lOMoAR cPSD| 15650444

Chapter 1. Introduction to Taxation President – fix amount of

tariffs, other cases
• TAXATION – state power, legislative process, mode of requiring expedient and
government cost distribution. effective administration
• THEORY OF TAXATION – government’s necessity for and implementation.
funding. Constitutional limitations (DEUP-NNFE-NECN-
• BASIS OF TAXATION – mutuality of support between the
NNTT)
people and the government.
• Receipts of benefits are conclusively presumed. Due process of law –
neither harsh nor
• THEORIES OF COST ALLOCATION oppressive
Aspects:
Benefit received theory – more benefit, more taxes.
: Substantive due process –
Ability to Pay Theory – contribute based on relative tax must be imposed only
capacity to sacrifice. for public purpose :
Procedural due process –
ASPECTS: no arbitrariness, right to
notice and hearing.
: Vertical Equity – gross concept; extent of ability
Assessment – made
to pay is proportional to tax base.
within 3 years from due date
: Horizontal Equity – net concept; of filing of return or actual
consideration of circumstances filing (whichever is later)
Collection – made
THE LIFEBLOOD DOCTRINE – without taxes, within 5 years from date of
government would be paralyzed: Taxes – essential assessment
and indispensable. Equal protection of the Law
– equal treatment both in
IMPLICATION: terms of rights conferred
and obligations imposed;
: doesn’t need constitutional grant. applies to taxpayers under
: tax exemption – claims: construed against taxpayer same circumstances.
Uniformity rule in taxation
: right to choose object of taxation – government – taxation shall be uniform
and equitable; : taxpayers
: courts not allowed to interfere under dissimilar
circumstances should not
: Income taxation taxable upon be taxed the same
(substantial distinction) :
receipt;
each class is taxed
deduction for capital expenditures and differently – falling under
prepayment not allowed; same class are taxed the
same
lower amount of deduction is preferred, in (relative equality)
case claimable expense subject to limit; Progressive system of
taxation – tax rates
higher tax base is preferred, in case of multiple increase as tax base
tax bases. increases (consistent with
taxpayer’s ability to pay)
Non-imprisonment for non-
• INHERENT POWERS OF THE STATE (pg. 4- payment of debt or poll tax
– applies only when the
5)
debt is acquired in good
Taxation Power – enforce proportional faith (bad
contribution f
a
Police Power – enact laws to protect wellbeing of the i
people t
h
Eminent Domain – take private –
property for public use after paying just compensation e
s
• SCOPE OF TAXATION POWER t
(CPUS) – comprehensive, plenary, unlimited, and a
supreme. f
a
• THE LIMITATIONS OF THE TAXATION POWER )
Inherent Limitations (TIPEN) Non-impairment of
Territoriality of Taxation – demand tax obligation and contract –
obligations within territorial jurisdiction; honored and shouldn’t be
extraterritorial taxation cancelled by a unilateral
– encroachment of foreign sovereignty. government action.
International Comity – all nations deemed equal to one Free worship rule – free
another (co- equal sovereignty); non-taxing of income exercise of religion but
and properties of other governments does not extend to income
from properties or
Public Purpose (only) – intended for the common good activities that are
Exemption of the Government – exemption: income proprietary or commercial
from its properties and activities conducted for profit in nature
(GOCC) Exemption of the following
Non-delegation of the Taxing Power – vested exclusively lands, buildings, and
in congress and is non- delegable. Exemption: LGU,

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improvements from property taxes religion

