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I. GENERAL PRINCIPLES OF TAXATION

A. Definition, Concept and Purpose of Taxation

1) Definition - is the inherent power of the state, acting through the legislature, to impose
and collect revenues to support the government and its recognized objects. Simply stated,
taxation is the power of the State to collect revenues for public purpose. That revenue goes
into a vast number of items, from paying debt, deafening the potential for implementing
certain policies to paying for public services and welfare benefits and the military, etc.

Governments use taxation to encourage or discourage certain economic decisions. For

example, reduction in taxable personal (or household) income by the amount paid as
interest on home mortgage loans results in greater construction activity and generates more
jobs.

2) Concept – it passes a legislative undertaking through the enactment of tax which will be
implemented by the executive branch of the government to raise income from the
inhabitants in order to pay the necessary expenses of the government

3) Purpose –

3.1) Revenue Purposes

3.2) Regulatory Purpose

3.3) Compensatory Purpose

The main purpose of taxation is to accumulate funds for the functioning of the government
machineries. All governments in the world cannot run its administrative office without funds
and it has no such system incorporated in itself to generate profit from its functioning.

One purpose of taxation is to increase in effectiveness and productivity of the nation as

government can implement various socio-economic development projects such as the
construction of roads and bridges, schools, health facilities and provision of social services.

B. Nature and Characteristics of Taxation

1) Nature

 It is inherent power in sovereignty

 Legislative in character

 Subject to constitutional and inherent limitations

 Territorial in Operation

 Subject to Constitutional and Inherent Limitations

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2) Characteristics

2.1) Efficient - A tax system should raise enough revenue such that government projects
can be adequately sponsored, without burdening the economy too much (not particularly
the tax payer), as not to become a disincentive for performance (internal and external
investment, work returns and savings).

2.2) Understandable - The system should not be incomprehensible to the layperson, nor
should it appear unjust or unnecessary complex. This is to minimize discontent and costs.

2.3) Equitable - Taxation should be governed by people's ability to pay, that is, wealthier
individuals or firms with greater incomes should pay more in tax while those with lower
incomes should pay comparatively less.

2.4) Benefit Principle - Those that use a publicly provided service (which is funding
primarily through taxation) should pay for it. However, conflicts in principle may and often
do arise between this and principle 2.

C. Power of Taxation as distinguished from Police Power and Power of Eminent Domain

Point of Comparison Taxation Police Power Eminent Domain

Exercised only by the Exercised only by the Granted also to public service
Authority
gov’t gov’t companies or public utilities
To promote general
To raise revenue to To facilitate the State’s need
Purpose welfare through
support the gov’t of property for public use
regulations
All persons, property, All persons, property, Only upon a particular
Scope
rights and privileges rights and privileges property

Taxes paid become No transfer of title; at

Transfer is affected in favor of
Effect part of the public most, there is restraint or
the State
funds injurious use of property

Limited to the cost of

Amount of exaction
No exaction; but private
regulation, issuance of
No limit property is taken by the State
the license or
for public purposes
surveillance

No special or direct
No direct benefit is
benefit is received by A direct benefit results in the
received; a healthy
Benefits received the taxpayer; merely form of just compensation to
economic standard of
general benefit of the property owner
society is attained
protection

Contracts may not be Contracts may be

Non-impairment of contracts Contracts may be impaired
impaired impaired

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D. Theory and Basis of Taxation

1) Theory
 The existence of the government is a necessity.
 The government cannot continue without a means to pay its expenses.
 The government has the rights to compel its citizens and property within its limits to
contribute.
2) Basis
2.1) Necessity
2.2) Reciprocal Duties
 Taxation is based on the reciprocal duties of protection and support between the
government and its people.
 Government receives taxes from the people which is used to perform functions of
government and other benefits.
 Benefit-received theory

E. Principles of a Sound Tax System

 Fiscal adequacy – the source of government revenue should be efficient to demand the
needs of public expenditure; creating new taxes or new tax machinery or by merely
changing the rates applicable to existing taxes
 Equality or theoretical justice – the tax burden should be proportionate to the taxpayer’s
ability to pay; ability-to-pay principle
 Administrative feasibility – the tax laws should be capable of convenient, just and effective
administration
Each tax should be:
- clear & plain to the taxpayer
- capable of uniform enforcement
- convenient as to time, place and manner of payment
- not unduly burdensome upon or discouraging to business activity

F. Scope and Limitations of Taxation

1) Inherent limitations - restrictions on the power exists from the very nature of the power of
taxation itself
 Requirement that levy must be for a public purpose
 Non-delegation of the legislative power to tax, except:
- Delegation to the President
- Delegation to local governments
- Delegation to administrative bodies
 Exemption from taxation of government entities
 International comity
 Territorial jurisdiction

