ACCT101- Income Taxation
political subdivisions exercise the power of
CHAPTER 1: INTRODUCTION TO
TAXATION
Tax
• is an enforced proportional contribution levied
by the lawmaking body of the State to raise revenue
for public purposes.
Definition of Taxation
• A (state) power by which an independent state,
through its lawmaking body, raises and
accumulates revenue from its inhabitants to pay the
necessary expenses of the government.
➢ Power refers to the inherent power of a
state, coextensive, with sovereignty to
demand contributions for public purposes
to support the government.
• A process or act of imposing (levying) a charge by
governmental authority on property, individuals, or
transactions to raise money for public purposes
• A means (mode of cost distribution) by which the
sovereign state apportions the cost of government
among those who are privileged to enjoy its
benefits.
Theory of Taxation
• The government's necessity for funding to
provide public services for civilization and
orderliness.
Basis of Taxation
• The mutuality of support between the people and
the government
Nature of Taxation Power
1.) Inherent Power of Sovereignty
• Taxation is as old as the government itself. Its
existence commences concurrently with the four
elements of a state
➢ People
➢ Territory
➢ Sovereignty
➢ Government
• From the moment a state is born; it
automatically possesses the power to collect taxes
from its inhabitants
• The government having sovereignty can enforce
contributions upon its citizens even without a
specific provision in the constitution authorizing it
• Any provision in the constitution regarding
taxation does not create rights for the sovereignty
to have the power to tax but it merely constitutes
limitations upon the supremacy of tax power
2.) Essentially a Legislative Function
• The law-making body of the government and its
taxation. The powers to enact laws and ordinances,
and to impose and collect taxes are given to
Congress.
• The power to make tax laws cannot be delegated
to other branches of the government or exercised by
the executive or judicial branch of government
since it is peculiarly and exclusively legislative in
nature.
• Taxation powers that cannot be delegated (tax
delegation) are as follows:
➢ Power to select the coverage, object, or
property to be taxed
➢ Tining the nature and purposes for which
taxes shall be collected
➢ Determining the place or suits of tax
imposition
➢ Fixing the amount to be imposed and tax
rates
➢ Granting tax exemptions or condonation
➢ Setting down the rules of taxation in general
• Congress may, by law, authorize the President to
impose tariff rates, import and export quotas,
custom duties, subject to the limitations and
guidelines the congress may impose, consistent
with the national development program of the
government. (Article VI, Section 28 of the
Constitution)
• Each local government unit shall have the power
to create its own sources of revenues, fees, and
charges, subject to such guidelines and limitations
as Congress may provide consistent with the basic
policy of local autonomy.
• Such as taxes, fees and other charges shall
accrue exclusively to the local government. (Article
X, Section 5 of the Constitution)
3.) Public Purposes
• The proceeds of the tax must be used:
➢ For the support of the state or government
➢ Some recognized objects of government or
directly to promote the welfare of the
community
➢ Public Improvement
➢ Unemployment relief
➢ Building and roads or infrastructure
➢ Local police forces (subsidies) under 6141
➢ Industries classified as indispensable
➢ Construction of home sites
➢ Promotion of science and invention
➢ Enlistment of the underprivileged
➢ Rehabilitation of the sugar industry
➢ Pensions to deserving retirees
➢ Oil industry’s protection
➢ Socialized housing
➢ Education subsidy
4.) Territorial in Operation
 • Taxation may be exercised only within the
territorial jurisdiction of the taxing authority.
Within the territorial jurisdiction, the taxing
authority may determine the “place of taxation”
(Tax situs)
• The power to tax can only be exercised with the
territorial jurisdiction of a taxing authority, except
when there exists privity of the taxing State and the
object of tax based on the tax principle of reciprocal
duties.
• In fixing tax situs, the following criteria are
generally observed:
➢ Poll/Capitalization/Community Taxes
It is based upon the residence of the taxpayer,
regardless of the source of income location of the
property of the taxpayer.
➢ Property Tax
Real Property is subject to taxation in the state or
country where it is located, regardless of whether
the owner is a resident or a non-resident
➢ Personal Property
the situs is wherever it was actually kept or located,
was held to be at the domicile of its owner,
following the age-old doctrine of mobilia sequuntur
personam (movables follow the person)
➢ Excise taxes
Where the privilege is exercised
Where the taxpayer is a national
Where he has his residence
Theories of Cost Allocation
1.) Benefit Received Theory
➢ presupposes that the more benefit one
receives from the government the more
taxes he should pay
2.) Ability to Pay Theory
➢ Those who have more should be taxed more
even if they benefit less from the
government. Those who have less shall
contribute less even if they receive more of
the benefits from the government.
Aspects of the Ability to Pay
1.) Vertical Equity (Gross Concept)
• Proposes that the extent of one's ability to pay is
directly proportional to the level of this tax base.
2.) Horizontal Equity (Net Concept)
• Requires consideration of the particular
circumstance of the taxpayer.
The Lifeblood Doctrine
• Taxes are essential and indispensable to the
continued subsistence of the government. Without
taxes, the government would be paralyzed for the
lack of motive power to activate or operate it (CIR
vs, Alque)
• Taxes are the lifeblood of the government, and
their prompt and certain availability are an
important need.
• Upon taxation depends on the government's
ability to serve the people for whose benefit taxes
are collected. (Verasa vs. Fernandez)
Implication of the Lifeblood Doctrine in
Taxation
1.) Tax is imposed even in the absence of a
Constitutional grant
2.) Claims for tax exemption are construed against
taxpayers
3.) The government reserves the right to choose the
objects of taxation
4.) The courts aren't allowed to interfere with the
collection of taxes
5.) In income taxation:
a.) Income received in advance is taxable upon
receipt
b.) Deduction for capital expenditures and
prepayments is not allowed and effectively defers
the collection of income tax
c.) A higher tax base is preferred when the tax
object has multiple tax bases
Inherent Powers Of The State
• The government’s basic needs and rights which
coexist with its creation
1.) Taxation Power
• The power of the state to enforce proportional
contribution from its subjects to sustain itself
• it is an attribute of sovereignty that is exercised
by a jurisdiction whose interest should be served,
enhanced, and protected.
2.) Police Power
• The general power of the state to enact laws to
protect the well-being of the people
• It is exercised usually to guard against excesses or
abuses of individual liberty.
• The power is restricted by the due process clause
of the constitution which provides that no person
may be deprived of life, liberty, or property, without
due process of law
• It can be exercised through taxation because
taxes may be levied for the promotion of the welfare
of the public.
3.) Eminent Domain
• The power of the state to take private property for
public use after paying just compensation
