PRINCIPLES OF TAXATION

Stages of taxation:

1. Levying – the creation of tax law by Congress* (legislative body)

*Congress – composed of both the House of the Representatives and the Senate
2. Administrative – implementing of tax laws by the Executive
a. Assessment – Philippines uses self-assessment method wherein the taxpayer computes
his own tax; but the BIR can check through audits if the assessment is correct
b. Collection – actual receipt of payment in money by administrative agencies.
c. Enforcement – implementation of court decisions or rulings.

Incidence vs. Impact of Taxation:

1. Incidence – where the tax is actually imposed

2. Impact – who carries the burden of paying the tax

Example: For VAT, Incidence is on the buyer since the VAT is included in his payment for the goods
bought. However, the impact is on the seller since he is the one liable to pay the tax to the BIR.

Inherent powers of a State:

1. Taxation

Note: Taxation is generally unlimited (same with power to tax); However, tax itself is limited because it is
the actual payment which is already subjected to inherent and constitutional limitations)

2. Police Power – power of the government to provide services to its citizens for peace & order,
health, etc.

Note: IT IS A MISNOMER THAT IT ONLY INVOLVES ACTUAL POLICE AND MILITARY. –It actually
includes the general power of the government to provide different services for the welfare of the people.

3. Eminent Domain – power of the government to take private properties

Note: Can also be passed on to public service entities (eg. Maynilad)

*Power to tax may be exercised simultaneously with Police Power; but may not be exercised
simultaneously with Eminent Domain.

*Only Taxation is inferior to non-impairment of contracts

Inherent Limitations: (T-I-P-E-N)

1. Territoriality – you can only tax those within your territory

2. International Comity – you cannot tax other countries because they have their own sovereignty
3. Public Purpose – you can only impose taxes if it is for public purpose

Note: No need for public purpose of tax to be directly felt by the taxpayer, it is sufficient that he receives
the purpose of the tax indirectly.
 4. Exemption of the government – the government cannot tax itself because it is impractical
st
1 layer: GOVERNMENT ITSELF – EXEMPT
nd
2 layer: GOVT INSTRUMENTALITIES (Agencies, LGUs) – EXEMPT
rd
3 layer: GOCCs – TAXABLE;

Exception: SSS, GSIS, PhilHealth –BASTA THOSE DEDUCTED FROM YOUR

SALARY- and Local Water Districts

Before TRAIN, PCSO is also Exempt

5. Non delegation of taxation powers – only the Congress can levy taxes

Exceptions:

1. President = Tariffs
2. LGUs = Local taxes
3. Administrative Agencies (BIR, BOC) = for proper implementation of taxes

NO NEED TO MEMORIZE CONSTITUTIONAL LIMITATIONS, JUST MAKE SURE TO MEMORIZE

INHERENT

Instances where bank secrecy law is waived:

1. To know the Gross Estate of the decedent;

2. For those applying for Compromise using financial incapacity; and
3. Upon request of foreign tax authority
INCOME TAX

Philippines uses a semi-global / semi-schedular tax system

Global – taxed based on net income

Schedular – taxed based on gross income wherein income are separated into different classes
with its own tax rates

Situs of taxation:

1. Interest Income – residence of debtor

a. Note: If interest on bank deposits, use where the branch is rather than where the bank is
incorporated
2. Income from services – performance
3. Sale of Real Property – location of property
4. Sale of Personal Property – place of sale
5. Dividend
a. From domestic Corp – INCOME WITHIN
b. Foreign Corp – USE PREDOMINANCE TEST
i. IF less than 50% of gross income for preceding 3 years earned within the PH –
ALL DIVIDENDS ARE CONSIDERED AS WITHOUT
ii. IF 50% or more of gross income for preceding 3 years earned within PH –
PRORATE BASED ON GROSS INCOME; thus, part of it will be considered
within and part of it will be considered without
1. Dividend x Phil GI / Total GI = Income within
2. The rest, income without
6. Sale of shares – USE INCORPORATION TEST
a. The country where the corporation was incorporated, no matter where its income or
operations are, is the situs of its income

Types of taxable income:

