 Taxation- sovereign raises REVENUE to defray the expenses of the government.

Other sources of taxes:

-selling government property
-sources and contributions of other government agencies
-donations
 Basic purpose of taxation
1. TO SECURE REVENUES for the support of the government
2. TO REGULATE BUSINESS and occupation
3. TO PREVENT UNDUE ACCUMULATION OF WEALTH
4. TO PROTECT HOME INDUSTRIES against foreign competition (through imposing higher taxes to foreign goods)
 Nature of taxation
1. INHERENT IN SOVEREIGNTY
- inherent power of the state
-not constitutional grant
2. LEGISLATIVE IN CHARACTER
-can be exercised only by the LAWMAKING BODY
 Scope of taxation (in the absence of constitutional restrictions)
-Comprehensive
-Unlimited
-Plenary/ general
-Supreme/ highest
 Theory of taxation
CHAPTER 5: ITEMS AND CONCEPT OF INCOME
GROSS INCOME: income reduced by EXCLUSIONS
INCOME TAX:
-yearly profits arising from property, professions, trades or offices
-based on income, gross or net

CLASSIFICATION OF INCOME TAXPAYERS

 Individual- natural persons (filipino citizens/not, resident/nonresident of the philippines)
 Corporation and Partnership- does not include (general professional partnerships, joint venture, consortium)
 Estate- property, rights and obligations of a person which are not extinguished by his death and those who
accrued since the opening of the succession
 Trust- arrangement created by will or agreement under which property is passed to another for conservation or
investment

SUBJECT TO INCOME TAX NOT SUBJECT TO INCOME TAX

1. Compensation for services (fees, salaries, wages,
commissions)
2. Derived from the conduct of trade/ business/ exercise
of profession
1. Self-Help Income
2. RATA, PERA and ACA granted to government
employees
-Representation and Transportation Allowance
-Personnel Economic Relief Allowance
-Additional Compensation Allowance (part of other
benefits)

3. Gains derived from dealings in property

4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions
11. Partner’s distributive share for the net income of the
GENERAL PROFESSIONAL PARTNERSHIP

12. Illegal Activities

13. Compensation paid in kind- based on the fair market

value

14. Compensation paid in money- whole amount is

subject to tax (withholding tax is deducted by the
employer)
15. Compensation paid in promissory note

16. Tips and gratuities- PAID DIRECTLY to an employee

by a customer (but not subject to withholding tax)
17. Transportation, representation and other allowances
NOT SUBJECT TO INCOME TAX IF:
-ordinary and necessary expenses
-paid/ incurred by the employee in the pursuit of the
trade, business or profession
-the employee is REQUIRED TO LIQUIDATE the
expenses in accordance with the specific
requirements

18. EXCESS OF ADVANCES made over actual expenses if

not returned to the employer
19. Vacation and Sick leave allowances

20. Forgiveness and Indebtedness- if there are services NOT SUBJECT TO INCOME TAX IF:
rendered no services rendered but the creditor simply condones
the debt
21. Remuneratory Donations- if it is based on NOT SUBJECT TO INCOME TAX IF:
GRATITUDE (UTANG NA LOOB) If no actions/ services done but it was BASED ON PURE
LIBERTY
22. Recovery of bad debts previously deducted NOT SUBJECT TO INCOME TAX IF:
(unexpected na binayaran)- if it has tax benefit to the It is net loss and has no tax benefit to the taxpayer
taxpayer

23. Refund of tax NOT TAXABLE IF it is income tax, estate tax, donor’s tax,
special assessments, VAT or other that is not deductible
from gross income

24. Refund of indirect tax

25. Leasehold improvements

26. Gross income from manufacturing, merchandising or

mining business

27. Gross income from farming

28. Receipt of dividends Stock dividends are NOT TAXABLE

Stock dividends are taxable if:
-the shares are later redeemed for a consideration by the
corporation/ conveyed by the stockholder to the extent
of such consideration
- there is a change in the stockholder’s equity results by
virtue of the stock dividend issuance
29. Intercorporate dividends
30. Tax informer’s reward
 Leasehold improvements
-Outright method: report as income in the fair market value of the improvements
-Spread-out method:
Cost of leasehold improvements xx
Less: accumulated depreciation xx
Book value, end of lease xx
Divide by remaining term of the lease x x
Annual income xx

