JANE ANTONETTE R.

ARCALES INCOME TAXATION

CHAPTER 1: GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

Inherent Powers of the Government State

Power of Taxation Power of Eminent Domain Police Power

Definition To exact an enforced To expropriate private To promote the general

contribution upon persons, property for public purpose welfare of the people by
properties or rights to in return for a just limiting or regulating the
generate revenues for the compensation rights of properties of any
use and support of the gov’t person

Directed against Persons, properties, rights Real property Rights or property

Purpose To raise revenues Public purpose Public welfare

Consideration Services and protections Just or monetarial

presumed furnished by the consideration
gov’t

Amount Tax imposition may be Regulation fee must be limited

unlimited

Similarities - Exist independently with the constitution

- Ways or means of the gov’t to interfere with private rights and properties -
Rest upon necessity 🡪 no gov’t is effective w/o them
- Presupposes (direct or indirect) compensation
- Legislative in nature and character 🡪executive (local or national) branch for actual exercise
of the power

Limitations on the Power of Taxation

Constitutional Limitations – specifically cited or written in the provisions of the PH Constitution

∙ Due Process of the Law – a law which hears before it condemns, which precedes to inquiry and tenders judgment only after trial
∙ Equal Protection of the Law – prevents any taxpayer from being singled out as a special subject of hostile or discriminating tax
legislation
∙ Non-impairment for non-payment of a debt or a poll tax
- Unless guilty of estafa (fraud or deceit)
∙ Non-impairment of the provisions on Obligations and Contracts
∙ The rule of taxation shall be uniform and equitable
- Avoids class tax legislation
- Based on the ability to pay and reasonable in amount taking into account certain factors
∙ No public money or property shall be appropriated for a religious or private purpose
∙ Exemption from taxation of educational, religious and charitable organizations
∙ No law granting any tax exemption shall be passed w/o the concurrence of a majority of all the members of Congress - Tax exemption
– a grant of immunity expressed or implies to a particular person, right or property, from a particular tax to which other persons
generally within the same class, taxing authority or territory are subjected to ∙ Non-impairment of the jurisdiction of the Supreme Court
on Tax Cases
 ∙ The PH President has the power to approve or veto a tax bill approved and passed by the PH congress

Inherent Limitations

∙ public purpose
∙ non-delegation of the taxing power 🡪 except to local gov’t
∙ exemption of the gov’t entities
∙ w/in the territorial jurisdiction of the state
∙ international comity, convention, or agreements
∙ prohibition of double taxation

Taxation 🡪 the inherent power of the state to exact an enforced contribution upon persons, properties or rights for the purpose of
generating revenues for the use of the gov’t

- ways or means of apportioning the operational cost of the gov’t and all its public needs among those who, in some measures, are
privileged to enjoy its benefits and therefore must bear the burden
- the act of levying a tax or the process by which the gov’t, through its law making body, raise revenues to defray its necessary
expenses

Nature of Taxation

∙ authority
- necessity and inherent in every gov’t
- legislative
- theory: gov’t cannot exist w/o taxation
∙ basis
- theory: taxes are imposed upon persons, properties or rights for the support of the gov’t in return for the general
advantages and protections
- principle: where there is no benefit, there is no power of tax
- reciprocal duties
Objects of Taxation
➢ Person
➢ Real Property
➢ Transaction
➢ Income
➢ Tangible Personal Property
➢ Intangible Personal Property
➢ Gratuitous Transfer of Property
➢ Business

Purposes of Taxation

● primary purpose – to raise revenues for the use and support of the gov’t to enable it to carry out its functions
● secondary purpose – to promote general welfare, social and economic dev’t of a country and its people

Scope 🡪 plenary or unlimited; restricted only by constitutional limitations

Nature of Tax Laws/ Internal Revenue Laws

∙ Civil in Nature – not political nor penal although there are some penalties provided for violations

Constructions – reasonable w/ a view of carrying out their purpose and intent 🡪 Plain/ ordinary language Applications –

prospective in operation 🡪 may operate retrospectively if expressly declared or if it is the legislative intent
 Basic Principles of Sound Tax System

∙ fiscal adequacy – source of revenues must be enough to meet the expenditures of the gov’t
- elastic revenue in response to variations of the public or gov’t
∙ equality or theoretical justice – equitable or proportionate distribution of the tax burden
- ability to pay – income earned or received
∙ administrative feasibility – reasonable and convenient enforcement, just, and effective administration

Tax – the enforced burden or mandatory contribution imposed by the gov’t based on power of taxation, upon persons, properties or rights.

Essential Characteristics

∙ enforced contribution ∙ legislative in nature ∙ based on law ∙ monetarial

∙ for public purpose ∙ paid at regular intervals
∙ proportionate in character ∙ imposed upon persons, properties or rights ∙ for gov’t revenues
Classifications

∙ as to Subject Matter
- personal/capitation/poll tax – fixed amount of taxes imposed regardless of property, professions or occupations ▪
community tax
- property tax – imposed upon taxpayers’ assets/property, real or personal, situated w/in the territorial jurisdiction of the
state in proportion to its value or some other reasonable method of apportionment
▪ real property tax
- privilege/excise tax – imposed on taxpayers’ exercising their rights and privileges of performing an act or engaging in an
occupation
▪ donor and estate tax
∙ as to Scope or Authority
- national tax – imposed by the national gov’t, enforced by the BIR or Bureau of Customs (both under the Dept of Finance)
▪ income tax, custom duties, tariff
- local tax – imposed by the local gov’t
▪ real estate tax, community tax
∙ as to Purpose
- general tax – for national or general funds
▪ estate tax
- special tax – for special funds
▪ gasoline tax
∙ as to Liabilities
- direct tax – cannot be passed on or shifted to other person for payment
▪ income tax
- indirect tax – imposed upon persons liable to pay but are permitted by law to be shifted or passed on to other persons ▪
value added tax
∙ as to Determination of Amounts
- specific tax – based on weight or volume capacity or any physical unit of measurements
▪ excise tax on liquors and cigarettes
- ad-valorem tax – based on the sales price or other specified values of the properties
▪ vat
∙ as to Graduation or Rates
- progressive/graduated tax – amount of tax increases as the bracket/layer increases
▪ gift tax, estate tax
- regressive tax – amount of tax decreases as the bracket/layer increases
- proportionate tax – may be higher or lower depending upon the bracket or classification
Distinctions between Tax and License fee
Tax License fee

purpose of raising revenues purpose of regulation

power of taxation police power

direct authority from congress levies tax imposed under delegated power to the local gov’t

amount – usually big small in amount, enough only to cover the cost of services or
regulation

failure to pay does not render the business or occupation illegal failure to pay renders a business or occupation illegal

Distinctions between Tax and Toll

Tax Toll 🡪 compensations charged by the owner for the use of his
property and improvements

represents a demand of sovereignty represents a demand of proprietorship

imposed by gov’t imposed by gov’t or private person

for the support and use of the gov’t to recover the cost or property and its improvements

Distinctions between Tax and Special Assessment

Tax Special Assessment

imposed upon persons, properties or rights imposed only on land and its improvements

imposed by national or local gov’t local gov’t

for the use and support of the gov’t to recover the cost of the public improvements

ordinary and of general application extraordinary and situational as to time and locality

Distinctions between Tax and Tariff/Custom Duties

Tax Custom duties

not all taxes are tariffs/custom duties all tariffs/custom duties are taxes

imposed upon persons, properties or rights imposed only upon articles imported to or exported from the
country

Distinctions between Tax and Debt

Tax Debt
 based on law based on contract

non-assignable assignable

payable in terms of money in terms of money or in property

non-payment (except poll tax) results to imprisonment non-payment does not result to imprisonment

not subjected to right of offset subjected to the right of offset

Tax Situs or Place of Taxation – the territorial jurisdiction of the gov’t where it has the authority to impose its taxation power
which is to levy and collect taxes on persons, properties or rights

Basic rule – the state where the subject to be taxed has a situs may rightfully levy and collect the tax

∙ situs – necessarily in the state which has jurisdiction or which exercises dominion over the subject in question - persons – poll tax
may be properly levied upon persons who are inhabitants or residents of the state (citizen or not) - real property – subject
to taxation in the state in which it is located (owner – resident or not)
- tangible personal property – taxable in the state where it has actual situs or physically located
- income – properly exacted from persons who are residents or citizens in the taxing jurisdiction and even non-residents and
non-citizens provided that the income is derived from sources w/in the taxing state
- business, occupation and transaction – where the business is done, where the occupation is engaged or where the
transaction took place
- gratuitous transfer of property – transmission of property w/o consideration
▪ where the transferor is a citizen/resident or where the property is located

Phases or Aspects of Taxation

∙ levying or imposition of tax – the legislative process of determining the persons, properties or transactions or rights to be taxed ∙
assessment and collection of tax – manners or procedures of enforcing the tax obligations of the taxpayers - administrative in
character
- Department of Finance – BIR , Bureau of Customs, and LGUs

International Comity – fundamental rule of taxation that no law shall be passed to impose taxation on the property owned by a foreign
gov’t or sovereignty

Categories of Double Taxation

Double Taxation – the act of taxing the same taxpayer twice by the same kind of character of tax, by the same taxing authority w/in the
same jurisdiction, for the same purpose and during the same taxable period

∙ direct
∙ indirect

Classifications of Tax Escapes

∙ tax credit – tax payments made by the taxpayer or through withholding agents, that are expressly allowed by law as deductions
directly against the basic taxes due
∙ tax exemption – grant of immunity, express or implied, to a particular person, right, transaction or property, from a particular tax
to which other persons generally w/in the same taxing authority or territory is subjected to
- express or affirmative – expressly written or cited under the provisions of the constitution, statute, treaty, ordinance, or
 franchise
- omission or implied - all those not mentioned under the law are deemed tax exempted
∙ tax evasion or dodging – the fraudulent (illegal) act of using pretenses or forbidden devices in order to lessen the tax liability or
payment; punishable by law
∙ tax avoidance – act of using legitimate or lawful means permitted by our tax laws in order to minimize or avoid tax liability or
payment
∙ tax shifting – legitimate act of passing one’s tax liability for payment to another person in accordance w/ the provisions of the
law

Taxation Law

❖ refers to any law that arises from exercise of the taxation power of the state.