2) Constitutional limitations - restrictions in the exercise of the power of the taxation as

expressly provided in the Philippine Constitution

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 Due process
 Equal protection of the laws
 Rule of uniformity and equity in taxation
 Non-imprisonment for non-payment of poll tax
 Non-impairment of the obligations and contracts
 Non-infringement of religious freedom
 No appropriation for religious purposes
 Exemption of religious, charitable or educational entities, non-profit cemeteries, and
churches from taxation
 Exemption of revenues and assets of non-stock, non-profit educational institutions and
donations for educational purposes from taxation
 Concurrence by a majority of all members of the congress for the passage of a law
granting any tax exemption
 Power of the President to veto any particular
item or items in a revenue or tariff bill
 Non-impairment of the jurisdiction of the Supreme Court in tax cases

G. Situs of Taxation
Situs is a Latin term which means “situation”, “location”, or “place.” In short, its literal meaning
refers to a place taxation. In real property, the rules are tax is imposed to a place or state where
the property is located and subject to be tax has a jurisdiction over the said property.

It gives us an idea that the place or state (city, municipality or province, wherein your property
is located has a jurisdiction in imposing the payment for property tax.

H. Stages or Aspects of Taxation

 Levy – deals with the provisions of law which determines:
- the person or property to be taxed
- the sum or sums to be raised
- the rate of the tax
- the time and manner of levying, receiving and collection the tax
 Assessment and Collections – constituted of the provisions of law which prescribe the
manner of enforcing the obligation on the part of those taxes to pay the demand thus
created
 Payment (Incidence of Taxation) – this is the act of compliance by the taxpayer including
whatever remedies are available to him under the law

I. Definition, Nature and Characteristics of Taxes

1) Definition - Taxes are enforced proportional contributions from persons and property, levied
by the state by virtue of its sovereignty for the support of the government and for all its public
needs.
2) Nature –
3) Characteristics
1) Enforced contributions

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2) Generally payable in money

3) Proportional in character, since taxes are based on one’s ability to pay
4) Levied on persons, property, or exercise of a right or privilege
5) Levied by the State having jurisdiction
6) Levied by the legislature
7) Levied for a public purpose
8) Paid at regular periods or intervals

J. Requisites of a Valid Tax

1) The tax should be within the jurisdiction of the taxing authority.
2) It must be for a public purpose.
3) The rule of taxation must be uniform.
4) It guarantees against injustice to individuals, especially by way of notice and opportunity to
be heard be provided.
5) It must not impinge on the inherent and Constitutional limitations on the power of taxation.

K. Tax as distinguished from other forms of exactions

1) Tariff - A tax is an all-embracing term to include various kinds of enforced contributions
imposed upon persons for the attainment of public purposes, while a tariff should be
understood to mean a kind of tax imposed on articles which are traded internationally.
2) Toll - Toll is a sum of money for the use of something, generally applied to the consideration
which is paid for the use of a road, bridge or the like, of a public nature.
A toll is a demand of proprietorship, is paid for the use of another’s property and may be
imposed by the government or private individuals or entities; while a tax is a demand of
sovereignty, is paid for the support of the government and may be imposed only by the
State.
3) License fee - Permit or License Fee is a charge imposed under the police power for purposes
or regulation.
License fee is imposed for regulation and involves the exercise of police power while tax is
levied for revenue and involves the exercise of the taxing power. Failure to pay a license
gee makes an act or a business illegal, while failure to pay a tax does not necessarily make
an act or a business illegal.
4) Special assessment - Special Assessment is an enforced proportional contribution from
owners of lands for special benefits resulting from public improvements.
Special Assessment is levied only on land, is not a personal liability of the person assessed,
is based wholly on benefits and is exceptional both as to time and place. Tax is levied on
persons, property, or exercise of privilege, which may be made a personal liability of the
person assessed, is based on necessity and is of general application.

5) Debt - Debt is generally based on contract, is assignable and may be paid in kind while a
tax is based on law, cannot generally be assigned and is generally payable in money. A
person cannot be imprisoned for non-payment of debt while he can be for non-payment of
tax except poll tax.

L. Kinds of Taxes

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 Capital Gains Tax - is a tax imposed on the gains presumed to have been realized by the
seller from the sale, exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of conditional sale.
 Documentary Stamp Tax - is a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or
property incident thereto.
 Donor’s Tax - is a tax on a donation or gift and is imposed on the gratuitous transfer of
property between two or more persons who are living at the time of the transfer.
 Estate tax - is a tax on the right of the deceased person to transmit his/her estate to his/her
lawful heirs and beneficiaries at the time of death and on certain transfers which are made
by law as equivalent to testamentary disposition.
 Income Tax - is a tax on all yearly profits arising from property, profession, trades or offices
or as a tax on a person’s income, emoluments, profits and the like.
 Percentage Tax - is a business tax imposed on persons or entities who sell or lease goods,
properties or services in the course of trade or business whose gross annual sales or
receipts do not exceed P550,000 and are not VAT-registered.
 Value-Added Tax - is a business tax imposed and collected from the seller in the course
of trade or business on every sale of properties (real or personal) lease of goods or
properties (real or personal) or vendors of services. It is an indirect tax; thus, it can be
passed on to the buyer.
 Withholding Tax on Compensation - is the tax withheld from individuals receiving purely
compensation income.
 Expanded Withholding Tax - is a kind of withholding tax which is prescribed only for certain
payors and is creditable against the income tax due of the payee for the taxable quarter
year.
 Final Withholding Tax - is a kind of withholding tax which is prescribed only for certain
payors and is not creditable against the income tax due of the payee for the taxable year.
Income Tax withheld constitutes the full and final payment of the Income Tax due from the
payee on the said income.
 Withholding Tax on Government Money Payments - is the withholding tax withheld
by government offices and instrumentalities, including government-owned or -
controlled corporations and local government units, before making any payments
to private individuals, corporations, partnerships and/or associations.