1. “Retunable” Income – subject to Income tax; all other income not subject to Final tax and CGT
2. Passive Income
3. CGT
Passive Income subject to Final Withholding Tax: (RIP w Duterte)

1. RIP w Duterte = Royalties, Interest on bank deposits, Prizes, Winnings, and Dividends
2. Only income in the Philippines are subject to final taxes; even if it is listed in the table below, if
earned abroad, it will be considered as Income subject to Income Tax. Make sure to always
check the situs of income.
3. It should be passive income to be able to subject to this tax. There are businesses that their
active source of income are from those enumerated above.
4. GENERAL RULE: --so if you forgot the rates, you can try solving using these general rules
a. NRANETB = 25%
b. NRFC = 30%
c. All others = 20%
5. Take note: If the given amount is net, you should gross up then multiply by the applicable tax rate
to get the Final Tax

Citizens DC and
Passive Income NRAETB NRANETB NRFC
and RA RFC
Royalties 20% 20% 25% 20% 30%
1
Exc. Literary Composition 10% 10% 25% 20% 30%
2
Interest on Bank Deposits 20% 20% 25% 20% 30%
15%
Exc. Interest on Foreign DC = 15%
3 Except NRC E E E
Currency Deposits RFC = 7.5%
- EXEMPT
Exc. Interest on Long Term
4 E E 25% - -
Deposits (5 years)
5
Prizes (more than 10k) 20% 20% 25% ITR 30%
5
Exc. If 10k or less ITR ITR 25% ITR 30%
5
Winnings 20% 20% 25% ITR 30%
6 Exempt if 5
Exc. PCSO winnings E 25% ITR 30%
10k or less
7 8
Dividends (if from DC) 10% 20% 25% E 15%
Share of Individual in
10% 20% 25% - -
Business Partnership

1
Corporations are not subject to 10% rule because technically they can’t create Intellectual Property
creations
2
Includes Deposit Substitute, Trust Fund & Similar Arrangements – make sure to remember this,
sometimes we only remember that only bank deposits are subject to passive income; but these items are
also given in problems
3
Generally its 15% after TRAIN. Before TRAIN, its 7.5%. So as I have told you before, Congress forgot to
amend final taxes on passive income of NRAETB and RFC. Thus, RFC remained to be 7.5%.

Also, ALL NON RESIDENTS, WHETHER INDIVIDUALS OR CORPORATIONS, are exempt from Interest
Income from Foreign Currency Deposits. Because the logic is, there are just investing here even though
they are not here so they’re given the incentives to be tax free.
4
If less than 3 years = 20%; If 3 – 4 years = 12%; If 4 -5 years = 5% -- so for example, if a taxpayer
invested for 5 years Deposit then he terminated at 4 years – then he will not be subjected to tax for first 3
st th
years but when he terminate at the 4th year, he needs to pay 5% tax on all his interest from 1 to 4 year.

5
DC and RFC are subject to ITR since it can never be part of their purpose to join competitions and the
like for prizes and/or winnings. Thus, it must be considered ultra vires acts (illegal corporate acts) and all
illegal income are subject to income tax. NRANETB and NRFC doesn’t submit ITR so they will always be
subject to the Final Taxes

6
PCSO Winnings after TRAIN now subject to 20% FT if more than 10k. If before TRAIN, Exempt any
3
amount. However, As stated in Comment No. , Final Taxes on NRAETB are not amended by the TRAIN
Law.

Please note: If 10k or less, IT IS EXEMPT. Not the same with Prizes that if its 10k or less, subject to ITR.