Types of Taxation Law

Tax Law - laws that provide for the assessment and collection of taxes.

➢ The National Internal Revenue Code (NIRC)

➢ The Tariff and Customs Code
➢ The Local Tax Code
➢ The Real Property Tax Code

Tax Exemption Laws - laws that grant certain immunity from taxation.

➢ The minimum wage law

➢ The Omnibus Investment Code og 1987 (E.O. 226)
➢ Barangay Micro-Business Enterprise (BMBE) Law
➢ Cooperative Development Act

Source of Tax Laws

➢ Opinion/Ruling of Secretary of Justice ➢ BIR Revenue Rulings and Regulations
➢ PH Constitution ➢ Philippine Special Laws and Statutes
➢ Presidential Decrees and statutes ➢ Decisions of the PH Courts (higher and lower courts)
➢ National Internal Revenue Code of the Philippines

Types of Administrative Issuances

➢ Revenue Regulation
● signed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue
● specify, prescribe, or define rules and regulations
● formal pronouncement intended to clarify or explain the tax law
● has the force and effects of the law
● not intended to expand or limit the application of the law or otherwise, it is void.
➢ Revenue Memorandum Orders
● provides directives and instructions necessary in the implementation of stated policies, goals, objectives, plans,
and programs of the Bureau in all areas of operations except auditing

➢ Revenue Memorandum Rulings

● are rulings, opinions, and interpretation of CIR with respect to the provisions of the Tax Code and other tax laws
 ● may issue from time to time by the CIR
● provide tax payers guidance on the tax consequences in specific situations
● BIR rulings cannot contravene the issued RMS; otherwise, the rulings are null and void ab initio.
➢ Revenue Memorandum Circulars
● issued by the BIR and other agencies/offices
● publish pertinent, applicable portions, implications of laws, rules, regulations, and precedents.
➢ Revenue Bulletins
● refer to periodic issuances, notices, and official announcements of the CIR that consolidate the Bureau if Internal
Revenue’s position
➢ BIR rulings
● official position of the Bureau to queries
● raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws.

Rulings are merely advisory or sort of information service to the taxpayer such that none of them is binding except to the addressee
and may be reversed by the BIR at any time.

Types of Rulings

➔ Value Added Tax rulings (VAT) rulings

➔ International Tax Affairs Division (ITAD) rulings
➔ BIR rulings
➔ Delegated Authority (DA) rulings

Generally Accepted Accounting Principles (GAAP) vs. Tax Laws

GAAP Tax Laws

❖ not laws ❖ include rules, regulations, and rulings prescribe the

❖ mere conventions of financial reporting criteria for tax reporting
❖ benchmark for fair and relevant valuation and ❖ special form of financial reporting intended to meet
recognition of income, expenses, assets, liabilities, and specific needs of tax authorities
equity of a reporting entity for general purpose
financial reporting
❖ intended to meet the common needs of a vast number
of users in the general public

Note: Taxpayers normally follow GAAP in recording transactions in their books. However, in the preparation and filing of tax
returns, taxpayers are mandated to follow the tax law in cases of conflict with GAAP.

Nature of Philippine Tax Laws

 ➔ civil and not political in nature

BIR Organizations, Powers, and Functions

Bureau of Internal Revenue (BIR) – the gov’t agency that is authorized and tasked to administer and execute internal revenue laws
and regulations

∙ mission – to render services to the public w/ justice and honor at all times
- to maintain public confidence in the integrity and efficiency of the revenue service

Primary Officials

∙ Chief Commissioner
∙ 4 Deputy Commissioners
∙ Revenue Regional Directors – directly responsible to the Commissioner of Internal Revenue and to the Deputy Commissioners ∙ Asst.
Revenue Regional Directors
∙ Revenue District Officers
∙ Dept. Heads of the Assessment and Collection Group and Legal and Administrative Groups ( two working groups) ∙ other
BIR Officials (Operational/Functional Support Offices

Central Office – confined on national policy formulation, proper planning, execution of internal revenue laws and rules and the general
direction and control of the entire internal revenue service

Regional Offices – further subdivided into various revenue district offices

BIR Powers and Authorities

∙ assessment and collection of all national revenue taxes, fees and charges
∙ enforcements of all forfeitures, penalties and fines connected
∙ execution of judgments in all cases decided in its favor by various courts
∙ effect and administer the supervisory and police powers conferred to it by laws

BIR Commissioner’s Powers and Authorities

➢ interpret tax laws and decides tax cases

➢ obtain information, summons, examine, administer oath and take testimony of persons
➢ make assessments and prescribe additional requirements for tax administration and enforcement
➢ delegate his powers

BIR Powers that cannot be delegated

➢ to recommend the promulgation of rules and regulations by the Finance Secretary

➢ to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the BIR
➢ to compromise or abate any tax liability or refund tax credits
➢ to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept
➢ to compromise or abate any tax liability or refund tax credits
➢ to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

Commissioner’s Power to make: Assessments, additional requirements, for tax administration and enforcement

1. examination of tax returns and determination of taxes due.

2. Assess the proper tax on the best evidence obtainable on taxpayer’s failure to submit required tax returns, statements, reports and
other documents.
3. Conduct inventory taking, surveillance and to prescribe presumptive gross sales/receipts
4. Terminate taxable period
 5. Prescribe real property values
6. Inquire into bank deposits
7. Accredit and register tax agents
8. Prescribe additional procedural or documentary requirements

Commissioner’s Power to Compromise, Abate Taxes, Refund Tax Credits

A. BIR Compromise Settlement Program

- This program aims to give opportunities to tax payers with outstanding accounts payables or receivables and disputed
assessments with the BIR. Including those already filed in courts to settle their tax liabilities.

Taxpayers who can avail the compromise settlement program

1. Delinquent accounts
2. Cases under administrative protest pending the revenue offices, revenue district offices, legal services, large tax payer service,
enforcement service, excise tax payers services and collection service.
3. Civil tax cases disputed before the courts
4. Collection cases filed in court
5. Criminal violations, except those already filed in court or those involving tax fraud.

Cases not covered by the Compromise Settlement Program

1. Withholding taxes
2. Criminal tax fraud
3. Criminal violations already filed in courts
4. Delinquent accounts with duly approved schedule of installment payments

Grounds or basis for tax compromise

1. Reasonable doubt as to the validity of the tax claim against the tax payer. Compromise penalty is equal to atleast 40% of the basic
assessed tax.
2. Financial incapacity of the tax payer. Compromise penalty is equal to atleast 10% of the basic tax assessed.

Grounds for Tax Abatement

1. Unjust or excessive amount of tax claim or due

2. Administrative or collection cost do not justify the collection of the tax claim or due.

Ground for tax refund or tax credit

1. Taxes are erroneously or illegally received it penalties are paid w/o authority
2. Tax payers filed in writing w/in 2 years after the payment of taxes or penalties.

BIR commissioner’s duties and functions

➢ Ensure the provision, distribution, it BIR forms, receipts, certificates and appliances and the acknowledgement of payment of taxes
➢ Divide the country to such required number of required revenue districts
➢ Make arrests and seizures For violation of penal laws
➢ Make assignments of Internal Revenue officers and other employees
➢ Submission of the commissioner’s annual report and other pertinent information

BIR Jurisdiction Authority on National Taxes

● 1. Individual tax ● 3. Estate tax

● 2. Corporate income tax ● 4. Donors tax
 I. Remedies of the government, in general

Section 203: Period of Limitations Upon Assessment and collection of

taxes
5. Percentage tax
6. VAT
TAX REMEDIES OF GOVERNMENT AND TAXPAYERS 7. Excise tax
8. Documentary stamp tax

∙ Except as provided in section 222, Internal Revenue shall be assessed within 3 years after the last day prescribe by law for the filing of
the tax return and no proceeding in court without assessment for the collection of such taxes shall begin after the expiration if
such period.
Section 222: Exceptions as to Period of Limitations of assessment of Collection of taxes.

1. In case of a false or fraudulent tax return with intent to evade tax or of failure to file tax return, the tax may be assessed, or w
proceeding in court for the collection of such tax may be filed without assessment at any time within 10 years after the discovery
of the falsity, fraud or omission.
2. If before the expiration of the time prescribed in Section 203 for the assessment of the tax both the BIR commissioner and the tax
payer have agreed in writing to it’s assessment after such time, the tax may be assessed within the period agreed upon. 3. Any internal
revenue tax which has been assessed within the period of Limitations as prescribed in paragraph (a) and (b) hereof, and in Section 203
may be collected by distraint or levy or by proceeding in court within 5 years following the assessment of tax.

Section 223: Suspension or Non- Suspension of Running of the Statute of Limitations

1. Suspension of the running of the Statute of Limitations in section 203 and 222, on the making of the assessment and the beginning
of the distraint or levy or proceeding in court for collection in respect of any deficiency shall be suspended. a. For the period during
which the BIR Commissioner is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court
and for 60 days thereafter.
b. When the taxpayer request for a reinvestigation which is granted by the commissioner
c. When the tax payer cannot be located in the address given by him in the tax return filed, upon which a tax is being
assessed and collected without subsequently giving a change of address.
2. Non suspension
a. Warrant of distraint and levy is duly served upon the taxpayer, his authorized representative or a member of his household
with sufficient discretion and no property can be located
b. Tax payer is out of the Philippines
c. Tax payer cannot be located in the address given by him/her but has informed the BIR of a change address. II.

