the partners are
taxable in their individual capacity with respect to their share in the income of the partnership.

b) Business partnership
A business partnership is one formed for profit. It is taxable as corporation.
Examples:
a. A partnership between Atty. Mendoza, a lawyer, and Mark Santos, an accountant, to practice in taxation advisory
services would be a business partnership since the two partners are not in the same profession.
b. A partnership between accountants Khim and Vinson to venture into a beauty parlor would be a business
partnership since the venture is not in practice of a common profession.
c. A partnership between accountants Juan and Miguel to venture into audit services would be a general
professional partnership.
d. Dentists Wency and Andy partnered to operate a dental clinic. During slack season, they are converting their
clinic into a beauty saloon. Their partnership is a business partnership since it is earning income from business.

3. Joint venture
A joint venture is a business undertaking for a particular purpose. It may be organized as a partnership or a
corporation.

Types of joint ventures:

a.Exempt joint ventures
Exempt joint ventures are those formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a
service contract with the Government.

Similar to a GPP, this type of joint venture is not treated as a corporation and is tax-exempt on its regular income,
but their venturers are taxable to their share in the net income of the joint venture.

b. Taxable joint ventures

All other joint ventures are taxable as corporations.

4. Co-ownership
A co-ownership is joint ownership of a property formed for the purpose of preserving the same and/or dividing its
income.

A co-ownership that is limited to property preservation or income collection is not a taxable entity and is exempt
but the co-owners are taxable on their share on the income of the co-owned property.

However, a co-ownership that reinvests the income of the co-owned property to other income-producing
properties or ventures will be considered an unregistered partnership taxable as a corporation.

Note:
1. Consistent with the territoriality rule, all taxpayers, except resident citizens and domestic corporations, are
taxable only on income earned within the Philippines.
2. The NIRC uses the term "without the Philippines" to mean outside the Philippines.

The Residency and Citizenship Rule

Taxpayers who are residents and citizens of the Philippines such as resident citizen and domestic corporations are
taxable on all income from sources within and without the Philippines. A corporation is a citizen of the country of
incorporation. Thus, a domestic corporation is a citizen of the Philippines.

Basis of the extraterritorial taxation

Resident citizens and domestic corporations derive most of the benefits from the Philippine government compared
to all other classes of taxpayers by virtue of their proximity to the Philippine government.

Under our laws, resident citizens and domestic corporations enjoy preferential privileges over aliens. Also,
between resident and non-resident citizens, resident citizens have full access of the public services of our
government because they are in the country. The taxation of foreign income of resident citizens and domestic
corporations properly reflects this difference in benefits consistent with the Benefit Received Theory.

The extra-territorial tax treatment of resident citizens and domestic corporations is also intended as a safety net to
the potential loss of tax revenues brought by situs relocation or the practice of executing or structuring
transactions such that income will be realized abroad to avoid Philippine income taxes.

The issue of international double taxation

The rule on extraterritorial taxation on resident citizens and domestic corporations exposes these taxpayers to
double taxation. However, the NIRC allows a tax credit for taxes paid in foreign countries. In fact, resident citizens
and domestic corporations pay minimal taxes in the Philippines on their foreign income because of the tax credit.

SITUS OF INCOME
The situs of income is the place of taxation of income. It is the jurisdiction that has the authority to impose tax upon
the income.

Situs of income vs. source of income

Situs of income should be differentiated from the source of income. The latter pertains to the activity or property
that produces the income.

Situs is important in determining whether or not an income is taxable in the Philippines. Situs is particularly
important to taxpayers taxable only on income within. However, it is also important to taxpayers taxable on global
income for purposes of the computation of the foreign tax credit.

INCOME SITUS RULES

Types of income
1. Interest income
2. Royalties
3. Rent income
4.Service income

Place of taxation (situs)

1.Debtor's residence
2.Where the intangible is employed
3.Location of the property
4.Place where the service is rendered

OTHER INCOME SITUS RULES

A. Gain on sale of properties
1. Personal property
Domestic securities - presumed earned within the Philippines
Other personal properties - earned in the place where the property is sold
2. Real property - earned where the property is located

B. Dividend income from:

1.Domestic corporation - presumed earned within
2.Foreign corporation
a) Resident foreign corporation - depends on the pre-dominance test
The pre-dominance test
If the ratio of the Philippine gross income over the world gross income of the resident foreign corporation in the
three-year period preceding the year of dividend declaration is:

-At least 50%, the portion of the dividend corresponding to the Philippine gross income ratio is earned within
- Less than 50%, the entire dividends received is earned abroad
b) Non-resident foreign corporation - earned abroad

C.Merchandising income - earned where the property is sold

D. Manufacturing income - earned where the goods are manufactured and sold

CHAPTER 4

INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
a. Final income taxation
b.Capital gains taxation
C.Regular income taxation

Mutually exclusive coverage

The tax schemes are mutually exclusive. An item of gross income that is subject tax in one scheme will not be taxed
by the other schemes. Similarly, items income that are exempted in one scheme are not taxable by the other
schemes.

