Philippine Tax System and Income Taxation

This course is intended to give students an overview of the Philippine Tax System. These include
basic principles and rules of the income tax system that are applicable to individuals and
corporations. This also covers a guide on how to file the income tax returns, know the prescriptive
periods and the remedies of the taxpayers.

Learning Objectives. At the end of this module you are expected to:
1. Identify the different government offices handling the tax administrative functions;
2. Discuss the powers and duties of the Bureau of Internal Revenue;
3. Enumerate the officials of the Bureau of Internal Revenue;
4. Enumerate the powers and extent of authority of the Commissioner of Internal Revenue.

National Internal Revenue Code (NIRC) of 1997 governs the imposition and collection of the following
national internal revenue taxes:
1. Income tax
2. Estate tax
3. Donor’s tax
4. Value-added tax (VAT)
5. Percentage taxes
6. Excise taxes
7. Documentary stamp tax

Government offices handling tax administrative functions: Department of Finance (DOF) – Bureau of
Internal Revenue (BIR); Bureau of Customs (BOC); and Land Transportation Commission (LTC)

DOF – Principal office responsible for the administration, supervision of matters and issues related to
taxation.

Government officials that administer and enforce tax administrative functions

1. Secretary of Finance
2. Commissioner of Internal Revenue
3. Commissioner of Customs
4. Presiding Justice and Associate Justice of the Court of Tax Appeals
5. Deputy Commissioner of the BIR
6. Regional Directors and Regional District Officers of the BIR
7. Provincial, city and Municipal Treasurers
8. Examiners and Collection Agents of the BIR and BOC

Bureau of Internal Revenue

 Powers and Duties:
1. To assess and collect all national internal revenue taxes, fees and charges
2. To enforce all forfeiture, fines and penalties connected in the assessment and collection
function
3. To decide in all cases decided in its favor by the CTA and the ordinary courts
4. To give effect, administer and supervise police power conferred to it by the Tax Code

Officials of the Bureau of Internal Revenue

 Chief Officials
1. Commissioner of Internal Revenue – known as BIR Commissioner
2. Four Deputy commissioner
BIR Officers. They are tasks to administer and enforce the Tax Code
1. Revenue Regional Director
2. Revenue District Officer
3. Revenue Examiners
4. Division chiefs
5. BIR Collection Agents

Powers and Authorities of the Commissioner of Internal Revenue

1. Power to interpret tax laws and decide tax cases. (Section 4)
2. Power to obtain information, and to summon, examine and take testimony of persons. (Section
5)
3. Power to make assessments and prescribe additional requirements for tax administration and
enforcement. (Section 6)
4. Authority to delegate power. (Section 7)
5. Authority to compromise, abate and refund or credit tax. (Section 204)

Powers of BIR Commissioner that cannot be delegated

1. The power to recommend the promulgation of rules and regulations by the Sectary of Finance.
2. The power to issue rulings of first impression, or reverse, revoke, or modify any existing rulings
of the BIR.
3. The power to compromise or abate any tax liability.
4. The power to assign or re-assign internal revenue offices to establishments where the articles
subject to excise tax are produced or kept.

General Principles and Concepts of Taxation

Learning Objectives. At the end of this module you are expected to:
1. Define what is taxation;
2. Identify the inherent power of the sovereign state;
3. Distinguish the similarities and differences among taxation, eminent domain and police powers;
4. Describe the nature of taxation power;
5. Discuss the basis, purpose and scope of taxation;
6. Identify the constitutional and inherent limitations;
7. Enumerate the ascpects of taxation;
8. Define what is situs of taxation;
9. Describe the principle of sound tax system.

Inherent Powers of the Sovereign State

 Essential powers necessary for the survival of the sovereign state.
 Serves as the central force in order that a government can
o Command,
o Maintain peace and order, and
o Survive

Inherent Powers of the Sovereign State

 1. Police Power
2. Eminent Domain Power
3. Taxation Power

Police Power
 Refers to the inherent power of the sovereign state to legislate for the protection of health,
welfare and morals of the community
 It is exercised usually to guard against excesses or abuses of individual liberty.