• It is founded upon the idea that the common
necessities and interests of the community
transcend individual rights in the property.
• The constitution limits the exercise of the power
by providing that property may not be taken
without just compensation.
• Just compensation means paying the owner the
full monetary equivalent of the property taken for
public use.
Comparison of the 3 Powers of the State
Importance Of Taxation
• It is the primary source of government revenue
that is used to effectively and permanently perform
government functions.
• Exercised to raise revenue for the very existence
of the government to serve the people for whose
benefit taxes are collected. These are the reasons
make the payment compulsory.
• It supports the other inherent powers of the state
Purposes Of Taxation
• The primary purpose of taxation is to raise
revenues by collecting funds or property for the
support of the government in promoting the
general welfare and protecting its inhabitants.
• Secondary or non-revenue purposes
➢ Reduction of Social Inequality
➢ Encourage the growth of local industries
➢ Protect our local industry against Unfair
Competition
➢ As an implementation of the Police Power of
the state (Regulatory Measure)
➢ Regulate Inflation
➢ Achieve economic and social stability
Limitation to the Power of Taxation
A.) Inherent Limitations
1.) Territoriality of Taxation
• The government can only demand tax obligations
upon its subjects or residents within its territorial
jurisdiction
Exception:
a.) Income Taxation - Resident citizens and
domestic corporations are taxable on income
derived both within and outside the Philippines
b.) Transfer Taxation - Residents or citizens such as
resident citizens, non-resident citizens, and
resident aliens are taxable on transfers of
properties located within or outside the Philippines
2.) International Comity (Mutual Courtesy
or Reciprocity)
• Countries of the world agreed to one fundamental
concept of co-equal sovereignty wherein all nations
are deemed equal with one another regardless of
race, religion, culture, economic condition or
military power
3.) Public Purpose
• Taxation must be exercised absolutely for public
purpose
4.) Exemption of the Government
• the government normally does not tax itself as this
will not raise additional funds but will only impute
additional cost
• The income of the government from its properties
and activities conducted for profit including income
from government-owned and controlled
corporations is subject to tax
• Government-owned and controlled corporations
performing proprietary functions which are tax
exempt are as follows:
➢ Government Service Insurance System
(GSIS)
➢ Social Security System (SSS)
➢ Philippine Health Insurance Corporation
(PHIC)
➢ Philippine Charity Sweepstakes Office
(PCSO)
5.) Non-delegation of the Taxing Power
• the legislative taxing power is vested exclusively
in congress and is not delegable pursuant to the
doctrine of separation of the branches of
government.
B.) Constitutional Limitations
1.) Observance of the due process of Law
• No one should be deprived of life, liberty, or
property without due process of law. Tax laws
should neither be harsh nor oppressive.
2.) Equal protection of Law
• No person shall be denied the equal protection of
the law. Taxpayers should be treated equally both
in terms of rights conferred and obligations
imposed (applies where taxpayers are under the
same circumstances and conditions )
3.) Rule of uniformity and equity
• Taxpayers under dissimilar circumstances should
not be taxed the same. Taxpayers should be
classified according to the commonality in
attributes, and the tax classification to be adopted
should be based on a substantial distinction.
4.) Non-impairment of obligations and
contracts
• State should set an example of good faith among
its constituents. It should not set aside its
obligation from contract by the exercise of its
taxation power. Exemptions granted under contract
with the authors and should not be done collateral
government action
5.) Progressive System of Allocation
• Under the progressive system tax rate increase as
the tax base increases. The constitution favors
progressive tax as it is consistent with the
taxpayer's ability to pay. Moreover, the progressive
system aids in an equitable distribution of wealth
and society by taxing the rich more than the poor.
6.) Non- imprisonment for nonpayment or
debt or poll tax
• No one shall be imprisoned because of his poverty
and no one shall be imprisoned for mere inability to
pay debt.
• debt acquired in good faith = applicable
• debt acquired in bad faith = estafa (can be
imprisoned)
• Non-payment of tax (public interest) ≠ non
payment of debt (private interest)
7.) Free Worship Rule
• Philippine government adopts free exercise of
religion and does not subject its exercise to
taxation. This, however, does not extend to income
from properties are activities of religious
institutions that are proprietary or commercial in
nature.
8.) Exemption from property taxation of
religious, charitable, or educational entities,
nonprofit cemeteries, churches and
mosques, lands, buildings, and
improvements
• Exemption from property tax applies for
properties actually, directly, and exclusively used
for charitable, religious, and educational purposes
9.) Majority of all the members of congress
required granting tax exemption
10.) No public money shall be appropriated
for religious purposes
11.) Non-diversification of tax collections
12.) Non-delegation of the power of taxation
13.) Exemption from taxes of the revenues
and assets of non-profit, non-stock
educational institutions
14.) Non-impairment of the jurisdiction of
the supreme court to review cases
15.) The requirement that appropriations,
revenue, or tariff bills should originate
exclusively in the house of representatives
16.) The delegation of taxing power to local
government units
Stages of the Exercise of Taxation Power
1.) Levy or Imposition
• It involves the passage of tax laws or ordinances
through the legislature. The tax laws to be passed
shall be determining the nature of taxes, those to be
taxed, how much is to be collected, and how taxes
are to be implemented. (impact of taxation)
2.) Assessment and Collection
• assessment and determination of tax liabilities
and collection. (incidence of taxation)
Situs of Taxation
• The place of taxation. Situs rules serve as frames
or reference in gauging whether the tax object is
within or outside the tax jurisdiction of the taxing
authority
Examples of Situs Rules
1.) Business Tax Situs
• Businesses are subject to tax in the place where
the business is conducted
2.) Income Tax Situs on Services
• Service fees are subject to tax where they are
rendered
3.) Income Tax Situs on Sale of Goods
• the gain on sale is subject to tax in the place of
sale.
4.) Property Tax Situs
• Properties are taxable in their location
5.) Personal Tax Situs
• persons are taxable in their place of residence
Doctrines in Taxation
1.) Marshall Doctrine
• Power to tax includes the power to destroy
• Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally, and
uniformly
• While tax power is so extensive that it seems it can
destroy, it does not include the power to destroy if it
is used solely for the purpose of raising revenue.
2.) Holme’s Doctrine
• Taxation power is not the power to destroy while
the court sits.
• Taxation power may be used to build or encourage
beneficial activities or industries by the grant of tax
incentives.
3.) Prospectivity of Tax Laws
• states that a tax bill must only be applicable and
operative after becoming law. Thus, the