7
Only for Cash and Property Dividends. If Stock dividend, Exempt since it is just reinvestment in the
company, no actual receipt so it is still a capital. See summary of Dividend rules below:

ISSUING CORPORATION RECIPIENT TAX RATE

DOMESTIC CORPORATION CITIZENS / RESIDENT ALIEN 10%
NRAETB 20%
NRANETB 25%
DOMESTIC CORP / RESIDENT FOREIGN
E
CORP
15% (see comment
NRFC 8
No. )
FOREIGN CORPORATION CITIZENS ITR
E or ITR
RESIDENT ALIEN / NRAETB
(predominance test)
E or 25%
NRANETB
(predominance test)
DOMESTIC CORP ITR
E or ITR
RESIDENT FOREIGN CORP
(predominance test)
E or 30%
NRFC
(predominance test)

8
Tax Sparing Rule – FT of NRFC of Dividends on DC:
Subject to Special Rate of 15%, under treaties entered into by Philippines and other states, subject to the
following conditions:

1. Dividends of DC from NRFC are not subject to tax abroad; OR

2. Dividends of DC from NRFC are subject to tax at the lower rate of 15%.

NOTE: IF SILENT, USE 15% since majority of the countries we have economic relations with are already
with tax treaties with the Philippines. Thus, subject to treaty rate of 15%. But if the problem states that the
transaction is with a non-treaty country, use 30% (the General Rule FT of NRFC).
CAPITAL GAINS TAX (CGT)

ONLY 2 TRANSACTIONS ARE SUBJECT TO CAPITAL GAINS TAX:

1. Sale of Shares of Stocks not traded in Stock Exchange

2. Sale of Real Property Classified as Capital Assets

Note: CGT may be paid in installment if initial payment is 25% or less of Contract Price. Initial Payment
means total payments made during the year of transaction, not just on the transaction date itself.

Sale of Shares of Stocks not traded in Stock Exchange

1. Applicable to individuals/corporations who are not habitually engage is selling of stocks. If the
taxpayer is engage in selling shares shares (eg. Stock Brokers), it will not be considered as a
capital asset, thus subject to income tax.
2. If traded in stock market, subject to 6/10 of 1% of Selling Price
a. CONSIDERED AS OPT, NOT CGT
3. Tax Rates (on capital gains = SP less Tax Basis)
a. ALL INDIVIDUALS = 15%
b. DC = 15%
c. RFC/NRFC = 5% on first 100k gain; 10% on excess of 100k
4. TAX BASIS OF STOCKS
a. Purchased
i. FIFO
ii. Specific Identification
iii. Moving Average
b. Inheritance – FMV @ Time of death
c. Gift – lower between:
i. FMV @ time of gift; OR
ii. Basis of the last preceding owner whom it was not acquired by gift
d. Inadequate consideration – amount paid
e. Tax Free Exchange – substituted basis of stocks (basis of stocks received = basis of
stocks or assets transferred)
5. WHAT IS A TAX FREE EXCHANGE?
Tax Free Exchanges are exchanges of shares of stocks with other shares of stocks for which
gains will not be subjected to tax because it is considered as mere investment of capital rather
than consummated transactions which create taxable gain (losses are also not recognized for tax
purposes). There could be other tax free exchanges but the most usual are:
a. Merger / Consolidation – A + B = A or A + B = C
 b. Initial Acquisition of Control – Acquisition of control (>50% ownership) by not more than
5 persons (the wording of the law is “by the taxpayer and not more than 4 persons” but
they’re essentially same)
6. EXHANGE NOT SOLELY FOR STOCKS
Usually, in tax free exchanges, the corporation issues only shares of stocks to replace the shares
of stocks surrendered by the taxpayer. However, in rare instances, the corporation to be acquired
may distribute assets together with the stocks issued. In such instance, GAINS, but not losses,
are recognized up to the extent of cash & other properties received.
Rules:
a. If Cash/Other Property > Gain
i. Cash/Other Property up to the extent of actual gain = GAIN
ii. Excess cash/Other Property = Return of Capital
Basis of New Shares = Basis of Old Shares – return of capital
b. If Cash/Other Prop < Gain
i. Cash/Other Prop = GAIN
ii. Excess gain = Unrealized gain
Basis of New Shares = Basis of Old Shares
7. WASH SALES
a. 61 day rule: If you buy substantially identical securities 30 days before or after sale,
capital losses are not deductible against capital gains.