: however, compensation
: Religious, charitable and educational entities to priests,
: Non-profit cemeteries, churches and mosques etc. with
military,
Doctrine of use: applies only to properties actually, penal
directly, and exclusively devoted to religious institutions,
activities, etc. etc. not
Non-appropriation of public funds or property for the considered
benefit of any church, sect, or system of religion – religious
government should not favor nor support any particular appropriatio
system of n.
Exemption from taxes of the revenues and assets non- : Business Tax Situs – where the business is
profit, non-stock educational institutions (Doctrine of use) conducted.
: including grants, endowments, donations, or contributions
: Private educational institutions : Income tax situs on services – where service is
– minimal 10% income tax rendered
Concurrence of a majority of all members of Congress : Income tax situs on sale of goods – in the place of
for the passage of a law granting tax exemption : In
sale
withdrawal, only a relative or quorum majority is required
Non-diversification of tax collections – used only for : Property tax situs – in its location
public use.
Non-delegation of the power of taxation – as part of : Personal tax situs – in their place of
lawmaking be vested exclusively in Congress residence
Non-impairment of the jurisdiction of the Supreme Court
to review tax cases – all tax cases can be raised to and be • OTHER FUNDAMENTAL DOCTRINES IN TAXATION
finally decided by the Supreme Court of the Philippines Marshall Doctrine – “The power to tax involves
Appropriations, revenue, or tariff bills shall the power to destroy”: an instrument of police
originate exclusively in the house of power.
representatives : used to discourage or prohibit
undesirable activities or occupation.
: does not necessarily mean that the House bill must become the final (e.g. SINTAX)
law. : solely for the purpose of raising
revenues – does not
: Senate may propose or concur with amendments include the power to destroy
: Held constitutional – senate changed entire house version of Holme’s Doctrine – “Taxation power is not the
tax bill power to destroy while the
court sits.”
Delegation of taxing power to loca l : used to build or encourage beneficial
government units – constitutional activities – grant of tax incentives. (e.g.
recognition of the local autonomy of Tax
LGU Holidays)
STAGES OF THE EXERCISE OF TAXATION Prospectivity of tax laws
: ex post facto law/law that retroacts –
POWER Levy or Imposition prohibited by
constitution, unless intended by
: impact of taxation; legislative act Congress under certain justifiable
: enactment of a tax law by Congress – House of conditions. (e.g. under foreign
Representatives and The Senate occupation even
after the war)
: tax bills must originate from House of Non-compensation or set-off –
Representatives. cannot delay payment of tax; not a debt.
Exceptions
: However, each may have their own versions
proposed which is approved by both bodies. : Taxpayer’s claim become
due and demandable – recognized by
DISCRETION IN THE EXERCISE: government; a refund was made
(DSDKNSM) : overpayment of taxes
: Local taxes
‘Determine object of taxation ‘Set tax rates/amount collected Non-assignment of taxes
: Contracts executed shall not
‘Determine purpose of levy – public use ‘Kind of tax to be imposed prejudice the right of government to
collect
‘National and local government apportionment ‘Situs of Taxation
Imprescriptibility in taxation – government’s
‘Method of collection right to collect does not prescribe unless the law
itself provides for such prescription.
Assessment and Collection : Prescription – lapsing of a right due
to the passage of time
: incidence of taxation; administrative act of taxation
Under NIRC, tax prescribed if not collected within:
: tax law is implemented by the administrative branch of
the government : involves assessment/determination of 5 years from the date of assessment
the tax liabilities of taxpayers and collection. 3 years from the date of return required to be
• SITUS OF TAXATION filed, in absence of an assessment
Situs – place of taxation; tax jurisdiction. Doctrine of estoppel – “still the taxpayer’s fault”
Situs rules – frames of reference whether
tax object is within or without the jurisdiction.

: error of any government

employee does not bind

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the government since it is not

subject to estoppel.
Judicial Non- Interference : generally, courts : Tax Avoidance (tax minimization) – any act or trick
cannot issue injunction against the government’s that reduces or totally escapes taxes by any legally
pursuit to collect tax : anchored on the lifeblood permissible means. (e.g. selection/execution of
doctrine transaction that would effect to lower taxes)
Strict Construction of Tax Laws – “taxation is the
rule; exemption is the exception” : Tax exemption (tax holiday) – immunity, privilege or
: when language of law is clear and freedom from being subject to tax granted by
categorical – no room for constitution, law, or contract.
interpretation, only for application ‘Can be revoked by Congress except those
: Vague tax laws – means no tax law; granted by constitution and under contracts’
construed against the government and
in favor of the taxpayers – obligation B. Those that do not result to loss of government
arising from law is not presumed (due revenues (ShiCapTra)
process) : Vague exemption laws –
means no exemption law; claim for : Shifting – process of transferring tax burden to other
exemption is construed strictly against taxpayers
the taxpayer in accordance with the
lifeblood doctrine Forms of Shifting
‘Exemption must be ‘Forward Shifting’ follows the normal flow
clear and of distribution; common with essential
unequivocal. Any doubt is resolved commodities and services such as food and
against the taxpayer. fuel (e.g. manufacturers to wholesalers,
wholesalers to retailers)
• DOUBLE TAXATION – occurs when same taxpayer is
taxed twice by same tax jurisdiction for the same ‘Backward shifting’ reverse of forward shifting; common to non-
thing. essential commodities; buyers have market power with numerous
Elements of double taxation (OTPJP) alternatives
: Primary elements – same object :
Secondary elements – same type, purpose, taxing jurisdiction ‘Onward shifting’ any tax shifting in the distribution channel exhibits
and/or tax period. either of the former forms.
Types of Double Taxation
: Capitalization – adjustment of the value of an
: Direct double taxation – all the element of double taxation exists for
asset caused by changes in tax rates.
both impositions; discouraged since it is oppressive and burdensome.
‘counter the rule of equal protection ‘Value of mining property decreases when
and uniformity in the constitution’ : Indirect output is subject to higher tax – form of backward
double taxation – at least one of the shifting
secondary elements of double taxation is not
common for both impositions; prevalent in : Transformation – elimination of wastes or losses
practice. by taxpayer to form savings to compensate for the
Impact of double taxation minimized: tax imposition or increase in taxes. (e.g.
: Provision of tax exemption – only one tax law improvement of goods)
is allowed to apply to the tax object : Allowing
foreign tax credit – payment made in foreign
tax law is deductible against the tax due of the
TAX AMNESTY VS. TAX CONDONATION – both construed
domestic tax law : Allowing reciprocal tax
against taxpayers and in favor of the government
treatment – reduced tax rates or exemption
Tax Amnesty
on foreign taxpayer if the country of the same
give same treatment to Filipino non-resident : general pardon – granted by government for erring taxpayers
therein : chance to reform and enable fresh
: Entering into treaties or bilateral agreements – start – clean
lower tax rates for their residents engage in slate
transaction that are taxable by both of them : retrospective in application
: covers both civil and criminal liabilities
: conditional upon the taxpayer paying a portion
Tax Condonation (tax remission) :
• ESCAPE FROM TAXATION – means available to the forgiveness under certain justifiable grounds
taxpayer to limit or even avoid the impact of taxation. : covers only civil liabilities : applies
• Categories of Escape from Taxation A. Those that prospectively to any unpaid balance – portion paid will
result to loss of government revenue (Ev, Av, Ex)
not be refunded
: Tax Evasion (tax dodging) – any act or trick that tend : requires no payment
to illegally reduce or avoid payment of tax (e.g.
understatement of income, overstating of expenses)
Chapter 2: Taxes, Tax Laws, and Tax Development Act)
Administration SOURCES OF TAXATION LAWS
TAXATION LAW – any law that arises from the : Constitution
exercise of the taxation power of the state. : Statutes and Presidential
TYPES OF TAXATION LAWS Decrees – tariff and customs
: Tax Laws – provide for the code : Judicial decisions or case
assessment and collection laws – due to ambiguity
of taxes (e.g. NIRC, Tariff : Executive Orders and Batas
and Customs Code, Pambansa
LGU) : Administrative Issuance - DOF
: Tax Exemption Laws – grant : Local
certain immunity from Ordinances : Tax treaties and
taxation. (e.g. Minimum conventions with foreign countries
Wage Law, BMBE Law, Coop.
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: Revenue returns, tax laws shall prevail –