effectiveness of the tax law commences upon its
approval and its scope would only cover the present
and future transactions.
4.) Non-compensation or Set-off
• Taxes are not subject to automatic set-off or
compensation
• Taxpayer cannot delay payment pending the
resolution of his claim
5.) Non-assignment of Taxes
• Tax obligations cannot be assigned or transferred
to another entity by contract
6.) Imprescribility in Taxation
• Prescription- lapsing of a right due to the passage
of time.
• The rule on tax imprescriptibility states that
unless otherwise provided by the tax law itself,
taxes, in general, are not cancellable.
7.) Doctrine of Estoppel
• Misrepresentation made by one party toward
another relying on upon in good faith will be
deemed true and blinding against the person
making the misrepresentation
• The government is not subject to estoppel. An
error by any government employee does not bind
the government.
8.) Judicial Non-interference
• Generally, courts are not allowed to issue
injunctions against government pursuit to collect
taxes. This would unnecessarily defer tax collection.
9.) Strict Construction of Tax Laws
• when the language of the law is clear and
categorical, there is no room for interpretation.
There is only room for application.
• When tax rules are vague, the doctrine of strict
legal construction is observed:
➢ vague tax laws - construed against the
government and in favor of the taxpayers
➢ vague exemption laws - construed against
the taxpayers and in favor of the
government
Double Taxation
• means an act of the sovereign by taxing twice for
the same purpose in the same year upon the same
property or activity of the same person, when it
should be taxed once, for the same purpose, and
with the same kind or character of tax.
• double taxation in the strict sense and double
taxation in the broad sense
• in its strict sense, referred to as direct duplicate
taxation, double taxation means:
1.) Taxing twice
2.) by the same taxing authority;
3.) Within the same jurisdiction or taxing district;
4.) for the same purpose;
5.) in the same year or taxing period;
6.) some of the property in the territory
Elements of Double Taxation
1.) Primary element: Same object
2.) Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation
1.) Direct Double Taxation
• Occurs when all the elements of double taxation
exist for both imposition
2.) Indirect Double Taxation
• Occurs when at least one of the secondary
elements of double taxation is not common for both
imposition
How to Minimize Double Taxation
a.) Provision of tax exemption
b.) Allowing foreign tax credit
c.) Allowing reciprocal tax treatment
d.) Entering into treaties or bilateral agreements
Escapes from Taxation
• are the means available to the taxpayer to limit or
avoid the impact of taxation
Categories:
A.) Those that result to loss of government
revenue
1.) Tax Evasion (tax dodging)
• under this method, the taxpayer uses unlawful
means to evade or lessen the payment of tax. This
form of tax dodging is prohibited and therefore
subject to civil and criminal penalties.
2.) Tax Avoidance (tax minimization)
• It is reducing or totally escaping payment of taxes
through legally permissible means.
3.) Tax Exemption (tax holiday)
• Immunity or privilege or freedom from being
subject to a tax that others are subject to.
B.) Those that do not result to loss of
government revenue
1.) Shifting - The process of transferring tax
burden to other taxpayers
Forms:
a.) Forward Shifting
• shifting of tax which follows the normal flow of
distribution: from the manufacturer, wholesaler,
and retailer to consumers
b.) Backward Shifting
• use of substitute products
c.) Onward Shifting
• refers to tax shifting in the distribution channels
that exhibits forward or backward shifting
2.) Capitalization
• adjustment of the value of an asset caused by the
changes in tax rates.
3.) Transformation
• eliminates wastes or losses by the taxpayer to
form savings to compensate for tax imposition or
increases in taxes.
Tax Amnesty
• general pardon granted by the government for
erring taxpayers to give chance to reform. Absolute
forgiveness or waiver by the government on its
right to collect and is retrospective in application.
Tax Condonation (tax remission)
• forgiveness of the tax obligation of a certain
taxpayer under certain justifiable grounds.
Tax Amnesty vs Tax Condonation
• Amnesty covers both civil and criminal liabilities
• Condonation covers only civil liabilities of the
owner
• Amnesty operates retrospectively by forgiving past
violations
• Condonation applies prospectively to any unpaid
balance of the tax, hence the portion paid by the
taxpayer will not be refunded
• Amnesty is also conditional upon payment to the
government portion of the tax, while condonation
requires no payment
CHAPTER 2: TAXES, TAX LAWS, AND TAX
ADMINISTRATION
Taxation Law
• Refers to any law that arises from the exercise of
the taxation power of the state
Types:
1.) Tax Laws
• These are laws that provide for the assessment
and collection of taxes
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code
2.) Tax Exemption Laws
• these are laws that grant certain immunity from
taxation
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987
(E.O. 226)
c. Barangay Micro-Business Enterprise
(BMBE) Law
d. Cooperative Development Act
Sources of Taxation Laws
1. Constitution
2. Statues and Presidential Decrees
3. Judicial Decisions or Case Laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and Conventions with foreign
countries
8. Revenue Regulations
Types of Administrative Issuances
1.) Revenue Regulations
• are issuances signed by the Secretary of Finance
upon recommendation of the Commissioner of
Internal Revenue (CIR) 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.
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 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.
4.) Revenue Memorandum Circulars
• Issuances that publish pertinent applicable
portions as well as applications of laws regulations
and precedent issued by the BIR and other agencies
or office
5.) Revenue Bulletins
• refer to an authoritative instrument for
announcing periodic issuances, notices, and official
announcements in relation to the provisions of the
Tax Code, relevant tax laws, and other issuances for
the guidance of the public
6.) BIR Rulings
• BIR Rulings are the official position of the
Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and
interpretation of tax laws
Types of Rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings
Generally Accepted Accounting Principles
(GAAP)
• are not laws, but are mere conventions of
financial reporting.
• They are benchmarks for the fair and relevant
valuation and recognition of income, expense,
assets, liabilities, and equity of a reporting entity
for general purpose financial reporting.
Nature of Philippine Tax Law
• Philippine Tax Laws are civil and not political in
nature. They are effective even during periods of
enemy occupation.
• Our Internal Revenue Laws are not penal in
nature because they do not define crime.
Elements of a Valid Tax
1.) tax may be levied by the taxing power having
jurisdiction over the object of taxation.
2.) tax must not violate Constitutional and inherent
limitations
3.) tax must be uniform and equitable
4.) tax must be for public purposes
5.) tax must be proportional in character
6.) tax is generally payable in money
Classification of Taxes
A.) As to Purpose
1.) General/Fiscal/Revenue Tax
• tax imposed solely for the general purpose of the
government, i.e., to raise revenue for government
expenditures
2.) Special/Regulatory
• tax imposed for a specific purpose, i.e., to achieve