CLASSIFICATION OF ITEMS OF GROSS INCOME

because of the different tax schemes, items of gross income can be classified as follows:
1.Gross income subject to final tax
2.cross income subject to capital gains tax
3.Gross income subject to regular tax

FINAL INCOME TAXATION

Final income taxation is characterized by final taxes wherein full taxes are withheld by the income payor at source.
The recipient income taxpayer receives the income net of taxes. The payor is the one required by law to remit the
tax to the government. Consequently, the recipient income taxpayer does not need to file income tax returns
because the withheld tax constitutes the full tax due and are therefore deemed final payments. This system of
taxation is referred to as the final withholding tax system.

Final taxation is applicable only on certain passive income listed by the law. Not all items of passive income are
subject to final tax.

Passive income vs. active income

Passive incomes are earned with very minimal or even without active involvement of the taxpayer in the earning
process.

Examples of passive income:

1. Interest income from banks
2. Dividends from domestic corporations
3. Royalty
Active or regular income arises from transactions requiring a considerable degree of effort or undertaking from the
taxpayer. It is the direct opposite of passive income.

Examples of active income:

1.Compensation income
2. Business income
3. Professional income

CAPITAL GAINS TAXATION

Capital gains tax is imposed on the gain realized on the sale, exchange and other dispositions of certain capital
assets.

Capital assets are assets not used in business, trade or profession. Capital assets are the opposites Of ordinary
assets, Ordinary assets are assets used in business, trade or profession such as inventory, supplies or property,
plant and equipment Also, not all capital gains are subject to capital gains tax. Most of them are subject
to regular income tax.

The NIRC identifies capital gains tax as a final tax but they are hybrid forms of Final taxes since it also employs self-
assessment method. The taxpayer still files capital gains tax returns to report the gain and pay the tax to the
government
Capital gains taxation applies only to two types of capital assets: domestic stocks
and real property. Capital gains taxation will be discussed in detail in Chapter 6.

REGULAR INCOME TAXATION

The regular income tax is the general rule in income taxation and covers all other income such as:
1.Active income
2.Other income
a.Gains from dealings in properties, not subject to capital gains tax
b.Other passive income not subject to final tax

Items of gross income from these sources are valued or measured using an accounting method, accumulated over
an accounting period, and reported to the government through an income tax return. Regular income taxation
makes use of the self-assessment method.

ACCOUNTING PERIOD
Accounting period is the length of time over which income is measured and reported.
Types of Accounting Periods
1. Regular accounting period - 12 months in length
a.Calendar
b. Fiscal
2. Short accounting period - less than 12 months

Calendar year
The calendar accounting period starts from January 1 and ends December 31. This accounting period is available to
both corporate taxpayers and individual
taxpayers.
Under the NIRC, the calendar year shall be used when the;
1. taxpayer's annual accounting period is other than a fiscal year (i.e. longer than 12 months in length)
2. taxpayer has no annual accounting period (i.e. less than 12 months in length)
3. taxpayer does not keep books
4. taxpayer is an individual

Fiscal year
A fiscal accounting period is any 12-month period that ends on any day other than December 31. The fiscal
accounting period is available only to corporate income taxpayers and is not allowed to individual income
taxpayers.

Deadline of Filing the Income Tax Return

Under the NIRC, the return is due for filing on the fifteenth day of the fourth month following the close of the
taxable year of the taxpayer. The regular tax due is payable upon filing of the income tax return.

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business - The accounting period covers the date of the start of the business until the
designated year-end of the business.
2. Dissolution of business - The accounting period covers the start of the current year to the date of
dissolution of the business.
3. Change of accounting period by corporate taxpayers- The accounting period covers the start of the
previous accounting period up to the designated year-end of the new accounting period. Note that BI
approval is required in changing an accounting period. It is not automatic.
4. Death of the taxpayer - The accounting period covers the start of the calendar year until the death of the
taxpayer.
5. Termination of the accounting period of the taxpayer by the Commissioner of Internal Revenue ; The
accounting period covers the start of the current year until the date of the termination of the accounting
period.

ACCOUNTING METHODS
Accounting methods are accounting techniques used to measure income.
Types of Accounting Methods
1. The general methods
a. Accrual basis
b. Cash basis
2. Installment and deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis

General Methods for income from sale of goods or service

1. Accrual basis
Under the accrual basis of accounting, income is recognized when earned regardless of when received. Expense is
recognized when incurred regardless of when paid. Income is said to have accrued when the right to receive is
established or when an enforceable right to secure payment is created against the counter-party.
2. Cash basis
Under the cash basis of accounting, income is recognized when received and expense is recognized when paid.

