MODULE 1: GENERAL PRINCIPLES OF TAXATION DIFFERENCES OF THE FUNDAMENTAL POWERS

ELEMENTS OF STATES Power of Power of Eminent

Police Power
1. People Taxation Domain
2. Territory Definition Power to enforce Power to enact Power to take
3. Government contributions for such laws in private property for
4. Sovereignty public purposes relation to persons public use upon
and property as paying of just
THREE BRANCHES OF THE GOVERNMENT may promote compensation. (Art
1. Legislative public health, 3, sec 9)
− Vested in the Congress (consists of the Senate and safety, morals,
House of Representatives, except those reserved to the and the general
people by the provision on initiative and referendum.) welfare of the
(Sec. 1, Art. VI, 1987 Constitution) public
− Law-making As to purpose Primary for Use of property is Taking of property
2. Executive raising revenue Regulated for for public purpose
− Vested in the President. (Sec. 1, Art. VII, ibid) for the support purpose of
− Execution of the law of the promoting the
3. Judiciary government general welfare.
− Vested in the Supreme Court and lower courts. (Sec. 1, Regulate and Property only Liberty and Property only
Art. VIII, ibid) affect (sometimes property
− Interpretation of the law liberty, in case of
tax evasion)
In taxation, there is a law enacted by the congress and enforced by the Persons Community or Community or Individual as the
executive department through Bureau of Internal Revenue on assessment affected class of class of individuals owner of a
and collection. individuals particular property
• National taxes – BIR Authority Only the Only the May be granted to
• Local taxes – provincial, city, or municipal treasurer of the local exercising the government or government public service
government power its political (national) or its companies of
subdivisions political public utilities
FUNDAMENTAL (INHERENT) POWERS OF THE STATE
(local) subdivisions
“inherent” because it co-exists with the State
Effect Taxes collected Property taken is Property taken
• The provision under the constitution is not a source of powers.
become part of destroyed after payment of
Hence, the provision under the constitution serves only as a
the public fund. because it is just compensation
limitation of the power of the government to interfere with the
(for general noxious or becomes
private right.
appropriation) injurious to public government
1. Police power (health or safety) property for public
• Power to prescribe regulations to promote health, morals, use.
peace, education, good order of safety and the general welfare Benefits Assumed the Person affected Person affected
of the people. (Primicias v. Fugoso, 80 Phil. 71) received equivalent of the receives no direct received a just
o Penal laws tax in the form and immediate compensation of
o Security regulation code of protection, benefit but only an the property
and benefits intangible altruistic expropriated.
2. The power of eminent domain received from feeling that he has
• Private property may be expropriated for public use and upon the government. contributed to the
payment of just compensation and condemnation of private general welfare.
property is justified only if it is for the public good and there is Amount of Generally, no Amount imposed No amount
genuine necessity therefor of a public character. imposition limit on the should not be imposed but the
o Private property that will be hindrance for public use amount of tax more than the cost owner is paid just
will be taken away and paid of just compensation that may be of the license and compensation of
imposed. the necessary the property taken.
3. The power of taxation
expense of
• Taxation is an act of levying a tax. It is the process or means
(Do not violate regulation.
by which the sovereign, through its law-making body, raises
the provision of
income to defray the necessary expense of the government. Itis
the constitution
a method of apportioning the cost of the government among
since it is the
those who in some measures are privileged to enjoy its benefits
only limitation.)
and must, therefore, bear its burden. (51 Am. Jur.314).
Constitutional Subject to Relatively free Subject to certain
SIMILARITIES OF THE THREE INHERENT POWERS limitation constitutional from constitutional constitutional
1. Derived from existence of the State itself limitation limitations and is limitation (e.g.
2. Exercisable even without constitutional grant superior to the inferior to
3. Way of state to interfere with private rights impairment impairment
4. Primarily exercised by the legislature provisions contract clause)
a. Through enactment of laws (Congress)
5. Exercised for public purpose 1987 Constitution: No person shall be deprived of life, liberty, or property
6. Attributes of sovereignty without due process of law, nor shall any person be denied the equal
7. Presupposes an equivalent compensation protection of the laws. (If violation of the provision happened.)
TO SUMMARIZE: THEORIES OF TAXATION
1. Lifeblood doctrine
Government • Taxes are the lifeblood of the government, and their prompt and
certain availability an imperious need. (North Camarines Lumber
Co. Inc. vs. Collector of Internal Revenue, G.R. No. L-12353,
Police Power September 30, 1960 citing Bull vs. U.S. 295, U. S. 247).
Power of Eminent Domain Inherent Powers of
the Government 2. Necessity Theory
Power of Taxation • The existence of the government is a necessity; that it cannot
continue without means to pay its expenses; and that for those
means, it has the right to compel all citizens and property within
Legislative Executive Judicial its limits to contribute.
Department Department Department
3. Benefits-Protection Theory
• Under this theory, for the benefit and protection received by the
Enforcement of taxpayer from the government, the state has the right to demand
Enactment of the payment of tax.
Tax Law Interpret Tax
Tax Laws
1. Assessment Laws
(Levying) PRINCIPLE OF SOUND TAX SYSTEM
2. Collection
1. Fiscal Adequacy
• Sources of the revenue of the government should be sufficient
Inherent Limitation (Protection) to meet the demand of public expenditures regardless of
business condition.
Constitutional Limitation – The amount that is collected from the taxes should be much
greater than the cost to operate the government.
TAXPAYER – If the expenses are greater than the collection, the tax
system is unsound.
CHARACTERISTIC OF TAXATION – However, if it is unsound, it is still a valid tax law.
1. An attribute of sovereignty
2. The strongest of all inherent powers 2. Theoretical justice
• If the issue, in instance, is revenue raising. • Tax burden must be proportionate to the taxpayer’s ability the
• However, if the issue is promotion of public health and safety, tax burden must be proportionate to the taxpayer’s ability to pay.
then the police power will be superior.
– If a person has a higher capacity to pay taxes, then they will
3. Practically absolute and unlimited pay higher taxes. Vice Versa.
• One decision of a supreme court: CUPS – Comprehensive, – Because we follow the progressive system of
Unlimited, Plenary, Supreme taxation (as the tax base increase, the tax rate
• Comprehensive – since the Congress (not the supreme court increase and vice versa). Direct Relationship
since it is a political question) have the power to subject – Regressive system of taxation: As the tax base
(whoever) to tax whenever it will raise the revenue. Supreme decrease, tax rate increase and vice versa. (Indirect)
Courts will only see if there is a violation in the constitution.
What if the theoretical justice has been violated, does it mean
4. Carries with it inherently the power to embarrass and destroy. the tax laws become invalid? Possible, if there is violation on
• U.S. Justice Malcolm: Taxation includes the power to destroy. constitutional provision and it will affect the constitutionality of
“The power to tax includes the power to destroy.” the law (theoretical justice).
– because the Congress can impose any tax rate to the
extent that they will destroy the operation or business 3. Administrative Feasibility
of the taxpayer. • Tax laws must be capable of convenient, just and effective
• Justice: “The power to tax do not include the power to destroy administration. (Free from confusion and uncertainty).
as long as the court sit.” – The collection of taxes must be feasible, if not, it will be
– because the court can extract out the tax laws that unsound even if you impose tax laws. Hence, it must be feasible.
violate the provision in the constitution. – If the administrative feasibility is violated, it will not
5. It is a legislative power affect the validity of the tax law. It will just remain
unsound.
STAGES OR PROCESS OF TAXATION
1. Levy or Imposition CHARACTERISTICS OF TAXES
• A legislative act whereby the Congress shall determine the 1. An enforced contribution
