Page 1: Chapter 1 & 2 - Foundations of Philippine Taxation

Chapter 1: Introduction to Taxation

* Definition and Purpose:

* Taxation is the inherent power of the state to impose financial burdens on individuals and
entities within its jurisdiction. It is the lifeblood of the government, enabling it to fund essential
public services.
* Purposes:
* Revenue Generation: The primary purpose, funding public services like infrastructure,
education, and healthcare.
* Regulation: Influencing behavior, such as imposing "sin taxes" on tobacco and alcohol.
* Redistribution: Narrowing income inequality through progressive taxation.
* Protectionism: Tariffs to protect domestic industries from foreign competition.
* Inherent Powers of the State:
* Taxation: The power to levy taxes.
* Police Power: The power to enact laws for public welfare.
* Eminent Domain: The power to take private property for public use with just compensation.
* Taxation is considered the strongest power due to its essential role in government
operations.
* Principles of a Sound Tax System:
* Fiscal Adequacy: Revenue must be sufficient to meet government expenditures, with
flexibility to adjust to economic changes.
* Administrative Feasibility: Tax laws should be clear, enforceable, and minimize compliance
costs for taxpayers and administrative costs for the government.
* Theoretical Justice (Equity):
* Ability-to-pay principle: Tax burden proportional to financial capacity.
* Benefit principle: Those who benefit from government services should pay for them.
* Classifications of Taxes:
* Direct Taxes: The tax burden falls directly on the taxpayer (e.g., income tax, estate tax).
* Indirect Taxes: The tax burden can be shifted to another party (e.g., VAT, excise tax).
* National Taxes: Imposed by the national government (e.g., income tax, VAT).
* Local Taxes: Imposed by local government units (e.g., real property tax, business permits).

Chapter 2: Taxes, Tax Laws, and Tax Administration

* Sources of Tax Laws:

* Constitution: Sets fundamental principles of taxation.
* National Internal Revenue Code (NIRC): The primary tax law, detailing tax rates, rules, and
procedures.
* Revenue Regulations (RR): BIR interpretations and implementations of the NIRC.
* Revenue Memorandum Circulars (RMC): BIR clarifications and guidelines.
* BIR Rulings: Interpretations of tax laws for specific taxpayer situations.
* Jurisprudence: Court decisions that establish legal precedents.
* Role of the Bureau of Internal Revenue (BIR):
* Assessment and collection of national taxes.
* Enforcement of tax laws.
* Issuance of revenue regulations, rulings, and circulars.
* Conducting tax audits and investigations.
* Providing taxpayer assistance and education.
* Tax Legislation:
* Bills originate in the House of Representatives.
* Passage through both houses of Congress.
* Presidential approval.
* Publication in the Official Gazette or a newspaper of general circulation.
* Taxpayer Rights and Responsibilities:
* Rights: Due process, confidentiality, right to information, right to refund.
* Responsibilities: File accurate returns, pay taxes on time, maintain records, cooperate with
BIR audits.
* Tax Avoidance vs. Evasion:
* Avoidance: Legal strategies to minimize tax liability (e.g., tax planning).
* Evasion: Illegal methods to escape tax payment (e.g., underreporting income).
* Tax Assessments:
* Deficiency assessment: BIR determines unpaid taxes.
* Notice of assessment: Formal demand for payment.
* Protest process: Administrative and judicial remedies.

Page 2: Chapter 5 - Final Income Taxation

Chapter 5: Final Income Taxation

* Concept:
* The tax withheld at source is considered the full and final tax.
* Taxpayers are no longer required to include the income in their annual income tax return.
* Subject Income:
* Interest on bank deposits: 20% final tax.
* Dividends from domestic corporations: 10% final tax.
* Royalties: 20% final tax.
* Prizes and winnings: Varies depending on amount.
* Computation and Withholding:
* Specific tax rates apply to different types of income.
* Payors are responsible for withholding and remitting the tax.
* Example: Interest income of 10,000 pesos, 2,000 pesos final tax is withheld.
* Reporting:
* BIR Form 1601F (Final Withholding Tax Remittance Return).
* BIR Form 2307 (Certificate of Final Tax Withheld).
* Final vs. Creditable Withholding Tax:
* Final: No further tax liability.
 * Creditable: Advance payment, can be offset against annual tax due.

Page 3: Chapter 6 - Capital Gains Taxation

Chapter 6: Capital Gains Taxation

* Capital Assets:
* Assets held for investment or personal use.
* Examples: Real property held for investment, shares of stock not held for trading, personal
assets (e.g., jewelry, art).
* Excludes ordinary assets like inventory.
* Computation of Gains and Losses:
* Selling price - basis (cost) = capital gain/loss.
* Real Property and Shares of Stock:
* Real property: 6% of the higher of gross selling price or current fair market value.
* Shares of stock (not traded): 15% of net capital gain.
* Shares of stock (traded through local stock exchange): 0.5% of gross selling price.
* Tax Rates:
* Specific rates are mandated by the NIRC.
* Reporting:
* BIR Form 1707 (Capital Gains Tax Return for Onerous Transfer of Real Property).
* BIR Form 1707A (Capital Gains Tax Return for Sale of Shares of Stock Not Traded Through
the Local Stock Exchange).

Page 4: Chapter 7 - Introduction to Regular Income Taxation

Chapter 7: Introduction to Regular Income Taxation

* Gross vs. Taxable Income:

* Gross income: All income subject to tax, before deductions.
* Taxable income: Gross income minus allowable deductions.
* Taxpayers:
* Individuals: Residents, non-residents, citizens.
* Corporations: Domestic, foreign, resident foreign, non-resident foreign.
* Computation Framework:
* Gross income - allowable deductions = taxable income.
* Taxable income x applicable tax rate = income tax due.
* Tax Tables:
* Progressive tax rates for individuals (graduated rates).
* Fixed tax rate for corporations (25% for domestic corporations).

Page 5: Chapter 9 - Regular Income Taxation - Inclusions in Gross Income

Chapter 9: Regular Income Taxation - Inclusions in Gross Income

* Gross Income:
* All income derived from whatever source, legal or illegal.
* Income Sources:
* Compensation: Salaries, wages, bonuses.
* Business: Sales, service income.
* Professional: Fees, commissions.
* Gains from property: Sale of assets.
* Other: Pensions, annuities, prizes.
* Income Recognition:
* Accrual vs. cash basis.
* Accrual: Income recognized when earned, expenses when incurred.
* Cash: Income recognized when received, expenses when paid.
* Specific Items:
* Fringe benefits: Taxable to the employee, deductible to the employer.
* Prizes/awards: Taxable, subject to specific rules.
* Recovery of bad debts: Taxable if previously deducted.
* Exclusions:
* Gifts, inheritances (subject to estate/donor's tax).
* Life insurance proceeds.
* Certain employee benefits (e.g., de minimis benefits).