Tax and accounting concepts of accrual basis and cash basis distinguished
The financial accounting concept of accrual basis and cash basis are similar to their counterparts, except only for
the following tax rules;

1. Advanced income is taxable upon receipt

Income received in advance is taxable upon receipt in pursuant to the lifeblood Doctrine and the Ability to Pay
Theory. The subsequent taxation of advanced income in the period earned will expose the government to risk of
now collection. This rule is applicable on the sale of services not on goods
2.Prepaid expense is non-deductible.
Prepaid expenses are advanced payment for expenses of future taxable periods. These are not deductible against
gross income in the year paid. They are deducted against income in the future period they expire or are used in
the business, trade or profession of the taxpayer. Normally, the expensing of prepayments does not properly reflect
the income of the taxpayer: It also contradicts the Lifeblood Doctrine as it effectively defers the recognition of
income.
3. Special tar accounting requirement must be followed.
There are cases where the tax law itself provides for a specific accounting treatment of an income or expense. The
specified method must be observed even if it departs from the basis regularly employed by the taxpayer in
keeping his books.

Hybrid basis
The hybrid basis is any combination of accrual basis, cash basis, and/or other methods of accounting. It is used
when the taxpayer has several businesses which employ different accounting methods.

Sale of goods with extended payment terms

The sale of goods with extended payment terms may be reported using the accrual basis, installment method, or
deferred payment method.

Installment method
Under the installment method, gross income is recognized and reported in proportion to the collection from the
installment sales.

installment method is available to the following taxpayers:

1. Dealers of personal property on the sale of properties they regularly sell
2.the selling price Dealers of real properties, only if their initial payment does not exceed 25% of
3. Casual sale of non-dealers in property, real or personal, when their selling price exceeds P1,000 and their initial
payment does not exceed 25% of the selling price

Initial payment
initial payment means total payments by the buyer, in cash or property, in the taxable year the sale was made. The
term "initial payment" is broader than downpayment. It also includes the installment payments in the year of sale.

The percentage of completion method for construction contracts

Under the percentage of completion method, the estimated gross income from construction is reported based on
the percentage of completion of the construction project.
There are several methods of estimating project completion in practice, but the output method based on
engineering survey is prescribed by the NIRC.

Income from Leasehold Improvement

Leasehold improvements are tangible improvements made by the lessee to the property of the lessor.
Improvements will benefit the lessor when their useful life improvement. extends beyond the lease term. This
benefit is referred to as income from leasehold improvement.

Under Revenue Regulations No. 2, the income from leasehold improvement can be
reported using either of the following method at the option of the taxpayer:

1. Outright method
The lessor may report as income the fair market value of such buildings of improvements are completed.
improvements subject to the lease at the time when such buildings of
2. Spread-out method
The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements
at the termination of the lease and report as income for each year of the lease an aliquot part thereof.

Crop year basis

under the crop year basis, farming income is recognized as the difference between the proceeds of harvest and
expenses of the particular crop harvested. The expenses of each crop are accumulated and deducted upon the
harvest of the crop.

Use of different accounting methods

Taxpayers with more than one type of business using different accounting methods can consolidate the income
reported using the different methods. There is no need to restate the income to a common accounting method.
However, the methods applied to each business should be applied consistently from period to
period.

Change in Accounting Period

The change in accounting period requires prior BIR notice. The following documentations are required:
1. A letter of request addressed to the DO having jurisdiction over the place of business of the taxpayer showing:
2. The original and the proposed new accounting period
b. The reason for desiring to change the accounting period
2. Certified true copy of the SEC approved amended by-laws showing change in accounting period
3. Sworn statement of "non- forum shopping" statin& that such request has not been previously acted upon by the
BIR National Office
4. Duly filed up BIR Form 1905
5. A sworn" undertaking by an officer of the taxpayer to file a separate final or Adjustment return for the period
between the close of the original accounting period and the date designated as the close of the new accounting
period

The request for approval of the change in accounting period shall be filed at any time not less than 60 days prior to
the beginning of the new accounting period The certification approving the adoption of a new accounting period
must be released within 30 days from the date of receipt of the complete documentary requirements.
TAX REPORTING
Types of Returns to the Government
1. Income tax returns - provide details of the taxpayer's income, expense, tay due, tax credit and tax still due the
government.
2. Withholding tax returns - provide reports of income payments subjected to withholding tax by the taxpayer-
withholding agent.
3.Information returns

Information Returns
Certain taxpayers are also required to file information returns. Information returns do not involve any payment or
withholding of tax but are essential to the government in its tax mapping efforts and in its evaluation of tax
compliance. The non-filing of income tax returns, withholding tax returns, or information returns is subject to
penalties, fines, and or imprisonment.

MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System
The traditional manual system of filing income tax return is by paper documents where taxpayers fill up BIR forms
to report income, expenses, or any declaration required to be filed with the BIR.

Under the NIRC, the income tax return shall be filed to the following, in descending order of priority, within the
revenue district office where the taxpayer Is registered or required to register:
1. An authorized agent bank (AAB)
2.Revenue Collection Officer
3.Duly authorized city or municipal treasurer, if there is no BIR office in the locality

2. e-BIR Forms
The BIR introduced the e-BIR Forms with an offline or online version. Taxpayers fill up their income tax returns in
electronic spreadsheets without the need of writing on papers returns. The system ensures completeness of data
on the return and is capable of online submission. If there are no penalties that require BIR assessments, taxpayers
would have to print a hard copy of the filled tax returns and proceed directly to the bank for payment.