subject or object of taxation (it may be person whether natural ✓ Not voluntary
or juridical; property whether real or personal; or rights), the 2. Proportionate in character
amount to be collected and how it is to be implemented. ✓ It must be based on the taxpayer’s ability to pay.
(Impact of taxation) 3. Generally payable in money, although the law may allow the payment
2. Assessment in other form
• Administrative in character. The determination of the correct 4. Imposed on persons, property or exercise of right or privileges
amount of applicable tax. 5. Imposed by the State which has jurisdiction over the object or subject of
3. Collection of tax taxation (Person, property or excise)
6. Levied for public purpose
• Administrative in character. This involves the act of
7. Personal to the taxpayer
administration and implementation of tax laws by the executive
through its administrative agencies such BIR and Bureau of
Customs.
PURPOSES OF TAXATION difference is subject to VAT, or called as VAT
1. Revenue or Fiscal or Primary Purpose – to raise revenue to finance Payable. The Php2 will be remitted to the BIR.
various activities of the government. However, the tax burden is transferred in the form of
– To defray expenses of the government higher cost by selling it to another seller. The final
2. Other Purposes – is used to regulate inflation, to achieve economic and consumer will shoulder the higher cost.
social stability, to serve as a key instrument for social control. 3. As to purpose
– The amount of taxes may be increased to curve the spending – General, fiscal or revenue
power, to protect local industries against foreign competition and • Primary purpose of tax is to raise revenue.
minimize inflation in times of prosperity. It may be reduced to – Special
expand business, encourage foreign trade and to ward off • Other purposes, such as to protect local industries and to
depression in times of declining economic condition. encourage investment.
– Taxes on imported goods may also be used as a bargaining tool by 4. As to manner of computation
the government. – Specific
i. In order to protect local manufacturer and be able • Based on unit
to compete, taxes are used to increase tariff rates. – Ad Valorem
ii. If there is an increase in tariff rates, then there is • Based on value.
an increase in cost. o Capital gains tax on real property: 6% market value
– Taxes are imposed to encourage economic growth by granting tax or selling price, whichever is higher, will be based on
incentives, exemptions, relief to attract investments that will the amount of valuation of the property
increase employment. 5. As to taxing authority
i. Philippine Economic Zone Authority (PEZA) – – National
there are tax holidays that is not to raise revenue • Implemented and administered by the Bureau of Internal
but to raise the economic activity. Revenue
– Is used for the promotion of science, invention or in financing • Written in the tax code
educational activities or use in improving the efficiency of the police • Enacted by Congress
forces in the maintenance of peace and order. – Local
CLASSIFICATION OF TAXES • Implemented by the City, Municipal, or Provincial Treasurer
1. As to subject matter • Enacted by the Sanggunian (Panlalawigan or Panlungsod)
– Person (Personal, poll or capitation) • In fact, under the local government code, the local government
• Community tax or Poll tax has the power to raise their own revenue and they have fiscal
• Taxes are imposed on the person themself residing on certain autonomy.
locality 6. As to rate
– Property – Progressive tax
• Real property tax • Tax base increases as well as tax rate.
• Taxes are imposed on the property itself, within its physical • Tax base decreases as well as tax rate.
territorial jurisdiction. – Regressive tax
• Ex. If it is outside the Philippines, it cannot be liable to pay • Tax base increases, tax rate decreases.
taxes since the property is outside the territorial jurisdiction • Tax base decreases, tax rate increases.
(which is the Philippines) and will not receive protection from – Proportionate
the government. • Fixed rate.
– Excise or privilege tax
EXAMPLES OF NATIONAL TAX
• Taxes are imposed on the privilege, not the person or the
1. Income tax
property. Although the value of the property can be a basis but
2. Estate tax
the tax itself is the privilege.
3. Donor’s tax
• The taxes provided under the National Internal Revenue Code
4. Value-added tax
are the excise or privilege taxes, such as income tax, donor’s
5. Other percentage tax
tax, estate tax, value-added tax, percentage tax, and
6. Excise tax
documentary stamp tax.
7. Documentary stamp tax
o Income tax is taxed from your privilege to generate
an income. EXAMPLES OF LOCAL TAX
o Estate tax is taxed from the transfer of the property 1. Real property tax
from the decedent to the legal heirs. 2. Professional tax
3. Business taxes, fees and charges
2. As to one who bears the burden
4. Community tax
– Direct tax
5. Tax on banks and other financial institutions
• The taxpayer bears the tax liability and tax burden. Also, the
tax burden cannot be transferred. TOLL AND TAXES
o Income tax: tax liability and burden cannot be Toll – a sum of money for the use of something, generally applied to the
transferred because it is both personal. consideration which is paid for the use of road, highway, bridges or the like,
– Indirect tax of a public nature. (Black law dictionary, 6th edition)
• The tax burden can be transferred, not the tax liability because
it is personal. Toll Tax
o Value-added tax: the tax burden can be transferred It is a demand of proprietorship It is a demand of
in the form of higher cost. sovereignty
o Ex. A manufactured a product worth Php10, which It is a construction of roads and express
is the product’s cost that B will have input tax. B sold ways which are built-operate-transfer. It is
it as Php12, which has an output tax. The Php2 financed by private individuals where they
have an agreement with the government that
 after they recovered their respective costs Debt Tax
and reasonable income, the ownership will Obligation arising from contract Obligation arising from law
be transferred to the government. Generally assignable Generally, not assignable
Paid for the use of another’s property Paid for the support of the
government In fact, under Art. 1179 of the Civil Code,
Exaction is based on the cost of construction Exaction is based on the general rule all rights acquired by breach
or maintenance. necessity of the state. obligation are transmissible.
Can be imposed by the government or Can be imposed only by It can be paid in kind (Dacion en pago) Generally payable in money
private entities. the government. according to agreement
Can be subject of compensation Cannot be subject of
PENALTY AND TAXES compensation
Penalty – a sum of money which the law exacts payment of by way of No imprisonment for non-payment of There is imprisonment for
punishment for doing some act which is prohibited or for not doing some act debt (except when it arises from crime). non-payment of tax (through
which is required to be done. (Black law dictionary, 6th edition) tax evasion)
Prescriptive period is governed by the Prescriptive period is
Penalty Tax ordinary contract governed by the tax code.
It can be imposed by the government It can only be imposed by the Draws interest when it is stipulated or Does not draw interest except
or private individuals or entity. government when there is default. when delinquent.
Its purpose is to regulate conduct. Its purpose is to raise revenue
DISTINCTION OF TARIFF AND CUSTOMS
LICENSE FEE AND TAXES
License fee – charge imposed by the governmental body for the granting of Tariff Customs
a privilege. (Pennsylvania Liqour Control Board vs. Publiker Commercial Official list or schedule Means habitual practice
Alcohol C., 347 Pa. 555, 32 A.2d 914, 917) It denotes the list or Denotes customary tolls or dues paid by
schedule of commodities merchant upon commodities on their way to
License fee Tax with the particular duties or from market, not necessary differentiated
The purpose is to regulate The purpose is to raise revenue or charges upon each by the class of goods for the benefit of the
business or occupation noted. king, lord local government or other authority.
Primary an exercise of police An exercise of power of taxation
power OTHERS
The exaction is limited to the cost Generally, no limit as to the amount Imposts – in its broad sense, means any tax or tribute imposed by authority,
of police surveillance and of exaction and applies as well to a tax on persons as a tax on merchandise. (Nague,
regulations Tariff and custom code 1st edition 2005). This indicates a particular kind of
Non-payment of license make the Non-payment of tax does not make tax levied by the government on importation or exportation of commodities in
business illegal business illegal or out of the Philippines.