Civil remedies of government for collection of taxes

Section 205/207. Government's Remedies for the collection of Taxes.

Summary Remedies by the government

a. Section 207 Distraint of personal property

- Upon the failure of the person owing delinquent tax or delinquent revenue to pay the same at the time required
the BIR Commissioner or his duly authorizer representative of the amount involve is in excess of 1M or the
revenue district officer if amount is 1M or less. Shall seize and distraint any goods sufficient to satisfy the tax
or charge.
 - Constructive distraint- to safe guard the interest of the government, may place under constructive distraint- the
personal property of a delinquent tax payer who in his opinion
a) Is retiring from and business subject to tax
b) Is intending to leave the Philippines
c) Is intending to remove his property there from
d) Is intending to hide or conceal his property
e) Is intending to perform any act of tending to obstruct the proceedings for the collection of the tax due
or which may be due from him.
b. Section 207. By levy upon Real property
- After the expiration of time required to pay the delinquent tax or delinquent revenue, real property may be
levied upon, before, simultaneously or after the distraint of the personal property belonging to the
delinquent tax payer.
- Levy shall be effected by writing upon said certificate or a written notice of levy shall be mailed or served upon
the Registry of Deeds.
c. Section 217 Further distraint or levy
- Remedy distraint of personal property and levy on real property may be repeated if necessary until the full
amount of tax due, including all expenses is collected
Judicial remedies by the government

a. Civil action- files cases for collection of taxes before the courts requiring the tax payer to pay his taxes. b.

Criminal action file a case for collection of taxes and imposing penalty against tax payer.
∙ Either of these remedies or both may be simultaneously pursued. Provided however that the remedies and levy shall not be availed
of if the amount of tax involved is not more than 100.00
∙ Penalty shall not be imposed until it is finally decided by the commissioner

Tax payers Remedies Protesting an Assessment, Asking for Tax Refunds

Section 228. Protesting the assessment of Tax.

When The BIR commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the
tax payer of his tax audit findings. Provided, however that such a Pre assessment Notice (PAN) Shall not be required in the following
cases:

1. When the findings for any deficiency tax is the result of a mathematical error
2. Discrepancy has been determined between tax withheld and the amount actually remitted by the withholding agent. 3. A taxpayer
who opted to claim a refund of tax credit of excess creditable withholding tax for a taxable period was determined to have carrier over
and automatically applied the same amount claimed against the estimated tax LIABILITIES for the taxable quarters of the succeeding
taxable year.
4. The excise tax due on excisable articles has not been paid
5. An article locally purchased or imported by an exempt person, such as but not limited to vehichles, capital equipment, machinery,
and spare parts has been sold traded or transferred to non-exempt person.
∙ Tax payer shall be informed in writing by the BIR of the laws and facts which the assessment was made otherwise
assessment is void
∙ Tax later is required to respond to such ore assessment Notice. If the tax payer fails to respond BIR commissioner or duly
authorized personnel shall issue FINAL NOTICE AND DEMAND (FAND).
∙ Assessment maybe protested by filing a request within 30 days from the receipt of the assessment. ∙
Within 60 days of the protest, all relevant supporting documents shall be submitted.
∙ If the protest is denied in part or whole or is not acted upon within 180 days from submission of the document the decision
will be final, executory and demandable.

Flow/sequence of protest/ appeal by tax payer

(FAND) Commissioner Decision- if protest is denied
BIR Examiner (PAN) BIR EXAMINER
COTA decision- if protest is denied SC- any decision is final, executory and demandable

Section 229 Recovery of Tax Erroneously or illegally collected.

− No suit or proceedings shall be maintained in any court for the recovery of any internal revenue tax hereafter allegedly to have been
Erroneously or illegally assessed or collected or if any penalty claimed to have been collected without authority or of any sum
alleged to have been excessively or in any manner wrongfully collected until a claim for refund or credit had been duly filled with
the BIR Commissioner.
− No suit or proceedings shall be filed after the expiration of the 2 years from the date of payment of the tax.

Section 230 Forfeiture of cash refund and of tax Credit

1. Tax Refund – a refund check or warrant issued which shall remain unclaimed or uncashed within 5 years from the date of the said
warrant was mailed shall be forfeited.
2. Tax Credit – tax credit that remains unutilized after 5 years from the date of issue shall unless revalidated be considered invalid.
PENALTIES /ADDITION TAXES

Failure to comply with the Tax code of the Philippines will be imposed with penalties

1. Surcharge of 25%
a. Failure to file any tax return and pay the tax due on the date required
b. Unless otherwise authorized by the BIR commissioner filing a tax return with an internal revenue officer other than those
whom the return is required to be filed
c. Failure to pay the deficiency or delinquency tax
d. Failure to pay the full/part of the amount of tax shown on tax return required to be filed in or before the date prescribed
2. Surcharge of 50%
a. Willful neglect to file the tax return within the prescribed period
b. False or fraudulent tax return willfully made.
− Provided that a substantial under declaration of taxable sales, receipts income etc. Shall constitute prima facie evidence. − Failure to
report sales, receipts or income etc. In an amount exceeding 30% of that declared per tax return and a claim of deductions in an
amount exceeding 30% of actual deductions shall render tax payer to be liable for substantial overstatement of deductions
3. Interest of 12% per annum
a. In general there shall be assessed and collected on any unpaid amount of tax interest at the rate of 12% per annum or such
higher rate as may be prescribed by rules and regulations from the date prescribed for payment. b. Deficiency interest- any
deficiency in the tax due as the term is defined in the NIRC shall be subject to the 12% interest prescribed in paragraph (3) a.
here of shall be assessed and collected from the date required for its payment. c. Delinquency interest- there shall be assed
and collected on the unpaid amount of taxes, 12 % interest rate in paragraph 3 (a) here of until the amount is fully paid which
interest shall form part of the tax in case of failure to pay i. The amount of the tax due on any tax return required to be filed
ii. The amount of the tax due for which no tax return is required
iii. A deficiency tax or any surcharge or interest thereon on the due date appearing in the final notice and demand of
the BIR commissioner
d. Interest on extended payment- there shall be assessed and collected 12 % interest at the rate herein above prescribed on
the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid in the ff cases:
i. If any person required to pay the tax is qualified and elects to pay on installment, but fails to pay the tax or any
installment hereof , or any part of such amount of installment on or before the date prescribed date for
payment.
ii. Where the BIR commissioner has authorized a tax payer an extension of time within which to pay tax or
deficiency but fails to pay the said tax with extension period.
General provisions

1. The additions to the basic tax, delinquency tax or deficiency tax shall apply to all taxes, fees and charges imposed in the NIRC and
shall be paid in the same manner as part of the tax.
2. If the withholding tax agent is the government or any of its agencies or any government controlled corporations the employee shall
 thereof be responsible for the withholding and remittance of the income tax and shall be personally liable. 3. The term person includes
an officer or employee of a corporation or partnership who has such officer employee or member is under duty to perform the act in
respect to which the violation occurs.
4. Income tax returns filed and taxes paid within the prescribed filing or payment period is presumed to have been filed and paid as of
the last day of the filing period.

Formulas/ determination of the additions (penalties) to the basic tax

FORMULA 1: w/ delinquency tax but without willful neglect of fraud

Correct tax due per tax returned filed 150,000 Less: payment of tax due per tax return (100,000) Delinquency
Tax 50,000

Additions to delinquency tax:

1) 25% surcharge on delinquent tax

(50,000 x .25) 12,500
2) 12% interest on delinquent tax
(50,000 x .12 x 3/12) 1,500
Assessed amount of tax 64,000

note 1. Unpaid period is 3 months

*if w/ willful neglect surcharge will be 50%
CHAPTER 2: GENERAL IMPOSITION OF INDIVIDUAL INCOME TAXATION