3. Electronic Filing and Payment System (eFPS)

The FPS is a paperless tax filing system developed and maintained by the BIR. Taxpayers file tax returns including
attachments in electronic format and pay the tax through the Internet.

Taxpayers mandated to use the eFPS

1.Large taxpayers duly notified by the BIR
2.Top 20,000 private corporations duly notified by the BIR
3. Top 5,000 individual taxpayers duly notified by the BIR
4.Taxpayers who wish to enter into contracts with government offices
5.Corporations with paid-up capital of P10,000,000
6.PEZA-registered entities and those located within Special Economic Zones
7.Government offices, in so far as remittance of withheld VAT and business tax are concerned
8.Taxpayers included in the Taxpayer Account Management Program (TAMP)
9. Accredited importers, including prospective importers required to secure the Importers Clearance Certificate
(IC) and Custom brokers Clearance Certificate (BCC)
In case of unavailability of the FPS during maintenance or instances of technical errors, FPS enrolled taxpayers may
file manually.

PAYMENT OF INCOME TAXES

The general rule is "pay as you file", The capital gains tax and regular income tax are paid as the taxpayer files his
return. Installment payment of income tax is allowed on certain conditions.

Taxpayers under the FPS system shall e-pay their tax online through internet banking service. The account of the
taxpayer will be auto-debited for the amount of taxes to be paid.

PENALTIES FOR LATE FILING OR PAYMENT OF TAX

The late filing and payment of taxes is subject to the following additional charges:

1. Surcharge
a. 25% of the basic tax for failure to file or pay deficiency tax on time
b.50% for willful neglect to file and pay taxes

The non-filing is considered 'willful neglect' if the BIR discovered the non-filing first. This is the case when the
taxpayer received a notice from the BIR to file return prior to his actual filing. If the taxpayer filed a return before
the receipt of such notice, the same is considered simple neglect subject to the 25% surcharge.

2. Interest - Double of the legal interest rate for loans or forbearance of any money in the absence of any express
stipulation

Since the legal interest is currently set at 6%, the interest penalty is therefore 12% per annum effective January 1,
2018. Note that NIRC imposed an interest penalty of 20% per annum until December 31, 2017. Under the new
rules established by RR21-2018, the interest period shall be computed based on actual days divided 365 days. The
additional day in February during a leap year will be counted. The yearly-monthly-daily counting method
established in prior regulations is already abandoned.

3. Compromise penalty
Compromise penalty is an amount paid in lieu of criminal prosecution over a tax violation. The schedules of
compromise penalty related to income taxes are included in.

CHAPTER 5

FEATURES OF FINAL INCOME TAXATION

1. Final tax
2. Tax withholding at source
3.Territorial imposition
4.Imposed on certain passive income and persons not engaged in business in the Philippines

The Final Withholding System

The final withholding system imposes upon the person making income payments the responsibility to withhold the
tax. The tax which will be deducted at source is final. The taxpayer receives the income net of tax and there would
be no need for him to file an income tax return to report the same.
The final withholding system is inherently territorial. It applies only to certain passive income earned from sources
within the Philippines. Note that taxation is territorial and we cannot impose tax obligation (filing or withholding)
against non-resident subjects of foreign sovereignty. Hence, all items of income earned from sources abroad,
passive or active, are subject to tax under the general scope of the regular income tax.

Rationale of Final Income Taxation

The final withholding tax is built upon taxpayer and government convenience, It relieves the taxpayer of the
obligation to file an income tax return. This is very convenient for taxpayers who are limited by distance, time and
cost to comply. For the government, the final withholding system is the most convenient and effective system in
collecting taxes on income where there is high risk of non-compliance or tax evasion.

Under the NIRC, final income tax is imposed on certain passive income and upon non-resident persons not engaged
in business in the Philippines.

Passive income
Items of passive income are earned with very minimal involvement from the taxpayer and are generally irregular
in timing and amount. Unlike items of active income, they are not usually specifically monitored by taxpayers.
When not recorded by the taxpayer, their existence can be difficult to predict while their actual amount may be
difficult to determine. Thus, the final withholding at source is the most favored scheme in taxing items of passive
income.

Non-resident persons not engaged in business in the Philippines

Non-resident persons not engaged in trade or business in the Philippines, such as non-resident aliens not engaged
in trade or business (NRA-NETBs) and non-resident foreign corporations (NRFCs), have high risk of non-
compliance. These taxpayers do not have offices or fixed places of business in the Philippines making tax
compliance very unlikely due to their absence and distance in the Philippines. Also, the Philippine government
cannot impose upon them the obligation to file return due to territorial consideration.

