INCOME TAXATION PRELIM

PRINCIPLES OF TAXATION ● The amount or rate of the Tax

● Kind of Tax
Taxation ● Apportionment of the Tax (e.g., whether
Taxation is the process or means by which the the Tax shall be general or limited to a
sovereign (independent State), through its particular locality or partly general and
law-making body (the legislature), imposes partly local)
burdens upon subjects and objects within its ● Situs of Taxation
jurisdiction to raise revenues to carry out the ● The manner of collection method
legitimate objects of government.
Principles of Sound Tax System
levying a tax to finance government
Fiscal Adequacy
expenditures. It is a power inherent to
sovereign states and essential for the The sources of government revenue must be
government's existence sufficient to meet expenditures and other
public needs.
Purpose of Taxation
Theoretical Justice
Primary (Revenue or Fiscal Purpose)
A sound tax system must be based on
taxation aims to provide funds or property to taxpayers' ability to pay.
promote the citizens' general welfare and
protection and fund government activities. Administrative Feasibility

Secondary (Regulatory Purpose) Tax laws must be capable of convenient, just,

and effective administration (free from
Taxation regulates or controls general welfare confusion and uncertainty). Thus, the tax system
promotion, inequality reduction, and should have the merits of simplicity, flexibility,
economic growth. and diversity.
Inherent Power of the State Classification of Taxes
Police Power As to scope
It is the State's power to restrain and regulate 1. National Tax - imposed by the national
the use of liberty and property. It may be government (e.g., income tax, estate tax,
exercised only by the government. The property donor's tax, value-added tax [VAT],
taken in exercising this power is destroyed documentary stamp tax).
because it is intended for a harmful purpose.
2. Local Tax - imposed by local government
Power of Taxation units such as municipal corporations (e.g., real
It is the State's power to defray the necessary estate and local business taxes). The local
expenses of the government government unit's power to tax is based on a
constitutional grant of the enactment of the
Power of Eminent Domain Local Government Code of the Philippines.
Hence, the local government's power to tax is
It is the State's power to acquire private
not inherent.
property for a public purpose upon payment
of just compensation. As to Who Bears the Burden

Scope of the Power of Taxation 1. Direct Tax – It is demanded from the person
who also shoulders the burden of Tax or Tax,
The Supreme Court held that the power of
which the taxpayer cannot shift to another.
Taxation is the most absolute of all powers of
Both the incidence (liability for the payment of
the government. It has the broadest scope of all
the Tax) and the impact or burden of the Tax
the powers of the government because, in the
falls on the same person (e.g., income tax,
absence of limitations, it is considered
estate tax, donor's Tax).
comprehensive, limited, plenary, and supreme
2. Indirect Tax – A tax demanded from one (1)
● The subject or object (person, property,
person with the expectation and intention that
and excises/privileges) to be taxed
he shall indemnify himself at the expense of
● The purpose of the Tax if it is a public
another. These are taxes wherein the incidence
purpose
of or the liability for the payment of the Tax falls