Amendments to Individual Income Taxation by TRAIN Act RA No. 10963: NIRC of 2017

1. IIT 🡪 Personal Income Taxation (PIT)

2. RC, RA, NRC, NRAEBP, EEI, SEI, SPI, MIE 🡪 no longer allowed to claim the items of Allowed Personal Exemption (APE) and Health
Hospital Insurance Premiums (HHIP)
3. Taxable Estate and Taxable Trust 🡪 no longer allowed to claim the items of Basic allowed personal exemption (P20,000) 4. Employee
Individual (EEI) 🡪 basic income tax rates of 0% to 35% on Gross Compensation Income plus Non-Trade, Business, Professional Income
(before, 5% to 32%)
5. Self-Employed Individual (SEI) or Self-Professional Individual 🡪 0% to 35% on their total amount of taxable net income from trade,
business or profession
6. Mixed Income Earner 🡪 0% to 35% on Gross Compensation Income plus Non-Trade, Business, Professional Income combined with
their taxable net income from trade, business or profession
7. SEI, SPI, MIE with yearly gross sales price of goods or yearly gross receipts of services plus their other non-operating trade, business
or professional income < P3 million (new annual VAT threshold amount)
a. Option 1 – PIT at regular rates plus 3% percentage tax in NIRC Sec 116
b. Optional Income Tax (OIT) at rates of 0% to 8% on the total amount of gross sales price of goods or gross receipts of
services plus their other non-operating business income/non-operating professional income
- OIT rates: 0% for the first P250,000 plus 8% on the excess over the first P250,000
- MIEs shall avail of the 1st P250,000 exemption only once
8. Non-resident Alien Not Engaged in Business in PH (NRANEBP) 🡪 taxed at 25% income tax rate based on their gross income in PH
only
9. Special Aliens of Filipino Employees (SAFE) 🡪 taxed at 15% on taxable gross compensation income in PH sources only 10. General
Professional Partnership and its Members/Partners 🡪 the 40% Optional Standard Deduction can be claimed only once either by the
GPP or its members/partners
 11. Tax Exempt amount of the 13th month pay, bonus, and other incentive pay is P90,000 and below per year (before, P82,000 and
below)
12. Non-Taxable Minimum Wage Earner (NTMWE) 🡪 exempt from income tax on his entire statutory minimum wage (SMW) items a.
Minimum Wage Earner (MWE) 🡪 receives or earns additional compensation such as commissions, honoraria, fringe benefits,
incentive pay benefits (13th month pay, bonus, productivity pay and other incentive pay) in excess of the allowable statutory
amount of P90,000 per year
- Taxable allowances and other taxable income (except income-exempt SMW items) 🡪 regular/basic income tax
rates of 0% to 35%
13. Winnings/prized from the PCSO are subject to 20% final income tax (except P10,000 or less)
14. PCSO 🡪 reclassified as a taxable corporation subject to the corporate income taxes
15. Interest income received by an individual taxpayer (except non-residents) from a depository bank under the expanded foreign
currency deposit system 🡪 final income tax rate of 15%
16. Capital Gains from Sale of Shares of Stock outside or not Traded through the local stock exchange (Initial Public Offering and
Secondary Public Offering) 🡪 final tax rate of 15% upon the net capital gain realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation held as a capital asset (before, 5% on the first P100,000
and 10% on the excess)
17. Sales of Shares of Stock listed and traded in the local stock exchange or on a SPO or IPO 🡪 every sale, barter or other dispositions
shall be levied, assessed and collected a percentage tax rate of 6th tenths on one percent (6/10) of the gross sales price or gross value
in money of the shares of stocks sold, bartered or exchanged or other dispositions 18. Final Income Tax Rates (Fringe Benefit Tax Rates)
19. Uniforms and clothing allowances at a maximum of P6,00 per year as tax exempt de-minimis benefits 20. Rice subsidy of not over
P2,000 per month or one sack of 50kg per month amounting to not over P2,000 as tax exempt de minimis benefits
21. Medical cash allowance to dependents of employees, not exceeding P1,500 per semester or P250 per month as tax exempt de-
minimis fringe benefits (before, P750/semester, P150/month)
22. Interest on deficiency tax, delinquency tax and extension of payment is at 12% per year (double the legal interest rate on loan of
6%) (before, 20%)
23. 1st quarter income tax return for SEI, SPI, MIE is on or before May 15 of the current taxable year (before, April 15) 24. 2 nd installment
payment of the basic income tax due exceeding P2,000 shall be on or before October 15, following the close of the taxable year
(before, July 15)

Administrative Provisions on Individual Income Taxation

Compliance Requirements

1. Registration with the BIR Citizen

2. Accounting books/records
3. Issuance of sales invoices and official receipts
Persons Required to File Income Tax Returns 1. Filipino
4. Filing of tax returns and payments of related taxes 5.
Withholding taxes on specified/certain payments to
suppliers/sellers

a. Residing in the PH, on his income from sources in and out of the PH
b. Residing outside the PH, on his income from sources in the PH
2. Alien residing in the PH – income w/in the PH
3. Non-resident alien engaged in trade, business or in the exercise of profession in the PH – income w/in the PH

Persons Not Required to File Income Tax Returns

1. w/ respect to pure compensation income (sources w/in the PH), the income tax on which has been correctly withheld a. deriving
compensation income from two or more employers at any time during the taxable year shall file an income tax return
2. Sole income – subjected to final withholding income tax
3. Exempt from income taxation pursuant to the Tax Code and other laws
∙ May be required to file an information return pursuant to the rules and regulations prescribed by the Sec. of Finance upon
 recommendation of the BIR Commissioner

Place to File Income Tax Returns and Pay Income Taxes

∙ City of municipality in which such person has his legal residence or principal place of business in the PH o
Authorized agent bank
o Revenue district officer
o Collection agent
o Duly authorized treasurer
∙ No legal residence or place of business in the PH
o Main office of the BIR Commissioner

When to File Income Tax Returns and Pay Income Taxes

A. Regular Filing of Individual Income Tax Returns

1. Annual Estimated Income Tax Return for SEI
a. On or before April 15 of the same taxable year
b. Estimated Income Tax – the amount which the individual declared as income tax in his final adjusted/annual
income tax return for the preceding taxable year less the sum of the credits allowed against said tax
i. 1st installment (25%) – on or before Apr 15 of the same current year at the time of the declaration in the
current year
ii. 2nd installment (25%) – on or before Aug 15
iii. 3rd installment (25%) – on or before Nov 15
iv. 4th installment (balance after tax credit) – on or before Apr 15 of the following calendar year (when the
final actual yearly income tax return is due to be filed)
c. Self-employment income – earnings derived by an individual from the practice of profession, conduct of trade
or business carried on by him as a sole proprietor or by a partnership of which he is a member/partner 2. Quarterly Income
Tax Returns for SEI
a. 1st quarter income tax return (3 months) – on or before May 15
b. 2nd quarter income tax return (6 months) – on or before Aug 15
c. 3rd quarter income tax return (9 months) – on or before Nov 15
d. 4th quarter income tax return (12 months) – on or before Apr 15 of the following year
∙ Final Annual Adjustment Income Tax Return – if sum of the quarterly income tax payments made during the
taxable year ≠ total income taxes due to the entire taxable income of that year:
o Pay the balance of the income tax due, or
o Carry-over the excess income tax credit, or
o Be credited or refunded w/ the amount of the excess income tax credit
3. For employees deriving purely compensation income
a. Yearly income tax return – filed on or before Apr 15 of the following year
4. Final Income Tax Return on Sale of Property Classified as Capital Asset
a. On capital gain realized from sale of shares of stocks in a domestic corporation, held as capital asset, not
traded/listed in the PH local stock exchange – shall be filed w/in 30 days after each transaction together with a
consolidated final income tax return
i. Final income tax shall be paid upon filing, on or before the 15 th day of the 4th month following the close of
the year
b.On capital gains realized from sale of real property located in the PH held as capital asset – income tax return
and final income tax shall be filed and paid within 30 days after each transaction
B. Substituted Filing of Income Tax Returns – a system of filing the income tax return for an individual where his employer’s annual
return maybe considered as the former’s substitute income tax return in as much as the information provided in his regular
income tax return would be exactly be the same information contained in his employer’s annual return and his BIR Form 2316

Persons Qualified for Substituted Filing of Income Tax Returns

 1. Received purely compensation income (regardless of amount)
2. Received the income only from one employer
3. The amount of income tax due was correctly withheld by the employer
4. His/her spouse has complied with all the above requirements
5. Employer – filed its annual information return and issued him/her copies of BIR Form 2316
Persons Not Qualified for Substituted Filing of Income Tax Returns

1. Receiving income from two or more employers concurrently or successively at any time during the taxable year 2. If derived
compensation income’s corresponding income tax due is not equal to income tax withheld (even if collectible or refundable)
3. Monthly gross compensation income < P5,000 or the statutory minimum wage (whichever is higher) and opted for non withholding
tax on said income
4. Received other income in addition to the compensation income and otherwise not subject to final income tax 5.
Spouse not entitled to the substituted filing of income tax return
6. Non-resident alien engaged in trade or business in the PH – pure compensation income and other business or professional related
income

Place and Time for Payment of Income Taxes, “Pay as you File System”

1. The amount of income tax shall be paid in money by the person subjected thereto at the place and time the income tax return is
filed
2. Installment Payment of Basic Income Tax – basic income tax due is in excess of P2,000 and the taxpayer is not a non-resident alien
a. 1st installment – paid at the same time the income tax return is filed
b. 2nd installment – on or before Oct 15 following the close of the calendar year
c. If any installment is not paid on or before the date fixed – whole amount becomes due and payable (together with the
delinquency penalties

Amended Income Tax Returns – may be amended w/in 3 years from its filing or from the last day prescribed for its filing ∙

No notice for tax audit/examination, assessment and demand has been actually served

Persons Under Disability

∙ Duly authorized agent or representative or by a guardian

Signature Presumed Correct

∙ Signed individual’s name – prima facie (accepted correct until proven otherwise) evidence for all purposes

Self-assessment System – mandated by law, an income taxpayer is required to file his/her income tax return, computing such declarable
gross income w/ claimable allowed deduction, by himself/herself, or with the assistance of accountants based on their own
knowledge/interpretations of the income tax laws

BIR Assessment, Imposition, Collections of Deficiency Tax – the basic assessed tax or deficiency income tax or delinquency income tax
discovered shall be paid upon notice and demand from the BIR Commissioner

Accounting or Taxable Year of Individuals – fiscal or calendar year

∙ Individual taxpayer (EEI, SEI, MIE) – may only employ the calendar year

Methods of Accounting Allowed

1. Cash basis/method
2. Accrual basis/method
3. Accounting for long-term contract – recognizes income and expenses for long-term contracts
a. Percentage of Completion method
b. Completed Contract method – cannot be used anymore
4. Installment basis/method – adopted by those who sells or disposes personal property on the installment plan o Income is
 recognized any taxable year – proportion of the installment payments actually received in such year o Gross profit
realized or to be realized when payment is completed, bears the contract price
Keeping Books of Accounts and Records

1. All corporations partnerships, sole proprietorships or persons required by law to pay internal revenue taxes – required to keep a
journal/ledger (or their equivalents)
2. Quarterly sales, earnings, receipts < P50,000 – simplified set of bookkeeping records
3. Quarterly sales, earnings, receipts > P150,000 – books of accounts must be audited and examined annually by an independent CPA
with a duly accomplished Account Information Form (AIF)
4. Subsidiary books – optional