 Gross income from manufacturing, merchandising or mining business

 Gross income from farming
-Cash basis: no inventory is used to determine profits
-Accrual basis: an inventory is used to determine profits
-Crop basis: used when farmer is engaged in producing crops which take more than 1 year to gather
 Receipt of dividends
-cash dividend: form of dividend which is paid in cash to shareholders
-stock dividend: distribution by a corporation to its shareholders of the corporation’s own stock
-property dividend: dividend paid in shares of stock of another corporation or other property of the corporation
 Intercorporate dividends
 Tax informer’s reward- an amount equivalent to 10% but not exceeding 1,000,000 of the revenues, surcharges or
fees recovered and fine or penalty imposed and collected shall be given as reward to persons instrumental in the
discovery of violations of the provisions of the internal revenue laws

The following are DISQUALIFIED TO AVAIL THE INFORMER’S REWARD:

1. BIR official/ employee
2. Relative within the 6th civil degree of consanguinity of a BIR official/ employee
3. BIR officials who already retired or separated from service

CHAPTER 6: FRINGE BENEFIT TAX

Fringe benefit- any good, service or other benefit furnished or granted by an employer in cash or in kind in addition to
basic salaries EXCEPT RANK AND FILE EMPLOYEES
NOT SUBJECT TO FRINGE BENEFIT TAX
1. Fringe benefit which are authorized and exempted from income tax
2. Contributions of the employer for the benefit of the employee (retirement insurance, hospitalization benefit plans)
3. Benefits given to the rank and file (subject to regular income tax) -fringe benefit tax SHALL NOT APPLY TO RANK
AND FILE EMPLOYEES
4. De minimis benefits (not subject to income tax as well as withholding tax on compensation income of managerial,
supervisory and rank-and-file employees)
5. If the benefits are necessary to the business (income tax)
6. If the benefit is for the convenience/ advantage of the employer- not subject to income tax fringe benefit tax should
be shouldered by the employer

DE MINIMIS BENEFITS- exempt from the fringe benefit tax and the excess is subject to income tax
PER YEAR
1. Actual medical assistance (medical and healthcare needs, annual medical/executive check-up, maternity assistance
and medical consultations)- NOT EXCEEDING 10K
2. Employees’ achievement awards (length of service/ safety achievement)- NOT EXCEEDING 10K
3. Monetary value received from both CBA and productivity incentives schemes combined- NOT EXCEEDING 10K PER
EMPLOYEE
4. Uniforms and clothing allowance- NOT EXCEEDING 6K
5. Christmas gifts and major anniv celeb- NOT EXCEEDING 5K PER EMPLOYEE
6. Monetized unused vacation leave credits of employees- NOT EXCEEDING 10 DAYS
PER MONTH
1. Rice subsidy- NOT EXCEEDING 2K
2. Medical cash allowance to dependents of employees- NOT EXCEEDING 1,500 PER EMPLOYEE PER SEMESTER/ NOT
EXCEEDING 250 PER MONTH
3. Laundry allowance- NOT EXCEEDING 300
PER REGION
1. Daily meal allowance for overtime work and night shift- NOT EXCEEDING 25% OF THE BASIC MINIMUM WAGE
NO VALUE
1. Monetized value of vacation and sick leave credits
2. Items given to employees under special circumstances

SUBJECT TO FRINGE BENEFIT TAX

1. HOUSING PRIVILEGE- the following are not considered as taxable fringe benefit tax:
 Housing privilege of military officials of the armed forces of the Philippines consisting of officials of the
Philippine army, Philippine navy and Phillippine air force
 A housing unit which is situated inside or within the maximum of 50 meters from the perimeter of the business
or factory
 Temporary housing for an employee who stays in a housing unit for 3 MONTHS OR LESS
Note:
IF THERE IS NO TRANSFER OF OWNERSHIP: the monetary value of the benefit is 50% only
IF THERE IS TRANSFER OF OWNERSHIP: the monetary value is the entire value of the benefit