PASSIVE INCOME SUBJECT TO FINAL TAX

1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
3. Dividend income from a Real Estate Investment Trust
4. share in the net income of a business partnership, taxable associations, joint ventures, joint accounts, or co-
ownership
5. Royalties, in general
6.Prizes exceeding P10,000
7.Winnings
8.Informer's tax reward
9. Interest income on tax-free corporate covenant bonds

FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise indicated, the final tax rates to be discussed in the following sections apply to all taxpayers
(individuals and corporations) other than:
a.Non-resident alien not engaged in trade or business (NRA-NETB), and
b.Non-resident foreign corporation (NRFC).
Deposit substitutes
Deposit substitute means an alternative form of obtaining funds from the public other than deposits through the
issuance, endorsement, or acceptance of deb. instruments for the borrowers Own account, for the purpose of re-
lending of purchasing of receivables and other obligations, or financing their own needs or the needs of their agent
or dealer. Public means 20 or more corporate lenders at any one time.

The 19-lender rule

The mere notation of a debt instrument is not considered to be a public borrowing and is not deemed a deposit
substitute if there are only 19 or less individual or corporate lenders at any one time.

The 19-lender rule does not apply to government securities

Government debt instruments and securities including Treasury bonds, Treasury bills, and Treasury notes shall be
considered as deposit substitute irrespective of the number of lender at origination if such debt instruments and
securities are to be traded or exchanged in the secondary market. Debt instrument issued for interbank call loans
with maturity of not more than 5 days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit substitutes.

Interest income subject to regular tax

Interest income from the following sources is subject to regular income tax, not to final tax:
1. Lending activities, whether or not in the course of business
2. Investments in corporate bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default

DIVIDENDS
Dividends" means any distribution made by a corporation to its shareholders in other property. (Sec. 73, NIRC)
out of its earnings or profits and payable to its shareholders, whether in money or
Types of dividends:
1. Cash dividends - paid in cash
2. Property dividends - paid in non-cash properties including stocks or securities of another corporation
3. Scrip dividends - those paid in notes or evidence of indebtedness of the corporation
4. Stock dividends - paid in the stocks of the corporation
5. Liquidating dividends - distribution of corporate net asset

As a rule, dividends are income subject to tax. However, the following are not
income for taxation purposes:
1.Stock dividends
Stock dividends representing transfer of surplus to capital account shall not be subject to tax. Stock dividends are
in the form of increase in corporate value (i.e. capital gain) which should be properly taxable when realized
through disposal or sale of the stocks investment.

The distribution of stocks of another corporation as dividends is a taxable property dividend and not a stock
dividend.
2. Liquidating dividends
Under the NIRC, the receipt of liquidating dividends is not viewed as income but as exchange of properties. When
the liquidating dividends exceed the cost of the investments, the excess is a taxable capital gain, subject to regular
income tax. Any loss is deductible only to the extent of capital gain.

Taxability of Stock Dividends

Normally, stock dividends are exempt from income tax. Exceptionally, stock dividends are subject to tax at the fair
value of the stocks received under the
following conditions:
a. Subsequent cancellation and redemption
If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, equivalent to the distribution of a taxable
dividend, the amount so distributed shall be taxable to the extent it represents a distribution of earnings or profit.
For instance, a corporation declared stock dividends and immediately called the stock dividends for redemption
and cancellation. This act is equivalent to declaration of cash dividends.

b. If it leads to substantial alteration in ownership in the corporation

Substantial alteration in ownership in a corporation may occur when stock dividends are given in lieu of cash
dividends or when the corporation declared an optional stock or cash dividend.

Stock dividend vs. Stock split

Stock dividend is a capitalization of earnings while stock split results in reduction in the par value of stock and an
increase in the number of shares of shareholders. Assuming a 2-for-1 split, a shareholder holding one P50-par
value stock will be given two P25-par value stocks. While stock dividend may be taxable under certain
conditions, stock split will never be subject to income tax.

Presumptive source of dividend distribution

Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from
the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distribute
for the year in which received. (Sec. 73(C), NIRC)

Exempt Dividends
1. Inter-corporate dividends from domestic corporations - exempt from final tax
2.Dividends from cooperatives - exempt from final tax
3. Qualified foreign-sourced dividends - exempt from regular tax Inter-corporate dividends from domestic
corporations Inter-corporate dividends received by a domestic corporation and resident foreign corporation from
a domestic corporation are exempted under the NIRC to minimize double taxation.

Dividends from cooperatives

Under RA 9520, the distribution of dividends by an exempt cooperative to its members either representing interest
on capital or as patronage refunds shall not be subject to tax.

Inter-corporate dividends from foreign corporations

Dividends received by corporations from foreign corporations are generally subject to regular income tax.
However, domestic corporate recipients of such dividends may be exempted under certain conditions.
ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX
The 10% final withholding tax also applies to dividends or share in the net income of entities considered
corporations under the NIRC and special laws, such as:
1. Real Estate Investment Trusts
2. Business partnerships
3.Taxable associations
4.Taxable joint ventures, joint accounts or consortia
5.Taxable co-ownerships

TAX-FREE CORPORATE COVENANT BONDS

Interest income of non-resident aliens, citizens or residents of the Philippines on bonds, mortgages, deeds of trust,
or other similar obligations of domestic or resident foreign corporations with tax-free or tax-reduction provision
where the obligor shoulders in whole or in part any tax on the interest shall be subject to a final withholding tax of
30%.