Regulations – mandatory’
Administration, DOF, BIR, BOC
• NATURE OF PHILIPPINE TAX LAWS – civil and not
• TYPES OF ADMINISTRATIVE ISSUANCES political in nature; effective even during periods
Revenue of enemy occupation.
Regulations (clarifications) :
Issuance signed by Secretary of ‘Internal Revenue Laws’ not penal in nature, do
Finance, recommendation of the CIR not define crime; merely intended to secure
: formal pronouncements intended to clarify – compliance.
providing details of administration and
procedure : has the force and effect of a law, but • TAX – enforced proportional contribution levied
not intended to expand or limit; otherwise, void. by the lawmaking body of the State to raise
revenue for public purpose
Revenue
Memorandum Orders Elements of a Valid Tax Must
‘RMOs’ (steps) (be):
: issuance that provide directives or instructions, etc. 1. Levied by taxing power having jurisdiction
necessary in the implementation of the Bureau in all 2. Not violate constitutional and inherent
areas except auditing. limitations
3. Uniform and equitable
Revenue 4. For public purpose
Memorandum Rulings 5. Proportional in character
‘RMRs’ (exemption) 6. Generally payable in money Classification of
: rulings, opinions and interpretations of the Taxes
CIR : BIR Rulings, cannot contravene duly
issues RMR’s; otherwise, rulings are null and As to purpose
void ab initio.
: Fiscal or revenue tax – for general
Revenue purpose
Memorandum Circulars RMCs’
(announcement whenever there are : Regulatory – to regulate business,
issues) : issuance that publish conduct, acts or transactions
relevant and applicable portions as
: Sumptuary – to
well as implications – laws, rules,
achieve
etc. issues by BIR and others
social/economic
agencies.
benefits
Revenue
Bulletins ‘RB’ As to subject matter
: periodic issuances, notices, and official
announcements of the CIR for the guidance of the : Personal, poll or capitation – on
public persons/residents of a particular
BIR Rulings territory
: official positions of the Bureau to queries raised
: Property Tax – on personal or real
by taxpayer’s and other stakeholder relative to
properties
clarifications and interpretation of tax laws :
merely advisory, none of them binding except to : Excise or Privilege tax – upon
the addressee and may be reversed by BIR performance of an act; enjoyment of
anytime privilege: engagement in an occupation

As to incidence
• TYPES OF RULLINGS – VAT, International Tax
Affairs Division, BIR, Delegated Authority : Direct Tax – both impact and incidence
• GENERALLY ACCEPTED ACCOUTING of taxation rest upon the same taxpayer
PRINCIPLES VS. TAX LAWS : Indirect Tax – paid by any person rather
GAAP – not law but mere than statutory taxpayer
conventions of financial reporting;
intended to meet the common ‘Statutory Taxpayer – person named by
needs of a vast number of users in law to pay the tax
the general public.
TAX LAWS – special form of ‘Economic Taxpayer – one who actually
financial reporting which is pays the tax
intended to meet specific needs of
tax authorities. As to amount
: Specific tax – fixed amount on per unit
‘In cases of conflict in the basis (e.g. kilo, liter or meter, etc.)
preparation and filing of tax : Ad valorem – fixed proportion upon the value of tax
object
As to rate As to imposing authority