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 INCOME TAXATION PRELIM
on one (1) person, but the burden thereof can be Sources of Tax Laws
shifted or passed on to another person (e.g., 1. Philippine Constitution
VAT, percentage tax, excise tax) 2. Tax Treaties and Conventions with Foreign
Countries
As to the Determination of the Amount 3. The "Tax Code" (RA No. 8424 – National
Internal Revenue Code, as amended by RA
1. Specific – Tax of fixed amount by the head 10963-TRAIN Law; RA11534-CREATE Law],
or number or by some standard of weight or Tariff and Customs Code, and a portion of the
measurement (e.g., the excise tax on cigars and Local Government Code)
4. Statuses and laws like RA 1125 (an act
liquors).
creating the Court of Tax Appeals) and RA 7716
2. Ad valorem – Tax of a fixed proportion of (E-VAT Law)
5. Presidential Decrees and Executive Orders
the value of the property concerning which the 6. Court Decisions
Tax is assessed (e.g., VAT, income tax, donor's 7. Local Tax Ordinances
Tax, and estate tax). 8. Revenue issuances promulgated by the
Department of Finance, such as Revenue
As to Purpose Regulations (RR), Revenue Memorandum
Circulars (RMC), Revenue Memorandum
1. Fiscal/General/Revenue Tax – Levied Circulars (RMCs),
without a specific or predetermined purpose Double Taxation
(e.g., income tax, donor's Tax, and estate tax).
Double Taxation is taxing the same property,
2. Regulatory/Special/Sumptuary Tax – Those person, or activity when it should be taxed once
intended to achieve social or economic goals for the same kind and purpose of the Tax.
(e.g., tariff and specific duties on imports).
Two (2) kinds of Double Taxation:
As to Graduation or Rate
1. Direct Duplicate Taxation - is objectionable
1. Proportional – Tax based on a fixed and prohibited because it violates the
percentage of the property, receipts, or other constitutional provision on uniformity and
bases to be taxed (ad valorem on distilled spirits) equality. It means:
2. Progressive or graduated – As the Tax base ● Taxing twice;
grows, the tax rate increases (e.g., income tax ● By the same taxing authority;
on individual taxpayers). ● Within the same jurisdiction or tax
district;
3. Regressive – The tax rate increases as the
● For the same purpose;
based tax decreases. Although, this type of rate
● In the same year or taxing period; and
is not observed under the Philippine
● Same kind of character as Tax
Taxation.
2. Indirect Duplicate Taxation - extends to all
Essential Elements of Tax
cases with a burden of two (2) or more
It is an enforced Payment of Tax is not pecuniary impositions imposed by different
contribution voluntary payment or
donation taxing authorities.

It is generally payable in it is a financial burden Tax Avoidance vs. Tax Evasion

money payable in cash which must
be in legal tender Evasion or Dodging

It is proportionate payment of taxes should be It is an illegal way of avoiding or minimizing

based on the ability to pay tax liability.
theory or theoretical justice
(use of graduate tax)
Avoidance
It is levied upon persons, property, or the exercise of a It is the legal way to avoid or minimize tax
right or privilege (subjects or objects of Taxation).
liability.
The law-making body of the power of "imposing" a
the State levies it tax is purely a legislative Shifting
function
It transfers the burden from one (1) taxpayer
It is levied for public purposes. to another without violating the law

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INCOME TAXATION PRELIM
Capitalization Non-Resident Citizens (NRC)

It lowers the product's price, provided the 1. A Philippine citizen who establishes his
buyer will shoulder the taxes. physical presence abroad

Transf 2. A Philippine citizen who leaves the country

during the taxable year to reside abroad,
The manufacturer pays the Tax and will not
either as an immigrant or for employment
add Tax to the product's price, fearing the loss
permanently;
of their market.
3. A citizen of the Philippines who works and
Exemption
derives income from abroad and is required to
It is an immunity, privilege, or freedom of a be physically present abroad most of the time
particular person to pay a specific tax. (for 183 days or more)

INDIVIDUAL TAXPAYERS 4. A previously considered non-resident citizen

who arrives in the Philippines at any time
Situs of Taxation during the taxable year to reside permanently
in the Philippines.
Situs of Taxation means "place" of taxation. It
is the State or political unit which has Resident Alien (RA)
jurisdiction to impose a particular tax.
1. An alien present in the Philippines who is not
• The subject matter (person, property, or a mere transient or sojourner. A person who
activity) comes to the Philippines for a definite purpose
• Nature of the tax
• Citizenship 2. An alien who comes to the Philippines for a
• Residence of the taxpayer definite purpose, which, by its nature, would
• Source of income
require an extended stay making his home
• Place of excise, business, or occupation being
taxed temporarily in the Philippines; and

3. An alien who shall come to the Philippines

with no definite intention as to his stay

Non-Resident Alien (NRA)

1. Engaged in trade or business (Section 25

[A], RA 8424-Tax Code)

• An alien who comes to the Philippines

for more than 180 days during the calendar
year
Classification of Individual Taxpayers