some social or economic ends irrespective of
whether revenue is actually raised or not
3.) Sumptuary
• A tax levied to achieve some social or economic
objectives
B.) As to Subject Matter
1.) Personal/Poll/Capitation
• tax of a fixed amount imposed on an individual,
whether citizens or not, residing within a specified
territory without regard to their property or the
occupation in which he may engage (e.g.,
community tax)
2.) Property
• tax imposed on property, whether real or
personal, in proportion either to its value or in
accordance with some other reasonable method of
appointment (e.g., real estate tax)
3.) Excise
• any tax which does not fall within the
classification of a poll tax or property tax. This is a
tax on the exercise of certain rights or privileges
(e.g., income tax, estate tax, donor’s tax, VAT, other
percentage taxes)
C.) As to Incidence/ Who Bears the Burden
1.) Direct tax
• tax which is demanded from the person who also
shoulders the burden of tax or tax which the
taxpayer cannot shift to another (e.g., income tax,
estate tax, donor’s tax)
2.) Indirect tax
• tax which is demanded from one person in the
expectation and intention that he shall indemnify
himself at the expense of another or tax which can
be shifted to another person (e.g., value added tax,
other percentage taxes)
D.) As to Amount
1.) Specific
• tax of fixed amount imposed by the head or
number, or by some standard of weight or
measurement. It requires no assessment other than
a listing or classification of the subjects to be taxed
(e.g., excise tax on cigar, cigarettes and liquors)
2.) Ad Valorem
• tax of a fixed proportion of the value of the
property with respect to which the tax is assessed.
It requires the intervention of assessors or
appraisers to estimate the value of such property
before the amount due from each taxpayer can be
determined (e.g., VAT, Income Tax, Donor’s Tax,
and estate tax)
E.) As to Rate
1.) Proportional Tax
• tax based on a fixed percentage of the amount of
the property, receipts, or other bases to be taxed
(e.g., VAT, other percentage taxes)
2.) Progressive Tax
• the rate of which increases as the tax base or
bracket increases (e.g. income tax, estate tax, and
donor’s tax)
3.) Regressive Tax
• the rate of which decreases as the tax base or
bracket increases
F.) As to Imposing Authority/Scope
1.) National
• imposed by the National Government (e.g.,
income tax, estate tax, donor’s tax, value added tax,
other percentage taxes, documentary stamp tax)
2.) Local or Municipal
• imposed by municipal corporations (e.g. real
estate tax, community tax)
Distinction of Taxes with Similar Items
Tax System
• Methods or schemes of imposing, assessing, and
collecting taxes
Types:
1.) According to Imposition
• Progressive - Employed in the taxation of
income of individuals and certain local business
taxes
• Proportional - Employed in taxation of
corporate income and business
• Regressive - Not employed in the Philippines
2.) According to Impact
• Progressive System - emphasizes direct taxes.
it encourages economic efficiency as it leaves no
other resort to taxpayers than to be efficient.
Impacts more upon the rich.
• Regressive System - Emphasizes indirect taxes.
The impact of taxation rest upon the bottom end of
the society, it is anti-poor
Tax Collection Systems
A.) Withholding System on Income Tax
• The payor of the income withholds or deducts the
tax on the income before releasing the same to the
payee and remits the same to the government
1.) Creditable Withholding Tax
• Intended to support the self-assessment method
to lessen the burden of lump-sum tax payment of
taxpayer
a.) Withholding Tax on Compensation
• An estimated tax required by the government to
be withheld by employers against the compensation
income to their employees
b.) Expanded Withholding Tax
• Estimated tax required by the government to be
deducted on certain income payments made by
taxpayers engaged in business
2.) Final Withholding Tax
• payors are required to deduct the full tax on
certain income payments
• Intended for the collection of taxes from income
with a high risk of non-compliance
Difference between FWT & CWT
B.) Withholding System on Business Tax
• When the national government agencies and
instrumentalities including government-owned and
controlled corporations (GOCCs) purchase goods or
services from private suppliers the law requires
withholding of the relevant tax.
C.) Voluntary Compliance
System/Self-Assessment Method
• The taxpayer himself determines his income,
reports the same through ITR, and pays the tax to
the government
Tax due Determined under this system will be
reduced by :
a.) Withholding tax on compensation withheld by
employers
b.) Expanded withholding taxes withheld by
suppliers of goods or services
• The taxpayer shall pay to the government any tax
balance after such credit or claim refund or tax
credit for excessive tax withheld
D.) Assessment or Enforcement System
• The government identifies non-compliant
taxpayers, assesses their taxes including penalties
demands for taxpayer's voluntary compliance, or
enforces collection by coercive means such as a
summary proceeding or judicial proceedings when
necessary
Principles of a Sound Tax System
1.) Fiscal Adequacy
• Requires that the sources of government funds
must be sufficient to cover government costs.
• the government must not incur a deficit. A
budget deficit paralyzes the government's ability to
deliver essential public services to the people
• It is desirable that the government shall adopt
effective measures to collect taxes efficiently and
reduce its expenditures to obtain a balance and
adequate fiscal budget.
2.) Equality or Theoretical Justice
• This principle states that the tax burden must be
proportionate to the taxpayer’s ability to pay. It also
suggests that the exercise of taxation should not be
oppressive, unjust, or confiscatory
3.) Administrative Feasibility
• Suggest that tax laws should be capable of
efficient and effective administration to encourage
compliance.
Tax Administration
• Refers to the management of the tax system. It is
entrusted to the BIR which is under the
supervision and administration of the Department
of Finance
Chief Officials of the BIR
• 1 commissioner
• 4 deputy commissioners, each to be assigned to:
a.) Operations Group
b.) Legal Enforcement Group
c.) Information Systems Group
d.) Resource Management Group
Other Agencies Tasked with Tax Collections
or Tax Incentives Related Function
1.) Bureau of Customs
2.) Board of Investments
3.) Philippine Economic Zone Authority
4.) Local Government Tax Collecting Unit
5.) Fiscal Incentives Review Board
Taxpayer Classification for Purposes of Tax
Administration
1.) Large Taxpayers - under the supervision of
the Large Taxpayer Service of the BIR National
Office
2.) Non-Large Taxpayers - Under the
supervision of the respective Revenue District
Offices (RDO) where the business, trade, or
profession of a taxpayer is situated
Criteria for Large Taxpayers
A.) As to Payment
1.) VAT - At least 200k/quarter for the preceding
year
2.) Excise Tax - At least 1M tax paid for the
preceding year
3.) Income Tax - At least 1M annual income tax
paid for the preceding year
4.) Withholding Tax- At least 1M annual
withholding tax payments or remittances from all
types of withholding taxes
5.) Percentage Tax - At least 200k percentage tax
paid or payable per quarter for the preceding year
6.) Documentary Stamp Tax - At least 1M aggregate
amount/year
B.) As to financial conditions and results of
operations
1.) Gross Receipts or Sales - 1B of total annual gross
sales or receipts
2.) Net Worth - 300M total net worth at the close of