Eminent Domain Power

 Refers to the inherent power of the sovereign state to take private property for a public
purpose.
 The Constitution limits the exercise of the power by providing that property may not be taken
without just compensation.

Taxation Power
 Refers to the inherent power of the sovereign state to exact an enforced contribution upon
o Persons,
o Properties, or
o Rights
for the purpose of generating revenues for the use of government

 The act of levying taxes or the process by which government through its law making body, raises
revenues to defray its necessary expenses.

Similarities among Taxation, Eminent Domain and Police Powers

1. They are inherent powers of the State
2. They constitute the three ways by which the State interferes with the private rights and
property
3. They are legislative in nature and character
4. They presuppose an equivalent compensation
5. They all underlie and exist independently of the Constitution
6. They are all necessary attributes of the sovereignty
7. The provisions in the Constitution are just limitation on the exercise of these powers

Distinction between Taxation, eminent Domain and Police Powers

Taxation Police Power Eminent Domain
1. As to concept Power to enforce Power to make and Power to take private
contribution to raise implement laws for property for public
government funds the general welfare use with just
compensation
2. As to scope Unlimited, Plenary, Broad in application Merely power to take
comprehensive and of general power to private property for
Supreme make and implement public use
laws
3. As to authority Exercised only by Exercised only by May be granted to
government government public service or
 public utility
companies
4. As to purpose Money is taken to Money or property is Private property is
support the taken or destroyed to taken for public use
government promote general
welfare
5. As to necessity The power to make Can be expressly Can be expressly
of delegation laws cannot be delegated to the local delegated to the local
delegated government units by government units by
the law making body the law making body
6. As to persons Operates on a Operates on a Operates on the
affected community or a class community or a class particular private
of individual of individual property of an
individual
7. As to benefits Continuous protection Maintenance of Market value of the
and organized society healthy economic property expropriated
standard of society
8. As to Inseparable for Protection, safety and Common necessities
importance existence of a nation – welfare of society and interest of the
it supports police community transcend
power and eminent (exceeds) individual
domain rights in property
9. As to amount Generally, no limit Sufficient to cover No imposition. The
of imposition cost of the license owner is paid the fair
and the necessary market value of the
expenses of police property
surveillance and
regulation
10. As to Constraints by Limited by the Bounded by public
limitation Constitutional and demand for public purpose and just
Inherent limitations interest compensation
11. As to Subject to Relatively free from Superior to and may
relationship to Constitutional and Constitutional override
Constitution inherent limitations limitations Constitutional
provision
Subject to Superior to
constitutional impairment provision Superior to
prohibition against of the Constitution impairment provision
impairment of the because the welfare
obligations and of the State is superior
contract to any private
contract
Inferior to impairment
provision of the
Constitution

Nature of Taxation Power

  The power to tax is an attribute of sovereignty that is exercised by the government for the
betterment of the people within its jurisdiction whose interest should be served, enhanced and
protected.
 The theory is that taxes are imposed upon persons, properties or rights for the support of the
government in return for the general advantages and protection which the government
provides the taxpayers.

Basis of Taxation
 Based on the Principle of Necessity. Lifeblood Theory. No government can exist without
taxation.
 Based on Reciprocal Duties. Reciprocal duties of protection and support between the state and
those that are subject to its authority.

Purpose of Taxation
 The principal purpose of taxation is to raise revenues for the use and support of the government
to enable to carry out its functions. (Revenue Purpose)
 The secondary purpose of taxation is to serve as means to contend social, general welfare and
economic development. (Regulatory Purpose)
Scope of Taxation
 Unlimited,
 Plenary (complete),
 Comprehensive (with wide extent of application),
 Supreme (with highest degree), and
 Subject to the constitutional and inherent limitation.