But can be held liable for tax Assessment – the process by which persons subject to taxation are listed,
evasion their property described, and its value, ascertained and stated. (Cooley,
Taxation, Vol 1 4th ed., p.78)
Three Kinds of License
Revenue – is a flow of wealth to the government. These are income of the
1. Licenses for the regulation of useful occupations or enterprises
government which includes all public moneys which the state collects and
a. Purely exercise of police power because the purpose of the
received from whatever source and in whatever manner. Revenue covers the
license is to regulate useful occupation or enterprises.
tax collected.
2. Licenses for the regulation or restriction of non-useful occupations
a. It can use (higher rate of) taxes as a mean to regulate to • Revenue is broader than taxes because the revenue involves all flow
discourage the non-useful occupation. of wealth to the government.
3. Licenses for revenue only. Subsidy – is a monetary aid directly granted or given by the government to
a. Purely exercise of taxation. individual or private commercial enterprises in which the government desires
SPECIAL ASSESSMENT AND TAXES to participate or which is considered proper subject of government aid
Special assessment – an assessment in the nature of a tax levied upon because such purpose is likely to be beneficial to the public.
property according to benefits conferred on the property. (Davies vs. City of SOURCES OF PHILIPPINE TAX LAWS
Lawrence, 218 Kan. 551, 545 P.2d 1115, 1120) 1. (1987) Constitution of the Philippines
2. Statutes – laws enacted (by Congress, specifically R.A. 8424 and its
Special assessment Tax
amendment) and established by the will of the legislative department of
It is levied only on land It is levied on person, property right
the government.
or privileges
3. Executive orders – regulations issued by the President or some
It is not liability of the person It is liability of the person taxed administrative authority for the purpose of interpreting, implementing or
assessed giving administrative effect to a provision of the constitution.
It is based wholly on benefits on the It is based on necessity of the 4. Tax treaties and conventions with foreign countries
land (not on necessity) government 5. Revenue regulation promulgated by the Department of Finance
It is exceptional both as to time and It has general in application 6. BIR and Custom revenue Memorandum
place 7. BIR Ruling
8. Judicial decisions
DEBT AND TAXES 9. Local tax ordinances
Debt – is an obligation to pay or render services for a definite period of time
based on a contract. Note: In case of conflict between the tax laws and GAAP, the tax laws shall
prevail (if the issue is tax liability). However, for purpose of financial statement
presentation, GAAP prevail over tax law.
TYPES OF ADMINISTRATIVE ISSUANCES
1. Revenue Regulations (RRs) are issuances signed by the Secretary of
Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the
effective enforcement of the provisions of the National Internal Revenue
Code (NIRC) and related statutes.
✓ Administrative issuance of Department of Finance
2. Revenue Memorandum Orders (RMOs) are issuances that provide
directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in
the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.
3. Revenue Memorandum Rulings (RMRs) are rulings, opinions and
interpretations of the Commissioner of Internal Revenue with respect to
the provisions of the Tax Code and other tax laws, as applied to a
specific set of facts, with or without established precedents, and which
the Commissioner may issue from time to time for the purpose of
providing taxpayers guidance on the tax consequences in specific
situations. BIR Rulings, therefore, cannot contravene duly issued RMRs;
otherwise, the Rulings are null and void ab initio.
✓ RMR prevails over BIR Rulings
4. Revenue Memorandum Circular (RMCs) are issuances that publish
pertinent and applicable portions, as well as amplifications, of laws,
rules, regulations and precedents issued by the BIR and other
agencies/offices.
5. Revenue Bulletins (RB) refer to periodic issuances, notices and official
announcements of the Commissioner of Internal Revenue that
consolidate the Bureau of Internal Revenue's position on certain specific
issues of law or administration in relation to the provisions of the Tax
Code, relevant tax laws and other issuances for the guidance of the
public.
6. BIR Rulings are official position of the Bureau to queries raised by
taxpayers and other stakeholders relative to clarification and
interpretation of tax laws.
✓ Applies only to specific matters
REQUISITES FOR LAWFUL EXERCISE OF TAXING POWER
1. Public purpose
a. If it is in private purpose, it is a robbery in a legal form
2. Uniformity rule of taxation observed
a. Persons or things that are similarly situated must be treated
(taxed) alike.
3. Either the person or property taxed is within the jurisdiction of the
government levying the tax
a. The only person with jurisdiction over the person, property,
right, or privileges that will be imposed on tax.
b. The jurisdiction here is not just the physical or territoriality,
since if you are a resident citizen and you have an income
that generates within/without, then you are taxable from the
income within/without even if your income is generated from
U.S. or Japan. Also, you have a jurisdiction because of the
citizenship of the one that generates the income. Last, the
taxable here is not the person or the property, rather the
privilege that one to generate income.
4. In the assessment and collection of certain kinds of taxes, notice and
opportunity for hearing are provided. (Pepsi Cola Bottling Company vs.
Municipality of Tanauan, G.R. No. L-31156. February 27, 1976, citing
Malcolm, Philippine Constitutional Law, 513-14)
a. There must be a due process. Otherwise, it will violate the
1987 Constitution. The taxpayer must be given the
opportunity to be heard.
INHERENT LIMITATION
1. Limited to territorial jurisdiction of the taxing power or situs of taxation
2. Observance of international comity
a. Rule: Philippines cannot imposed taxes on foreign country
since it is observed by international comity and based on
doctrine of par in parem non habet imperium (a co-equal
state cannot imposed to another co-equal state).
3. Public purpose of taxes
4. Non-delegablity of the taxing power
5. Recognized tax exemption of the government entities
a. The government that performs governmental functions are
exempted from taxes.
b. The government that performs private and proprietary
functions are taxable.
FACTORS THAT DETERMINE THE SITUS OF TAXATION
1. Kind or classification of the tax being levied
• Person, property, excise or privileges
2. Situs of the thing or property taxed
• Location of the thing or property
3. Citizen of the taxpayer
4. Residence of the taxpayer
5. Source of the income taxed
6. Situs of the excise, privileged, business or occupation being taxed
• If it is an income tax and you are a resident or a citizen, you
are taxable from income within/without by reason of
citizenship.
• If you are an “alien” and generate an income from the
Philippines, you are taxable based on residency.
• If you are not a citizen or a resident, but generated an
income from the Philippines, you are still taxable because of
the source of income or the place of the excise, privileged,
business or occupation.
(1) SITUS OF TAXATION
Situs means the location of property or an item for legal purposes.
Determination of situs of taxation:
1. Subject matter
2. Nature of tax
3. Citizenship
4. Residence
Certain rules in situs of taxation:
Real Property
– Real property is normally determined by its geographical location
but with the exception of intangible real property such as “Contracts
for public works, and servitudes and other real rights over
immovable property”. (Article 415 (10) of the NCC)
Tangible Property
– Tangible personal property for estate tax purpose is determined of
its geographical location.
Intangible Property
Intangible personal property is generally determined by the residence of the
decedent. However, the following intangible properties are deemed situated
within the Philippines.
We follow the doctrine of mobilia sequuntur personam. It literally means
“movable follows the residency of the owner”.
• Ex. Foreign national who is residing outside the
Philippines, his movables follow his residency.
However, the supreme court said that if it will cause injustice, we will not follow
the doctrine of mobilia sequuntur personam.
Listed below are all considered as properties located within the Philippines:
– That franchise which must be exercised in the Philippines
– Shares, obligations or bonds issued by any corporation or sociedad
anonima organized or constituted in the Philippines in accordance
with its laws
 – Shares, obligations or bonds by any foreign corporation eighty-five
percent (85%) of the business of which is located in the Philippines
– Shares, obligations or bonds issued by any foreign corporation if
such shares, obligations or bonds have acquired a business situs in
the Philippines
– Shares or rights in any partnership, business or industry established
in the Philippines, shall be considered as situated in the Philippines.
(Sec 104, RA. 8424)
• Ex. You are a foreign national and a partner of a partnership
in the Philippines, your share in the partnership is considered
property located within the Philippines.
To summarize: If you are a citizen or a resident, you are taxable from all
properties regardless of location. If you are a non-resident alien, you are
taxable only from the property located within the Philippines. This is important
in estate tax.
DOCTRINE OF MOBILIA SEQUUNTUR PERSONAM
Movables follow the person
• Applicable when convenient
• Not applicable
– Inconsistent with provision of the law
– Application would result in injustice
– When property has acquired an actual situs elsewhere.
• Tangible property
– Definite location + some degree of permanency
OTHER SITUS OF TAXATION
1. Business tax situs – place where the business is conducted
➢ If the business is conducted in the Philippines, it is an income
within the Philippines.
➢ If the business is conducted abroad, it is an income
generated (outside the Philippines) abroad.
2. Income tax situs
a. Residence
b. Citizenship
c. Where the income was earned.
3. Income tax situs on sale of goods – place of sale
➢ If the sale is consummate within the Philippines, it is an
income within the Philippines.
➢ If the sale is consummate abroad, it is an income generated
abroad.
4. Income tax situs on sale or service – where services are rendered
➢ You are paid within the Philippines, yet the services are
rendered abroad, then it is an income generated abroad.
➢ You are paid abroad, yet the services are rendered within the
Philippines, then it is an income located within the
Philippines.
5. Property tax situs – where the property is located
a. Real property or tangible personal property – location
b. Intangible personal property – generally domicile of the
owner unless the situs is acquired elsewhere.
6. Personal tax situs – where the persons place of residence.
(2) OBSERVANCE OF INTERNATIONAL COMITY
This is based on the principle of par in parem non habit imperium (equals do
not have authority over one another).
o The observance of international comity is expressly recognized under
Section 32, (B)(7)(a) of the Tax Code by excluding the income derived
by foreign government from gross income as follows:
– “Income Derived by Foreign Government. – Income derived from
investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions
established by foreign governments.”
(3) PUBLIC PURPOSE OF TAXES
Test in determining Public Purpose
− Duty test
o Whether the thing to be furthered by the appropriation of public
revenue is something which is the duty of the State, as a
government, to provide.
− Promotion of General Welfare test
o Whether the proceeds of the tax will directly promote the
welfare of the community in equal measure. (1 Cooley 384)
o Ex. public schools, increase the income of police officers
Illustration of Public Purpose
1. The eradication of a dreaded disease is a public purpose (Benjamin
Gomez vs. Enrico Palomar et al, G.R. No. L-23645. October 29, 1968)
a. In this case, there was a law enacted wherein the collection
(profit/proceeds) in the postage stamp will be used for
eradication of tuberculosis. However, some petitioners