each calendar/fiscal year
3.) Gross Purchases - 800M total annual purchases
for the preceding year
4.) Top corporate Taxpayer listed and published by
the SEC
CHAPTER 3: INTRODUCTION TO INCOME
TAXATION
Income
• all wealth that flows into the taxpayer other than
as a mere return of capital.
Why is income subject to tax?
• It is an excellent object of taxation in the
allocation of government costs.
• income is the most prevalent source of a
taxpayer’s wealth.
• It is the best measure of the taxpayer’s ability to
pay.
• Gross Income = taxable income
= (gross income - deductions & personal
exceptions allowed by law)
➢ Any inflow of wealth to the taxpayer from
whatever source legal or illegal, that
increases net worth.
Taxable Income
• means the pertinent items of gross income
specified in the Tax Code as amended, less the
deductions, if any authorized for such types of
income
• Tax concept of Income = Gross Income
• Taxable Item of Income = Item of /Inclusion
in Gross Income
Elements of Gross Income
1. it is a return on capital that increases net
worth
2. it is a realized benefit
3. it is not exempted by law, contract or treaty.
• Capital - any wealth or property
• Gross Income - return on wealth or property that
increases the taxpayer’s net worth
Return on Capital vs. Return of Capital
Capital Items deemed with Infinite Value:
Life, Health & Human Reputation
• Incapable of monetary valuation. anything
received as compensation for their loss is deemed a
return of capital
Recovery of Lost Capital vs. Recovery of Lost
Profits
Taxable Recoveries of Lost Profits
a.) Proceeds of crop or livestock insurance
b.) guarantee payment
c.) indemnity received from a patent infringement
suit
• Benefit (taxable)- Any form of advantage
derived by the taxpayer. There is benefit when
there is an increase in the net worth of the taxpayer.
An increase in net worth occurs when one receives
income, donation, or inheritance
• Realized = earned. There should be a degree of
undertaking or sacrifice from the taxpayer to be
entitled to the benefit
Requisites of a Realized Benefit:
1.) There must be an exchange transaction
2.) The transaction involves another entity
3.) it increases the net worth of the recipient
Types of Transfers
1.) Bilateral Transfers or Exchanges (Onerous
Transactions) - sale, barter
• benefits derived are subject to transfer tax
2.) Unilateral Transfers (Gratuitous
Transactions) - succession, donation
• benefits derived are not realized Because of the
absence of earning process
3.) Complex Transactions
• Partly gratuitous and partly onerous.
• Gratuitous portion = Subject to transfer tax
• Onerous portion = Subject to income tax
• FV - Selling Price = subject to transfer tax
• Selling Price - Cost = Subject to income tax
Another Entity
• Gains/Income from Separate Entities = taxable
• Gains/Income from Same Entity= not taxable
Benefits in Absence of Transfer (Unrealized
gain/holding gains)
• increase in wealth of the taxpayer in the form of
appreciation or increase in the value of his
properties or decrease in the value of his obligation
in the absence of a sale or barter transaction is not
taxable
Mode of Receipt/Realization Benefits
1.) Actual Receipt - Actual physical taking of the
income in the form of cash or property
2.) Constructive Receipt - No actual physical
taking of the income but the taxpayer is effectively
benefited
Types of Income Taxpayers
A.) Individuals
1.) Citizen
• Citizens of the Philippines at the time of the
adoption of the Constitution on February 2, 1987.
• Born before January 17, 1973, to Filipino mothers
who elected Filipino citizenship upon reaching the
age of maturity
• Those whose fathers or mothers are citizens of the
Philippines
•Those who are naturalized in accordance with the
law
a. Resident Citizen - Filipino citizen
residing in the Phil.
b. Non-Resident Citizen
2.) Alien
a. Resident Alien - An individual who is
residing in the Philippines but is not a
citizen thereof
b. Non-resident Alien - Not residing in the
Philippines, not a citizen thereof
i. Engaged in trade or business (NRA-ETB)-
stayed in the PH for more than 180 days
ii. not engaged in trade or business
(NRA-NETB) - stayed in the PH for not
more than 180 days, has a definite purpose
General Classification Rule for Individuals
1.) Intention
2.) Length of Stay
B.) Corporations
1.) Domestic Corporations - Organized in
accordance with PH laws and registered by
resident citizens in the PH
2.) Foreign Corporations- Organized under a
foreign law
a. Resident Foreign Corporations (RFC) -
Operate and conduct business in the PH
through a permanent establishment
(branch)
b. Non-resident Foreign Corporation(NRFC) -
Does not operate or conduct business in the
PH
• Special Corporations - Domestic or foreign
corporations which are subject to special tax rules
or preferential tax rates
Other Corporate Taxpayers
1.) One-Person Corp. (OPC) - Corporation with
a single stockholder who may be a natural person,
trust or an estate
2.) Partnership - Business organization owned by
two or more persons who contribute their industry
or resources to a common fund for the purpose of
dividing the profits from the revenue
a. General Professional Partnership
(GPP) - Formed for the sole purpose of
exercising a common profession no part of
income that is derived from engaging in any
trade or business, not taxable but the
partners are taxable
b. Business Partnership - one formed for
profit and is taxable
3.) Joint Venture - Business undertaking for a
particular purpose. It may be organized as a
partnership or a corporation
a. Exempt Joint Ventures - formed for the
purpose of undertaking construction
projects or engaged in petroleum coal
geothermal and other energy operations
under a service contract with the
government
b. Taxable Joint Ventures - All other joint
ventures are taxable as corporations
4.) Co-ownership - A joint ownership of a
property formed for the purpose of preserving the
same and/or dividing its income
Taxable Estates and Trusts
1.) Estate
• Refers to the property, rights and obligations of a
deceased person not extinguished by his death
• Estate under judicial settlement = individual
taxpayer, taxable on the income of properties left
• Estate under extrajudicial settlement = exempt
entities & taxable to the heirs
2.) Trust
• An arrangement whereby one person (grantor or
trustor) transfers property to another
person(beneficiary) which will be held under the
management of a third party (trustee or fiduciary)
• Irrevocably designated by the grantor = individual
taxpayer, taxable on the income of the property
held in trust
• Revocably designated by the grantor = Not taxable
entities and are not considered as individual
taxpayers
The General Rules in Income Taxation
Residency & Citizenship Rule
• Taxpayers who are residents AND citizens of the
PH such as resident citizens and domestic
corporations are taxable on all income from sources
within and without the PH. A corporation is a
citizen of the country of incorporation.
Basis of the Extraterritorial Taxation
• Resident citizens and domestic corporations
derive most of the benefits from the PH
government compared to all other classes of
taxpayers by virtue of their proximity to the PH
government
• If the ratio of the PH gross income over the world
gross income of the resident foreign corporation in
the three-year period in the preceding year of
dividend declaration is :
➢ At least 50% - the portion of the dividend
corresponding to the philippine gross
income ratio is earned within
➢ Less than 50% - the entire dividends
received are earned abroad
C.) Merchandising Income - Earned where the
property is sold