Constitutional Limitations. Provisions of the fundamental law that restrict the unlimited, plenary,
comprehensive and supreme exercise by the State of its inherent power to tax.
1. Due process of law
2. Equal protection of law
3. No imprisonment for on-payment of a poll tax
4. Rule of taxation shall be uniform and equitable
5. Exemption from property taxation (land and buildings) of religious, charitable or educational
institutions, non-profit cemeteries, churches and convents appurtenant thereto
6. No public money and/or property shall be used for any religious and/or private purposes
7. The majority of all members of the National Congress shall pass the granting of tax exemptions
8. The congress may not deprived the Supreme Court of its jurisdiction in all tax cases
9. The Philippine President has the power to veto any item in a tax bill approved by the Congress
10. Tax collection shall be generally be treated as general funds of the government.

Inherent Limitations. Natural restrictions to safeguard and ensure that the power of taxation shall be
exercised by the government only for the betterment of the people whose interest should be served,
enhanced and protected.
1. Taxes may be levied only for public purpose
2. Non-delegation of the power to tax except to local government
3. Tax laws are only confine within the territorial jurisdiction of the State
4. Tax laws must be subject to international comity, convention and agreements
5. Government entities are generally tax-exempt
6. Prohibition of double taxation
Aspects of Taxation
1. Levying – imposition of the tax which is a legislative act or function
2. Assessment – determination of the correct amount of applicable tax (administrative function)
3. Collection

Objects of Taxation – refers to the subject to which taxes are imposed

1. Persons, whether natural or juridical persons
2. Properties, whether real, personal, tangible or intangible
3. Excise objects

Situs of Taxation
 Refers to the place of taxation
 It is the State or political unit which has jurisdiction to impose a particular tax over its
inhabitants
 It is the application of the principle of territorial jurisdiction which limits the exercise of tax
power in defining the object of taxation
 It defines the boundaries of the taxing power over the object of taxation in terms of location
whether or not they shall be subjected to tax
 Factors to consider in determining situs of taxation
1. Subject matter of the tax (person, property, or activity)
2. Nature, kind or classification of the tax being imposed
3. Source of income being taxed
4. Place of the excise, privilege, business or occupation being taxed
5. Citizenship of the taxpayer
6. Residence of the taxpayer

Principles of Sound Tax System

1. Fiscal Adequacy
2. Equality or Theoretical Justice
3. Administrative Feasibility

Nature of Taxes
1. Taxes are obligations created by law
2. Taxes are generally personal to the taxpayer

Essential Elements of Tax

1. Enforced contribution
2. Imposed by the legislative body
3. Proportionate in character
4. Payable in the form of money
5. Imposed for the purpose of raising revenue
6. Used for a public purpose
7. Commonly required to be paid at regular intervals
8. Imposed by the sovereign state within its jurisdiction

Classification of Taxes
1. As scope
 a. National
b. Local
2. As to subject matter or object
a. Personal, poll or capitation
b. Property
c. Excise
3. As to who bears the burden
a. Direct
b. Indirect
4. As to determination of amount
a. Specific
b. Ad valorem
5. As to purpose
a. General, fiscal, or revenue
b. Special or regulatory
6. As to graduation or rate
a. Proportional
b. Progressive or graduated
c. Regressive

Nature of Tax Laws

 Civil in nature
 Neither political nor penal in nature

Sources of Tax Laws

1. Constitution of the Philippines
2. National Internal Revenue Code
3. Tariff and Custom Code
4. Local Government Code
5. Local tax ordinance
6. Tax Treaties and International Agreements
7. Judicial decisions
8. Special laws (e.g. Statutes, Executive Orders)
9. Revenue rules and regulations and administrative rulings and opinions

Tax Distinguished from other terms

TOLL
Demand of proprietorship
Paid for the use of another’s property
Amount is based on cost of construction or
maintenance of the public improvement
May be imposed by the government or private
individuals or entities
TAX
Demand sovereignty
Paid for the support of government
Amount is based on the necessities of the state
Imposed only by the state

PENALTY TAX
Designed to regulate conduct Primarily aimed at raising revenue
 May be imposed by the government of private May be imposed only by the government
individuals or entities

DEBT TAX
Based on contract Based on law
May be paid in kind Generally payable in money
Assignable Cannot generally assignable, cannot generally be
the subject of the set-off or compensation
May be subject to set-off or compensation Imprisonment is a sanction for non-payment of
tax (except poll tax)
A person cannot be imprisoned for non-payment Governed by the special prescriptive periods
of debt (except when it arise from a crime) provided for in the Tax Code)
Draw interest when stipulated or when Does not draw interest except only when
prescription default delinquent

Special Assessment - is an enforced proportional contribution from owners of lands for special benefits
resulting from public improvements.