M. Sources of Tax Laws

The basic source of Philippine tax law is the National Internal Revenue Law, which codifies all
tax provisions, the latest of which is embodied in Republic Act No. 8424 (“The Tax Reform Act
of 1997”). It amended previous national internal revenue codes, which was approved on
December 11, 1997. A copy of the Tax Reform Act of 1997, which took effect on January 1,
1998.
The NIRC establishes basic taxes the government may levy such as personal income taxes,
corporate taxes, sales taxes, excise taxes and estate taxes. It also codifies the tax collection
process and procedures for appeals.

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N. Construction and Interpretation of

1) Tax Laws
2) Tax Exemptions and Exclusions
3) Tax Rules and Regulations
4) Penal provisions of Tax Laws
5) Non-retroactive application to Taxpayers

O. Doctrines in Taxation
1) Prospectivity of Tax Laws - As a general rule, tax laws are prospective in operation, unless
the legislative intent that statute should operate retrospectively is distinctly expressed or
necessarily implied.
Where a statute amending a tax law is silent as to whether it operates retroactively, the
amendment will not be given a retroactive effect so as to subject to tax past transactions
not subject to tax under the original act. Every case of doubt must be resolved against its
retroactive effect.

2) Imprescriptibility of Taxes - Considering that taxes are the lifeblood of the government, it
may be stated that the assessment and collection of taxes are imprescriptible unless
otherwise provided by the tax law itself. Thus, if the tax law itself is silent on prescription,
the right of the government to assess and collect taxes will not prescribe.
In criminal cases involving tax offenses punishable under the Tax Code, it would indeed
seem that tax cases are practically imprescriptible for as long as the period from the
discovery and institution of judicial proceedings for its investigation and punishment, up to
the filing of the information in court does not exceed five (5) years.
As the provision of the law stands in the statute book (and to this day it has remained
unchanged), prescription is a matter of defense and the information does not need to
anticipate and meet it. The defendant could, at most, object to the introduction of evidence
to defeat his claim of prescription. Anyway, the law says that prescription begins to run from
..." the institution of judicial proceedings for its ... punishment."
Unless amended by the legislature, this provision stays in the Tax Code as it was written
during the days of the Commonwealth. And as it is, must be applied regardless of its
apparent one-sidedness in favor of the Government. In criminal cases, statutes of limitations
are acts of grace, a surrendering by the sovereign of its right to prosecute. They receive a
strict construction in favor of the Government and limitations in such cases will not be
presumed in the absence of clear legislation.

3) Double Taxation – means taxing the same property/person/activity twice when it should be
taxed only once; that is, taxing the same property/person/activity twice by the same
jurisdiction, during the same taxing period for the same purpose and for the same kind of
tax by the same taxing authority when it should only be taxed but once.
 Indirect Duplicate Taxation – Double taxation in its broad sense. It extends to all cases
in which there is a burden of two or more pecuniary impositions. It is usually allowed as
long as there is no violation on the Constitution.

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 Direct Duplicate Taxation – Double Taxation in its strict sense. It is prohibited because
it comprises an imposition of the same tax on the same property for the same purpose
by the same state during the same taxing period. Violates the constitutional provision
of uniformity and equal protection, as well as the principle that tax must not be
excessive, unreasonable and inequitable. Such taxation should, whenever and
wherever possible, be avoided to prevent injustice or unfairness.

4) Power to Tax involves Power to Destroy – the Power of Taxation is sometimes viewed as
the power to destroy in the sense that a lawful tax cannot be defeated just because its
exercise would be destructive or would bring about insolvency to a taxpayer.
The principle implies that “an imposition of a lawful regulatory taxes and would be
destructive to the taxpayers and business establishments because the government can
compel payment of tax and forfeiture of property through the exercise police power.”