ANNUAL VALUE OF THE BENEFIT VALUE OF THE BENEFIT

CASE 1 – LEASES (AS LESSEE) RESIDENTIAL PROPERTY for the use of the employee
--- Monthly rental paid by employer x 50%
CASE 2 – OWNS RESIDENTIAL PROPERTY which was assigned to an officer for his use as residence
5% of FMV OF LAND AND IMPROVEMENTS x 50% ---
CASE 3- PURCHASES RESIDENTIAL PROPERTY ON INSTALLMENT BASIS and allows the employee to use the same
as his residence
5% of ACQUISITION COST x 50% ---
CASE 4- PURCHASES A RESIDENTIAL PROPERTY and TRANSFERS OWNERSHIP in the name of the employee
--- ACQUISITION COST or FMV, whichever is higher
CASE 5- PURCHASES A RESIDENTIAL PROPERTY and TRANSFERS OWNERSHIP to his employee at a price less than
the employer’s acquisition cost
--- FMV of CIR and FMV of Assessor, whichever is higher,
minus the cost to the employee

2. MOTOR VEHICLE OF ANY KIND

TRANSACTION MONETARY VALUE OF BENEFIT
CASE 1- PURCHASES THE MOTOR VEHICLE in the name of ACQUISITION COST
the employee
CASE 2 – PROVIDES THE EMPLOYEE WITH CASH FOR THE AMOUNT OF CASH RECEIVED BY THE EMPLOYEE
PURCHASE of a motor vehicle
CASE 3- SHOULDERS A PORTION OF THE AMOUNT OF AMOUNT SHOULDERED BY THE EMPLOYER
THE PURCHASE price of a motor vehicle
 CASE 4- PURCHASES THE CAR ON INSTALLMENT in the
name of the employee
CASE 5- OWNS AND MAINTAINS A FLEET OF MOTOR
VEHICLES for the use of the business and the employees
CASE 6- LEASES AND MAINTAINS A FLEET OF MOTOR
VEHICLES for the use of the business and the employees
CASE 7- THE USE OF YACHT WHETHER OWNED AND
MAINTAINED OR LEASED BY THE EMPLOYER
ACQUISITION COST (EXCLUSIVE OF INTEREST) / 5 YEARS
ACQUISITION COST OF ALL VEHICLES NOT NORMALLY
USED IN BUSINESS / 5 YEARS
AMOUNT OF RENTAL PAYMENT FOR MOTOR VEHICLES
NOT NORMALLY USED IN BUSINESS
DEPRECIATION OF YACHT AT AN ESTIMATED USEFUL LIFE
OF 20 YEARS

3. EXPENSE ACCOUNT
-EXPENSES INCURRED by the employee but which are paid or reimbursed by his employer
-PERSONAL EXPENSE of the employee paid for or reimbursed by the employer (purchases of groceries for personal
consumption of the employee and his family members

4. HOUSEHOLD EXPENSES
-SALARIES OF HOUSEHOLD EMPLOYEE (helper, personal driver of the employee)
-OTHER PERSONAL EXPENSES (homeowner’s association dues, garbage dues, etc)

5. INTEREST ON LOAN AT LESS THAN MARKET RATE

-Benchmark rate of 12%: portion sacrificed by the employer

6. MEMBERSHIP FEES, DUES, ETC (social and athletic clubs/ other similar organizations)

7. EXPENSES FOR FOREIGN TRAVEL- travelling expenses which are paid by the employer for the travel of the family
members of the employee shall be treated as taxable fringe benefits of the employee
NOT TAXABLE FRINGE BENEFITS IF:
-reasonable business expenses paid by the employer for his employee who will attend business meetings abroad
-inland travel expenses in connection with the foreign travel (expenses for food, beverages and local transportation)
EXCEPT: LODGING COST IN A HOTEL/ similar establishments amounting to an average of $300 or less perday (SUBJECT
TO FRINGE BENEFIT TAX)
-the cost of economy and business class airplane ticket: NOT SUBJECT TO FRINGE BENEFIT TAX
-first class airplane ticket: SUBJECT TO FRINGE BENEFIT TAX