Capital gains tax

As a rule, NRA-ETBs and NRFCs do not file income tax returns. Exceptionally, NRA- NETBs and NRFCs are required
to file income tax returns to report their gain from dealings in domestic stocks directly to buyers. Ownership of the
stocks shall not be transferred to the assignee without the required return and tax clearance

The Tax Sparing Rule

NRFCs shall be subject to a 15% final tax on dividend income instead of the 25% general final tax if the country of
domicile of the NFC credits against the tax due of such NFC taxes presumed to have been paid by such NRFC from
the Philippines equivalent to 10% of the dividends. In applying the tax sparing rule, the Supreme Court ruled that
the NIRC does not require that the foreign law of the non-resident corporation must give a deemed paid tax credit
for dividend equivalent to the percentage points waived by the Philippines pointing that the NIRC merely require
the country of the NFC to a deemed paid tax equivalent to that waived by the Philippines. (CIR vs. Procter & Gamble
Philippines Manufacturing Corporation and the CTA (G.R 66836)) Thus, the requirement of the tax sparing rule is
deemed satisfied if the country to (BIR Ruling Nos. 104-2012, March 22, 2012) which the NFC is domiciled imposes
no tax on dividends from foreign sources.

OTHER FINAL INCOME TAXES

1.Fringe benefits of managerial or supervisory employees
2. Income payments of residents other than depositary banks under the expanded foreign currency deposit system
(EFCDS) and expanded foreign currency deposit units (EFCDUs)
3. Income payments to oil exploration service contractors or sub-contractors

FRINGE BENEFITS TAX

Fringe benefits include all remunerations under an employer-employee relationship that do not form part of
compensation income. The fringe benefits of managerial and supervisory employees are subject to a final fringe
benefits tax.

INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS UNDER

THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
Residents, other than depositary banks under the expanded foreign currency deposit system, shall withhold 10%
final tax on income payments such as interest income on loans from expanded foreign currency deposit units
(FCDUs). The final taxation of FCDUs and EFCDUs.
INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SERVICE
CONTRACTORS
Under PD 1354, every subcontractor, whether domestic or foreign, entering into a contract with a service
contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to
eight percent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes,
whether national or local. Provided, however, that any income received from all other sources within and
without the Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign
subcontractors shall be subject to the regular income tax under the NIRC.

The term "gross income" means all income earned or received as a result of the contract entered into by the
subcontractor with a service contractor engaged in petroleum operations in the Philippines under Presidential
Decree No. 87. Note that the 8% final tax applies only to subcontractors, whether individuals or corporations,
resident or non-resident. Petroleum service contractors are subject to the regular income tax.

Persons or entities contracted by a petroleum service contractor to locally supply goods and materials that are
required by and in, or that are inherently necessary or incidental to, its exploration and development of petroleum
mineral resources and are entitled to the preferential 8% final tax on their gross income derived
from such contracts. (BIR Ruling No. 024-2001, June 13, 2001)

Note on Special Aliens

Under the old law, employees of offshore banking units, regional operating of regional administrative headquarters
of multinational companies, referred to as special aliens, are previously subject to 15% final tax on gross
compensation income. The special alien classification is now abolished by virtue of a presidential veto to the TRAIN
law. As such, these employees are now subject to regular income tax if they are residents and 25% final tax if they
are non-residents.

FINAL WITHHOLDING TAX RETURN

The final withholding tax return (BIR Form 0619-F), Monthly Remittance Return of Final Income Taxes Withheld,
shall be filed in triplicate by every withholding agent or payor who is either an individual or corporation for the
first two months of the quarter. Deadline and place for monthly manual filing The return shall be filed and the tax
shall be paid or before the 10th day of the month following the month in which withholding was made with:

a.The authorized agent bank of the revenue district office having jurisdiction over the withholding agent's place of
business
B.In places where there are no authorized agent banks, to the revenue collection officer
C. The authorized city or municipality treasurer within the revenue district where the withholding agent's place of
business is located.

Quarterly filing
The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance Return of Final Income Taxes
Withheld, on or before the last day of the month after each quarter.

Penalties for Late Filing or Remittance of Final Income Taxes Withheld

The same penalties for late payment of income taxes as discussed in Chapter 4 apply for non-withholding or non-
remittance of final taxes.
ENTITIES EXEMPT FROM FINAL INCOME TAX
1. Foreign governments and foreign government-owned and controlled
corporations
2. International missions or organizations with tax immunity
3. General professional partnership
4. Qualified employee trust fund

The first two categories are exempt on grounds of international comity. General professional partnerships and
qualified employee trust funds are expressly exempt from any income tax imposed under the NIRC. These entities
are exempt not only to final tax but also to capital gains tax and regular income tax.