5) Escape from Taxation – the ways by which a taxpayer could escape tax may be through
Tax Evasion and Tax Avoidance.
a) Shifting of Tax Burden – the transfer of tax burden to another.
1) Forward Shifting – the transfer of tax burden from the producer to distributor until it
finally reaches the ultimate purchasers or consumers.
2) Backward Shifting – the reverse of forward shifting. For example, the manufacturer
has agreed to buy the supplier’s product only if the price is reduced by the amount of
the tax, thus allowing the price increase.
3) Onward Shifting – tax burden is shifted twice or more either forwards or backward.
b) Tax Avoidance – The act of totally reducing or escaping payment of taxes through
legally permissible means.
1) Selling shares of stock through a stock exchange to avail of the lower tax rates
2) Estate planning within the means sanctioned by the Tax Code has been held to be one
of permissible tax minimization
Forms:
 shifting
 capitalization – backward shifting
 transformation
 exemption
c) Tax Evasion – The taxpayer uses unlawful means to evade or lessen the payment
of tax. This form of tax dodging is prohibited and therefore subject to civil or criminal
penalties.

Examples:

1) non—inclusion of sales

2) deliberate fabrication of expenses

3) forming an artificial person to evade taxation or to deliberately reduce taxable income

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6) Exemption from Taxation – this denotes a grant of express or implied immunity, to a

particular person, corporations or to persons, corporations, of a particular class, from a tax
upon property or an exercise which persons and corporations generally within the same
taxing district are obliged to pay. Tax exemptions are generally granted on the basis of a)
reciprocity, b) public policy and c) contracts.

Tax exemptions are governed by the ff. principles:

1) They are not presumed

2) When granted, they are strictly construed against taxpayer

3) They are highly disfavored and may almost be said “to be directly contrary to the
intention of tax laws.”

7) Doctrine of Equitable Recoupment – this doctrine of law states that “a tax claimed for refund,
which is prevented by prescription may be allowed to be used as payment for unsettled tax
liabilities if both taxes arise from the same transaction in which overpayment and
underpayment is due. However, the Supreme Court rejected the doctrine because such
doctrine may lead to the non-observance of the prescriptive periods set by the law.

8) Compensation and Set-off – the doctrine states that taxes are not subject to set-off or legal
compensation because the government and the taxpayer are not mutual creditor and debtor
to each other. A person cannot refuse to pay tax on the basis that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax cannot
await the results of a lawsuit against the government.

9) Compromise and Tax Amnesty – provides that compromises are generally allowed and
enforceable when the subject matter thereof is not prohibited from being compromised and
the person entering such compromise is duly authorized to do so.

10) Taxpayer’s Suit – a taxpayer suit is effected through court proceedings and could only be
allowed if the act involves a direct illegal disbursement of public funds derived from taxation.

a) Nature and Concept

b) As distinguished from a citizen’s suit

c) Requisites of a taxpayer’s suit challenging the constitutionality of a tax measure or act

of a taxing authority; concept of locus standi, doctrine of transcendental importance and
ripeness for judicial determination

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II. NATIONAL TAXATION (NATIONAL INTERNAL REVENUE CODE OF 1997, as amended.

EXCLUDE amendments introduced by R.A. No. 10963 or the Tax Reform for Acceleration
and Inclusion Law)

A. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a) Authority of the Secretary of Finance to promulgate rules and regulations - The

Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the provisions of this Code.

b) Specific provisions to be contained in rules and regulations

- The rules and regulations of the Bureau of Internal Revenue shall, among other things,
contain provisions specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Director shall canvass their
respective Revenue Regions for the purpose of discovering persons and property liable to
national internal revenue taxes, and the manner in which their lists and records of taxable
persons and taxable objects shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods subject to an excise tax,
and the manner in which the labelling, branding or marking shall be effected;

(c) The conditions under which and the manner in which goods intended for export, which
if not exported would be subject to an excise tax, shall be labelled, branded or marked;

(d) The conditions to be observed by revenue officers respecting the institutions and
conduct of legal actions and proceedings;

(e) The conditions under which goods intended for storage in bonded warehouses shall
be conveyed thither, their manner of storage and the method of keeping the entries and
records in connection therewith, also the books to be kept by Revenue Inspectors and the
reports to be made by them in connection with their supervision of such houses;

(f) The conditions under which denatured alcohol may be removed and dealt in, the
character and quantity of the denaturing material to be used, the manner in which the
process of denaturing shall be effected, so as to render the alcohol suitably denatured and
unfit for oral intake, the bonds to be given, the books and records to be kept, the entries
to be made therein, the reports to be made to the Commissioner, and the signs to be
displayed in the business or by the person for whom such denaturing is done or by whom,
such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the instrument, document
or object to which revenue stamps shall be affixed, the mode of cancellation of the same,
the manner in which the proper books, records, invoices and other papers shall be kept
and entries therein made by the person subject to the tax, as well as the manner in which
licenses and stamps shall be gathered up and returned after serving their purposes;

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(h) The conditions to be observed by revenue officers respecting the enforcement of Title
III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on
gifts and such other rules and regulations which the Commissioner may consider suitable
for the enforcement of the said Title III;

(i) The manner in which tax returns, information and reports shall be prepared and reported
and the tax collected and paid, as well as the conditions under which evidence of payment
shall be furnished the taxpayer, and the preparation and publication of tax statistics;