questioned the legality of this law because they assumed that
the proceeds are not for public purpose since the people who
will benefit from it are the persons who have tuberculosis.
b. The question here is that whether the collection is for public
purpose or not? Supreme Court: Affirmative that it is for
public purpose because it is one of the duties of the
government to eradicate the spread of the tuberculosis.
2. Financing educational activities and programmes. (R.A. No. 5447)
3. Promotion of science (R.A. No. 5448)
4. Erection and maintenance of roads, bridges and piers.
5. Aids for victims of calamity. (Luna vs. Chippewa County, 34 LRA 131)
6. Relief of the poor and unemployed
7. Payment of pensions and bonuses for service rendered by public
employees
(4) NON-DELEGABLITY OF THE TAXING POWER
• Maxim: potestas delegata non delegari potest which means “what has
been delegated, cannot be delegated.” (Doctrine of non delegata
potestas non potest delegari)
o If we delegated the enactment of laws to the government
(Congress), they cannot delegate it to others.
o The Congress can only exercise the taxing power.
o The administrative agency cannot exercise the taxing
power. Otherwise, it is a violation of the separation of
powers.
▪ Constitution: The power of legislation is
vested on the Congress, which is composed of
the Senate and the House of Representatives
(Art. VI, Sec. 1)
• The general rule barring delegation of legislative powers is subject to
the following recognized limitations or exceptions:
o Delegation of tariff powers to the President under Section
28 (2) of Article VI of the Constitution;
o Delegation of emergency powers to the President under
Section 23 (2) of Article VI of the Constitution;
o Delegation to the people at large;
o Delegation to local governments; and
▪ Fiscal Autonomy: The local government can
raise their own taxing revenue or source of
income.
▪ The local government can impose taxes
through ordinances.
o Delegation to administrative bodies.
Test of Valid Delegation (of Power to Administrative Agencies)
If one violates this test, it will not be a valid delegation of powers. Also, it will
be unconstitutional since it violates the Art. VI, Sec. 1 of 1987 Constitution.
1. Completeness test – is complete in itself, setting forth therein the policy
to be executed, carried out, or implemented by the delegate; (Pelaez vs.
Auditor General, No. L-23825, December 24, 1965)
2. Sufficient standard test — the limits of which are sufficiently
determinate and determinable — to which the delegate must conform in
the performance of his functions. (Pelaez vs. Auditor General, ibid, citing
People vs. Lim Ho, No. L-12091-2, January 28, 1960,106 Phil. 887). A
sufficient standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency to apply
it. It indicates the circumstances under which the legislative command is
to be effected. (Edu vs. Ericta, No. L-32096, October 24, 1970, 35 SCRA
481, 497)
a. The Congress setup a limit and boundaries. Then, the
implementing (administrative) agency will fill up the details
through the implementing rules.
Pure Legislative Act
These are not done by administrative agencies.
Coverage (subjects)
Object (Purpose)
Congress Situs (place) of taxation
Extent (rate)
Nature (kind)
Ex. One of the tax laws indicates that the BIR can determine the rate that will
be impose to the taxpayer. This is unconstitutional.
Can be delegated to administrative agency
1. The power to value property for purpose of taxation pursuant to fixed
rules
2. The equalization of assessments by a central body
3. Collection of taxes
4. The power to perform any of the innumerable details computation,
appraisement and adjustments and the delegation of such details.
(5) RECOGNIZED TAX EXEMPTION OF THE GOVERNMENT ENTITIES
Rule: The government cannot tax itself
➢ Exemption from taxation of government agencies and
instrumentalities
– Agencies performing governmental function
• Tax exempt, unless expressly taxed.
– Agencies performing proprietary functions
• Subject to tax, unless expressly exempted.
– Government Service Insurance System (GSIS)
– Social Security System (SSS)
– Philippine Health Insurance Corporation (PHIC)
– Philippine Charity Sweepstakes Office (PCSO)* (now
removed by R.A. 10963, TRAIN Law)
CONSTITUTIONAL LIMITATION
General or indirect (Applicable to the three inherent powers)
1. No person shall be deprived of life, liberty, or property without due
process of law. (Sec 1, Art. III, 1987 Constitution)
2. No person shall be denied the equal protection of the laws. (Sec 1, Art.
III, 1987 Constitution)
3. No law shall be passed abridging the freedom of speech, of expression,
or of the press, or the right of the people peaceably to assemble and
petition the Government for redress of grievances. (Sec 4, Art. III, 1987
Constitution)
4. No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and enjoyment
of religious profession and worship, without discrimination or preference,
shall forever be allowed. No religious test shall be required for the
exercise of civil or political rights. (Sec 5, Art. III, 1987 Constitution)
5. No law impairing the obligation of contracts shall be passed. (Sec 10,
Art. III, 1987 Constitution)
WHEN DUE PROCESS IS VIOLATED?
Due process – to hear, before it condemned.
1. Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose;
2. A tax is imposed on property outside or beyond the jurisdiction of the
State (e.g., extra-territorial taxation);
3. Arbitrary or oppressive methods are used in assessing and collecting
taxes;
4. When the tax measure is so arbitrary amounting to confiscation of
property;
5. In case of a retroactive statute which is so harsh and unreasonable.
(Pepsi Cola Bottling Co., vs. Municipality of Tanauan, G.R. No. L-31156.
February 27, 1976)
WHAT CONSTITUTE EQUAL PROTECTION OF THE LAW?
No person shall be denied the equal protection of the laws.
• Equal protection of the law clause "does not demand absolute equality
amongst residents; it merely requires that all persons shall be
treated alike, under like circumstances and conditions both as to
privileges conferred and liabilities enforced"
The equal protection does not allow class legislation, but it allows with valid
classification.
− Ex. There is an enactment of laws regarding senior citizens that
they will receive certain benefits, such as discounts.
− Is this a violation of equal protection of the law? No, because all
persons that qualified as senior citizens will be benefit with this law
and this is a valid classification.
− However, if you are a senior citizen and you do not receive such
benefits, this will constitute a violation of the law that has been
enacted.
− Ex. Maternity leave, paternity leave. (Valid classification)
EXTENT OF CONSTITUTIONAL GUARANTEE
Freedom of religion – prohibits the law establishing religion or prohibits the
free exercise of it. (Sec 5, Art. III, 1987 Constitution)
• The constitutional guaranty of the free exercise and enjoyment of
religious profession and worship carries with it the right to disseminate
religious information. Any restraint of such right can only be justified like
other restraints of freedom of expression on the grounds that there is a
clear and present danger of any substantive evil which the State has the
right to prevent. (American Bible Society vs. City of Manila 101 Phil 386
citing Tañada and Fernando on the Constitution of the Philippines, Vol.
I, 4th ed., p. 297)
o Facts: Before selling religious articles, one must have a permit from
the City of Manila.
o Issue: The American Bible Society questioned the legality of the
ordinance of it since it is a violation of 1987 Constitution because it
prohibits the exercise of freedom or religion through prior restraint.
o Ruling: Supreme court stated that the ordinance enacted by the
City of Manila is unconstitutional because it has proven that there
is a prior restraint.
No law impairing the obligation of contracts shall be passed. (Sec 10,
Art. III, 1987 Constitution)
• Franchise not covered in the non-impairment clause
o Franchise is a mere privilege granted by the state.
• A franchise partakes the nature of a grant which is beyond the purview
of the non-impairment clause of the Constitution.
• Article XII, Section 11, of the 1987 Constitution is explicit that no
franchise for the operation of a public utility shall be granted except
under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so
requires.
CONSTITUTIONAL LIMITATION
Specific or direct
1. No person shall be imprisoned for debt or non-payment of a poll tax. (Art
III, Sec 20)
2. All appropriation, revenue or tariff bills, bills authorizing increase of
public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may
propose or concur with amendments. (Art. VI, Sec 24)
3. The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation. (Art. VI, Sec 28[1])
4. The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national development
program of the Government. (Art. VI, Sec28[2])
5. Charitable institutions, churches and parsonages or covenants
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from
taxation. (Art. VI, Sec 28[3])
a. It only applies to real property tax.
b. Exclusively means solely (Case of the Lung Center of the
Philippines)
6. No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress. (Art. VI,
Sec 28[4])
a. Members – both the House and the Senate
7. The Congress shall have the power to define, prescribe, and apportion
the jurisdiction of various courts but may not deprive the Supreme Court
of its jurisdiction in all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto. (Sec. 2,
Art. VIII in relation to Sec. 5[2], Art VIII, 1987 Constitution)
8. No public money or property shall ever be appropriated, applied, paid or
employed, directly or indirectly for the use, benefit or support of any sect,
church, denomination, sectarian institution, or system of religion, or any
priest, preacher, minister or other religious teacher, minister, or
dignitary, is assigned to armed forces, or any penal institution, or
government orphanage or leprosarium except when the priest,
preacher, minister, or dignitary is assigned to the armed forces or to any
penal institution, or government orphanage or leprosarium. (Sec. 29 (2),
Art VI)
a. There is a recognition of separation between the Church and
the State, hence, there will be no public fund that will go to the
benefit of any church or religious sector.
9. All revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed
of in the manner provided bylaw. (Art XIV, Sec 4[3])
a. Sectarian universities such as San Beda and UST shall be
exempted from income tax.
b. Private educational institution or proprietary educational
institution such as FEU and
10. Propriety educational institutions, including those cooperatively owned,
may likewise be entitled to such exemptions subject to the limitations
provided by law including restrictions on dividends and provisions for
reinvestment. (Art XIV, Sec 4[3] par 2)
11. Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax. (Art XIV, Sec 4[4])
CASE: TOLENTINO VS. SECRETARY OF FINANCE
• Facts: The House of Representative made a bill, the VAT Law. When it
has passed to the Senate, the Senate bill version of the VAT Law was
already made. When it has been enacted, the provisions from the House
bill was totally eliminated. Hence, the VAT Law that has been executed
was the Senate bill version.
• Issue: The petitioners question the legality of the VAT law since it has
violated the provision of the Sec 24, Art. VI of the 1987 Constitution.
o Ruling: Supreme Court said that the law is valid and
constitutional because the requirements from the House of
Representative is the bill only, not the law. Otherwise, the
Senate will no longer have the power to propose or concur with
amendments
• Another Issue: The petitioners question the legality of the VAT law
since it is regressive because it is based on consumption, not the
capability to pay the tax.
o Ruling: Supreme Court said that it is regressive, however, it
did not totally prohibit the progressive because as per Sec
29[1], Art. VI of the 1987 Constitution, it cannot totally avoid or
eliminate being regressive.
The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation. (Art. VI, Sec 28[1])
Uniformity defined:
− Uniformity, as applied to the constitutional provision that all taxes shall
be uniform, means that all property belonging to the same class