Subsidy – is a monetary aid directly granted by the government to an individual or private commercial
enterprises deemed beneficial to the public.

Custom Duties – taxes imposed on goods exported into a country.

Tariff – duties payable on goods imported or exported; or the systems or principle of imposing duties on
importation or exportation of goods.

INCOME TAX on INDIVIDUALS

Learning Objectives. At the end of this module you are expected to:
1. Identify the different classification of individual taxpayers;
2. Identify who among the individual taxpayers are classified as ordinary taxpayers or special
taxpayers;
3. Define what is income for tax purposes;
4. Identify the classification and taxability of income;
5. Identify the procedures required for claiming personal exemptions;
6. Compute the individual income tax.

Individual taxpayers – are natural persons with income derived within the territorial jurisdiction of a
taxing authority. It may be either(1) Citizens or (2) Aliens.

Citizens – under Section I, Article III of the Philippine Constitution, a Filipino citizen is he who is/has:
a. Born (by birth) with father and/or mother as Filipino citizens
b. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon
reaching the age of majority
c. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine laws.
Alien – foreign born person who is not qualified to acquire Philippine citizenship by birth or after birth.

Classification of Individual Taxpayers

1. Citizens
a. Resident Citizen (RC)
b. Nonresident Citizen (NRC)
2. Aliens
a. Resident Alien (RA)
b. Nonresident Alien (NRA)

RC – Filipino citizen who:

a. Stayed permanently in the Philippines
b. Stayed outside the Philippines for less than 183 days during the taxable year
- Taxable for all income derived from sources within and outside the Philippines

NRC – Filipino citizen who:

a. Stayed outside the Philippines for 183 days or more during the taxable year
b. Established proof to the BIR Commissioner of his physical presence abroad with definite
intention to reside outside
c. Leaves the Philippines during the taxable year to reside abroad
d. Was previously a nonresident citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines
- Taxable for income derived from sources within the Philippines only.

RA – persons who are not citizens of the Philippines (foreign individuals) but:
a. Are residing within the Philippines
b. Stayed in the Philippines for more than one year from date of arrival
c. Actually present in the Philippines and who are not mere transients or sojourners
d. Lives in the Philippines with no definite intention as to his stay
e. Who comes to the Philippines for the purpose that requires extended stay for its
accomplishment making Philippines as his temporary home, regardless of his intention to return
to his residence abroad.

NRA – persons who are not citizens of the Philippines (foreign individuals):
a. Whose residence are not within the Philippines
b. Aliens who are mere transients or sojourners comes in the Philippines for a definite purpose
which in its nature may be promptly accomplished
Classification of NRA:
 Those engaged in trade or business within the Philippines (NRAETB)
I. Stayed in the Philippines for an aggregate period of more than 180 days during the taxable
year.
II. Aliens who have business income in the Philippines
 Those not engaged in trade or business within the Philippines (NRANETB):
I. Stayed in the Philippines for only 180 days or less during the taxable year
II. Aliens who do not have business in the Philippines.

Classes of Individual Taxpayers

1. Ordinary Taxpayer
 a. RC
b. NRC
c. RA
d. NRAETB
2. Special Taxpayers
a. NRANETB
b. Special Aliens/Filipino Workers (SAFE)
c. Minimum Wage Earners (MWE)

Special Aliens/Filipino Workers (SAFE)

 Those with managerial and technological position in:
i. Regional Area Headquarters (RAH)
ii. Regional Operating Headquarters (ROH)
iii. Offshore Banking Units (OBU)
iv. Foreign Petroleum Service Contractor and Subcontractor

Regional Area Headquarters (RAH)

 Branch establish in the Philippines by a multinational company
 Does not earn income from Philippines
 Merely acts as supervisory, communications and coordinating center for its affiliates,
subsidiaries or branches in the Asia Pacific Region and other foreign markets.