Language in which Accounting Books shall be kept

∙ Native language (English or Spanish) – If kept in another language, it is required to make a true and complete translation in a native
language

Preservation of Accounting Books – 10 years from the last entry in each book/records (before 2016 – 3 years) BIT

Audit, Examination of Accounting Books – made only once in a taxable year except:

1. There is fraud irregularity or mistakes

2. Taxpayer requests for reinvestigation
3. Verification of the compliance w/ the withholding tax laws and regulations
4. Verifications of capital gain tax liabilities
5. To obtain info for other persons
6. Retirement – within 10 days from the retirement date or in such period of time, submit their books and records for examination (to
be returned afterwards)
o Not considered retired or dissolved unless cleared by the BIR for any tax liability

Consequences for Non-compliance with BIR Revenue Regulations

1. Failure to file certain information returns – P1,000 for each failure but the aggregate amount for said failures during the calendar
year must not exceed P25,000 (unless due to reasonable cause and not to willfully neglect)
2. Failure of a withholding agent to collect and remit tax – penalty equal to the total amount of the tax not withheld/accounted
for/remitted
3. Failure of a withholding agent to refund excess withholding tax – penalty equal to the amount of tax refunds which were not
refunded to the employees resulting from any excess of the amount withheld over the tax actually due on their tax return

Fundamental Concepts on Individual Income Taxation

Globalized Income Taxation – taxation scheme/system wherein the taxable net income from whatever sources is computed under one
formula subject to the graduated income tax rates of 5% to 32%

Schedular Income Taxation – scheme/system of income taxation wherein income are classified into different categories, which at their net
amount are subjected to different graduated basic income tax rates

∙ Taxable net compensation income – 0% to 20%

∙ Taxable net business income – 0% to 35%
∙ Adjusted gross income abroad of non-resident citizens – 1%, 2%, or 3%

Income tax – tax imposed by the gov’t on the taxable income, whether at gross amount or at net amount, earned by taxable persons

Income – profit, gain, fruit, wealth or fortune derived from labor, from capital , or from both labor and capital, from sale or exchange of
assets, as well as those derived from other sources, whether legal or illegal, other than those representing returns of capital

Capital – a fund or a tree that generates the income

Taxable income – gains, profits or income items which are subject to income tax
 ∙ At gross amount – single final income tax rate
∙ At net amount – graduated income tax of 5% to 32%
∙ Requisites:
o There must be gain or profit
o The gain must be realized or received actually/constructively
o The gain must not be excluded/exempted by law from income taxation

Constructive Receipts of Income – credited to the account of the taxpayer, or set aside for him, or which may be drawn at any given time,
or a complete control for the disposal of such income is already placed in his hands

∙ Share in the net income of a partnership although not yet distributed

∙ Interest income already credited to the account of the bank depositor
∙ Dividends declared
∙ Rental payments already judicially deposited in a bank
∙ Matured interest coupons on certificate of bonds

Gross Income Taxation System – the income earned/received at gross amount (without any deductions) serves as the basis of the
applicable income tax rate in order to determine the corresponding income tax due

Gross Income – total amount of income earned without considering any deductions

Net Income – excess of gross income over the amount of the deductions permitted by law

Net Income Taxation System – the income earned at net amount (after deductions permitted by law) serves as the basis of the applicable
income tax rate in order to determine the corresponding income tax due

Net loss – excess of gross income over the amount of the deductions permitted by law; not subjected to income tax nor refund Passive

income – gains/income obtained from activities in which the taxpayer does not participate on a regular and continuing basis Active

income – gains/income earned by the taxpayer from activities in which he materially participated; regular and continuing basis Person –

natural or artificial being; an individual, a trust, estate, sole-proprietorship, corporations or partnerships, associations

Minimum Wage Earner (MWE) – a worker in the private sector paid the statutory minimum wage or an employee in the public sector with
compensation income or not more than the prescribed statutory daily minimum wage in the agricultural and non-agricultural sector

Classification of Taxes as to Taxability

1. Non-taxable income (NTI) or Income Exempt from Income Tax (IE) – exempted from basic income tax and different single final
income taxes
∙ 13th month pay, bonus and incentive pay of P90,000 below
2. Taxable income or income subject to income tax
a. Income Subject to Final Income Taxes (IFT) – exempt from graduated basic income taxes of 0% to 35% −
Interest income on bank deposits (20%)
− Gains from sale of real property located in the PH and held as capital assets (6%)
b. Income Subject to Basic Income Tax (IBT) – items declared in the taxpayer’s gross income on the income tax return −
Gross profit from sale of goods, salaries and allowances

Classifications of Income as to Source or Line of Activity

1. Compensation Income from Employment (CI) – earned by a fixed-earner employee, out of an employee-employer relationship 2.
Income from Business, Trade or Profession (TBPI) – self-employment income
3. Other Income (OI) – earned/derived from the sale of personal assets or from personal transactions
Classifications of Expenses as to Deductibility

1. Non-deductible Business Expenses – not permitted by law as allowed deduction from the gross income 2. Non-
business expense (NBE) – not connected in the business or practice of profession (personal expenses) 3. Deductible
 Business Expense (DBE) – permitted by law as allowed deductions from gross income

Sources of Income and Expenses

1. w/in the PH
2. outside the PH
3. in and partly outside the PH

Civil Statues (Exemption Status) of Individual Taxpayers

1. Single – w/o any qualified dependent

2. Head of the Family – at least one qualified dependent
3. Married – living together
4. Married but legally separated – physically separated under a court order, but not by divorce
5. Married legally divorced

Classifications of Individual Taxpayers

1. Special Individual Taxpayers – from the PH, taxed at the preferential single/flat tax rates (not required to file income tax returns) a.
Special Aliens or Filipino Employees (SAFE) – foreigners and/or their Filipino counterparts as technocrats (technically experts)
or holding managerial positions
i. Regional Area Headquarters of MNC
i. Multi-national Corporation (MNC) – a foreign firm or entity engaged in international trade with affiliates
or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets
ii. Regional Area Headquarters – branch establish in the PH by a MNC; does not earn income from the PH
but merely acts as supervisory, communications and coordinating center
ii. Regional Operating Headquarters of MNC
iii. Offshore Banking Units – foreign banking corporation located offshore, which is authorized to engaged in foreign
currency transactions and other related banking transactions in the PH
iv. Foreign Petroleum Service Contractor or Sub-Contractor engaged in petroleum operations in the PH under a service
contract w/ the gov’t
b. Non-resident Alien Not Engaged in Business in the PH (NRANEBP)
c. Minimum Wage Earner
2. Ordinary Individual Taxpayers – taxed at the graduated basic income tax rates of 0% to 35% and are required to file their income tax
returns and are required to file their income tax returns
a. Resident Citizen (RC) – Filipino in the PH
b. Resident Alien (RA) – foreigner in the PH
c. Non-resident Citizen – Filipino residing outside the PH
d. Non-resident Alien Engaged in Business in the PH (NRAEBP)
a. Non a resident nor a citizen but has a sole-proprietorship business established and operating w/in the PH
b.Non-resident alien who shall come to the PH and stay therein for an aggregate period of more than 180 days

Persons Considered Citizens of the PH

1. Natural born citizens – citizen of the PH from birth w/o having to perform any act to acquire or perfect his citizenship 2.
Naturalized citizens
3. Citizens of the PH at the time of the adoption of the PH Constitution
4. Persons who elected PH citizenship pursuant to the provisions of the Constitution
Persons Considered Non-resident Citizens

1. Established satisfaction to the BIR Commissioner of his physical presence abroad with a definite intention to reside therein 2. Left
the PH during the taxable year to reside abroad (immigration or employment)
3. Works and derives income abroad; physically present abroad most of the time during the taxable year (<183 days) 4. Previously
considered as non-resident and arrives in the PH to reside permanently in the PH – non-resident for the taxable year in which he
arrives
Immigrant – leaves the PH to reside abroad as an immigrant for which a foreign visa as such has been secured

Overseas Contact Worker – individual who leaves the PH on account of a contract of employment which is renewed from time to time w/in
and during the taxable year under such circumstances; required to be physically present abroad most of the time during a taxable year
(<183 days)

Employee – fixed earner deriving income out of an employer-employee relationship

Self-employed or Entrepreneur – engaged in business, trade or practice of profession

Professional – derives income from the practice of profession

Forms of Business Organization

1. Sole-proprietorship
2. Partnership
3. Corporation

Securities – shares of stocks in a corporation and rights to subscribe for or receive such shares

Dealer of Securities – with an established place of business, regularly engaged in the purchase of securities and resales thereof to
customers

Deposit substitutes – alternative form of obtaining funds from the public (from 20 or more individuals or corporate lenders) other than
deposits, through the issuance, endorsements or acceptance of debt instruments for the borrower’s account for relending or purchasing of
receivables and other obligations of financing their own needs or the needs of other agents or dealers

Mutual Fund Company – an open-end and close-end investment company

Long-term Deposit or Investment Certificate – not less than 5 years

Withholding Tax Agent – any person required to deduct and withhold any tax under the provisions of the NIRC

General Principles of Income Taxation for Individuals

1. Resident citizen – taxable on all income derives from sources w/in and outside the PH
2. Non-resident citizen – taxable only on income derived from sources w/in the PH
3. Overseas Contract Worker – taxable only on income from sources w/in the PH
− Seaman – vessel engaged exclusively in international trade
4. Alien – taxable only on income derived from sources w/in the PH

Income statement under GAAP must be distinguished with the income tax return under NIRC – International Tax Treaty/ Tax Law 🡨 Higher
Court 🡨 Tax Code 🡨GAAP

CHAPTER 3: TAXABLE INCOME OF INDIVIDUALS

Taxable Income – pertinent items of gross income specified in the Tax Code less deductions authorized to such types of income by the Tax
Code or special laws.