shall be taxed alike. (Adams vs. Mississippi State Bank, 23 South,
395, citing Mississippi Mills vs. Cook, 56 Miss., 40.)
Equity in Taxation
− Equity in taxation means fair, just, reasonable and proportionate to
one’s ability to pay.
Progressive defined
− Taxation is progressive when its rate goes up depending on the
resources of the person affected. (Reyes vs. Almanzor, G.R. Nos.
49839-46, April 26, 1991, 196 SCRA 322, 327).
REQUISITES OF REASONABLE CLASSIFICATION
To have a valid classification and no violation to uniformity and equity
1. The standards that are used therefor are substantial and not arbitrary;
2. The categorization is germane to achieve the legislative purpose;
a. Maternity is categorized to protect the rights and health of the
mother.
b. Senior Citizens normally are retired and cannot generate more
income. Senior Citizens’ discount is categorized to maximize the
use of their resources from pension or retirement pay.
3. The law applies, all things being equal, to both present and future
conditions,
a. Case of City of Ormoc: There has been an ordinance made by
the city that imposes tax from the manufacture of plantation of
sugar of a certain company. It was indicated in the ordinance the
name of the company. In that time, there has only one plantation
of sugar.
i. According to the petitioners, this is unconstitutional because
it violates the equal protection clause and no valid reasonable
classification. Also, it has been indicated in the ordinance that
the company is the only corporation that is subject to tax. It
only applies to the present condition, not the future condition
because if there is another company that will make another
plantation of sugar, they will not be subject to tax.
4. The classification applies equally well to all those belonging to the same
class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR,
197 SCRA 771)
TWO KINDS OF DOUBLE TAXATION
As a rule, is double taxation prohibited from the constitution?
• No, because if there will be double taxation, then the law will not be
unconstitutional for that reason alone unless if there will be a double
taxation in a strict sense.
1. Direct (strict sense)
− May be unconstitutional
− Violates uniformity rule or the equal protection guarantee
2. Indirect (broad sense)
− Follows constitutional rule on uniformity, there is no valid
objection to taxing the same income, business or property
twice
Double taxation in strict sense
Double taxation means taxing a person, property or rights
a. Twice;
b. Within the same taxable year;
c. By the same taxing authority;
d. Within the same jurisdiction; and
e. For the same purpose
▪ A is a resident-citizen and he is taxed by the Philippine government on
his income within (Philippines) and without (US) and the US government
taxed his income without (in the US). Is this double taxation in strict
sense?
o No, because both of the government have different taxing
authority from the each other.
NO DOUBLE TAXATION
• By taxing corporate income and stockholders’ dividends from the
same corporation
o ABC Corporation is taxed by its income. The corporation
declared dividends wherein it distributes income to the
stockholders then the distribution is also being taxed. Is this
double taxation in strict sense?
▪ No, because the corporation’s and stockholders’
taxes are different from each other (Doctrine of
Separate Juridical Personality).
• Tax imposed by the State and the local government upon the same
occupation, calling or activity
o In the rule of local government code, one limitation of the
power of the local government is that they cannot impose a
tax that is being imposed by the national government.
• Real estate tax and income tax collected on the same real estate
property leased for earning purposes
HOW TO AVOID DOUBLE TAXATION?
1. Allowing reciprocal exemption either by law or by treaty
a. It may have a treaty agreement between two different
countries that the overseas worker’s income will be exempted
to tax by the foreign country as well as foreign citizen in the
local country.
2. Allowance of tax credit for foreign taxes paid
a. Income generated in the foreign country and the Philippines
will be taxed by the Philippine government, however, the tax
paid in the foreign country is only allowed to be deducted in
the Philippines as tax credit.
b. Rule: Whichever is lower between the tax paid in the
Philippines and the foreign country.
3. Allowance of deductions such as for foreign taxes paid, and
vanishing deductions in estate tax
a. The payment abroad will be deducted in the local country to
arrive as taxable income.
b. Gross Income – Allowable Deduction = Taxable Income
4. Reduction of Philippine tax rate
a. Measure to reduce impact of double taxation
ESCAPE FROM TAXATION
1. Shifting of tax burden
a. VAT: The tax liability and tax burden are on the person, yet,
he can shift the burden in the form of higher cost on the
transferee.
b. If you are the final consumer, you cannot transfer any burden,
hence, you consumed the item at higher cost.
c. Tax liability cannot be shifted or transferred, only the tax
burden.
2. Transformation
a. Manufacturer: Transforms raw materials to finished products
3. Tax avoidance (tax minimization)
a. You can reduce the tax liability, but within the provision of the
law.
4. Tax evasion (tax dodging)
a. You are reducing the tax liability, but not in the accordance
with the law.
Example to distinguish tax avoidance and tax evasion
There are two roads: one road is free, and one road is being paid for.
• If you are crossing the free road, then this is the tax avoidance
because you are minimizing your tax liability but within the
provision of law.
• On the other hand, if you are crossing the other road but you are
not willing to pay, then it is tax evasion because you are minimizing
your tax liability but not in the accordance with law.
If there is no issuance of receipt, then it is tax evasion.
• There will be no reflection and recognition of income.
• It reduces tax liability because it reduces revenue. Hence, gross
income will be lower as well as the taxable income.
• Under the law, all the revenues from sale of services shall be
required to be issued with receipts and invoices for sale of goods.
Others
Before, donation of less than or equal to P100,000 is exempted from donor’s
tax, however, as per TRAIN Law, donations’ flat rate is 6%.
• Before, if a person wants to donate P200,000, then it is subject to
tax. Hence, to be exempted from tax, he must split the donation,
the first P100,000 will be donated in the current year (12/31) and
second P100,000 will be donated next year (1/1).
o Is this allowed? Yes, this is tax avoidance since it is
allowed by the prior law.
SHIFTING OF TAX BURDEN
• Transfer of burden (not payment) of tax from the statutory taxpayer to
another without violating the law
• All indirect taxes (VAT, percentage tax) may be shifted; direct taxes
cannot be shifted
Ways of Shifting Tax Burden
1. Forward shifting
− Manufacturer => Retailer => Consumer
2. Backward shifting
− Consumer => Retailer => Manufacturer
3. Onward shifting
− Shifting two or more times either forward or backward
IMPACT VS. INCIDENCE OF TAXATION
1. Impact
− Point of original imposition of tax (or the one on whom the tax
is formally assessed)
2. Incidence
− Point on which the tax burden finally rests
Example:
• VAT is originally assessed against the seller who is required to pay
the said tax, but the burden is actually shifted or passed on to the
buyer.
• Income Tax: Tax impact and tax incidence are both on the person
wherein you cannot shift the tax burden because the income tax
both have the tax liability and the tax burden.
TRANSFORMATION
• A manufacturer absorbs the burden of tax
• to maintain the market share and to recover such tax expense
• by improving the process of production.
TAX EVASION VS. TAX AVOIDANCE • The Doctrine of Equitable Recoupment finds no application in the
Philippines
TAX EVASION TAX AVOIDANCE
Another name Tax dodging Tax minimization Allowed compensation
Means Use by illegal means Use legal means • If all requisites of legal compensation are present, then there will
Penalty Punishable by law Not punishable by law be legal compensation by operation of the law even though the
Object To entirely escape To merely minimize parties are not aware of it.
payment of taxes payments of taxes • In a real-life case, the claim of the taxpayer against the government
• If you are not issuing receipts, then it is tax evasion. In fact, under tax has appropriation, hence, the claim is liquidated.
code, if you have under declaration of revenue or income at least 30% • However, the rule is that off-setting is not allowed.
and above, then there will be an assumption that the you have a willful
intention to evade. Hence, there will be an understatement of income COMPROMISE
and overstatement of expenses.
• Making reciprocal concessions, avoid litigation, or put an end to one
TAX ADMINISTRATION already commenced
• Reduction of the taxpayer’s liability
• Refers to the management of the tax system • Persons allowed:
o BIR Commissioner
INTERPRETATION AND CONSTRUCTION OF TAX STATUTES o Collector of Customs
o Customs Commissioner
• Tax imposition – strictly against the government and liberally in favor
of the taxpayer. TAX AMNESTY
o Tax imposition is an additional burden to the taxpayer.
• Waiver of the Government of its right to collect taxes
• Tax exemption – strictly against the taxpayer and liberally in favor of • Never favored nor presumed in law
the government. o To avail tax amnesty, there must be a specific provision under
o In fact, to avail the tax exemption, there must be a clear the law that grants tax amnesty.
provision under the law that grants tax exemption. o If the taxpayer died 30 years ago, one will pay 6% without any
penalty to transfer the inheritance to the legal heirs.
• Tax deduction – strictly against the taxpayer and liberally in favor of the
• Construed strictly against the taxpayer
government.
o Tax exemption and tax deduction are highly unfavorable to the TAX AMNESTY VS. TAX EXEMPTION
government. Hence, it must be interpreted in strictissimi juris.
o To avail the tax deduction, there must be a very specific AMNESTY EXEMPTION
provision under the law that one is entitled to tax deduction. Scope of Immunity from all criminal, Immunity from civil liability
immunity civil and administrative only
SOURCES OF TAX UNDER NIRC liabilities from non-
payment of taxes
1. Income tax
2. Estate and donor's taxes To whom General pardon given to all A freedom from a charge or
3. Value-added tax granted taxpayers burden to which others are
4. Other percentage taxes subjected
5. Excise taxes Application Applies only to past tax Generally, prospective in
6. Documentary stamp taxes periods hence retroactive application
7. Such other taxes collected by the BIR application
Presence Yes, there is revenue loss None, because there was
POWER OF THE COMMISSIONER TO INTERPRET TAX LAWS AND TO of Actual since there was actually no actual taxes due as the
DECIDE TAX CASES Revenue taxes due but collection person or transaction is
Loss was waived by the protected by tax exemption
• The power to interpret the provisions of this Code and other tax laws government.
shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance. TAX EXEMPTION AND EXCLUSION
• The power to decide disputed assessments, refunds of internal revenue
• Never favored nor presumed in law
taxes, fees or other charges, penalties imposed in relation thereto, or
• Construed strictly against the taxpayer
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 Exclusion is broader than exemption
Court of Tax Appeals. • Exemption is within the definition of an object subject to tax; however,
• BIR – CTA – COA by provision of law, it is exempted.
• Exclusion covers the two: One is excluded because you are being
COMPENSATION AND SET-OFF exempted; Another, one did not fall to the definition of an object
subject to tax.
• Taxes are not subject to set-off or legal compensation
• The government and the taxpayer are not mutual creditor and debtor of
each other
o When the government impose taxes, they are exercising in their
sovereign capacity. While the government incurred obligation to
the taxpayer, they are exercising only in their proprietary capacity.
o Taxes are obligation imposed by law, while the obligation of the
government to the taxpayer arises from a contractual relation
only.
 MODULE 2: INCOME TAX ON INDIVIDUALS (3) RESIDENT ALIEN