• Situs of Income - Place of taxation of income. It D.) Manufacturing Income - Earned where the
is the jurisdiction that has the authority to impose a goods are manufactured and sold
tax upon the income
• Source of Income - Activity or property that
produces the income

Income Situs Rules

Other Income Situs Rules

A.) Gain on sale of properties
1.) Personal Property
a. Domestic Securities - Presumed earned
within the PH
b. Other Personal Properties - Earned in
the place where the property is sold
2.) Real Property - Earned where the property is
located

B.) Dividend Income from

1.) Domestic Corporation - Presumed earned
within
2.) Foreign Corporation
a. Resident Foreign Corporation -
Depends on the predominance test

• Gross Income Ratio = Total -Dividend / Total

• Earned w/in PH = GIR x Div
• Earned w/out PH = 100% - GIR x Div.)
b. Non-resident Foreign Corporation -
Earned abroad
Pre-dominance Test
CHAPTER 4: INCOME TAX SCHEMES,
ACCOUNTING PERIODS, ACCOUNTING
METHODS, AND REPORTING
Income Tax Schemes (NIRC):
a.) Final Income Taxation
b.) Capital Gains Taxation
c.) Regular Income Taxation
Mutually Exclusive Coverage
• An item of gross income that is subject to tax
in one scheme will not be taxed by other
schemes
• items of income that are exempted in one
scheme or not taxable by the other schemes
• Group A - Businesses that focus on
financial institutions, construction, water,
hotel, and land transportation
• Group B - focuses mostly on the
manufacturing section as well as mining
• Group C - businesses that involve trade,
retail, maintenance, supply distribution, and
real estate
• Group D - focuses on businesses that
involve utilities such as transport, rent,
electricity as well as multimedia and
recreational activities
• Group E - focus on health, education,
security, R&D, agricultural, aquatic, and
other forms of business activities
Passive Income
• Burned with very minimal or even without
active involvement of the taxpayer in the
earning process
Examples:

Classification of Items of Gross Income a.) Interest Income from Banks

1.) Gross income subject to final tax

2.) Gross income subject to capital gains tax
3.) Gross income subject to regular tax

FINAL TAX INCOME

1. Final tax * <5 years
2. Tax withholding at source
3. Territorial imposition ** >5 years (pre-termination rate: <3y-20%;
4. Applicable only to certain passive income 4y-12%, <5y-5%; >5y - exempt
and NR persons NETB in the Philippines
*** only RESIDENT TAXPAYERS
• Recipient income taxpayer receives the
income net of taxes
• Payor is the one required by law to remit b.) Dividend Income
the tax to the government
• recipient income taxpayer does not need to
file ITR because the withheld tax constitutes
the full tax due and is therefore deemed final
payment

➢ NRA-NETB: 25% general final tax rate

➢ NRFC: 25% general final tax rate
➢ OTHERS: Varies (5%-30%) *Tax-exempt for corporations as
➢ Final Withholding Tax RETURN: BIR inter-corporate dividend income, stock, and
FORMS 0619-F (Monthly) filed and paid liquidating dividends are not dividend income.
before the 10th day of the month
**Under tax sparring rule, otherwise 25%
following the month in which the
withholding was made. eFPS filing: 15-11 ***Tax-exempt for GPP, JV organized for
days following the End Of Month for construction and PCG&OE
Group A-E.
➢ BIR FORMS 1601-FQ (Quarterly) filed c.) Royalties
on or before the last day of the month
after each quarter.

Classification of Tax Groups (according

to industry):
*Royalties on books sold on digital are subject 3. Within 18 months from the date of sale
to 20% FWT. 4. Notification to BIR Com. Within 30 days
from the date of sale
5. Availed once every 10 years.
Not fully utilized: Unutilized portion is a
Prizes and Winnings
taxable amount subject to CGT.

Taxable amount = (Unutilized/Gross

selling price) x tax base

*Exempt are prizes received without effort on

the recipient’s part and no substantial future
service, and from sanctioned national sports
organizations.
** Winnings from horse racing are not subject REGULAR INCOME TAXATION
to FWT but to OPT (10% or 4%) • The general rule in income taxation and
covers all other income such as:

Active/ regular Income a.) Active Income

b.) Other Income
• Arises from transactions requiring a I. gains from dealings in properties, not
considerable degree of effort or undertaking subject to capital gains tax
from the taxpayer II. other passive income not subject to
final tax
Examples:
• Items of gross income from these sources are
a.) Compensation Income valued or measured using an accounting
b.) Business Income method accumulated over an accounting period
c.) Professional Income and reported to the government through an
ITR.
• makes use of the self-assessment method
CAPITAL GAINS TAXATION

• Imposed on the gain realized on the sale TYPES OF ACCOUNTING PERIOD

exchange and other dispositions of certain
capital assets Accounting period - Length of time over
• Capital assets - are assets not used in which income is measured and reported
business trade or profession
• Ordinary assets- are assets used in business 1. Regular accounting period (12
trade or profession months)
a. Calendar (January 1 – December 31)
Domestic shares (15%)
1. Capital assets ITR deadline: not later than April 15 of the
2. Sold directly to buyer or not traded in the following year
LSE
3. Selling price - Cost = Capital gain x b. Fiscal (any 12-month period, ends on any
15% = CG Tax other day than Dec. 31, NOT applicable to
If traded in LSE, subject to business tax of 60% individual, ONLY to corporate IT)
of 1% of the selling price.
ITR deadline: 15th day of 4th month following
Real properties (6%) the close of the taxable year
1. Capital assets
2. Within 2. Short accounting period (less than 12
3. Tax base: HIGHER of Selling price(SP) or months)
Fair Market Value(FMV)
4. FMV = higher between Assessed value • Changing period is not automatic, it requires
or Zonal value. BIR approval.
5. Tax base x 6% = CGT
EXEMPTION: PRINCIPAL RESIDENCE Instances of Short Accounting Period
Requisites:
1. Principal residence of the seller
2. Fully utilized for new principal residence
• Newly Commenced Business -covers the date Amortization of prepayments and
of the start of the business until the designated depreciation
year end of the business
Deductions xx
• Dissolution of Business - covers the start of
the current year to the date of dissolution of the Net Income xx
business
• Change of accounting period by corporate
• Hybrid Basis - Any combination of accrual
taxpayers - year end of the new accounting
basis, cash basis, and/ or other methods of
period
accounting. it is used when the taxpayer has
• Death of taxpayer - Covers the start of the several businesses which employ different
calendar year until the death of the taxpayer accounting methods