CHAPTER 6

CLASSIFICATION OF TAXPAYER'S PROPERTIES

1. Ordinary assets - assets used in business, such as:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year
b.Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business
C. Real property used in trade or business of a character which is subject to the allowance for depreciation
d. Real property used in trade or business of the taxpayer

Business is habitual engagement in a commercial activity involving the regular sale of goods or services for a profit.
Non-profit entities are not businesses.

Basically, ordinary assets are:

A. Assets held for sale - such as inventory
B. Assets held for use - such as supplies and items of property plant and equipment like buildings, property
improvements, and equipment
2. Capital assets - any asset other than ordinary assets

Basically, capital assets are.

1. Personal (non-business) assets of individual taxpayers
2.Business assets of any taxpayers which are:
a.Financial assets-investments - such as cash, receivables, prepaid expenses and
b. Intangible assets - such as patent, copyrights, leasehold rights; franchise rights

Asset classification is relative

The classification of assets or properties as ordinary asset or capital asset does not depend upon the nature of the
property but upon the nature of the taxpayer's business and its usage by the business.

Interestingly, the revenue regulations classify real and other properties acquired (ROPA) by banks as ordinary
assets even if banks are not actually engaged in the realty business. This is an apparent recognition of the fact that
ROPA are normally acquired and sold by banks in their normal course of business. However, ROPA in the form of
domestic stocks held by banks are capital assets. Under RR6-2008, "stocks classified as capital assets" means all
stocks and securities held by taxpayers other than dealers in securities.
Asset Classification Rules
A. Asset property purchased for future use in business is an ordinary asset even though this purpose is later
thwarted by circumstances beyond the taxpayer control.
B. Discontinuance of the active use of the property does not change its character previously established as a
business property.
C. Real properties used, being used, or have been previously used, in trade of the taxpayer shall be considered
ordinary assets.
D. . Properties classified as ordinary assets for being used in business by a taxpayer not engaged in the real
estate business are automatically converted to capital assets upon showing of proof that the same have not
been used in business for more than 2 years prior to the consummation of the taxable transaction involving
such property.
E. A depreciable asset is an ordinary asset even if it is fully depreciated, or there is a failure to take
depreciation during the period of ownership.
F. Real properties used by an exempt corporation in its exempt operations are considered capital assets.
Exempt corporations are not business.
G. The classification of property transferred by sale, barter or exchange, inheritance, donation, or declaration
of property dividends shall depend on whether or not the acquirer uses it in business.
H. . For real properties subject of involuntary transfer such as expropriation and 300 foreclosure sale, the
involuntariness of such sale shall have no effect on the
I. classification of such real property. Change in business from real estate to non-real estate business shall not
change the classification of ordinary assets previously held.

Taxpayers engaged in real estate business includes real estate dealer, real estate developer, real estate lessor and
taxpayers habitually engaged in real estate business. Taxpayers habitually engaged in real estate business include
those registered with the sales transactions in the preceding year. HLURB or HUDCC as dealer or developer or
those with at least 6 taxable real estate
TYPES OF GAINS ON DEALINGS IN PROPERTIES
1.Ordinary gain - arises from the sale, exchange and other disposition including pacto de retro sales and other
conditional sales of ordinary assets
2.Capital gain - arises from the sale, exchange, and other disposition including pacto de retro sales and other
conditional sales of capital assets

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

There are only two types of capital gains subject to capital gains tax:
1. Capital gains on the sale of domestic stocks sold directly to buyer
2. Capital gains on the sale of real properties not used in business

Domestic Stocks
corporation regardless of its features, such as:
Domestic stocks are evidence of ownership or rights to ownership in a domestic
1. Preferred stocks (participative, cumulative, etc.)
2. Common stocks
3. Stock rights
4.Stock options
5. Stock warrants
6.Unit of participation in any association, recreation, or amusement club (golf, polo or similar clubs)
The capital gains tax covers not only sales of domestic stocks for cash but also exchange of domestic stocks in kind
and other dispositions such as:

1.Foreclosure of property in settlement of debt

2. Pacto de retro sales - sale with buy back agreement
3. Conditional sales - sales which will be perfected upon completion of certain specified conditions
4.Voluntary buy back of shares by the issuing corporation- redemption of shares which may be re-issued and not
intended for cancellation

The term other disposition does not include:

1. Issuance of stocks by a corporation
2. Exchange of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks for cancellation by the issuing corporation
6.Gratuitous transfer of stocks

Issue of stocks including treasury stocks

The issue of stocks to stockholders by a corporation is a financing transaction rather than a sale transaction. The
excess of fair value received over the par value of shares issued is an additional capital to the corporation.

Stocks acquired by the corporation from its shareholders, treasury shares, cannot be considered assets or
investments in accounting sense. The excess of the consideration received in the re-issuance of treasury stocks
called treasury share premium is an additional capital and is not income. Under US tax rules, treasury shares can
be considered as investments if the corporation trades on its shares as it would in the shares of other corporations.
As such, the treasury share premium is viewed as a capital gain. Under the NIRC and RR6-2008, however, there is
no express provision taxing treasury share premium, Hence, treasury share premium should not be subjected to
capital gains tax.