: Proportional tax – flat/fixed rate tax; emphasizes equality : National Tax – imposed by national
government
: Progressive of graduated tax – increasing rates as the tax base
increase ‘Income Tax – annual income,
gains or profits ‘Estate Tax –
: Regressive tax – decreasing tax rates as the tax gratuitous transfer of
base increase; anti-poor properties by a decedent
upon death ‘Donor’s Tax –
: Mixed Tax – combination of any of the above types of tax
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gratuitous transfer of properties by a

living
donor
‘Value Added Tax – consumption tax
collected by VAT business taxpayers ‘Other
Percentage Tax – consumption tax collected
by non-
VAT business taxpayers ‘Excise Tax – tax
on sin products and non-essential
commodities (e.g. alcohol, cigarettes,
metallic
minerals)
‘Documentary Stamp Tax – on
documents, instruments, loan
agreements, etc.

: Local Tax – imposed by the municipal or local

government

‘Real Property
Tax
‘Professional
Tax
‘Business Taxes, fees, and charges
‘Community tax ‘Tax on banks, etc.

• TAX VS. REVENUE

: Tax – amount imposed
: Revenue – amount collected
• TAX VS. LICENSE FEE
: Tax – broader subject; post-activity imposition : License
Fee – emanates from police power;
pre- activity imposition
• TAX VS. TOLL
: Tax – demand of sovereignty : Toll – demand of
ownership; dependent upon the value of property leased
‘Both government and private entities can impose toll,
but private entities can’t impose
tax.’
• TAX VS. DEBT
: Tax – arises from law
: Debt – arises from private contracts
• TAX VS. SPECIAL ASSESSMENT
: Tax – imposed upon persons, properties, or privileges
: Special Assessment – levied on lands adjacent to a
public improvement; nonpayment will not imprison
owner
• TAX VS. TARIFF
: Tax - imposed upon persons, properties, or privileges
: Tariff – imposed on imported or exported
commodities
• TAX VS. PENALTY
: Tax – imposed for government support; arises from law
: Penalty – imposed to discourage an act (by
both government and private individuals)

; arises from both law and contracts

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• TAX SYSTEM – methods or schemed of  Voluntary compliance system –

imposing, assessing, and collecting taxes. taxpayer himself determine his
income, reports through ITR and pays
TYPES OF TAX SYSTEM (pg. 41-42) the tax to government: Selfassessment
method
 According to Imposition : will be reduced by creditable withholding tax
: Progressive – income of individuals, and transfers of properties by  Assessment or enforcement
individuals system – government identifies non-
: Proportional – corporate income and business compliant taxpayers, assess and
: Regressive – not employed in PH demands compliance by means of
 According to Impact summary or judicial proceedings
: Progressive System – emphasizes direct taxes; cannot be shifted
: Regressive System – emphasizes indirect taxes; shifted by business to PRINCIPLES OF SOUND TAX SYSTEM (acc. to
consumers Adam Smith)

TAX COLLECTION SYSTEM  Fiscal Adequacy – sources of

government funds must be sufficient
 Withholding System on Income to cover government costs; tax should
Tax – payor of the income withholds/deduct the increase in response to increase in
tax on the income before releasing the same to government spending
the payee and remits the same to the  Theoretical Justice – suggest that
government (ability to pay theory) taxation should consider the
: Creditable withholding tax taxpayers’ ability to pay; it should not
‘Withholding tax on compensation - be
estimated tax required to be withheld by oppressive, unjust, or confiscatory
employers against employees’ income  Administrative Feasibility – tax laws
‘Expanded Withholding Tax – tax required to be deducted on should be capable of efficient and
certain income payments made by taxpayer engaged in business (e.g. effective administration to encourage
NRA-NETB) : Final Withholding Tax – payors are required to deduct the compliance: avoiding administrative
full tax on certain income payments: bottlenecks and reducing compliance
income with high-risk of non-compliance (e.g. RA, NRA) costs. (see applications on pg. 44)
 Withholding system on business tax – when
GOCCs purchase goods or services to private
entities, the TAX ADMINISTRATION – management of the tax
law requires withholding of relevant business system
tax (e.g. VAT, percentage tax) ‘Tax administration in PH – entrusted to BIR under
*Benefit- received theory
Chief Officials of the Bureau of Internal 14. To abate/cancel tax liabilities in certain cases
Revenue 15. To prescribe additional procedures/documentary
: 1 Commissioner requirements
: 4 Deputy Commissioners, each designated: 16. To delegate his powers to any subordinate – rank
‘Operations group equivalent to a division chief of an office
‘Legal Enforcement group ‘Information
Non-delegated power of the CIR
Systems group ‘Resource Management group
1. Power to recommend the promulgation of rules and
POWERS OF THE BUREAU OF INTERNAL regulations to SOF
REVENUE 2. Power to issue rulings of first impression; reverse/modify
(pg. 44) any existing rulings
1. Assessment and collection 2. 3. Power to compromise/abate tax liabilities Except,
Enforcement of penalties, etc. (Regional Evaluation Board may compromise)
3. Administering supervisory and police power : basic deficiency – 500,000 or less
4. Assignment of officers/employees to other duties : minor criminal violence
5. Provision of forms, receipts, etc. to proper officials 4. Power to assign/reassign officers to establishments -
6. Issuances of receipts and clearances articles subject to excise tax are produced/kept
7. Submission of annual report to Congress and COC in
matters of taxation Rules in Assignment of revenue officers to other duties