(j) The manner in which internal revenue taxes, such as income tax, including withholding
tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and
documentary stamp taxes shall be paid through the collection officers of the Bureau of
Internal Revenue or through duly authorized agent banks which are hereby deputized to
receive payments of such taxes and the returns, papers and statements that may be filed
by the taxpayers in connection with the payment of the tax: Provided, however, That
notwithstanding the other provisions of this Code prescribing the place of filing of returns
and payment of taxes, the Commissioner may, by rules and regulations, require that the
tax returns, papers and statements that may be filed by the taxpayers in connection with
the payment of the tax. Provided, however, That notwithstanding the other provisions of
this Code prescribing the place of filing of returns and payment of taxes, the Commissioner
may, by rules and regulations require that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid, respectively, through collection officers or
through duly authorized agent banks: Provided, further, That the Commissioner can
exercise this power within six (6) years from the approval of Republic Act No. 7646 or the
completion of its comprehensive computerization program, whichever comes earlier:
Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may
be designated for the filing of tax returns and payment of taxes by said large taxpayers.

For the purpose of this Section, "large taxpayer" means a taxpayer who satisfies any of the
following criteria;

(1) Value-Added Tax (VAT). - Business establishment with VAT paid or payable of at least One
hundred thousand pesos (P100,000) for any quarter of the preceding taxable year;

(2) Excise Tax. - Business establishment with excise tax paid or payable of at least One million
pesos (P1,000,000) for the preceding taxable year;

(3) Corporate Income Tax. - Business establishment with annual income tax paid or payable of at
least One million pesos (P1,000,000) for the preceding taxable year; and

(4) Withholding Tax. - Business establishment with withholding tax payment or remittance of at
least One million pesos (P1,000,000) for the preceding taxable year.

Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner,
may modify or add to the above criteria for determining a large taxpayer after considering such
factors as inflation, volume of business, wage and employment levels, and similar economic
factors.

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The penalties prescribed under Section 248 of this Code shall be imposed on any violation
of the rules and regulations issued by the Secretary of Finance, upon recommendation
of the Commissioner, prescribing the place of filing of returns and payments of taxes
by large taxpayers.

2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue

a) Powers and duties of the Bureau of Internal Revenue - The Bureau of Internal Revenue
shall be under the supervision and control of the Department of Finance and its powers and
duties shall comprehend the assessment and collection of all national internal revenue taxes,
fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor by the Court of
Tax Appeals and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to
it by this Code or other laws.

b) Power of the Commissioner to interpret tax laws and to decide tax cases - the power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

c) Non-retroactivity of rulings - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers, except in the following
cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;(b) Where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which
the ruling is based; or(c) Where the taxpayer acted in bad faith.

B. Income Tax

1. Definition, Nature and General Principles

1) Definition - Income Tax is a tax on a person's income, emoluments, profits arising from
property, practice of profession, conduct of trade or business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any,
authorized for such types of income, by the Tax Code, as amended, or other special laws.

2) Nature

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1. It is a national tax or one imposed by the national government under the National Internal
Revenue Code;

2. It is an excise tax because it is imposed on the right to generate or receive income through
labor, capital and others, and not or persons or property;

3. It is a direct tax since it is imposed on the person who is personally bound to pay the tax, a
burden he cannot shift to another

4. Income tax is a general tax because it is primarily intended to provide large amounts of
revenue to the government and secondarily to offset the regressive sales and consumption
taxes, and to mitigate the evil of inequalities in the distribution of wealth;

5. It is progressive because the tax rate increases as the tax base increases.

3) General Principles

1. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;

2. A non-resident citizen is taxable only on income derived from sources within the
Philippines;

3. An individual citizen who is working and deriving income abroad as an OFW is taxable only
on income from sources within the Philippines Provided, that the OFW, who is a
citizen of the Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively in international
trade shall be treated as an OFW.

4. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and

6. A foreign corporation whether engaged or not in trade or business in the Philippines is

taxable only on the income derived from sources within the Philippines.

a) Income Tax systems – Global, Schedular and Semi-schedular or Semi-Global Taxpayer’s

income

a. Schedular System - Different types of incomes are subject to different sets of

graduated or flat income tax rates. Applicable tax rates will depend on the
classification of the taxable income and the basis could be gross income
(without deductions) or net income

The Recipient of the income files separate regular income tax return or capital gains
tax return except for passive income subject to final withholding tax.

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Reason for the exception: It is the withholding agent who is responsible for filing the
withholding tax return and payment of income tax to the BIR on such passive income
of the investor.

b. Global System – The taxpayer is required to lump up all items of income earned during
a taxable period and pay a single set of income tax rates on these different items of
income.