INDIVIDUAL TAXPAYERS • An individual whose residence is within the Philippines and

• Who is not a citizen thereof. (Section 22(F) RA 8424)
1. Resident citizens (RC)
2. Non-resident citizens (NRC) Who are resident aliens?
• X, a non-resident citizen, has generated an income abroad. His • Not a mere transient or sojourner
income is not taxable in the Philippines because the taxable for o Foreign national that went in the Philippines as tourist are not
NRA are income within the country only. resident aliens because they are just mere transient.
3. Resident aliens (RA) o If his definite purpose may be promptly accomplished, an alien
4. Non-resident aliens (NRA) individual is a transient and considered as non-resident alien.
a. Engaged in trade or business (ETB) • If his purpose requires an extended stay making his home temporarily
b. Not engaged in trade or business (NETB) in the Philippines, he becomes a resident.
5. Exempt from income tax
• There must be a specific provision under the law that grants tax (4) NON-RESIDENT ALIEN
exemption.
• An individual whose residence is not within the Philippines and
WHO ARE CITIZENS OF THE PHILIPPINES? • Who is not a citizen thereof.

1. Citizens at time of adoption of Constitution (1987) Engaged in Trade or Business

2. Fathers or mothers are citizens (jus sanguinis) • Aggregate stay in the Philippines for a period of more than 180
3. Born before January 17, 1973, of Filipino mother, who elect Philippine days during any calendar
citizenship upon reaching the age of majority • In the calendar year, the alien individual stayed for 30 days
4. Naturalized in accordance with law and went back to his country. He came back to the
Philippines and stayed for 45 days. Again, he came back
HOW IS CITIZENSHIP LOST? for 60 days. He came back again for 50 days. Hence, he
1. Naturalization in a foreign country stayed aggregately for 185 days.
2. Express renunciation of citizenship • Regular tax rate and deductions are allowed.
3. Subscribing to an oath of allegiance to support the Constitution or laws • Aggregate – whole formed by combining several;
of a foreign country combination.
4. Cancellation of the certificate of naturalization
Not Engaged in Trade or Business
5. Declared by competent authority a deserter of the Philippine armed
• Aggregate stay in the Philippines does not exceed 180 days during
forces in time of war, unless subsequently, a plenary pardon or
any calendar year.
amnesty has been granted
• Tax’s flat rate is 25% from all income generated within the
(1) RESIDENT CITIZEN Philippines. Also, no deduction is allowed.

• A Filipino citizen and SUMMARY

• Who lives permanently in the Philippines; or TAXABLE
• Stayed outside the Philippines for less than 183 days during the TAXPAYER TYPE OF INCOME TAX BASE
ON INCOME
taxable year. Compensation Gross income
Profession, business and/or
Taxable income
(2) NON-RESIDENT CITIZEN Resident
Within and trade
without the Passive and capital gains on Gross income (except
Citizen
1. Physical presence, with intention to reside abroad Philippines sale of (1) unlisted stocks of capital gains on
2. An immigrant or permanent employee abroad domestic corporations and (2) unlisted stocks or
real property domestic corporations)
3. Employee abroad (physically present abroad most of the time [183
Compensation Gross income
days] during the year) Profession, business and/or
4. A previously considered nonresident citizen who arrives in the Taxable income
trade
Nonresident Within the
Philippines at any time during the taxable year to reside permanently Passive and capital gains on Gross income (except
citizen Philippines
in the Philippines shall be treated as a nonresident citizen for the sale of (1) unlisted stocks of capital gains on
taxable year in which he arrives in the Philippines with respect to his domestic corporations and (2) unlisted stocks or
real property domestic corporations)
income derived from sources abroad until the date of his arrival in the
Compensation Gross income
Philippines. (Sec 22 (e), R.A. 8424) Profession, business and/or
• The taxable year is 2021. You went abroad on 1/1/2021, Taxable income
trade
Resident Within the
however, went back to the Philippines on 4/1/2021. alien Philippines Passive and capital gains on Gross income (except
o From 1/1/2021 – 4/1/2021, you are considered as a sale of (1) unlisted stocks of capital gains on
non-resident citizen wherein you are taxable from domestic corporations and (2) unlisted stocks or
real property domestic corporations)
income within the Philippines. Compensation Gross income
o From 4/2/2021, you are now considered as a Passive and capital gains on Gross income (except
resident citizen wherein you are taxable from Nonresident Within the
sale of (1) unlisted stocks of capital gains on
alien Philippines
income within and without the Philippines. domestic corporations and (2) unlisted stocks or
real property domestic corporations)
Three types of non-resident citizen
1. Immigrants – non-resident citizen from the time of departure from the Income Classification
Philippines 1. Compensation income (Regular Income)
2. Employees of a foreign entity on a permanent basis – same – there is an employee-employer relationship
treatment as immigrants 2. Income from business or exercise from profession (Regular Income)
3. Overseas Contract Workers (OCW) 3. Passive income
a. Subject to final tax – taxes are fully paid wherein it is no longer
required to declare it in the income tax return.
 i. Interest from bank deposit: If one received the interest • If it has not exceeded the amount and one chose 8% tax rate, then
from the bank, the 20% final tax is already deducted. The it will be in lieu (instead) of the graduated tax rates and the 3%
bank becomes the withholding agent of the BIR. percentage tax.
ii. Stocks from corporation: If the company declared
dividends of P10,000, stockholder will only receive Self-employed/Professionals
P9,000 because it is subject to 10% final tax. Gross sales or gross • Option to avail of an 8% tax on gross sales
b. Not subject to final tax – income generated not in the receipts and other or gross receipts and other non-operating
Philippines wherein it is part of the regular (or gross) income non-operating income income in excess of P250,000
which is need to declare in the income tax return. does not exceed • In lieu of the graduated income tax rates
i. Interest from foreign bank: Interest generated in the P3,000,000 and the 3% percentage tax
Philippines, however, from a foreign bank is not subject
to final tax. Gross sales – sale of goods; Gross receipts – sale of services
ii. Trading shares of stock, from dividends only Ex. The gross sales or receipts amounted to P2,800,000.
4. Capital gain
• P2,800,000 – P250,000 = P2,550,000 x 8% = P204,000 income tax
a. Subject to final tax
• If you do not want to apply the 8%, you are subject to graduated tax
i. Capital gains from sale, disposition, barter, or exchange
rates, but the tax base is not the gross sales or receipts, rather the
of shares of stock, not traded or listed in the stock
taxable income (Gross Sales – Allowable Deductions).
exchange.
ii. Capital gains from sale of real property in the Philippines Mixed Income Earners
• Held as capital asset – subject to 6% fair market Income from
value or selling price whichever is higher Compensation
b. Not subject to final tax – same as passive income not subject (It must have the → Graduated income tax rates (0-35%)
to final tax employee-employer
relationship)
Philippine Embassy/Consulate Service Personnel
Income from Yes Graduated income tax rates (0-35%)
• Not treated as a non-resident citizen
Business or Practice →
• Income is taxable
of Profession OR
Citizen v. Alien Individual Employees of Foreign Embassies and
International Organizations in the Philippines Gross sales or gross 8% income tax based on gross sales or
• Resident citizens receipts and other gross receipts and other non-operating
o Subject to income tax (being taxed on worldwide income) non-operating income income in lieu of the graduated income
does not exceed tax rates and the 3% percentage tax
• Alien individual employees
P3,000,000? No
o Exempt Graduated income tax rates (0-35%)
→
TAXATION REGIME FOR RC, NRC, AND RA Under the labor code:
Except for income subject to final withholding tax, the income tax shall be To know if this is an employee-employer relationship, there must be
computed using the following graduated tax rates: 1. A test of payment of salary;
Not over P250,000 0% 2. Power to hire;
Over P250,000 but not over P400,000 20% of the excess over P250,000 3. Power to terminate;
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over 4. Power of control – the employer can control the results, means,
P400,000 and methods how the work is to be accomplished.
Over P800,000 but not over P2,000,000 P130,000 + 30% of the excess over
P800,000 Who cannot avail of the 8%?
Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess over 1. Originally elect the 8% but the gross sales/receipt exceed
P2,000,000 P3,000,000.
Over P8,000,000 P2,410,000 + 35% of the excess over
a. If you exceed the P3,000,000 threshold, you must be
P8,000,000
automatically VAT-registered.
The tax schedule effective January 1, 2022 and onwards shall be: 2. VAT-registered taxpayer, regardless of the amount of gross
Not over P250,000 0% sales/receipts.
Over P250,000 but not over P400,000 15% of the excess over P250,000 a. Even if it is less than P3,000,000, you cannot avail the 8%
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over tax rate.
P400,000
Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess over
3. Taxpayer who is subject to Other Percentage Taxes except those
P800,000 subject under Section 116.
Over P2,000,000 but not over P8,000,000 P402,500 + 30% of the excess over a. If it is not vatable, it is subject to 3% percentage tax rate.
P2,000,000 However, if you exceed P3,000,000, you are mandatorily
Over P8,000,000 P2,202,500 + 35% of the excess over vatable.
P8,000,000 4. Partners of a General Professional Partnership (GPP)
Pg. 68 in the book
Election of 8% – Mandatory
8% TAX RATE
Requirement in revenue regulation.
An employee does not have the option to choose the 8%. As per registration in the BIR, you must file quarterly tax return.