Power of the Commissioner of Internal Revenue 1. No more than 2 years – officers assigned in establishment
where excisable articles are kept
1. To interpret the provisions of NIRC 2. No more than 3 years – officers assigned to perform
2. To decide tax cases assessment and collection
3. To obtain information of person to effect tax collection 3. Not more than 1 year – officers and employees assigned
4. To make assessment and prescribe additional requirement to special duties
5. To examine and determine tax returns : can be amended Agents and Deputies for Collection of
within 3 years from National Internal Revenue Taxes
filing, except notice for audit has been served
6. To conduct inventory taking or surveillance 1. Imported goods – commissioner of
7. To prescribe presumptive gross sales and receipts customs and his subordinates
8. To terminated tax period 2. Energy tax – head of appropriate
supervision of DOF’ government offices and his subordinates
3. Receipts of payments of IR taxes
9. To prescribe real property values authorized to be made thru banks –
‘Zonal Value – values prescribed Authorized government depository banks
10. To compromise tax liabilities (AGDB)
11. To inquire bank deposits
12. To accredit and register tax agents ‘Failure of Secretary of OTHER AGENCIES TASKED WITH TAX
Finance to act on the appeal within 60 days is deemed an COLLECTIONS OR TAX INCENTIVES RELATED
approval’ FUNCTIONS
13. To refund or credit internal revenue taxes

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: Bureau of Customs (BOC) – collection - Attached agency of DTI

of tariffs and VAT on importation - 1 director general
- 3 deputy directors
- Under
supervision of : Local Government Tax Collecting Units – provinces,
DOF municipalities, cities, and barangays
- 1 customs commissioner
- 5 deputy commissioner - Imposed and collect to
- 14 district collectors rationalize fiscal
autonomy
: Board of Investments (BOI) – tasked to lead the
promotion of investment in PH: assisting Filipinos • TAXPAYER CLASSIFICATION FOR
and foreign investors to venture and prosper PURPOSES OF TAX ADMINISTRATION
: Large Taxpayers – under supervision of Large
- Supervise the grant of tax Taxpayer Service (LTS) of BIR national office
incentives under Omnibus : Non-large Taxpayers – under supervision of respective
Investment Revenue District Offices (RDOs) where business, etc. is
Code situated
- Attached agency of DTI
- 5 full-time governors
- Managing head appointed as vice • CRITERIA OF LARGE TAXPAYERS
chairman by President As to payment
: Philippine Economic Zone Authority (PEZA) – created to 1. Value Added Tax – at least
promote investments in export- oriented manufacturing
P200K/quarter: preceding year
industries in PH
2. Excise Tax – at least P1M paid:
- Supervise the grant both fiscal and preceding year
nonfiscal incentives 3. Income Tax – at least P1M annual
- Registered enterprises enjoy tax payment: preceding year
holiday on certain years; 4. Withholding Tax – at least
P1M annual remittances
exemption from import/export
including local taxes
5. Percentage Tax – at least P200K paid/quarter:
preceding year
6. Documentary stamp tax – at least P1M/year
AS to financial conditions and results of operations
1. Gross receipts or sales – P1M/year
2. Net worth – P3B/year
3. Gross purchases –
P800M/year: preceding year
4. Top corporate listed and
published by SEC

Automatic Classification of Taxpayers as Large

Taxpayers

1. All branches under LTS

2. Subsidiaries, affiliates, and entities of conglomerates
3. Surviving company in case of merger or
consolidation
4. Corporation that absorbs operation in case of spin-
off
5. Corporation with authorized capitalization of at
least P300M registered with SEC
6. Multination enterprises with authorized/assigned
capital at least
P300M
7. Publicly listed corp.
8. Universal, commercial, and foreign banks
9. Corporate taxpayer – at least P1M authorized
capital in banking industries, etc.
10. Corporate taxpayers engaged in the production of
metallic minerals