Net taxable income is subject to the graduated income tax rates in case of individuals
and to corporate income tax rates in case of corporations. It does not matter whether
the income received by the taxpayer is classified as compensation income, business
professional income, passive investment income, capital gain or other income. All
items of gross income as well as deductions and personal and additional exemptions
are reported in ONE income tax return to be filed at least annually and the applicable
tax rate is applied on the tax base.

c. Semi-schedular or semi Global tax system – Under this system, compensation income,
business or professional income, capital gain and passive income not subject to FWIT
(final withholding income tax) and other income are added together to arrive at the
gross income. Obtain net taxable income by subtracting from the gross income the
sum of allowable deductions from business or professional income, capital gain,
passive income not subject to FWIT in the case of corporations and personal and
additional exemption in case of individuals and subject such taxable income to one
set of graduated tax rates (individual) or normal corporate income tax rate
(corporation)

b) Features of the Philippine Income Tax Law

1. Income tax is a direct tax because the tax burden is borne by the income recipient
upon whom the tax is imposed.

2. Income tax is a progressive tax since the tax base increases as the tax rate increases.

3. The Philippines has adopted the most comprehensive system of imposing income tax
by adopting the citizenship principle, resident principle and the source principle.

4. The Philippines follows the semi-schedular or semi-global system of income taxation

c) Criteria in imposing Philippine income tax

1. Citizenship or nationality principle – A citizen of the Philippines is subject to Philippine

income tax (a) on his worldwide income, if he resides in the Philippines (b) only on his
Philippine source income, if he qualifies as a non-resident citizen where his foreign-
source income shall be tax-exempt.

2. Residence or domicile principle – An alien is subject to Philippine income tax

because of his residence in the Philippines. A resident alien is liable to pay Philippine
income tax only from his income from Philippine sources but is tax-exempt from foreign-
source income

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3. Source of income principle – An alien is subject to Philippine income tax because he

derives income from sources within the Philippines. Thus, a non-resident alien or non-
resident foreign corporation is liable to pay Philippine income tax on income from
sources within the Philippines

d) Types of Philippine income taxes

 Personal income tax on individuals

 Regular corporate income tax on corporations
 Minimum corporate income tax on corporations
 Capital gains tax on sale of shares of stocks of domestic corporation by a person who
is not a dealer in securities
 Capital gains tax on sale of real property classified as a capital asset by a person who
is not a real estate dealer or developer; if it is classified as ordinary asset – subject to
ordinary income tax
 Tax on passive investment income, such as interest, dividend and royalty
 Fringe benefits tax
 Branch profit remittance tax on Philippine branches of foreign corporations
 Tax on improperly accumulated earnings tax of corporations
 Final withholding taxes on certain income from sources within the Philippines payable
to resident or nonresident persons

e) Taxable period

The accounting period must follow a 12-month fiscal period but may or may not follow the
calendar year. Most Philippine companies have a fiscal year that ends in December or
March.

f) Kinds of taxpayers

1) Self-employed

“Single Proprietors are persons engaged in trade or business not including

performance of services as employee.”

The form to use when applying for this type of taxpayer is the BIR Form 1901. This
means if you are starting your own business as a Sole Proprietorship (registered with
the DTI), this should be your taxpayer type.

2) Professionals

“Professionals are self-employed individuals in the practice of profession or calling not

including performance of services as employee. Examples of these are those
engaged in computer, creative or performing arts, engineering, health, law, social
science, teaching, personnel and human resource development, finance and sales,
writing and journalism and others.”

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Just like for self-employed, the form to use when applying for this type of taxpayer is
the BIR Form 1901. Freelancers fall under this category. Those with PRC licenses fall
under this category. Consultants fall under this category.

3) Mixed-Income

“Mixed Income Earners are persons who are any two of the following: Professionals,
Single Proprietors, and Local Employees.

For instance, a teacher who is employed in a school, offers tutorial services for a fee,
and operates a retail sales business on the side should register as a local employee,
professional, and single proprietor all at the same time.”

As the name implies, it’s a type of taxpayer that means you’re registered to at least
two other types. From our experience, this is usually the people who are still employed
(corporate) but also have their own business (food stall).

4) Employees (aka Purely Compensation Earner)

“Local Employees are citizens of the Philippines who work and derive income from an
employer based within the Philippines.”

Majority of Filipinos fall under this. If you are a fresh graduate and you are completing
your pre-employment requirements, this is your taxpayer type.

Those entering the workforce should keep this in mind.

The form to use for this type of registration is the BIR Form 1902.

5) Under E.O. 98

“Persons Registering Under E.O. 98 are those individuals who are securing TIN to be
able to transact with other government offices such as LTO, NBI, DFA, and others.”

This is the least common type. And for 99% of us, we don’t need to worry about this.

2. Income Tax

a) Definition, Nature and General principles

b) Income

(1) Definition and nature

Income – is a flow of service rendered by capital by the payment of money from such
capital or any benefit rendered by a fund of capital through a period of time. Refers to
all gains, profits or income derived from any source such as services whether
constituting a demandable debt or not or from the use of capital.

1) In the absence of constitutional prohibition, a state legislature has the power to

impose tax upon income.

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2) Income tax has been referred to as a tax on the yearly profits arising from
property, professions, trades or offices, or a tax on a person’s income, emoluments,
profits, and the like.