Special Individual taxpayers – normally taxed at flat tax rate of 15% or 25% based only on their taxable gross income from within the
Philippines; no longer required to file income tax returns

Ordinary Individual Taxpayers – those required to file their income tax returns and are normally taxed at the graduated or progressive
income tax rates of 0% to 35% based on taxable income.

NIRC Format / Formula of Individual Income Tax Returns

Gross Income xxx
 Less: Allowed Deduction xxx

Taxable Net Income xxx

Income Tax Due (0% to 35%) xxx

Less: Income Tax Credit xxx

Income Tax Payable xxx

*If the centavos is less than P0.50, drop said centavos; if the centavos is P0.50 or over, round to P1.00

Per NIRC 2017 (years 2018-2022) Basic Income Tax Rates for Individuals RC, RA, NRC, NRAEBP
Over Not Over Tax Plus Excess Over

0 250,000 exempt exempt 0

250,000 400,000 0 20% 250,000

400,000 800,000 30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000

2,000,000 8,000,000 490,000 32% 2,000,000

8,000,000 no limit 2,410,000 35% 8,000,000

Per NIRC 2017 (years 2023 onwards) Basic Income Tax Rates for Individuals RC, RA, NRC, NRAEBP
Over Not Over Tax Plus Excess Over

0 250,000 exempt exempt 0

250,000 400,000 0 15% 250,000

400,000 800,000 22,500 20% 400,000

800,000 2,000,000 102,500 25% 800,000

2,000,000 8,000,000 402,500 30% 2,000,000

8,000,000 no limit 2,202,500 35% 8,000,000

Summarized Rules on Individual Income Taxation per TRAIN Act

Classes of Individuals Tax Base Tax Source Tax Rate

Rule 1. Resident Citizen Taxable Net Income World, in Philippines plus in FC Basic/Regular 0% to 35%
a. Income Basic Tax (GIW less ADW)

b. Income Final Tax Taxable Gross Income In Philippines only Single rates

c. Income Exempt Various income items not subject to individual income tax
 Rule 2. Resident Alien, Non Taxable Net Income In Philippines only Basic/Regular 0% to 35%
Resident Citizen, Non- (GIP less ADP)
Resident Alien Engaged in
Business in PH a. Income
Basic Tax

b. Income Final Tax Other Gross Income In Philippines only Single rates

c. Income Exempt Various income items not subject to individual income tax

Rule 3. Non-Resident Alien Taxable Gross Income In Philippines only Single Rate 25%
Not Engaged in Business in
Ph
a. Income Basic Tax

b. Income Final Tax Other Gross Income In Philippines only Single Rates

c. Income Exempt Various income items not subject to individual income tax

Rule 4. Special Alien, Gross Compensation In Philippines only Single Rate 15%
Filipino Employee Income
a. Income Basic Tax

b. Income Final Tax Special Income In Philippines only Various Rates

c. Income Exempt Various income items not subject to individual income tax

Special Alien or Filipino Employee – refers to a foreigner or a counterpart Filipino employee who is holding a managerial or technical
position, employed by certain specified business organizations in the Philippines, cited as follows:

1. Regional Area Headquarters of Multinational Corporations

2. Regional Operating Headquarters of Multinational Corporations
3. Offshore Banking Units
4. Foreign Petroleum Service Contractor or Subcontractor engaged in Petroleum Operation in the Philippines under the
Philippine government contract

Provided that the Filipino employee, employed by regional area headquarters or regional operating headquarters of a multinational
corporation in the Philippines, as per BIR Rev. Reg. 11.2010, shall have the options to be taxed either:

1. At 15% of gross compensation income in Philippines

2. At the basic income tax rates of 0% to 35% on taxable net income in Philippines

Specific Formulas of Income Tax Returns for RA, RC, NRC, NRAEBP, if EEI, SEI, or MIE

Formula 1. For Employee only (EEI)

 Gross Compensation xxx

Add: Non-Trade, Business, Professional Income xxx

Gross Compensation Income plus NTBPI xxx

Income Tax Due (0% to 35%) xxx

Formula 2. For Self-employed only (SEI or SPI)

Business Income (GPFS) xxx

Other Income (NOTBPI) xxx

Gross Income xxx

Less: Allowed Deduction (DBE) xxx

Taxable Net Income xxx

Income Tax Due (0% to 35%) xxx

Formula 3. For Mixed Income Earner (MIE)

Compensation Income plus NTBPI xxx

Business Income (GPFS) xxx

Other Income (NOTBPI) xxx

Gross Income xxx

Less: Allowed Deduction (DBE) xxx

Taxable Net Income xxx

Income Tax Due (0% to 35%) xxx

*If resident citizens, the gross income allowed and allowed deduction, are those in and outside the Philippines. *In the case of
resident aliens, non-resident citizens and non-resident aliens engaged in business in the Philippine, the reportable gross income and
allowed deductions, are within the Philippines only.

Income Taxation for Minimum Wage Earner

1. Minimum Wage Earner – refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public
sector with compensation income of not more than the prescribed statutory minimum wage in the agricultural and non-agricultural sector
of the region where he/she is assigned.

2. Statutory Minimum Wage – refer to the rate fixed by the Regional Tripartite Wage and Productivity Board as defined by the Bureau of
Labor and Employment Statistics of the DOLE.

3. Compensation income of minimum wage earner who work in the private sector and being paid the statutory minimum wage as fixed
by the RTWPB / National Wages and Productivity Commission applicable to where he/she is assigned shall be exempt from income
taxation.

4. Compensation income of employees in the public sector with compensation of not more than the SMW in the non-agricultural
sector, as fixed by RTWPB / NWPC shall be exempt from income taxation.

5. Basic Salary of MWE in the public sector shall be equated to the SMW in the non-agricultural sector applicable to the place he is
assigned. The determination of SMW in the public sector shall adopt the same procedures and consideration as those of the private
sector.

6. Basic pay including cost of living allowances (COLA), holiday pay, overtime pay, night shift differential pay, and hazard pay earned by
the MWE shall also be exempt from income taxation. Provided however that an employee who receives additional compensation such as
commission honoraria, fringe benefits, incentive pay benefits in excess of the allowable statutory amount of P90,000 a year, taxable
allowances and other taxable income other than the SMW items shall be subject to the basic/regular tax rates of 0% to 35% on other
taxable income items. SMW items shall still be exempt from income taxation.

7. MWE’s earning other income in addition to compensation income are not exempted from income tax on their entire income during the
taxable year exempt the SMW items.
8. Hazard pay – amount paid by the employer to MWE’s who were actually assigned to danger or strife-torn areas, disease-infected places,
or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to
MWE’s which does not satisfy the above criteria is deemed subject to income tax and withholding tax.

In case of hazardous employment, the employer shall attach to the Monthly Remittance Return of Withholding Tax on Compensation for
return periods March, June, September, and December a copy of Department of Budget and Management circulars or equivalent as to
who are to receive hazard pay.

9. Any reduction of diminution of wages for purposes of exemption from income tax shall constitute misrepresentation and therefore, shall
result to the automatic disallowance of expense i.e. compensation and benefits account on the part of the employer. The offenders may be
criminally prosecuted.

The wage order shall not cover household or domestic helpers, persons in the personal service of another person, and workers of
registered micro-business establishments, with certificate of authority.

Income Taxation for Non-Taxable Minimum Wage Earner

If the MWE earned income consisting only of SMW items, whether with or without income exempt from income tax and/or income
subject to final tax, but did not earned any other item subject to basic income tax, then such MWE is classified as Non-Taxable MWE and
shall be exempt from income tax on his SMW items.

Income Taxation for Taxable Minimum Wage Earner

If the MWE earned other income subject to the basic income tax, in addition to his SMW items, whether with or without income
exempt from income tax and income subject to final income tax, then such MWE is classified as Taxable MWE and shall be taxable only
on his other taxable income beyond the SMW items.

Statutory Minimum Wage Items (SMW Items):

1. Statutory/Daily minimum wage or basic pay including cost of living allowance (COLA)
2. Holiday Pay
3. Hazard Pay
4. Overtime Pay
5. Night Shift Differential Pay

Income Taxation for Married Couples

Married couples, subject to the provision of Section 51 (D) of the NIRC, shall compute separately their individual income taxed based on
their respective taxable net income. Provided, that if there are any unidentified income/expense which cannot be definitely attributed to
or identified as exclusively earned by either of the spouses, the same shall be shared equally between them for the purpose of
determining their respective taxable income.

1. Married couples, whether RC, RA, NRC, NRAEBP, shall file only one income tax return.

2. In one/same ITR. the gross income, allowed deductions, taxable net income and income tax due, income tax credit and income tax
payable of each spouse shall be computed separately.

3. Identify income and expenses directly or wholly attributable to either spouses. In case of joint/unspecified/untraceable/allocated
income and expenses, unless otherwise stated, these are shared equally.

4. Where it is impracticable to file one ITR, each spouse may file a separate ITR but the tax return shall be consolidated by the Bureau of
Internal Revenue for purposes of verification for the taxable year.
Format/Formula:
Husband Wife Combined

Compensation Income xxx yyy xxxyyy

Business Income (GPFS) xxx yyy xxxyyy

Share in Unspecified Income (50% each) xxx yyy xxxyyy

Gross Income xxx yyy xxxyyy

Less: Allowed Deduction (DBE) xxx yyy xxxyyy

Taxable Net Income xxx yyy xxxyyy

Income Tax Due (0% to 35%) xxx yyy xxxyyy

Income Taxation for Parent and Child

For parents and child who are both working, subject to the provisions of Section 51 (D) of the NIRC, shall compute separately their
individual income taxes based on their respective taxable net income.