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: transaction involves another property: increases net

worth of recipient
MODE OF RECEIPTS/REALIZATION BENEFIT
Chapter 3. Introduction to Income Taxation (pg. 69)
1. Actual receipt – actual physical taking of income
• THE CONCEPT OF INCOME in form of cash/property
: Subject to tax – best measure of taxpayers’ ability 2. Constructive receipt – no actual physical taking
to pay tax; excellent object of taxation of income but taxpayer is effectively benefited
: Taxation purposes – taxable concept, Examples:
“gross income” : Offset of debt in consideration for sale of
- Taxable item, “items of gross goods/service : deposit of income to checking
income”, “inclusion in gross account
income” : increase in capital of a partner from profit of
- Taxable income, items of gross partnership
income less deductions and
exemptions INFLOW OF WEALTH WITHOUT INCREASE
- Gross income, any inflow of OF NET
wealth to taxpayers from WORTH – e.g. receipt of property in trust;
whatever source that increases borrowing of money
net worth

: Elements of Gross Income • TYPES OF TRANSFERS

- Return on capital that increases 1. Bilateral transfer/exchanges – onerous transactions
net worth (e.g. sale, barter); subject to income tax
- Realized benefit 2. Unilateral transfers – gratuitous transactions (e.g.
- Not exempted by law, contract, succession – upon
or treaty death, donation); subject to transfer tax
3. Complex transactions – partly gratuitous and partly
• Capital – any wealth or property onerous; “transfers for less than full and adequate
• Return of capital – merely maintains net worth consideration”
• RETURN ON CAPITAL – increases the net worth (e.g. Transfer tax – excess of fair value from selling
price; Income tax – excess of selling price from cost)
• Capital Items Deemed with Infinite Value – incapable of • Entity – every person, natural or juridical
pecuniary valuation; received as compensation for their • Regardless of the underlying economic
loss; deemed as relationship gains or income derived are taxable
return of capital since each corporation is a separate
: Life entity (e.g. parent and subsidiaries, sister
‘Life insurance paid to heirs or beneficiaries upon death of the companies)
insured are exempt from income tax. ‘Life insurance collected by • Sales of home office to its branch office – not
employer as beneficiary from an officer is likewise exempt. taxable since they are a same entity
Except: (return on capital) : excess amount • Income between businesses of a proprietor –
received over premiums paid upon surrender/maturity of policy taxable upon the same owner;
: gain realized from assignment/sale “proprietorship”, not a judicial entity
of policy
: interest income from unpaid balance of the • Unrealized gains or holding gains – not taxable
proceeds of policy : excess of the proceeds received over since they haven’t yet materialized in an exchange
acquisition costs and premium payment by an assignee : transaction
Health – compensation for personal injuries or torturous acts
Examples:
: Human Reputation – cannot be measured financially; any
indemnity received is deemed return of capital (e.g. : Increase in value of:
slander, alienation of affection, breach of promise to - Investments in
marry) equity/debt
securities - Real
properties held
(revaluation increment)
• RECOVERY OF LOST CAPITAL VS. - Value of foreign currencies
RECOVERY OF LOST PROFITS (pg. 65) held/receivable
: Recovery of lost capital – merely maintains net worth - Land dues to discovery of
: Recovery of lost profits – increases net worth; as good as mineral reserves : Decrease
realization of income Examples: in value of:
: Proceeds of crop or livestock insurance - Foreign currency –
: Guarantee payments : Indemnity received fluctuation exchange rates
from patent infringement suit : Birth of animal offspring
: Accrual of fruits in an orchard :
• REALIZED BENEFIT growth of farm vegetables
“benefit”, any form of advantage derived by taxpayer that
leads to increase in net Exemption:
worth : Income received in non-cash considerations – taxable at fair
Excep t: value of property received
: receipts on loan – offsetting effect in net worth : • Rendering of Services – an exchange does not
discovery of lost properties : receipt of money or exist but does not cause loss of capital; entire
property – held in trust, to be remitted consideration received is an item of gross income

“realized”, earned; requires sacrifice from the taxpayer to be • EXEMPTED BY LAW, CONTRACT, OR TREATY
entitled of benefit. : Income of qualified employee trust fund :
Requisites: Revenues of non-profit non-stock educational
: exchange in transaction institutions