Regional Operating Headquarters (ROH)

 Branch establish in the Philippines by a multinational company
 Engage in any of the following services:
o General administration and planning
o Business planning and coordination
o Sourcing of raw materials
o Corporate finance advisory services
o Research and development services
o Technical support and maintenance
o Data processing and communication
o Business development

Offshore Banking Unit (OBU)

 A foreign banking corporation
 Authorized to engage in foreign business transaction with the Philippines

Minimum Wage Earners (MWE)

 Works in the private and public sector who are being paid the Statutory Minimum Wage as fixed
by the:
o Regional Tripartite Wage and Productivity Board
o National Wages and Productivity Commission
as applicable to the place where he/she is assigned and/or working

CONCEPT of INCOME
Income – refers to all earnings derived from:
 Rendered service (labor/employment)
  Capital (business or investment)
 Or both rendered service or business
 Gain derived from sale or exchange of personal or real property eithrt ordinary or capital asset

> In broad sense, all income from whatever source, derived within and without the Philippines, legal or
illegal.

Sources of Income
 The place wherein the income is earned
 Governed by the situs of taxation
 Necessity to determine whether such income is subject to tax or not
 Income may be earned from:
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines

Classifications of Income
1. Compensation income
2. Profession or Business Income
3. Passive Income
4. Capital Gain

Taxable income
 These are pertinent items of gross income enumerated in the Tax Code less deductions, if any,
and/or personal exemptions authorized by law.
 Amount of income upon which the tax rate prescribed by law is applied to obtain the amount of
income tax payable
 Gains, profits or income which are subject to income either at gross or net amount

Requisites for Income to be taxable

1. There must be gain or profit
2. The gain must be realized or received – whether actual realization or constructive receipt
3. The income earned must not be exempted from income taxation

INCOME TAX ON CORPORATION

Learning Objectives. At the end of this module you are expected to:
1. Define and classify corporate taxpayers;
2. Identify the classification and taxability of income of a corporation;
3. Discuss the concept of Normal Corporate Income Tax (NCIT) and Minimum Corporate Income
Tax (MCIT);
4. Compute income taxes using the Normal Corporate Income Tax (NCIT);
5. Compute income taxes using the Minimum Corporate Income Tax (MCIT);
6. Discuss the treatment of Special Corporation;
7. Compute income tax due of Special Corporate Taxpayers.

CONCEPT OF INCOME
Learning Objectives. At the end of this module you are expected to:
1. Identify what are the inclusions in gross income;
2. Identify the taxable and non-taxable gross income;
3. Identify the classification of gross compensation income;
4. Discuss the treat of fringe benefits for taxation purposes.
5. Identify the classification of gross income from business;
6. Determine the taxability of passive income;
7. Identify the tax rates applicable to income subject to final taxes.

ALLOWABLE DEDUCTION

Learning Objectives. At the end of this module you are expected to:
1. Identify allowable deductions for both individual and corporate taxpayers;
2. Identify the differences between itemized and optional standard deductions;
3. Identify expenses incurred by a taxpayer to be deductible;
4. Identify expenses are fully and partly deductible.

TAX RETURN PREPARATION AND TAX PAYMENTS

Learning Objectives. At the end of this module you are expected to:
1. Identify the applicable tax returns to be prepared by different taxpayers;
2. Prepare income tax returns;
3. Discuss the deadline of filing tax returns and payment of tax dues.

PENALTIES AND REMEDIES OF THE TAXPAYER

Learning Objectives. At the end of this module you are expected to:
1. Discuss the process and procedures of tax assessment;
2. Discuss the remedies of the government;
3. Discuss the remedies of the taxpayers;
4. Identify the prescriptive periods for assessment and collection.