Tax- it is all about money, deductions

It is a mandatory obligation that we have to pay

It is a duty that we have to do
We cannot run form it.
Is used by government to support the people to provide general welfare of the people

GENERAL PRINCIPLES OF TAXATION

Inherent Powers of the state
Why they are inherent?
Because it is needed by the government, if none, the government cannot properly
function. It is essential for the government to exist because in the absence of any of these
powers, the government cannot properly exist.

The Inherent powers of the state are as follows:

1. Power of Taxation
2. Police Power
3. Power of Eminent Domain

Inherent defined:
As being inherent, it means that as long as the state exists, this power can never be taken away.

1. Power of Taxation – An inherent power of the state exercised through legislature, to impose
burdens upon subjects and objects within its jurisdiction, for the purpose of raising revenues to
carry out the legitimate objects of the government.

THE GOVERNMENT CANNOT EXIST WITHOUT MONEY. IT NEEDS THE POWER OF

TAXATION TO RAISE MONEY NEEDED TO SUPPORT ITS EXISTENCE. This is why is
often referred to as the LIFEBLOOD or the “bread and butter” of the government.

Nature:
An inherent power of the state exercised through the legislature.

Scope:
To impose burdens upon subjects and objects within its jurisdiction.

Purpose:
For raising revenue to carry out the legitimate objects of the government

Revenue Objective – To build a just and human society and the establishment of a government
under certain ideals and aspirations.
 Sumptuary Objective – An implement of the police power of the state for regulatory purposes.
In this case, it is used in furtherance of any government objective either as an incentive or
deterrence. As an implement, the generation of revenue is merely incidental or in furtherance
thereof. (Lutz v. Araneta, 98 Phil 148).

Compensatory Objective – For social justice purposes or other purposes or other legitimate
objectives of the State, with a view to realize social justice, equitable distribution of wealth,
economic progress and other similar objectives (Southern Cross Cement Corp. v. Cement
Manufacturers Assoc. of the Phils, GR 158540)

2. Police Power – the power of the government to enact laws to promote peace and order, public
welfare, security, health and safety.

This is the power vested in the Legislature by the Constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes and ordinances, either with penalties or
without, not repugnant to the Constitution, for the good and welfare of the State and its
subjects.Basis:
This power is based on the legal maxim “salus populi est suprema lex” (the voice of the people is
the supreme law). Every citizen of every community, in a civilized society must bear certain
burdens imposed for the good of all.

Note:
No right is absolute in the face of the common good.

Nature:
Police power is an attribute of sovereignty and founded on the obligation of the State to provide
protection for its citizens and the safety and good order of society.

Scope:
Police power is founded on which our social system rests and has for its object the improvement
of social and economic conditions affecting the community. It depends on the security of the
social order, life and health of citizens, comfort and existence in a thickly populated community,
enjoyment of social life, and beneficial use of property.

Requisites:
1. Interest of the public is general, not that of pa particular class
2. means used are reasonably necessary for the purpose, and not unduly oppressive upon
individuals

3. Power of Eminent Domain – This is the right of the State to acquire private property for public
use upon payment of just compensation and observance of due process. 

Basis:
It is based on genuine necessity and that necessity must be of public character. It must be
reasonable and practicable such that it would greatly benefit the public with the least
inconvenience and expense to the condemning party ad property owner consistent with such
benefit.

Requisites:
1. There must be taking of public property
2. It must be for public use
3. There must be just compensation
4. Due process of law must be observed in taking of the property

Distinction:

Police Power Eminent Domain Taxation

To regulate the activities To raise Revenue and

for welfare/Property is To take Property for support of the
As to Purpose
taken for public use Public public use government
purpose Constitution

As to Exercising Government / Private

Government Government
Authority Entities

The owner is paid the

As to the Amount of Sufficient to cover the costs
fair market value of the No Limit
Imposition of regulation
property expropriated

None. Compensation here Compensation is the

refers to the intangible,
altruistic feeling
As to Compensation
that the individual has
contributed to
the public good
Just Compensation – protection and public
the full and fair improvements
equivalent of the instituted by the
property taken. government for the
taxes paid

liberty and Property

As to Object/Persons property property rights Community or class
affected Community or Owner of the property of
class of individuals individuals

As to the Non- Superior to the Superior and may Inferior to the “Non-
Impairment “Non-Impairment Clause” override the “Non- Impairment Clause”
Clause/Relationship of the Impairment Clause” of of
with the Constitution Constitution the Constitution the Constitution
Similarities:
1. They are indispensable to the existence of a state.
2. They are inherent rights which means that they can exist without the constitution.

3. They are the means by which the state interferes with private rights and properties.
4. These powers are generally exercised by the legislature.
5. They contemplate an equivalent compensation or benefit.