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: SSS, GSIS, Pag-Ibig, or PhilHealth benefits : Taxable Estates and Trusts : Estate –
Minimum wage and salaries and qualified senior properties, rights, and obligations of a
citizen deceased person not extinguished by his
: Regular income of BMBEs death
: Income of foreign governments and FGOCCs : Income - Judicial settlement:
of international missions and organizations – tax treated as an individual
immunity; named and has ruling taxpayer
- Extrajudicial
TYPES OF INCOME TAXPAYER (pg. 70) settlement: taxable to
A. Individuals heirs : Trust – an
Citizen arrangement whereby
Since February 2, 1987 one person transfer
Fathers/mother are citizen of property to another
PH Born before January 17, person which will be
1973 of Filipino mothers held by a third party
Naturalized thru law : Resident Citizen – (grantor/trustor – beneficiary – trustee or fiduciary)
Filipino citizen residing in PH - Irrevocable: an
: Filipino working in PH individual taxpayer
embassies/consulate offices - Revocable: taxable to
: Went abroad under tourist visa : grantor
Non-resident Citizen - Citizen staying abroad: - If silent, presumed
- for more than 183 days revocable
- as an immigrant or for permanent
employment B. Corporations – includes partnership except
- works and GPP and joint venture engaged in energy
derives income operations under contract with
- previously considered as NRC and government
arrives in PH anytime during taxable Domestic Corporation –
year organized in accordance with PH laws
(even if controlled by
Alien foreigners)
: Resident Alien (retains status until he abandons it or Foreign Corporation – organized under
depart from PH) foreign law
- alien who came with an : Resident Foreign Corporation (RFC) – operates in
immigration visa PH through permanent establishment (a branch)
- lives in PH without definite : Non-resident Foreign Corporation (NRFC) – does not
intention to stay operate in PH
- who came with Special Corporations – domestic/foreign
definite purpose that corporations which are subject to special
requires an extended stay tax rules or
: Non-resident alien preferential tax rates
- Engaged in Other Corporate Taxpayers
trade/business: less than 1 : Partnership
year but more than 180 ‘GPP – not a taxable entity
days but partners are taxable individually ‘Business Partnership
- Not engaged: not more – taxable as a corporation : Joint Venture – other than
than 180 days exempt venture which are taxable to venturers’ share in
: with net income : Co-ownership – not taxable entity but to
definite income of co-owner unless income of co-owned property is
purpose that reinvented into other incomeproducing properties
can promptly
accomplishe d • GENERAL RULE: Resident Citizen and Domestic
Corporation are taxable on income earned within and
without the PH, others are within the PH only
• SITUS OF INCOME – place of taxation of income; jurisdiction - At least 50%, portion of dividend
that has the authority to impose tax upon the income : corresponding PH gross income
Source of Income – activity or property that produces the – earned within
income - Less than 50%, entire dividends
earned without
INCOME SITUS RULES (pg. 78) : Non-resident FC – earned abroad
TYPES OF INCOME PLACE OF TAXATION C. Merchandising Income – earned where the property is
Interest Income Debtor’s residence sold
Royalties Where intangible is employed D. Manufacturing Income – earned where the goods are
Rent Income Location of property
manufactured and sold (production and distribution)
Service Income Place where service is rendered

OTHER INCOME SITUS RULES (pg. 79)

A. Gain on sale of properties
1. Personal Property
: Domestic securities – presumed within
: Other – earned where property is sold
2. Real Property – earned where property is
located B. Dividend income from:
1. Domestic Corporation – earned within
2. Foreign Corporation
: Resident FC – pre-dominance test: ratio of PH
gross income over world gross income

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Chapter 4. Income Tax Schemes, Accounting capital gains tax; applies self-
Periods, Accounting Methods, and Reporting assessment method

• INCOME TAXATION SCHEMES – mutually exclusive

: Final Income Taxation – final withholding tax system
– withheld at source
- Applicable on certain passive
income

PASSIVE INCOME VS. ACTIVE INCOME

: Passive income – earned with minimal or without active
involvement
: Active income – arising from transactions requiring a
considerable degree of effort or undertaking

: Capital Gains Taxation – gain realized on the sale,

exchange and other disposition of certain capital
assets; employs selfassessment method

Capital asset: not used in

business or trade; other than
ordinary asset - Capital
gains:
domestic stock and real
property
- Taxable whichever is higher
between selling price and fair
market value (zonal value) :
Regular Income Taxation –
general rule of income taxation.
Covers all active income and
other income not subject to final
tax and

• ACCOUNTING PERIOD – length of time over TYPES OF ACCOUNTING PERIODS (pg. 102) which income is measured and reported 1.
REGULAR ACCOUNTING PERIOD
: Calendar Year – from Jan 1 to Dec 31
Available for both corporate and individual taxpayers
Used when taxpayer has no actual accounting book; does not keep books; an individual

: Fiscal Year – any 12-month period that ends on any day other than Dec 31
Available only to corporate income taxpayers

2. SHORT ACCOUNTING PERIOD – less than 12 months

: Newly commenced business – date of start until designated year-end

: Dissolution of Business – start of current year to date of dissolution (return shall be filed within 30 days for corporate taxpayers)

: Change of accounting period by corporate taxpayers – start of previous accounting up to designated year-end of new accounting
-
period (BIR approval is required – not automatic)

: Death of taxpayer – star of calendar year until death of the taxpayer (accounting period shall be terminated exactly at the date of
death)

: Termination of the accounting period of the taxpayer by the commissioner of internal revenue – start of current
year until date of termination (ITR and tax shall be due and payable immediately)

:DEADLINE OF FILING THE INCOME TAX RETURN

: CALENDAR YEAR – on or before April 15 of the following year
: FISCAL YEAR – on or before the 15th day of the fourth month in the same year

ACCOUNTING METHODS – accounting techniques used to measure income (pg. 105)

1. General methods
Accrual Basis – income(expense) is recognized when earned(incurred) regardless of when received(paid).
Cash Basis – income(expense) is recognized when received(paid).