However, a business or one that exercise a profession has the ability to
choose the 8% tax rate, but there is a requirement which the gross sales or
receipts must not exceed P3,000,000.
• If it has exceeded the amount, it must automatically apply the
graduated tax rate plus subject to VAT.
• The taxpayer must signify the intention to elect the 8% income tax rate
in the 1st Quarter Percentage and/or income Tax Return, or on the
initial quarter return of the taxable year after the commencement of a
new business/practice of profession.
• Failure to elect – the taxpayer shall be considered as having availed
of the graduated rates (0-35% plus the 3% percentage tax).
 • Such election shall be irrevocable and no amendment of option shall Solution:
be made for the said taxable year.
His tax due for 2018 shall be computed as follows:
Illustrations and Examples Taxable Income from Business:
Gross Receipts Php 2,500,000
Illustration 1: Elected the 8% but gross sales/receipt exceed P3,000,000 Less: Cost of Sales 1,000,000
Mr. JMLH signified his intention to be taxed at 8% income tax rate on gross Gross Income Php 1,500,000
sales in his 1st Quarter Income Tax Return. He has no other source of income. Less: Operating Expenses 600,000
His total sales for the first three (3) quarters amounted to P3,000,000.00 with Net Income from Operation Php 900,000
4th quarter sales of P3,500,000.00. Add: Non-operating Income 100,000
Taxable Income Php 1,000,000
Summary of Income:
1st Quarter 2nd Quarter 3rd Quarter Tax Due:
(8% Rate) (8% Rate) (8% Rate) 4th Quarter On P800,000.00 Php 130,000
Total Sales P500,000 P500,000 P2,000,000 P3,500,000
Less: Cost of Sales (300,000) (300,000) (1,200,000) (1,200,000)
On excess (1M – 800k) x 30% 60,000
Gross Income P200,000 P200,000 P800,000 P2,300,000 Income Tax Due Php 190,000
Less: Operating
Expenses (120,000) (120,000) (480,000) (720,000) Illustration 4: Mixed Income Earner
Taxable Income P80,000 P80,000 P320,000 P1,580,000 Mr. MAG, a Financial Comptroller of JAB Company, earned annual
compensation in 2018 of P1,500,000.00, inclusive of 13th month and other
Solution: benefits in the amount of P120,000.00 (exempted up to P90,000 [Max]) but
Tax due shall be computed as follows: net of mandatory contribution to SSS and PhilHealth. Aside from employment
Total Sales Php 6,500,000 income, he owns a convenience store, with gross sales of P2,400,000. His
Less: Cost of Sales 3,000,000 cost of sales and operating expenses are P1,000,000.00 and P600,000.00,
Gross Income Php 3,500,000 respectively, and non-operating income P100,000.
Less: Operating Expenses 1,440,000
Solution:
Taxable Income Php 2,060,000
His tax due for 2018 shall be computed as follows if he opted to be taxed at
Tax Due Under Graduated Rates eight percent (8%) income tax rate on his gross sales for his income from
On P2,000,000 Php 490,000 business:
On excess (2,060,000 – 2M) x 32% 19,200
Total compensation income Php 1,500,000
Total Php 509,200
Less: Non-taxable 13th month pay and
Income Tax Due other benefits (max) 90,000
Tax Due under the graduated rates Php 509,200 Taxable Compensation Income Php 1,410,000
Less: 8% income tax previously paid (Q1 – Q2)
Tax Due:
(3M – 250k) x 8% 220,000
1. On Compensation
Annual Income Tax Payable Php 289,200
On P800,000.00 Php 130,000
Illustration 2: Gross sales/receipt exceed P3,000,000 On excess (1,410,000 – 800k) x 30% 183,000
Ms. RPSV is a prominent independent contractor who offers architectural and Tax Due on Compensation Income Php 313,000
engineering services. Since her career flourished, her total gross receipts
2. On Business Income
amounted to P4,250,000.00 for taxable year 2018. Her recorded cost of
Gross Sales Php 2,400,000
service and operating expenses were P2,150,000.00 and P1,000,000.00,
Add: Non-operating Income 100,000
respectively.
Taxable Business Income Php 2,500,000
Solution: Multiplied by income tax rate 8%
Tax Due on Business Income Php 200,000
Her income tax liability will be computed as follows:
Gross Receipts Php 4,250,000 Total Income Tax Due (Compensation and Business) Php 513,000
Less: Cost of Sales 2,150,000
Solution:
Gross Income Php 2,100,000
His tax due for 2018 shall be computed as follows if he did not opt for the
Less: Operating Expenses 1,000,000
eight percent (8%) income tax based on gross sales/receipts and other non-
Taxable Income Php 1,100,000
operating income:
Tax Due: Total compensation income P 1,500,000
On P800,000.00 Php 130,000 Less: Non-taxable 13th month pay
On excess (1.1M – 800k) x 30% 90,000 and other benefits-max 90,000
Income Tax Due Php 220,000 Taxable Compensation Income P 1,410,000
Add: Taxable Income from Business
Illustration 3: No election of the 8% Gross Sales P 2,400,000
In 2018, Mr. GCC owns a nightclub and videoke bar, with gross sales/receipts Less: Cost of Sales 1,000,000
of P2,500,000.00. His cost of sales and operating expenses are Gross Income P 1,400,000
P1,000,000.00 and P600,000.00, respectively, and with non-operating Less: Operating Expenses 600,000
income of P100,000.00. Net Income from Operation P 800,000
Add: Non-operating Income 100,000 900,000
• Here you cannot qualify for 8% even though the gross sales did Total Taxable Income P 2,310,000
not exceed P3,000,000 because it is subject to other percentage
taxes (nightclub). Tax Due:
• It must apply the graduated tax rate plus percentage tax. On P2,000,000 Php 490,000
On excess (2,310,000 – 2M) x 32% 99,200
Total Income Tax Php 589,200
Solution: (1) COMPENSATION INCOME
On February 2019, taxpayer tendered his resignation to concentrate on his
business. His total compensation income amounted to P150,000.00, inclusive • Arising from personal services rendered under an employer-
of benefits of P20,000.00. His business operations for taxable year 2019 employee relationship
remains the same. He opted for the eight percent (8%) income tax rate. • Salaries and wages, commissions, tips, allowances, bonuses, fringe
benefits of rank-and-file employees, and other forms of compensation
Total compensation income Php 150,000 o Salaries – paid in monthly basis
Less: Non-taxable benefits 20,000 o Wages – paid in daily basis
Taxable Compensation Income Php 130,000 o Fringe benefits – normally paid in cash or in kind to
Tax Due: managerial and supervisor employees only (e.g., housing,
1. On Compensation car, groceries)
On P130,000.00 (not over P250,000.00) Php 0 • Taxed at gross amount (no deductions allowed)