1. Minor children who are gainfully employed are mandated by law to file their own separate income tax returns through their
guardians and parents.

2. The income of an unmarried minor, derived from property gratuitously received from a living parent by way of gift or donation, shall
be included and declared as part of the parent-donor’s gross income in his ITR if the related donor’s tax is still unpaid. In such case, the
parent-donor is still the legal owner of the property and its income.

3. In the following cases, the income on such donated property shall be reported as part of the child-donor’s gross income in his ITR; a.
when the related donor’s tax has been paid
b. when the transfer of such property is exempt from donor’s tax

In such case, the child-donee is already the legal owner of the property and its income.

Income Taxation for Taxable Estate

Estate – total value of all the properties, rights, and obligations of a decedent on date of death.

Decedent – deceased individual whose property are the object of the laws on succession.

Heir/Beneficiary – person who shall receive a property inheritance, cash or non-cash, tangible or intangible in the form of a legacy,
bequest or devise from a deceased person by a last will and testament or by operation of law.

Executor – person appointed by the deceased to take charge, preserve, manage, and distribute the estate of a deceased person.

Administrator – person appointed by the court to take charge, preserve, manage, and distribute the estate of a deceased person.

Income Producing Estate Considered a Non-Taxable Person

If the decedent’s estate is not under administration or settlement, then said estate is considered a non-taxable estate. The income
received by the estate during the period of administration or settlement. Shall not be subject to income tax on the part of the said
estate.

Income Producing Estate Considered a Taxable Person

If the decedent’s estate is under administration or settlement, then said estate is considered a taxable individual person. The income of the
estate during the period of administration shall be subject to income tax on the part of the estate which is treated as a separate taxpaying
unit since the decedent’s estate is deemed the sole beneficiary during the period of administration and settlement.

*The income from decedent’s estate which were credited or distributed to the heirs shall be included in the gross income on the
individual’s ITR of each heir.
*This income distributed to the heir shall be subject to the 15% creditable expanded withholding tax at source. However, 100% of the
gross income distributed shall be reported as part of the taxable gross income to the heir. The heirs shall claim the 15% withheld income
tax at source.

Format/Formula of Income Tax Return for a Taxable Estate

Gross Income from Estate xxx

Less: Allowed Deductions

Deductible Expenses xxx

Income Distributed to Heirs xxx xxx

Taxable Net Income xxx

Income Tax Due (0% to 35%) xxx

Income Taxation for a Taxable Trust

Contract of Trust – an agreement executed between a trustor-grantor and a trustee- fiduciary whereby the property of the former is
transferred to the latter for conservation or management and ultimately, the title to the property in trust as well as the income
therefrom will be transferred to the beneficiary as directed by the grantor.

Grantor – owner of the property who created the trust. He is also the trustor, benefactor, or creator.

Trustee – person who manages the property in trust. He is also known as executor, administrator, manager, receiver, fiduciary, or
conservator.

Beneficiary – person who is the ultimate successor of the property in trust. He is also known as the successor, recipient, and grantee.

Income Producing Trust Considered a Non-Taxable Person

If under the terns of the Contract of Trust:

1. The Trust is a Revocable Trust

 Revocable Trust – a trust at any time the power to revert in grantor the title to any part of the corpus of the trust is vested. a.
In the grantor either alone or in conjunction with any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income there from
b. In any person not having a substantial adverse interest in the disposition of such part of the corpus or the income
therefrom. the income of such part of the trust shall be included in computing the taxable income of the
grantor.
2. The Entire Income of the Trust is for the Benefit of the Grantor
Where any part of the income of a trust:
a. Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of
such part of the income maybe held or accumulated for future distribution to the grantor/owner.
b. Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of
such part of the income, maybe distributed to the grantor.
c. Is, or in the discretion of the grantor or of any person not having a substantial interest in the disposition of such part
of the income maybe applied to the payment of premiums upon policies of insurance on the life of the grantor, such
part of income of the trust shall be included in computing the taxable income of the grantor.

In all of the above cases, the income from the trust shall be deemed credited to the grantor and shall be part of his gross income in his ITR.

Income Producing Trust Considered a Taxable Person

The income producing trust is considered a taxable person if under the contract of trust, the title to the said property in trust shall be later
on transferred to the beneficiary and the income of the trust is partially or fully credited to or for the benefit of the beneficiary.
Under the law, the following are treated as a separate taxable trust:

1. A trust where the income accumulated in trust for the benefit of unborn or unascertained persons, which contingent interest and
income accumulated or held for future distributions under the terms of the contract of trust.
2. A trust where the income which is to be distributed currently by the fiduciary to the beneficiaries, and the income collected by a
guardian of an infant which is to be held or distributed as the court may direct.
3. A trust where the income which, in the discretion of the fiduciary, maybe either distributed to the beneficiaries or
accumulated.

*Exception – The income tax imposed in the NIRC shall not apply to employee’s trust funds which forms part of a pension, stock
bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees:

1. If contribution are made to the trust by such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in accordance with such plan. 2. If under the trust
instrument it is possible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any
part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit to any employee or
distribute by such employee or distribute.

*The income from the trust which were credited or distributed to the beneficiary and grantor shall be included in the gross income on the
ITR of beneficiary/grantor.

*This income distributed to the grantor shall be subject to the 15% creditable expanded withholding tax at source. However, 100% of the
gross income distributed shall be reported as part of the taxable gross income of such grantor and beneficiary. The beneficiary/grantor
shall claim the 15% withholding income tax at source.

Consolidation of Income of Two or More Trusts

Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance
is the same, the taxable income of all the trusts shall be consolidated and the income tax provided in the NIRC computed on such
consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the
trust administered by him bears to the consolidated income of the several trusts.

Where a grantor executed two or more separate contract of trusts on separate property each manage by separate trustees, where all of
the trusts are for the benefit of one and the same beneficiary, then:
 1. Each trustee must file a separate trust’s income tax return with the BIR
2. The BIR will consolidate all the trust income tax returns files
3. Each trust shall share in the total income tax still due and payable from the consolidated trusts.

Formula/Computational Pattern for Each and Consolidated Trusts

Trust I Trust II Combined

Gross Income xxx yyy xxxyyy

Less: Allowed Deductions xxx yyy xxxyyy

Taxable Net Income xxx yyy xxxyyy

Income Tax Due xxx yyy xxxyyy

Less: Income Tax Paid by Trust I and II xxx yyy xxxyyy

Income Tax Payable xxx yyy xxxyyy

Allocation of Each Trust of the Total Income Tax Due on the Combined Trusts

Trust I = (Net Income/Combined Net Income) X Combined Income Tax

Trust II = (Net Income/Combined Net Income) X Combined Income Tax

Taxable Trust Administered in Foreign Countries

In the case of a trust administered in a foreign country, the special deductions for income distribution to the grantor and beneficiary shall
not be allowed: Provided, that said amount of income given to the grantor/beneficiary likewise, shall not be included in computing the
taxable income of the beneficiary/grantor.

Format/Formula of Income Tax Return for a Taxable Estate

Gross Income from Trust Abroad xxx

Less: Allowed Deductions

Deductible Expenses xxx

Income Credited to Grantor xxx

Income Credited to Beneficiary xxx xxx

Taxable Net Income xxx

Income Tax Due (0% to 35%) xxx

CHAPTER 4: CLASSIFICATION OF INCOME AND EXPENSES FOR INDIVIDUALS

Classification of Income
 1. Income Subject to Basic Income Tax (IBT)
∙ income shall be at gross amounts and subject to the basic income tax rates of 0% to 35% based on gross or net income ∙
included/reportable on taxpayer's income tax returns (ITR)
Example:
a. Compensation for services
b. Gross profit from trade, business or practice of profession
c. Gains from dealings in property
d. Interests income
e. Lease income
f. Royalty income
g. Dividend income
h. Annuity income
i. Prizes and winnings
j. Pensions and retirement benefits
k. Share in the net income of a general professional partnership
2. Income Subject to Final Income Tax (IFT)
∙ income items which are subject to the different single final income tax rates (15%, 10%, or 20%) based on gross
amounts.
∙ final income taxes shall not be declared anymore on the individual ITR

Gross Income Taxation/Final Income Taxation - a scheme where a final/single income tax rate is imposed on income at gross amount
(without any deduction by law)

3. Income Exempt from Income Tax (IE)

∙ income items exempt from basic income tax rates (0% to 35%) or from various final income tax rates ∙ shall
be excluded on the ITR
A. Exempt Retirement Benefits, Pensions, Gratuities
1. Retirement benefits from received by officials and employees of private firms in accordance with a reasonable
private benefit plan by employer
▪ Reasonable Private Benefit Plan - a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of his officials and employees for the purpose of distributing earnings and
principal of the fund.
2. Amount received by an official/employee or his heirs (if such official/employee is separated from the service of his
employer because of his death, sickness, physical disability)
3. Benefits received by RC, NRC, or NRA from foreign government agencies
4. Payment of benefits under the laws of the United States
5. Benefits from SSS (R.A. 8282) and GSIS (R.A. 8291)
B. Exempt Miscellaneous Income Items
1. Income derived by foreign government
2. Income derived by the government or its political subdivisions
3. Prizes and awards
4. 13th month pay
5. Premium contributions for GSIS, SSS, Pag-ibig
6. Gains from sale/exchange/retirement of bonds, debentures
7. Gains upon redemption of shares of stocks
8. Winning from PCSO, Sweepstakes, and Lotto Draws (if not > P10,000)
9. Gains from sale of real property
10. Gains from sale of shares of stocks
11. Interest income from sale of agricultural land
12. Representation and travelling allowances
13. Separation pay
14. Personnel Economic Relief Allowance (PERA)
 15. Dividend income
16. Interest income on long-term deposits or investment in banks
17. Interest income from deposits with depository banks
18. Income earned from abroad by RA, NRC, NRA
19. De minimis benefits
20. Fringe benefits exempt from income tax
21. Statutory minimum wage income of non-taxable "minimum wage earner"
22. Income under the treaty of PH and foreign country
23. Income of senior citizen
24. Income of employee (if gross income is < P250,000)
25. Income from religious services

Classification of Expenses

Business Expenses - nominal or revenue expenditures necessary in the operation of the business or in the exercise of the profession of an
individual to generate income.