• Termination of the accounting period of the • Sale of goods with extended payment terms -
taxpayer by the Commissioner of Internal Maybe reported using the accrual basis,
Revenue - covers the start of the current year installment method, or deferred payment
until the date of the termination of the method.
accounting period
• Installment Method - gross income is
recognized and reported in proportion to the
collection from the installment sales
ACCOUNTING METHODS
• Deferred Payment Method - Variant of the
• Accounting techniques used to measure accrual basis and is used in reporting income
income when a noninterest-bearing note is received as
a consideration in a sale
Types:
• Percentage of Completion Method
1.) The General Methods
• Initial payment - total payment by the buyer
a.) Accrual Basis
in cash or property in the taxable year the sale
• Income is recognized when earned regardless was made
of when received
• Selling Price - Entire amount for which the
• Expense is recognized when incurred buyer is obligated to the seller
regardless of when paid
Computed as:
Cash received/receivable xx
Cash income xx
FMV of prop. received/abele xx
Add: Accrued income xx
Mortgage/any indebtedness
Advanced income xx
Assumed by the buyer xx
Gross income xx
Selling Price xx
Less: Cash expenses xx
• Contract Price - amount receivable in cash or
Accrued expenses xx other property from the buyer.

Amortization of prepayments and

depreciation Tax Rules:

Deductions xx 1.) Advanced income is taxable upon receipt.

Net Income xx 2.) Prepaid expense is nondeductible.

3.) Special tax accounting requirements must
be followed
b.) Cash Basis
• Income is recognized when received and
expense is recognized when paid TAX REPORTING
Types of Returns to the Government
Cash income xx
1.) ITR - Provide details on the taxpayer's
Add: Advanced income xx income, expense, tax due, tax credit, and tax
bill due the government
Gross income xx
Less: Cash expenses xx
2.) Withholding TR - provide reports of
income payment subjected to withholding tax
by taxpayer- withholding agent
3.) Information returns - do not involve
any payment or withholding of tax but are
essential to the government in its tax mapping
efforts and its evaluation of tax compliance
• Non-filing = subject to penalties, fines,
and/or imprisonment
Mode of Filing ITR
1.) Manual Filing System
2.) e-Bir Forms
3.) Electronic Filing and Payment System
(eFPS)
• Payment of Income Taxes - pay as you file
Basic Comparison of Filing and Payment
Systems
Penalties for Late Filing or Payment of
Tax
1.) Surcharge
a.) 25% of the basic tax for late
b.) 50% for willful neglect to file and pay
2.) Interest - Double of the legal interest rate
for loans or forbearance of any money in the
absence of any expressed stipulations
• legal interest is 6% so the penalty is 12% per
annum
Interest period =tax due x 12% x actual
days/365
3.) Compromise Penalty - amount paid in
lieu of criminal prosecution over a tax violation
CHAPTER 10: COMPENSATION
INCOME
• Employer - control over the payment of
employee remuneration
• Employee - control over the payment of
employee remuneration
Elements of Employer-Employee
Relationship
1.) Selection and engagement of employees -
screening process
2.) Payment of wages - employer usually fixes
and controls the payment
3.) Power of dismissal - employer has the
power to retrench or terminate employees
when incurring heavy losses or other
reasonable bases
4.) Power of control - Employer has the power
to control the employee on the means and
methods by which the work is accomplished
Types of Employees as to Function
1.) Managerial Employees - Given powers
or prerogatives to lay down and execute
managerial policies and/or hire, transfer,
suspend, layoff, recall, discharge, assign or
discipline employees
2.) Supervisory Employees - Effectively
recommend such managerial actions if the
exercise of such authority is not merely
routinary or clerical in nature but requires the
use of independent judgment
3.) Rank and file Employees - Hold neither
managerial or supervisory functions
Types of Employees as to Taxability
1.) Minimum Wage Earners - Recipients of
minimum wage. They are exempt from income
tax on their compensation.
• Statutory Minimum Wage -
5,000/month or 60,000 per year whichever is
higher
2.) Regular Employees - Are subject to
regular progressive income tax
NOT employees:
1. Consultants
2. Directors WITHOUT management function
3. Talents and artists
• Not compensation income, but professional
or business income.
COMPENSATION INCOME TAX MODEL
Gross compensation income xxx,xxx
Less: Nontaxable compensation xxx,xxx
Taxable compensation income xxx,xxx
• Gross Compensation Income - Generally
includes all remunerations received under an
employer-employee relationship

NONTAXABLE COMPENSATION
INCOME
1.) Mandatory deductions
a. GSIS, SSS, PhilHealth, HDMF, and union
dues.
2.) Exempt benefits
a. Under NIRC and special laws
b. Under treaty
c. Necessary for business of the employer
d. For the advantage of the employer
EXEMPTION UNDER NIRC AND
SPECIAL LAWS
1.) Remuneration received as incidents
of employment
2. De minimis benefits
• Facilities or privileges but are relatively
small value and are furnished by the employer
merely as a means of promoting the health,
goodwill, contentment, or efficiency of his
employee
• excess of threshold shall form part of 13th
Month Pay and Other Benefits for determining
the P90,000 ceiling of Other Benefits.
Taxable De Minimis Benefits
1.) Excess de minimis over their regulatory
limits
2.) other benefits of relatively small value that
are not included in the list of de minimis
benefits
Treatment of Taxable De Minimis
Benefits
a.) For rank and file employees - Treated as
other compensation income under the category
“13th-month pay and other benefits”
b.) For managerial and supervisory employees
- treated as fringe benefit subject to final fringe
benefit tax
3. 13th-month pay and other benefits not
exceeding 90,000
• not exceeding P90,000 = exempt from
income tax and CWT
• excess of P90,000 = subject to regular
income tax
• Govt. employees = Christmas bonus (=
1-month salary) + 5,000 cash gift
• Private employee = equivalent to 1-month
salary
• Bonus - performance-based
• Gift - gratuity
4. Certain benefits of minimum wage
earners
Other benefits include (RR 2-98)
1. Christmas bonus
2. Productivity incentive bonus
3. Loyalty awards
4. Gifts in cash or in kind
Tax Rules:
a.) Exemption from withholding tax does not
mean income tax exemption
b.) Exemption from tax is not automatic - shall
apply for confirmation of tax exemption.
c.) Employees working in Philippine embassies
or consulate offices are subject to Philippine
income tax.
Summary of Rules
* Taxpayer must prove if there is an exemption
grant under contract or special law.
• Necessity of the employer rule - Benefits
or allowances furnished by the employer to the
employees to enable them to appropriately and
effectively execute their duties as required by
their employment are exempt from income tax
• Convenience of the employer rule -
benefits or allowances which are intended for
the furtherance of the interest of the employers
business or to ensure its smooth operations are
exempt from income tax
TAXABLE COMPENSATION INCOME
1. Regular compensation – FIXED pays
a. Basic salary