2. On Business Income Exclusions

Gross Sales Php 2,400,000 • Fringe benefit for other than rank-and-file employees
Add: Non-operating Income 100,000 o Subject to fringe benefit tax
Taxable Business Income Php 2,500,000 o If you are a managerial or supervisor employee, your monthly
Multiplied by income tax rate 8% salary is part of the compensation income, however, the
Tax Due on Business Income Php 200,000 fringe benefits (e.g., cars) you are receiving are subject to
Total Income Tax Due (Compensation and Business) Php 200,000 final tax.
• De minimis benefits
Illustration 5: Mixed Income Earner o Small amount benefits wherein its purpose is to bring
Mr. WBV, an officer of AMBS International Corp., earned in 2018 an annual productivity to the rank-and-file employees. (e.g., rice
compensation of P1,200,000.00, inclusive of 13th month and other benefits in allowance, uniform allowance)
the amount of P120,000.00. Aside from employment income, he owns a farm, o There is a price ceiling provided under the revenue
with gross sales of P3,500,000. His cost of sales and operating expenses are regulation. If you exceed the price ceiling, it may or may not
P1,000,000.00 and P600,000.00, respectively, and with non-operating be taxable since you will include it to the P90,000.
income of P100.000.00. • Bonuses, 13th month pay and other benefits not exceeding P90,000
• Those specifically excluded by law
• If it is based on graduated tax, you must first compute the taxable
income. (2) BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION
His tax due for 2018 shall be computed as follows: • Business and/or trade income
Total compensation income P 1,200,000 • Fees from the exercise of profession
Less: Non-taxable 13th month pay • Gains from sale or exchange of assets
and other benefits-max 90,000
• Commissions, rental income, and other incomes not covered by
Taxable Compensation Income P 1,110,000
Add: Taxable Income from Business compensation income
Gross Sales P 3,500,000
(3) PASSIVE INCOME
Less: Cost of Sales 1,000,000
Gross Income P 2,500,000 • Interest Income
Less: Operating Expenses 600,000
• Royalties
Net Income from Operation P 1,900,000
Add: Non-operating Income 100,000 2,000,000 • Dividends
Total Taxable Income P 3,110,000 • Prizes – result of an effort made (e.g., prize in a contest)
• Winnings – result of a transaction where the outcome depends upon
Tax Due:
chance (e.g., betting)
On P2,000,000 Php 490,000
On excess (3,110,000 – 2M) x 32% 335,200 Interest Income – within the Philippines
Total Income Tax Php 845,200
TAX BASE TAX RATE
PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA) 1. On any currency bank deposit, yield or other 20% final tax
monetary benefits from deposit substitute, trust
• A contributor to a PERA may be entitled to fund and similar arrangement
• a non-refundable tax credit equivalent to 5% PERA contribution in 2. On long-term deposit or investment in the form
one calendar year. of savings, common or individual trust funds,
• The maximum allowable contribution is PhP100,000.00 for Philippine deposit substitutes, investment management
residents and PhP200,000.00 for overseas Filipinos. accounts and other investments evidenced by
certificates in such form prescribed by the
TYPES OF INCOME – CITIZENS AND RESIDENT ALIENS Bangko Sentral ng Pilipinas (BSP) in banks
(held for 5 years or more) Exempt
Pg. 12
In case of pre-termination: if held for
1. Compensation income – automatic subject to graduated tax (0-35%) 4 years to less than 5 years 5% final tax
2. Business income/income from practice of profession 3 years to less than 4 years 12% final tax
3. Passive income less than 3 years 20% final tax
4. Capital gains 3. From FCDU actually received by a resident 15% final tax
5. Other income citizen or resident alien
 4. From FCDU deposited by an OCW or seaman Exempt How much is the total final tax on Pedro’s income? P34,250
or non-resident citizen
5. From FCDU in a bank account in the joint names ½ - Exempt Copyright royalty (P11,250/90% x 10%) Php 1,250
of an OCW and spouse (resident) ½ - 15% final tax Mineral royalty (P12,000/80% x 20%) 3,000
Dividend (P270,000/90% x 10%) 30,000
FCDU – Foreign Currency Deposit Unit Total final tax Php 34,250
Illustration for No. 5 How much is the income tax still due and payable of Pedro in 2020? P0
H, the husband, is an OFW, and his wife (W) opened a joint account. In this • There is no still due and payable because it is all subject to final tax
case, the husband is exempted from tax while the wife is subjected to 15%
wherein the tax is fully paid already.
final tax.
• The interest generated will be divided by two (2) (4) CAPITAL GAINS

Royalty – within the Philippines Subject to Final Tax

1. Sale of shares of stock not listed or traded in the stock exchange
TAX BASE TAX RATE 2. Real property
a. In general 20% final tax
b. Books, literary works, and musical compositions 10% final tax Not subject to Final Tax
1. Sale of shares of stock listed and traded in the local stock exchange
Illustration for No. 2
2. Sale, exchange or other disposition of other capital assets
Every time there is a book is sold, the writer has a share called royalties. For
instance, the book is P100 each. The writer will receive P90 from the publisher within the Philippines
and the publisher will remit the P10 to the BIR. Hence, the publisher will be
the collecting agent. TAX BASE TAX RATE
1. Net capital gains on sale 15% final on net capital gains
Prizes and Winnings – within the Philippines of shares of stock not
listed and traded in the
TAX BASE TAX RATE local stock exchange
Prizes 2. Capital gains on sale of Exempt from income tax, but subject to
1. Exceeding P10,000 20% final tax shares of stock listed and 6/10 of 1% stock transaction tax (STT)
2. Not exceeding P10,000 Graduated income tax traded in the local stock on gross selling price
Other Winnings exchange
1. PCSO/Lotto not exceeding P10,000 Exempt 3. Capital gains on sale of • 6% final on selling price or FMV,
2. PCSO/Lotto exceeding P10,000 20% final tax real property situated in whichever is higher
3. Others 20% final tax the Philippines • An option to be taxed using
Prizes has P10,000 threshold graduated income tax is sold to
government
Difference between Prizes and Winnings • Exempt if sale of principal
Winnings are games of chance, while prizes use effort residence, subject to certain
conditions. [Sec 24, D.2, NIRC]
Dividends – Within the Philippines 4. Income from the sale, Graduated income tax
exchange or other
TAX BASE TAX RATE disposition of other
Cash and/or property dividends: capital assets, subject to
1. From a domestic corporation, or from a joint 10% final tax rule on holding period
stock company, insurance or mutual fund
Sources outside the Philippines
company, and regional operating
headquarters of multinational company or • If received by a resident citizen (RC)
share in the distributable net income after tax of o Graduated income tax
a partnership (except a general professional
partnership), association, joint stock or joint (5) OTHER INCOME
venture or consortium taxable as a corporation.
• Informer’s rewards
2. From foreign corporation received by resident Graduated
o Final tax of 10%
citizens income tax
3. From foreign corporation received by non- Exempt o Reward: 10% of the revenues, surcharges or fees
resident citizens and resident aliens recovered or P1,000,000 per case whichever is lower
• Excess campaign funds in an election
Sources outside the Philippines o Subject to graduated income tax
• If received by a resident citizen (RC)
o Graduated income tax TAXATION REGIME FOR NON-RESIDENT ALIENS ENGAGED IN TRADE
OR BUSINESS (NRA-ETB)
Example Problem
Pedro, a resident citizen, received the following during 2020: • Same manner as an individual citizen or a resident alien
Proceeds from copyright royalty, net of tax Php 11,250 o Dividends are subject to 20% (different from 10% for
Proceeds from mineral claim royalty, net of tax 12,000 citizen and resident alien)
Share from trading partnership, net of withholding tax 270,000 • Except as a Cinematographic Film Owner (and Similar Work)
o Subject to 25% final on taxable gross income.
• Net of tax – means the tax has been deducted
TAXATION REGIME FOR NON-RESIDENT ALIENS NOT ENGAGED IN
TRADE OR BUSINESS (NRA-NETB)

• In general, taxed at a rate of 25% (all types of income)

• Except: with Capital Gains (same taxation regime with the citizen
or resident alien)
• Interest income from a depository bank under the Expanded
Foreign Currency Deposit – exempted from tax

EXEMPT FROM INCOME TAX

1. Senior Citizens (in certain cases)

2. Minimum wage earners (MWEs)
a. But not their businesses
3. Exemptions granted under international agreements

Senior Citizens
• Any resident of the Philippines who is at least 60 years old
• Required pay income tax returns, except:
o 1) MWE, the income is exempt
o 2) Not exceed P250,000 (Taxable income)
• Exemption does not extend to income subject to final tax (i.e., interest
income from deposit, dividends) and capital gains tax

Minimum Wage Earners

• A worker paid statutory minimum wage (SMW)
• Compensation-related benefits – Exempted for tax
o Even if exceeded the threshold of P250,000, you are still
exempted for tax
o Ex. Holiday pay, Night shift differential
• Business/profession income – Subject to graduated tax
• Passive/Capital gains – Final tax

Illustration: MWE
Mr. CSO, a minimum wage earner, works for G.O.D., Inc. He is not engaged
in business nor has any other source of income other than his employment.
For 2018, Mr. CSO earned a total compensation income of P 135,000.00.

a) The taxpayer contributed to the SSS, Philhealth, and HDMF amounting to

P5,000.00 and has received 13th month pay of P11,000.00. His income tax
liability will be computed as follows:

Total Compensation Income Php 135,000

Less: Mandatory contributions Php 5,000
Non-taxable benefits 11,000 16,000
Taxable income Php 119,000

Taxpayer is exempt (for tax) since he is considered a minimum

income earner.

b) The following year, Mr. CSO earned, aside from his basic wage, additional
pay of P140,000.00 which consists of the overtime pay- P80,000.00, night
shift differential- P30,000.00, hazard pay- P15,000.00, and holiday pay-
P15,000.00. He has the same benefits and contributions as above.

Total Compensation Income Php 135,000

Add: Overtime, night shift differential,
hazard, and holiday pay 140,000
Total Income Php 275,000
Less: Mandatory contributions Php 5,000
Non-taxable benefits 11,000 16,000
Net taxable income Php 259,000
Tax Due EXEMPT

Taxpayer is tax exempt as an MWE. The statutory minimum wage

as well as the holiday pay, overtime pay, night shift differential pay
and hazard pay received by such MWE are specifically exempted
from income tax under the law.