3) Income, for tax purposes, means all wealth which flows into the taxpayer other than
as mere return of capital.

(2) When income is taxable

Taxable income means the pertinent items of gross income specified in the Tax Code
as amended, less the deductions, if any, authorized for such types of income, by the
Tax Code or other special laws.

Categories of taxable income:

 Passive investment income subject to final tax – no longer included in the taxpayer’s
taxable income. Example: royalties, interest income from Philippine currency bank
deposits
 Compensation income - income from personal services under employer- employee
relationship; allowable deductions are only premiums paid for health and hospitalization
insurance. Tax is computed on gross income in case of individuals. (Note difference in
gross income in indiv. and gross income perse).
Requisites:
b.1 it must arise from personal services underand employer employee relationship.
b.2 It is in the nature of income to the recipient employee. Example: Directors fee deemed
by law as compensation income;
 Non- compensation income –any other income that is not derived from personal services
or not related to an employer- employee relationship and is subject to tax on net income
basis. It includes: Capital gain – gains from dealingsin capital assets

i. Existence of income

- the value received in the form of cash or its equivalent as a result of rendition of service
or earnings in excess of capital invested. Example: cancellation of a taxpayer’s
indebtedness as a remuneration for service rendered is an income.

ii. Realization of income

- realization of gain may take the form of actual receipt of cash or may occur as a
constructive receipt of income. Mere increase in the value of property is not income but
merely an unrealized increase in invested capital.

iii. Recognition of income

iv. Cash method of accounting versus Accrual method of accounting

(3) Tests in determining whether income is earned for tax purposes

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i. Realization test - no taxable income until there is a separation from capital of something
of exchangeable value (money), thereby supplying the realization or transmutation
which would result in the receipt of income.

ii. Claim of right doctrine or doctrine of ownership, command or control - a taxable gain is
conditioned upon the presence of a claim of right to the alleged gain and the absence
of a definite unconditional obligation to return or repay.

iii. Economic benefit test, doctrine of proprietary interest - any economic benefit to the
employee that increases his net worth whatever may have been the mode by which it
is effected is taxable

iv. Severance test - income is recognized when there is separation of something which is
of exchangeable value

v. All events test

Requisites:

1) the right to income or liability be fixed; and

2) the amount of such income or liability be determined with reasonable accuracy.

c) Classification of income

Range of Monthly
Family Incomes (for a Size of Class (i.e.
Income Class Definition
Family Size of 5 Number of Households)
members)
Per capita income less
Less than PHP 7,890 per
Poor than official poverty 4.2 million
month
threshold
Per capita incomes
Between PHP 7,890 to
Low income (but not poor) between the poverty line 7.1 million
PHP 15,780/month
and twice the poverty line
Per capita incomes
between twice the poverty Between PHP 15,780 to
Lower middle income 5.8 million
line and four times the PHP 31,560 per month
poverty line
Per capita incomes
between four times the Between PHP 31,560 to
Middle class 3.6 million
poverty line and ten times PHP 78,900 per month
the poverty line
Per capita incomes
between ten times the Between PHP 78,900 to
Upper middle income 470 thousand
poverty line and fifteen PHP 118,350 per month
times the poverty line

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Per capita incomes

Upper income (but not between fifteen times the Between PHP 118,350 to
170 thousand
rich) poverty line and twenty PHP 157,800
times the poverty line
Per capita incomes at
Rich least equal to twenty At least PHP 157,800 150 thousand
times the poverty line

d) Situs of Income Taxation - Situs of taxation literally means place of taxation.

The general rule is that the taxing power cannot go beyond the territorial limits of the taxing
authority.

Basically, the state where the subject to be taxed has a situs may rightfully levy and collect the
tax. and the situs is necessarily in the state which has jurisdiction or which exercises dominion
over the subject in question.

Income tax may properly be exacted from persons who are residents or citizens in the taxing
jurisdiction and even from those who are neither residents nor citizens, provided the income is
derived from sources within the taxing state. Thus, resident citizens and domestic corporations
are taxable on all income derived from sources within or without the Philippines.

A nonresident citizen is taxable on all income derived from sources within the Philippines.

An alien, whether a resident or not of the Philippines, and a foreign corporation, whether
engaged or not in trade or business in the Philippines are also taxable only from sources within
the Philippines.