Note: the substantially identical requirement is strict in the sense that it is not only the corporation should
be identical, but also the same class of tax (eg. Sale of Common Shares, buy Preferred shares = NOT
WASH SALES)

Rules on Replacements Shares:

a. If Replacement Shares > Shares Sold

i. No deductible loss
ii. Loss should be considered deferred loss
Basis of Replacement Shares = Purchase Price + Deferred Loss
b. If Replacement Shares < Shares Sold
i. Deductible Loss = Loss x unreplaced shares/Total Sold
ii. The portion on replaced shares shall be considered deferred loss
Basis of Replacement Shares = Purchase Price + Deferred Loss

Sale of Real Property Classified as Capital Assets

1. Make sure that the Real Property is considered as Capital Asset by tax laws. Capital Asset in tax
is different from Capital Asset that we know of in Accounting. All those not considered as
Ordinary Asset shall be considered as Capital Asset
*Ordinary Asset – anything that is sold or used in business by the taxpayer
Note: Used in business means used to gain income but not necessarily to the primary
business of the taxpayer (eg. Primary business is bakery, but he has a different property that is
being rented out, thus, that property rented out will still be considered as Ordinary Asset)
2. TAX RATE: 6% of HIGHER between SP and FMV (higher of Assessed Value and zonal value)
3. EXEMPTED TRANSACTIONS:
a. Sale based on CARP;
b. Sale of low value housing projects;
c. Sale of principal residence, rules:
i. Can be availed only once every 10 years
ii. Must be used to buy or construct new residence within 18 months;
iii. Must actually be the principal residence of the taxpayer as certified by the
barangay captain, if a mere residential property, still subject to CGT
iv. Tax basis of property:
1. If Proceeds = New Residence
(a) NO TAX
(b) Tax basis: New Residence = Old Residence
2. If Proceeds < New Residence
(a) NO TAX
(b) Tax Basis: New residence = Old Residence + (Purchase Price –
Proceeds)
3. If Proceeds > New Residence
(a) 6% tax based on Tax Base * (Proceeds – New Residence) /
Proceeds
(b) Tax Basis: New Residence = Old Residence * Purchase Price /
Proceeds
EXPANDED WITHHOLDING TAX

1. The list will only be based on the usual board exam questions, there are a lot more rules on
expanded withholding tax
2. EWT or CWT are considered Income Tax Credit to be deducted in Tax computed in the ITR
3. The entitiy that you will look at is the payee, not the payor. (Except if Top Withholding Agent
“TWA” – the TWA should be the payor)
4. Tax Rates:
On Professionals:
If gross receipts is 3M
Individual payee 5%
or less
More than 3M 10%
If gross receipts is
Corporate payee 10%
720K or less
More than 720K 15%
On rentals:
Real Property 5%
Personal Property If 10k or less Exempt
More than 10k 5%
Share of Income of If income of partner is
10%
Partners from GPP: 720k or less
More than 720k 15%
Distribution of estate to
15%
beneficiaries:
On payments by Top
Withholding Agents
1
(TWA):
Goods 1%
Services 2%
1
Top Withholding Agents – Published by the BIR in their website (usually bi-annually) which includes Top
20,000 Corporations, Top 10,000 individuals, and eFPS users. There may be other criteria set by law or
regulations that can identify as a company as a TWA so the list posted should be really be checked.

The Withholding of payments for goods and services should only be made to regular suppliers: (a) With
6 transactions from preceding year; OR (b) With one transaction amounting to P10,000.
PEZA AND BOI

PEZA INCENTIVES:

1. Income Tax Holiday

a. For pioneering projects – 6 years
b. For non pioneering project – 4 years
c. Extension projects – 3 years
d. Subject to yearly extension
e. MAXIMUM PERIOD OF AVAILMENT: 8 YEARS
f. Other exemptions if ITH:
i. LBT
ii. Custom’s duties
iii. RPT (except if Land developer)
2. After ITH, PEZA are subject to 5% GIT. 5% tax is in lieu of all taxes.
a. 3% shall be paid to BIR
b. 2% shall be paid to LGU

Note: Only registered projects shall be subject to these rules, if there are other income from non-
registered projects, subject to regular income tax

BOI INCENTIVES

1. ITH – same rules as PEZA

2. After ITH, no 5% GIT. Subject to regular income tax.

Note:

1. Other entities that may be subject to 5% GIT: TIEZA, SBMA, BCDA;

2. PEZA and BOI still required to withhold withholding tax on compensation of its employees and pay FBT
since these are taxes of their employees, not the actual tax of the entity.
PERSONAL AND ADDITIONAL EXEMPTIONS:

1. Only applicable before TRAIN Law. This is repealed after TRAIN.

INDIVIDUALS:

1. Basic exemptions: 50k

2. Additional exemptions: 25k (maximum of 4 dependents)

Rules:

a. Dependents should be less than 21 years old or incapable of self-support

b. PWD may be counted as dependent even if after 21 years old
c. If Senior Citizen, 2 different view:
i. BIR View: NOT ALLOWED
ii. CTA View: ALLOWED AS EXEMPTION
d. If Aliens, subject to Reciprocity Rule. You must check how much exemption is allowed in
their country for Filipinos. Choose whichever is lower.
e. If a child became 21 during the year (or became independent), still considered as part of
exemption

Note: For other exemptions, please see discussion on Estate and Trust
ESTATE AND TRUST

ESTATE: - The assets of the decedent before being distributed to the heirs; 2 kinds of settlement:

1. EXTRA-JUDICIAL SETTLEMENT
a. The share of the heirs are taxed in their individual ITR
b. No Income tax for the estate
c. 15% CWT on Share in Income (whether distributed or not)
2. JUDICIAL SETTLEMENT
a. Taxed like an individual (so use Tax Table) –must get own TIN for Estate
i. EXEMPTIONS:
1. On the year of death - USE THE EXEMPTIONS AS IF STILL ALIVE
2. After year of death – FIXED 20k EXEMPTION
3. 2018 onwards – Repealed
ii. DISTRIBUTIONS:
1. If income distributed to heir in the year earned:
(a) Special deduction to Income of Estate
(b) Considered as Income for the heir subject to Income Tax
2. If income distributed to heir after year earned:
(a) Income of Estate subject to Income Tax
(b) No more special deduction for Estate
(c) No Taxable Income on the heir

TRUSTS: -funds given by trustor to trustee in favor of beneficiaries; 3 kinds of trusts:

1. REVOCABLE TRUST
a. Taxed as part of Income tax of trustor
2. IRREVOCABLE TRUST
a. Same tax rules with JUDICIAL SETTLEMENT
3. EMPLOYEE TRUST
a. The trust itself is not taxable
b. Employee subject to Income Tax on the excess of distributions to contributions
TAX ON SPECIAL CORPORATIONS

PAYEE BASE RATE

International Shipping
Gross Philippine Billings 2.5%
(passengers)
Lessors of cinematographic
Gross Rentals 25%
Films
Lessors of Aircrafts, Machineries,
Gross Rentals 7.5%
Equipment
Lessors of Vessels Gross Rentals 4.5%
Engage in Petroleum Business Gross Income 8%
Interest on Foreign Loans (NRFC
Interest payments 20%
lender)
Proprietary Educational
1
Taxable Net Income 10%
Institution
Microfinance NGOs Gross Receipts 2%

1
Proprietary = FOR INCOME; so if its non-profit or Government owned schools = Exempt

Example of For Profit: FEU; Example of Non-Profit: UST, DLSU, USLS; Example of Govt Owned: UP
8% GRT OPTION

1. Only available on Individuals with Gross Sales/Receipts less than or equal to 3M a year
2. In lieu of both income tax and OPT
3. NOT AVAILABLE TO:
a. GR/GS of more than 3M
b. VAT-registered voluntarily
c. Subject to OPT other than OPT 116

Note: It is based on GROSS RECEIPTS NOT GROSS INCOME unlike PEZA

Rules:

1. Purely Compensation Earner

a. GRADUATED RATES ONLY
2. Purely Business Income Earner
a. GRADUATED RATES; OR
b. 8% GRT (allowed to deduct 250k)
3. Mixed Income Earner
a. Compensation - GRADUATED RATES ONLY
b. Business Income
i. GRADUATED RATES; OR
ii. 8% GRT (Not allowed to deduct 250k)