1. Non-Business Expense (NBE) – not incurred or not connected in the operation of the business or in the exercise of the
profession
2. Non-Deductible Business Expense (NDBE) – expenses disallowed or not permitted by law
∙ business expenses permitted as deduction but violated any requirements for deductibility
3. Deductible Business Expense (DBE) – necessary and connected in the operation of the business or in the practice of
profession, which have complied with the requisites for deductibility
∙ declared as allowed deductions from the gross income on the ITR

Actual Itemized Deduction – actually incurred or paid, as provided for under the Tax Code

∙ adopted by individuals who are required to file their ITR

∙ if not stated as for exclusion from the allowed deductions, then it shall be included as allowed deductible business expense.
Example: Exclusion from the Allowed Deduction

1) Interest expense 1) Amount paid for personal, living or family expenses

2) Taxes expense
3) Losses expense
6) Amortization expense
4) Bad debts expense
7) Depletion expense
5) Depreciation expense
8) Charitable contribution expense 9) Research and development
expense 10) Pension trust contribution expense

2) Amount paid for new buildings or for improvement of any property or estate
3) Amount expended in restoring the property
4) Premiums paid on any life insurance policy of any officer or employee
5) Losses from sale/exchange of property
6) Losses from wash sales, except that of a dealer in stock and securities
7) Net capital loss or capital losses
8) Net wagering losses or wagering losses
9) Bribes, kickbacks, and other similar payments
10) Interest expenses (in certain conditions)
11) Capital outlays of depreciable assets for the expansion of private school facilities
12) Bad debts
13) Losses sustained during taxable year and not compensated for by insurance
Requirements for Deductible Business Expense

1. Expenses connected in trade, business, profession

2. Business expenses for the account of taxpayer
3. Business expenses that are reasonable, ordinary, or necessary
4. Business expenses incurred during taxable year
5. Business expenses not illegal
6. Business expenses that are documented
7. Business expenses if required, withholding tax must have been made

CHAPTER 5: INCOME TAX CREDITS AND INCOME TAX RETURNS FOR INDIVIDUALS

Income Tax Credits – tax payments allowed by law to be claimed as a direct deductions from the basic income tax due.
Tax Credits 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

1. Withheld Tax on Wages No No No Yes for 12 mos.

2. Withheld Tax at Source Yes 1 qtr Yes 1, 2 qtrs Yes 1, 2, 3 qtrs Yes for 12 mos.

3. Prior Quarters Income Tax Paid None Yes 1 qtr Yes 1, 2 qtrs Yes 1, 2, 3 qtrs

4. Income Tax Paid in Original Income Tax Yes Yes Yes Yes
Return Filed

5. Excess Tax Credit in Prior Year Yes Yes Yes Yes

5.1. Excess Tax Credit of Prior Quarter in None No No No

Taxable Year

6. Income Tax Abroad/to foreign country Yes, if RC Yes, if RC Yes, if RC Yes, if RC

Total Tax Credits P? P?? P??? P?

A. Rule I. Income Tax Credits items numbers (1) to (5) only for
a. Resident Aliens (RA)
b. Non-Resident Citizens (NRC)
c. Non-Resident Aliens Engaged in Business in Philippines (NRAEBP)
B. Rule II. Income Tax Credits items numbers (1) to (6) for
a. Resident Citizens (RC) – because their income earned abroad are also subject to the Philippine income tax, thus resulting to
an indirect double taxation

Limitations on Tax Credit for Income Tax Abroad for Resident Citizens
Resident citizens may, at his option, treat such income taxes abroad either as (1) deductible business expenses or (2) income tax credits
(but subject to limitation formulas A and/or B, whichever is lower).

FORMULA ACTUAL LOWER

USA Net Income USA Phil Income P23,000 P24,000 P23,000

Tax Due on
Net Income World ×
TNIW =
 CANADA Net Income Canada Phil Income P32,500 P32,000 P32,000
Tax Due on
Net Income World×
TNIW =

Allowed Tax Credit Limit A P55,000

ABROAD Net Income Abroad Phil Income P55,500 P56,000 P55,500

Tax Due on
Net Income World ×
TNIW =

Classifications of Withholding Taxes

1. Non-Creditable Withholding Tax – not allowed by law to be credited against the basic income tax due, nor as a deduction from the
gross income in the income tax returns
a. Withholding Final Income Tax – income tax withheld on specific/certain types of income; shall not be included in the
computation of the gross income and the withheld final income tax is a non-creditable withholding tax 2. Creditable Withholding Tax –
permitted by law as a deduction or credit against the basic income tax due. a. Withholding Tax on Wages – income taxes withheld on
gross compensation payment; related withheld income taxes are allowed as tax credits
b. Withholding Tax at Source – income taxes withheld, on gross business and other income payments

Tax Refunds or Tax Credits – any excess of the income taxes withheld over the income tax due from the taxpayer shall be returned or
credited within three (3) months from the 15th day of April, otherwise, it will earn interest at the rate of 6% per annum.

1. Professionals

a. If gross income payments do not exceed P720,000 10%

b. If gross income payments exceed P720,000 15%

2. Rentals (rental property) 5%

3. Cinematographic Film Rentals 5%

4. Prime contractor/sub-contractors 2%

5. Brokers and agents of professional entertainers 10%

6. Payments for medical practitioners 10%

7. Payments of income to beneficiaries of taxable estate and trust 15%

8. Payments made by credit card companies to any business entity, on ½ of gross payments 1%

9. Payments made by gov’t offices on their local purchases of goods 1%

10. Payments made by gov’t offices on their local purchases of services 2%

11. Payments made by top 10,000 corps to their local suppliers of goods 1%

12. Payments made by top 10,000 corps to their local suppliers of services 2%

13. Additional payments to gov’t personnel from importers, shipping and airline companies or their agents 15%
 for overtime services

14. Commission, rebates, discounts, and other similar considerations 10%

15. Gross payments to embalmers of funeral companies 1%

16. Payments made by pre-needs companies to funeral parlors 1%

17. Tolling fees paid to refineries 5%

18. Income payments made to suppliers of agricultural food products 1%

19. Income payments on purchases of materials, mineral products and quarry resources 1%

Income Tax Return – taxpayer’s sworn statement or declaration of his taxable gross income, deductible business expenses, resulting in a
net income or net loss for a given taxable period.

A. Rule I. For Employee Individual Only – Use BIR form 1700. Fixed earners shall file their calendar yearly income tax returns. B. Rule II.
For Self-Employed Individual Only – Use BIR form 1701Q and 1701. Variable income earners shall file their calendar quarterly and
yearly income tax returns.
C. Rule III. For Mixed Income Earner (both employee and self-employed) – Use BIR form 1701Q and 1701. Mixed earner shall file their
quarterly and yearly income tax returns.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Gross Income

Income in Jan to Mar P800,000 P800,000 P800,000 P800,000

Income in Apr to June 700,000 700,000 700,000

Income in July to Sept 900,000 900,000

Income in Oct to Dec 1,200,000

Gross Income P800,000 P1,500,000 P2,400,000 P3,600,000

Less: Allowed Deductions

Expenses in Jan to Mar P500,000 P500,000 P500,000 P500,000

Expenses in Apr to June 400,000 400,000 400,000

Expenses in July to Sept 650,000 650,000

Expenses in Oct to Dec 750,000

Allowed Business Exp. (P500,000) (P900,000) (P1,550,000) (P2,300,000)

Taxable Net Income P300,000 P600,000 P850,000 P1,300,000

Income Tax Dues (0% to 35%) P10,000 P80,000 P145,000 P280,000

 Less: Income Tax Credit 0 (10,000) (80,000) (145,000)

Income Tax Payable P10,000 P70,000 P65,000 P135,000

Notes:

✔ In USA, federal income tax is a national income tax, whereas state income tax is only a local income tax and shall be treated as
deductible business expenses
✔ Withholding Tax Agent – natural or juridical who shall pay compensation income subject to withholding tax ✔
Wages – all remuneration for services performed by an employee including non-cash remunerations, except: o
Agricultural labor paid entirely in products of the farm
o Domestic service in a private home
o Casual labor not in the course of the employer’s trade or business
o Services by citizens/residents of the Philippines for foreign governments or international orgs
✔ Quarterly Income Tax Payments – amounts of income tax payments made for each quarter during the taxable year. ✔
Quarterly Income Tax Returns shall be on a cumulative basis.
✔ Annual gross compensation income and withholding tax on wages shall be reported or declared only on the 4 th quarter’s (annual)
income tax return.
✔ Resident citizens shall report income and expenses from sources within and without the Philippines ✔
RA, NRC, NRAEBP shall report income and expenses from sources within the Philippines only
✔ Gross income computations only includes income items subject to basic income tax
✔ Allowed deductions are deductible business expenses only
✔ Income tax may be the
o Income tax due/payable before deducting the allowed income tax credit, if any, or
o Income tax due/payable after deducting the allowed income tax credit, if any
✔ If there is a conflict between GAAP and the Income Tax Laws, then the latter shall prevail
✔ Tax Treaty – an agreement made by two countries to resolve issues involving double taxation of passive and active income. ✔ If
there is a conflict between an international tax treaty/tax law and the Philippine Tax Laws/Tax Code, then the former shall prevail.