8. HOLIDAY AND VACATION EXPENSES

9. EDUCATIONAL ASSISTANCE TO THE EMPLOYEE/ HIS DEPENDENTS

the following are not subject to fringe benefit tax:
- Education or study involved is CONNECTED WITH THE EMPLOYER’S BUSINESS/ TRADE/ PROFESSION
- There is a written contract between them that the employee is under obligation to remain in the employ of the
employer

10. INSURANCE PREMIUMS (except SSS, GSIS, etc)

11. FRINGE BENEFIT OF NRA- a non-resident alien not engaged in trade or business in the Philippines who receives a
fringe benefit is subject to fringe benefit tax at a rate of 25%
CHAPTER 7: ITEMS EXCLUDED FROM GROSS INCOME
1. PROCEEDS OF LIFE INSURANCE
- excluded in gross income: DEATH OF THE INSURED (important requisite)
- included in gross income: when the insured OUTLIVES THE POLICY
- BENEFICIARY: Proceeds – Face Value
- OUTLIVED THE POLICY: Proceeds – Premiums paid (pag may nareceive)
: Face Value – Premiums paid (pag walang nareceive)

2. GIFTS, BEQUESTS AND DEVISES

excluded in gross income: must be in consideration of PURE LIBERTY (donor’s tax/ estate tax)
-Gift (donor’s tax)- voluntary transfer of property from one person to another without any compensation/ consideration
-Bequest (estate tax)- giving of PERSONAL PROPERTY by will
-Devise (estate tax)- transmission of REAL PROPERTY by will
-Descent (ancestors)- referred to as SUCCESSION

included in gross income: INCOME from such property

3. COMPENSATION FOR PERSONAL INJURIES OR SICKNESS

Excluded in gross income:
-compensation for PERSONAL INJURIES AND SICKNESS
-compensation for NONPHYSICAL INJURY (personal embarrassment, injury to personal reputation in the community,
mental pain and suffering

Included in gross income: compensation for LOSS OF PROFITS

4. INCOME EXEMPT UNDER TREATY – income of a taxpayer from foreign country binding or form an agreement upon the
government of the philippines is exempt from income tax to avoid double taxation

5. RETIREMENT BENEFITS, PENSIONS GRATUITIES, ETC

RETIREMENT BENEFITS
-compulsory retirement age: 65 years or more
-requisites for the exclusion of gross income:
 Must have a REASONABLE PRIVATE BENEFIT PLAN maintained by the employer and APPROVED BY THE BIR
 Retiring official/ employee has been in the SERVICE FOR MORE THAN 10 YEARS
 Retiring official/ employee must MORE THAN 50 YEARS OF AGE
 NOT HAVE PREVIOUSLY AVAILED OF THE PRIVILEGE UNDER THE RETIREMENT BENEFIT PLAN of the same or
another employer
SEPARATION PAY
-VOLUNTARILY RESIGNED: TAXABLE
-INVOLUNTARY RESIGNED/ FORCE TO TERMINATION: NOT TAXABLE
 Termination
 Redundancy (no longer needed)
 Retrenchment (reduction of employee due to loss)
 Closure
 Cessation
 Death. Sickness or other physical disability

6. SOCIAL SECURITY BENEFITS, ETC

7. US VETERANS- payments or benefits due to any persons residing in the Philippines administered by the US Veterans
Administration are not taxable
8. SSS AND GSIS BENEFITS- benefits from SSS, PAGIBIG, PHILHEALTH, LABOUR UNIONS shall be exempt from tax
9. INCOME DERIVED BY FOREIGN GOVERNMENT
10. INCOME DERIVED FROM ANY PUBLIC UTILITY OR FROM THE EXERCISE OF ANY ESSENTIAL GOVERNMENTAL
FUNCTION
11. PRIZEZ AND AWARDS
Excluded from gross income:
 Charitable
Artistic
Religious
Civic
Educational
Literary
Scientific
 NO EFFORT on the part of the recipient to enter the proceeding
 NO SERVICE RENDERED as condition to receiving the prize/ award