Individual taxpayers are natural persons with 2. Not engaged in trade or business – those
income derived from within the territorial NRAs are not included above.
jurisdiction of a taxing authority. Under RA 3. Alien individuals employed by an Offshore
8424, otherwise known as the National Gaming Licensee (OGL) and Service
Internal Revenue Code (NIRC), also known as Providers (under the paragraph of the Tax Code
the Tax Code, [Sec. 25 {G}] as amended by RA 11590.
Resident Citizens (RC)

1. Those who are citizens of the Philippines at

the time of the adoption of the 1987 Philippine
Constitution;

2. Those whose fathers or mothers are citizens

of the Philippines;

3. Those born before January 17, 1973, of

Filipino mothers

4. Those who are naturalized under the law.

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INCOME TAXATION PRELIM
Sources of Taxable Income

Types of Income Taxes

1. Basic Income Tax on regular or ordinary

income

2. Final Withholding Tax on Passive incomes

derived from Philippine sources

3. Capital Gains Tax (CGT) on Sale of Shares

of Stock of closely held domestic corporations Capital Gains Tax (CGT)
4. Capital Gains Tax (CGT) on the Sale of A final tax at the rate of 15% is hereby imposed
Real Properties located in the Philippines upon the net capital gains realized during the
taxable year from the sale, barter, exchange,
Final Withholding Tax (FWT) on Passive
or other disposition of shares of stock in a
Incomes
domestic corporation, except shares sold or
• Applicable only to passive incomes from disposed of through stock exchange
sources within the Philippines.

• It is a tax deducted from the income of the

payee or seller.

• It is the full and final payment of the income

tax liability. Hence, the income subject to this
tax is no longer included in the Income Tax
Return (ITR) of the individual taxpayer subject
to basic income tax under Section 24 (A) of the
Tax Code. Graduated Tax Rate under the TRAIN Law

• It cannot be credited/deducted against the Income Tax (‘18-’22) Tax ‘23-onwards

basic income tax due.
Not over Exempt Exempt
P250,000
• The liability for the payment of the tax is
primarily on the payor as the withholding Over P250,000 20% of the excess 15% of the
agent. but not over over P250,000 excess over
P400,000 P250,000

Over P400,000 P30,000 + 25% in P22,500 +

but not over excess of 20% in excess
P800,000 P400,000 of P400,000

Over P800,000 P130,000 + 30% P102,500 +

but not over in excess of 25% in excess
P2M P800,000 of P800,000

Over P490,000 + 32% P402,500 +

P2,000,000 but in excess of P2M 30% in excess
not over P8M of P2M

Over P2,410,000 + P2,202,500 +

P8,000,000 35% in excess of 35% in excess
P8M of P8M

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Self-Employed and Professionals (SEP) a specified time, whether as payment of
services, interest, or profits from investment.

Valuation of Income

The amount of income recognized is generally

the value received or which the taxpayer has a
right to receive. If the services were rendered at
a stipulated price, in the absence of any
Minimum Wage Earners (MWEs) evidence to the contrary, such price should be
presumed to be the fair market value of the
The term "statutory minimum wage (SMW) compensation received
earner" shall refer to a worker in the private
sector who paid the statutory minimum wage Classification of Income
or to an employee in the public sector with 1. Income as to source:
compensation income of not more than the a. Compensation income
statutory minimum wage in the b. Professional income
non-agricultural sector where they are assigned c. Business income
(Revenue Regulation No. 10-2008). MWEs are d. Other income
exempt from income tax on the following: 2. Income as to territorial source:
a. Income within the Philippines
1. Minimum wage b. Income outside the Philippines
c. Mixed income (partly within and
2. Holiday pay outside)
3. As to taxability:
3. Overtime pay a. Taxable income
• Ordinary or regular income is subject to
4. Night shift differential basic or normal tax, such as the schedular tax
under Section 24(A) of the Tax Code, as
5. Hazard pay amended.
● Reportable in the ITR (Quarterly and
Senior Citizens (SCs) and Persons with Annually, Filing)
Disabilities (PWDs) ● Subject to expanded withholding tax, if
applicable
are subject to income tax in the same manner as ● Tax credits
ordinary individual taxpayers. must file their ● Catch-all or basket of other income
income tax returns, whether from • Certain passive incomes
compensation, if not eligible to substituted ● Subject to final withholding taxes
filing, or otherwise. Likewise, if the aggregate ● Withholding taxes constitute the final
payment of income tax
gross income earned by the SC/PWD does not
● The payor is obliged to withhold and
exceed P250,000, he shall be exempt from remit the corresponding tax
income tax and shall not be required to file an ● No need to include it in the income tax
income tax return. return
● BIR will run after the withholding agent
GROSS INCOME ● Applicable only to certain passive
income derived from sources within the
Gross income means all income from whatever Philippines, such as interest income on
source derived within or outside the bank deposits and royalties
Philippines, whether legal or illegal. The Tax • Capital gains are subject to capital gains
Code does not distinguish legal and illegal taxes, specifically:
income ● Gain on sale of shares of stock of a
domestic corporation sold directly to a
“capital” constitutes the investment that is the buyer.
source of income. Therefore, capital is the ● Sale of real properties classified as
capital assets located in the Philippines.
fund, while income is the flow. Capital is
• Special income is subject to special rates.
wealth, while income is the service of wealth ● Subject to special rates and rules [e.g.,
Philippine Economic Zone Authority
Forms of Income (PEZA) and Board of Investments (BOI)
Income may be realized in any form, whether in entities whose income is either subject
to Income Tax Holiday or 5% special
money, property, services, or indirect corporate income tax as provided under
economic benefit. It also refers to the amount of the Tax Code.
money coming to a person or corporation within