3. Gross Income

a) Definition

Gross income means all income derived from whatever source.

b) Concept of income from whatever source derived

- means all income derived from whatever source including but not limited to the following
items:

a. Compensation for services in whatever form paid including but not limited to fees,
salaries, wages, commissions and other similar items

b. Conduct of trade or business or the exercise of a profession

c. Gains derived from the dealings in property

d. Interests

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e. Rents

f. Royalties

g. Dividends

h. Annuities

i. Prizes and winnings

j. Pensions

k. Partner’s distributive share from the net income of the general professional
partnership

c) Gross income vis-à-vis net income vis-à-vis taxable income

d) Sources of income subject to tax

1) Services: Place of performance of the service

 If the service is performed in the Philippines, the income is treated as from sources within
the Philippines
 It includes compensation for labor or personal services performed within the Philippines,
regardless of the residence of the payor, of the place in which the contract for service was
made, or of the place of payment
 Compensation is either in cash or in kind

2) Interest Income: Residence of the debtor

 If the obligor or debtor (corporation or otherwise) is a resident of the Philippines, the

interest income is treated as income from within the Philippines. It does not matter whether
the loan agreement is signed in the Philippines or abroad or the loan proceeds will be
used in a project inside or outside the country

3) Dividends: Residence of the corporation paying dividend

 Dividends received from a domestic corporation or from a foreign corporation are treated
as income from sources within the Philippines, unless less than 50% of the gross income
of the foreign corporation for the three-year period preceding the declaration of such
dividends was derived from sources within the Philippines, in which case, only the amount
which bears the same ratio to such dividends as the gross income of the corporation for
such period derived from sources within the Philippines bears to its gross income from all
sources shall be treated as income from sources within the Philippines.

4) Rents and Royalties: Location of the property or interest in such property

 If the property or interest is located or used in the Philippines, the gain or income is treated
as income from sources within the Philippines

5) Sale of property

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a. Real Property: Location of real property

 If the real property sold is located within the Philippines, the gain is considered as income
from the Philippines

b. Personal Property

 Personal property produced (in whole or in part) by the taxpayer within the Philippines and
sold without the Philippines, or produced without and sold within
 Any gain, profit or income shall be treated as derived partly from sources within and partly
from sources without the Philippines
 Purchase of personal property within and its sale without the Philippines, or purchase of
personal property without and its sale within the Philippines
 Any gain, profit or income shall be treated as derived entirely from sources within the
country in which sold. Accordingly, if the goods are shipped in a foreign port under “Free-
on-Board (FOB) shipping point” arrangement, title to the good is transferred at the foreign
port and any gain from the sale of such goods to a Philippine importer shall be treated as
income from sources outside the Philippines.

e) Classification of income subject to tax

(1) Compensation income - This income is taxed at progressive rates on gross income after
deduction of personal and additional exemptions but without deductions for expenses.

(2) Fringe benefits – is a special form of benefits you provide your employees on in addition to
their salaries and wages. It means any good, service or other benefit furnished or granted in
cash or in kind by an employer – corporate or sole proprietor, to an individual employee.

(3) Professional income - derive their income from the practice of their profession. This includes
lawyers and other persons who are registered with the Professional Regulation Commission
such as doctors, dentists, certified public accountants and others similarly situated. The term
"professional" also refers to one who pursues an art and makes his living therefrom such as
artists, athletes and others similarly situated.

(4) Income from business - income from profession, consist of business and/or trade income,
fees from the exercise of profession, gains from sale or exchange of assets, commissions
rental income, and other incomes not covered by compensation income.

(5) Income from dealings in property - It refers to the disposal through sale or exchange of a)
ordinary assets or capital assets. Imposed on the gains presumed to have been realized the
seller from the sales exchange or other disposition of capital assets located in the Philippines
including pacto de retro sales and other forms of conditional sale.

(6) Passive investment income - consist of interest from foreign and Philippine currency bank
deposits (including yields and other monetary benefits from deposit substitutes and trust fund
and similar arrangements), royalties, prizes and other winnings, and dividends. The other
sources of income include capital gains from sales of shares of stock, sales of real property,
informer’s rewards, etc.

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(7) Annuities, proceeds from life insurance or other types of insurance - annuities act as a
safety net, usually for those in their senior years, by providing a guaranteed stream of income
for life.

(8) Prizes and awards - from sources within the Philippines - 20%. However, prizes amounting
to P10,000 or less shall be declared as part of the income subject to the schedular tax rates.

---- WALA PA KO ANSWER STARTING HERE TIL END ----

(9) Pensions, retirement benefit or separation pay

(10) Income from any source whatever

f) Exclusions from gross income

(1) Rationale for the exclusions

(2) Taxpayers who may avail of the exclusions

(3) Exclusions distinguished from deductions and tax credits

(4) Exclusions under the Constitution

(5) Exclusions under the Tax Code

(6) Exclusions under special laws

4. Deductions from Gross Income

a) General rules

b) Return of capital

c) Itemized deductions

d) Optional Standard Deduction

e) Personal and Additional Exemptions

f) Items not deductible

5. Income Tax on Individuals

a) Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens

(1) Coverage – Income from all sources within and without the Philippines; exceptions

(2) Taxation on compensation income

(i) Inclusions – monetary and non-monetary compensation

(ii) Exclusions – Fringe benefits subject to tax; De Minimis benefits; 13th month pay and other
benefits and payments specifically excluded from taxable compensation income

(iii) Deductions – Personal and additional exemptions; Health and hospitalization insurance

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(3) Taxation of business income/income from practice of profession

(4) Taxation of Passive Income

(5) Taxation of Capital Gains

b) Income Tax on Non-Resident Aliens Engaged in

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