12. PRIZES AND AWARDS TO ATHLETES

Not taxable: if it is CONNECTED TO THE COMPETITION
Taxable: if it is NOT ARISING FROM THE COMPETITION, if the ATHLETE IS A PROFESSIONAL

13. SALES OF BONDS, DEBENTURES, AMD OTHER CERTIFICATE OF INDEBTEDNESS (with a maturity value of more than
5 years)

14. REDEMPTION OF SHARES IN MUTUAL FUND

15. MINIMUM WAGE EARNERS

subject to tax: income from the conduct of TRADE, BUSINESS OR PROFESSION
not subject to tax: EMPLOYMENT INCOME (part-time teacher)

CHAPTER 8: TAXATION OF INDIVIDUALS

INDIVIDUAL TAXPAYER INCOME WITHIN INCOME WITHOUT
1. Resident Citizen Taxable Taxable
2. Nonresident Citizen Taxable Not Taxable
3. Resident Alien Taxable Not Taxable
4. Nonresident Alien (ETB)-MORE Taxable Not Taxable
THAN 180 DAYS during any calendar
year
5. Nonresident Alien (NETB)- 180 Taxable Not Taxable
DAYS OR LESS during any calendar
year
KINDS OF INCOME OF INDIVIDUAL TAXPAYER
1. Compensation income- arising from EMPLOYEE-EMPLOYER RELATIONSHIP for services rendered (SUBJECT TO
GRADUATED RATE TAX)
2. Business income- income earned from SELF-EMPLOYMENT (SUBJECT TO 8% INCOME TAX)
3. Professional income- income earned from the PRACTICE OF PROFESSION
4. Passive income- income earned WITHOUT WORKING ACTIVELY and SUBJECT TO FINAL WITHHOLDING TAX

INCOME TAX RATES

Effective 2018-2022
OVER NOT OVER TAX PLUS OF EXCESS OVER
250,000 0%
250,000 400,000 20% -- 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 -- 2,410,000 35% 8,000,000

 FOR MARRIED INDIVIDUALS: husband and wife shall compute SEPARATELY their individual income tax BASED ON
THEIR RESPECTIVE TOTAL TAXABLE INCOMES
 If it is not stated their specific income, it should be presumed that share in the net income shall be divided
equally

-Mutual fund- investment vehicle that is made up of a pool of funds collected from many investors for the PURPOSE
OF INVESTING IN SECURITIES (such as stocks, bonds, money market instruments and similar assets)
-Trust funds-

NOTE!!
-Passive income: (SUBJECT TO FINAL WITHHOLDING TAX and NOT INCLUDED IN GROSS INCOME)
-laging inadd yung net final tax sa passive income pati sa taxable income
-pag hindi kasama sa final withholding tax, magiging part sya ng income tax (PRIZES AMOUNTING TO 10,000 0R LESS)

pag may kasamang net of final tax, idadagdag dun sa amount kase nga subject to final withholding tax
-pag may net na may percentage, imaminus sa 100% tapos ayon yung amount na ididivide

THE 8% INCOME TAX ON GROSS SALES OR RECEIPTS and NON-OPERATING INCOME

- The individual decides to choose this option shall not be subject to business tax of 3% NON VAT
- No deduction in expenses and COS
- Exemption of 250,000
-INSTANCES WHEN AN INDIVIDUAL CANNOT AVAIL 8% TAX:
1.if the annual gross sales/receipts and other non-operating income exceed 3,000,000
2. when the business is ALREADY VAT REGISTERED (considered as graduated rate of tax)
3. if he is a PARTNER OF GENERAL PROFESSIONAL PARTNERSHIP

OPTIONAL STANDARD DEDUCTION- NO DEDUCTION from COS and EXPENSES