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b. Tax-exempt income Characteristics of Philippine Income Tax
• By constitutional mandate
• By statute (general or special)
• By international comity (e.g., bilateral
agreements, treaties) National tax It is imposed and
collected by the National
Requisites for Income to be Taxable Government throughout
the country.
1. There must be gain
General tax It is levied without a
The gain need not be in cash derived from the
specific or
sale of assets. It may occur through the predetermined purpose.
exchange of property, payment, assumption, revenue from income tax
reduction, or cancellation of the taxpayer’s may be appropriated for
indebtedness (except gifts) or other profit general purposes.
realized from the completion of a transaction.
Excise tax It is imposed on the right
2. The gain must be realized or received or privilege of a person to
receive or earn an
A mere increase in property value without income.
actual realization, either through sale or other
Direct tax It is payable by the
disposition, is not taxable. The realization of
person upon whom it is
income need not take the form of an actual directly imposed by law.
receipt or property by the taxpayer, as it may It cannot be shifted or
occur where there is a constructive receipt of the passed on to others.
income.
Progressive tax. It is based on one’s
doctrine of constructive receipt ability to pay. The rate of
income tax increases as
complements the doctrine of actual receipt as a the tax base increases
test of the realization of income

• Payment is credited to the payee’s account;

or

• Payment is set aside for the payee or

otherwise made available so the payee may draw
upon it during the taxable year if notice of
intention to withdraw has been given without
substantial limitations.

3. The gain must not be excluded by law

from taxation

incomes exempt from tax by law or treaty are

not considered in determining gross income.
Income is recognized in the year it is actually
or constructively received in cash or cash
equivalent.

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Income Tax Systems

Schedular Tax System

the various types/items of income (e.g.,

compensation, business/ professional income)
are classified accordingly. They are accorded
different tax treatments following schedules
characterized by graduated tax rates. Since
these types of income are treated separately,
the allowable deductions shall likewise vary for
each type of income

Global Tax System

is grouped without any distinction as to the

type or nature of the income. After deducting
from expenses and other allowable
deductions, they are subject to a fixed rate tax.

Basic Features of Philippine Income

Taxation

1. It has adopted a comprehensive tax situs

using nationality, residence, and source rules. It
makes citizens and resident aliens taxable on
their income derived from all sources, while
snon-resident aliens are taxed only on their
income derived from within the Philippines.

Domestic corporations are taxed on universal

income, while foreign corporations are taxed
only on income from within the Philippines.

2. The individual income tax system is mainly

progressive in providing a graduated income tax
rate. Generally, corporations are taxed at a flat
rate of either 20% or 25% under the CREATE
Act.

3. It has retained more schedular than global

features concerning individual taxpayers but has
maintained a more global treatment of
corporations.

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