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TAX VS. ACCOUNTING CONCEPTS : Advanced income is taxable upon receipt (services only)
: Prepaid expense is non-deductible
Deducted against gross income on date of expiration
Contradicts the Lifeblood Doctrine

: Special tax accounting requirements must be followed

Hybrid Basis – combination of accrual basis, cash basis and or other methods of accounting when taxpayer has several businesses that
employs different accounting methods
2. Installment and deferred method (pg. 109) - Perceived as unjust, abusive
Installment Method – gross income is and improper
recognized and reported in proportion to the
collection from the installment sales. : Spread-out Method –
Available to: estimated depreciated value
- Dealers of: of such
building/improvement at
: Personal Property : the termination of lease and
report as income per year of
Real Properties, if
the lease an aliquot part
initial payment does not
thereof
exceed 25% of selling price - cost of improvement x
(Initial Payment/Selling (excess useful life over lease
Price) term/useful life of the
- Casual sale of non- dealers improvement)
of real/personal property, 5. Crop Year Basis – farming income = proceeds of
when selling price exceeds harvest – expenses of the
P1000 particular crop harvested (pg. 117)
and/or initial payment - Expenses of each crop are
does not exceed 25% of accumulated and deducted
selling price upon harvest

INITIAL PAYMENT: downpayment + installment

payments in the taxable year of sale (cash or property)

SELLING PRICE: entire amount which the buyer is

obligated; debtor assumes indebtedness of the property

CONTRACT PRICE: amount receivable from buyer; in

absence of agreement to assume indebtedness by the
debtor (Selling Price – Indebtedness)

GROSS INCOME: (Collection/Contract

Price) x Gross Profit

INDEBTEDNESS ASSUME EXCEEDS TAX BASIS:

Indirect payment added to initial payment

Deferred Payment Method – variant of accrual

basis, used when non-interest bearing note
is
received (pg. 113)
- Gross income computed
based on present value
while discount interest on
note is amortized as
interest income

3. Percentage of Completion Method – estimated

gross income from construction is reported based
on the percentage of completion of the project. -
Output method:
Prescribed by
NIRC
4. Outright and Spread-out Method – applied on
income from leasehold improvement
: Outright Method – lessor reports income the FMV
of building or improvements whenever it is
completed

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• TAX REPORTING
TYPES OF RETURNS TO THE GOVERNMENT
1. Income Tax Returns – provides details of the
taxpayer’s income, expense, tax due, tax
credit and tax still due
2. Withholding Tax Returns – provide reports of
income payments subjected to withholding
tax by the taxpayerwithholding agent
3. Information Returns – do not involve
payment or withholding of tax; essential to
government tax mapping and evaluation

NON-FILING OF ANY OF THE ABOVE IS

SUBJECT TO
PENALTIES, FINES, AND/OR
IMPRISONMENT
- Penalty of P1,000
for each failure not exceeding
P25,000
for all failure during
a calendar year
(due to willful
neglect)

• MODE OF FILING INCOME TAX RETURNS MANUAL

e-BIR eFPS
FORMS
DATE ENTRY Manual Electronic Electronic
FILLING/SUBMISSION Manual Electronic Electronic
TAX PAYMENT Manual Manual Electronic

TAXPAYERS MANDATED TO USE THE eFPS

(pg. 118)
1. Notified large taxpayers
2. Notified top 20,000 private corp.
3. Notified top 5,000 individual taxpayers
4. Taxpayer who wish to enter contracts with
government
5. Corp. with P10M paid-up capital
6. PEZA registered and those located w/n Special
economic zones
7. Government offices – remittance of withheld
VAT and Business Tax 8. Included in Taxpayer
Account Management Program (TAMP)
9. Accredited importers – required to secure ICC
and BCC

GROUPINGS OF TAXPAYES UNDER eFPS (see pg.

119)
• PAYMENT OF INCOME TAXES – general rule: “pay as
you file”; installment payment of income tax is
allowed on certain conditions.

• PENALTIES FOR LATE FILING OR PAYMENT

OF TAX
: Surcharge
- 25%, simple
neglect - failure
to file ontime
- 50%, “willful
neglect” –
notice received: Interest – computed based on
actual days divided by 365 days (pg. 122 for
examples)
- 20%, until Dec 31,
2017
- 12%, since Jan 1, 2018
: Compromise Penalty – amount paid in lieu of criminal prosecutions over a tax violation.

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