Exchange of stocks for services

the exchange or issue of stocks for services cannot be considered as exchange for property. No gain or loss can be
imputed as it involves payment of expense in kind.

Redemption of shares in a mutual fund

Cains from redemption of shares in a mutual fund are exempted by the NIRG from income taxation.

Gratuitous transfer of stocks

The gratuitous transfer of stocks either by way of donation inter-vivo or donation mortis causa is subject to
transfer tax, not to income tax.

If stocks are transferred for insufficient consideration or at significant discount to their fair value, the difference
between fair value and selling price is a donation subject to donor's tax.

MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchanged or disposed:
1.Through the Philippine Stock Exchange (PSE) or
2. Directly to buyer
TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE
The sale of domestic stocks classified as capital assets through the PSE is not subject to capital gains tax. It is
subject to a stock transaction tax of 60% of 1% of the selling price effective January 1, 2018. The old law imposed a
rate of 50% of 1% on the selling price.

CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPOSITIONS OF

DOMESTIC STOCK DIRECTLY TO BUYER

Nature of the CGT:

1. Universal tax
It applies to all taxpayers disposing stocks classified as capital assets regardless of classification of the taxpayer. By
situs, the gain on sale of domestic stocks is within. The tax applies even if the the sale is executed outside the
Philippines.
2. Annual tax
It is imposed on the annual net gain on the sale of domestic stocks directly buyer

Tax compliance
1.Transactional capital gains tax
Stocks are registrable securities which requires BIR tax clearance prior t their transfer of ownership. Filing of tax
returns is a pre-condition to tay clearance. The capital gains or losses are required to be reported after each sale,
exchange, and other dispositions through the capital gains tax return,Form 1707.
2.Annual capital gains tax
The 15% capital gains tax is an annual tax. The CGT is recomputed on the annual net gains and reported through a
final consolidated return (BIR Form 1707A) on or before the 15th day of the fourth month following the close of
the taxable year of the taxpayer.

Rationale of the wash sales rule

The Wash sales rule is intended to prevent taxpayers from feigning temporary losses which could enable them to
manipulate their reportable taxable net gain. Hence, the prohibition against the claim of wash sales is not an
absolute rule but is a form of deferral of loss intended to reflect the economies substance of the
transaction.

The wash sales rule is not applicable to dealers in securities as it is a normal way Of business for them to buy and
sell stocks and as a result realize gains or incur losses within short duration of time.

TAX FREE EXCHANGES

A. Corporate reorganization
B, Initial acquisition of control

CORPORATE REORGANIZATION
No gain or loss shall be recognized on a corporation or on its stocks or securities if such corporation is a party to a
reorganization and exchanges property in pursuance of a plan of reorganization solely for stocks or securities in
another corporation that is a party to the reorganization.
CHAPTER 7

CHARACTERISTICS OF THE REGULAR INCOME TAX

1. General in coverage
2.A net income tax
3.An annual tax
4.Creditable withholding tax
5.Progressive or proportional tax

General coverage
The regular income tax applies to all items of taxable income except those that are subject to final tax, capital gains
tax, and special tax regimes.

Net income taxation

The regular tax is an imposition on residual profits or gains after deductions for expenses and personal exemptions
allowable by law.

Annual income tax

The regular income tax applies on yearly profits or gains. The gross income and expenses of the taxpayer are
measured using the accounting methods adopted by the the taxpayer.
Taxpayer and are reported to the government over the accounting period selected by

Creditable withholding taxes

Most items of regular income are subject to creditable withholding tax (CWT). These creditable withholding taxes
are advanced taxes that must be deducted against regular tax due in computing the tax still due to the government.

Progressive or proportional tax

The NIRC imposes a progressive tax on the taxable income of individuals while it imposes a flat or proportional tax
of 25% upon the taxable income of corporations.

Gross income consists of the major topics:

1. Exclusions of gross income - list of income exempt to regular income tax
2 Inclusions in gross income - list of income subject to regular income tax
3. Special topics - covers income that are either exclusion or inclusion depending on certain circumstances, such as:
a. Fringe benefits
b. Dealings in properties

GROSS INCOME
Gross income constitutes all items of income that are neither excluded in gross income nor subjected to final tax or
capital gains tax. The items of gross income subject to the regular income tax.

Exclusions from Gross Income

These pertain to items of income that are excluded; hence, exempt from regular income tax. These will be
discussed in detail in Chapter 8.
Excluded income vs. exempt income
Excluded income is also exempt income. Excluded income are those listed by the NIRC as exempt income from
regular tax. The term exempt income includes all income exempt from income tax whether final tax, capital gains
tax or regular income tax. Exclusions from gross income are listed in the NIRC. Exemption from
income may be provided by the NIRC or special laws.