b. FIXED COLA, housing allowance, RATA

c. paid vacation and sick leave allowances

2. Supplemental compensation – Taxpayers Subject to Progressive

VARIABLE/Performance-based pays Income Tax
a. OT, hazard pay, night shift, holiday pay, 1.) Citizens
honoraria, director’s fees if employee, etc.
a.) Resident Citizen
b. Excess above 90,000 of 13th month pay and
other benefits b.) Non-resident Citizen
2.) Aliens
Ex. Model: a.) Resident Alien
Regular Compensation xx b.) Non-resident alien engaged in
Supplemental Comp. business
xx 3.) Taxable estate
(Sup. Comp + 13th MP - limit) 4.) Taxable trust
Taxable Compensation Income xx

Classification of Individual Taxpayers

Non-compensation Items 1.) Pure compensation income earner
1.) Fees 2.) Pure business or professional income
2.) Commissions to non-employees earner

3.) Tips and gratuities 3.) Mixed Income earner

• Profit sharing/ taxable bonus - A reward for PURE COMPENSATION EARNER

churning the business to post a profit
REVISED WITHHOLDING TAX TABLE
CHAPTER 14: REGULAR INCOME
TAXATION: INDIVIDUALS
• every employer is mandatorily required to
deduct the withholding tax from the
compensation income of their employees
Treatment:
1.) Full Payment - if the employee has no
other income (may avail of substituted filing
system) and the tax is correctly withheld
2.) Tax Credit - If the employee has other
taxable income or if the tax is not correctly
withheld
Income may come from:
a.) Casual sources
b.) Engagement in business or practice of a
profession

Consolidated or Adjustment Return

Needed when:
1.) Correct tax is not withheld
2.) Employee or his spouse has other income
Correct tax due not withheld by
employer
1.) Concurrent Employment
2.) Successive employment during the year
3.) Incurrence of error by the employer
Consolidated ITR may either be:
1.) BIR Form 1700 - If the employee is not
engaged in business or profession
2.) BIR Form 1701 for mixed-income
earners - If the employee is also engaged in
business and or profession
PURE BUSINESS AND/OR
PROFESSIONAL INCOME EARNER
• The taxable income from business or
profession may be computed using:
a.) Itemized deductions
b.) Optional Standard deduction
• Excess quarterly estimated tax - May, at the
option of the taxpayer, be carried forward to
quarters of the succeeding taxable year or
claimed through a tax refund
MIXED INCOME EARNER
• Will be subjected to the withholding tax on
compensation by their employers
8% Income Tax Option
• Must be indicated in the first quarter ITR or
In the first quarter percentage tax return and
irrevocable for the next calendar year
• Help me basic on the gross sales or gross
receipt on the individual taxpayer that is
subject to 3% percentage tax
Nature:
1.) A bundled tax- in lieu of:
a.) Regular income tax determined
through the income tax table
b.) 3% General percentage tax (now
temporarily 1% during this pandemic)
2.) Annual option - Valid as long as taxpayer
remained as Non-VAT payer during the year.
Invalidated once the taxpayer becomes VAT
taxpayer during the year.
3.) Paid quarterly and annually
Scope:
a.) pure business or professional income
earners
b.) Mixed income earners
Business Tax
• Individuals engaged in business or exercise
of a profession are also required to pay a
business tax which is either a 3% percentage
tax or a 12% VAT
Types of Business Taxpayers
1.) Exempt business - not subject to VAT or
percentage tax
2.) Business Specifically subject to other
percentage taxes - not subject to VAT but
subject to percentage tax of various rates
3.) Vatable Businesses - either pay:
a.) 12% VAT - If their annual sales exceed
3,000,000 or when they registered as VAT
taxpayers
b.) 3% general percentage tax - If their annual
sales did not exceed 3,000,000 and did not
opt to voluntary register as VAT taxpayers
Taxable Estates
• An estate income taxpayer if under judicial
settlement or administration.
Taxable Trusts
• Revocable Trust - Not a taxpayer and is
treated as pass-through entity whose income is
taxable to the grantor-trustor
• Irrevocable Trusts - Treated as an individual
taxpayer and is allowed 20,000 personal
exemption
• Employee trust funds - Exempted from
income taxes imposed under NIRC.
• Income of unmarried minors from property
received from parents - Shall be included in the
return of the parent
Except:
1.) The donor's tax has been paid on such
properties
2.) the transfer of such property is exempt
from donor’s tax

• Individuals with PERA - Exempted from

income tax on said contribution and are
entitled to a tax credit equivalent to 5% of said
contribution

Who shall file the ITR?

1.) A resident citizen engaged in trade,
business, or practice of profession within and
without the Philippines.

2.) A resident alien, non-resident citizen or

non-resident alien individual engaged in trade,
business, or practice of profession within the
Philippines.

3.) A trustee of a trust, guardian of a minor,

executor/administrator of an estate, or any
person acting in any fiduciary capacity for any
person, where such trust, estate, minor, or
person is engaged in trade or business

4.) An individual engaged in trade or business

or in the exercise of their profession and
receiving compensation income as well

Who are not required to file ITR?

1.) minimum wage earner

2.) An individual whose gross income does not

exceed P250,000.00

3.) An individual whose compensation income

derived from one employer does no exceed
60,000 and the income tax on which has been
correctly withheld

4.) An individual whose income has been

subjected to final withholding tax such as in the
case of NRA-NETB

5.) Pure compensation earners qualified under

the substituted filing system

Amendment of ITR - within 3 years from the

required date of filing