THEORIES OF COST ALLOCATION:

Benefit theory

The more benefits gained by the person, the more s/he should pay to the
government

Since we are enjoying the benefits out of the government operations including
services provided, we should also be paying the government for such benefits.
Examples are security and border as there are police officers securing the safety
of the public.

Cost of service theory

The state should only charge the actual cost of the service rendered, i.e. roads
as well as electricity.

The state can only charge up to the actual cost and also cannot even increase.
For example, the roads NLEX and SLEX. Charging costs should be for a definite
period of time because the government cannot just collect in perpetuity for the
access or the toll fee as we call it for utilizing the structure.

Ability to pay theory

The capacity of the taxpayer, i.e. ownership of property,  expenditure, including

income, gained.

Those who cannot pay should not be imposed on taxes.

For example, it is impractical to impose a professional tax on a person, not in
occupation.
The same applies also to the properties taxed proportionate to their value.
 National and Local Direct and Indirect Individual and Juridical

National Direct Individual

Taxes paid to the Directly paid to the A human person, Filipino,

Bureau of Internal government. Tax which resident.
Revenue (BIR) are the taxpayer must pay This is included because
automatically credited and cannot shift to an individual person is
as national taxes which another. liable to pay professional
goes to the national tax.
treasury

Example: Example: Example:

Income; value-added Income tax; Capital gains Professional tax
tax; Income tax;  tax; Real property
documentary stamp tax; Donor’s tax
tax, and also Estate tax.

Local Indirect Juridical person

Paid to the local Initially paid to the Corporations or

government units in the government by an partnerships. However, a
treasurer’s office. As intermediary,  who then juridical person does not
for us locals of Lapu- adds the amount of the pay professional tax.
Lapu City, every year tax to be paid to the Although still liable to
we go to the treasurer’s value of the income taxes as well as a
office of Lapu-Lapu City goods/services and then value-added tax.
to pay for our passes on the total
professional tax and amount to the end-user.
real property tax
assessed by the
assessor’s office.

Example: Example:
Real property tax; Real property tax;
Transfer tax; Transfer tax;
Professional tax. Professional tax.
BIR (Bureau of Internal Revenue)
Section 2 of the National Internal Revenue Code of 1997

Under the supervision and control of the Department of Finance

POWER OF BUREAU
 there main role is to compute the correct amount of taxes and collect taxes
 enforcement of forfeitures, penalties and fines for the non- compliance of a taxpayer
 These are government remedies in assessment and collection of taxes. Incase
the taxpayer, will not pay on time or there is a delay , they may enforced
forfeitures (taking properties) or imposition of penalties
 IF there is a case involving the BIR and the taxpayer, the BIR and taxpayer and
Court of Tax Appeal will decide in favor of BIR like enforcing penalties or
forfeitures. It is the mandate of BIR to execute the judgments of the Court
 Giving effects to and administering the supervisory and police powers conferred to it by
the NIRC and other laws
 The BIR has supervisory functions when it comes to the registration of taxpayers
and the registration of taxpayers is also part of the Police power of the
government. That is to ensure all the business are legal, all businesses will pay
taxes to support the government expenses.

BIR MISSION
 To have just enforcement or fair, equitable, uniform of tax laws for nation-
building and to uplift the lives of the Filipinos. Especially, nowadays, during the
pandemic and now we are affected by the typhoon Odette, the goal is to uplift
our lives.

BIR VISION
 Is an institution of service excellence and integrity. (unsay ganahan nilang ma
establish)
DELEGATED POWERS OF COMMISSIONER OF INTERNAL REVENUE

 To interpret tax laws

 They are tax laws created by congress and senate to interpret tax laws under the
original jurisdiction of the CIR, subject to review by the Secretary of Department
of Finance. It is manifested through the issuance of REVENUE REGULATTIONS.
 REVENUE REGULATIONS- the interpretations of CIR on various tax laws for
recommending approval, it is promulgated by the Secretary of Department of
Finance

 To decided cases
 Disputed Assessments – the are questions as to how taxes are computed, the CIR
who will decide if there are any protest
 If there are any request for refunds of internal revenue taxes, fees or other
charges
 Penalties imposed in relation thereto on non-compliance by the taxpayer
 Other matters arising under the NIRC or other laws or portions thereof
administered by the BIR

 To obtain information and to summon, examine and take testimony of persons

o That is to verify on how much is the actual tax liability of the taxpayer and
compared it to the amount paid by the taxpayer and if there are discrepancies,
The BIR may collect more from the taxpayer
 To ascertain correctness of any return
- If the taxpayer will file tax return to the BIR, the BIR will verify if the taxpayer
correctly input his tax return because that will have effect on th amount of
taxes that the taxpayer pays.
 To make a return where none has been made
- If the certain taxpayer did not publish, did not submit any tax returns to the
BIR, the BIR has the power to get information, summon documents to testify
so that BIR will be the one to make his tax return and will verify how much is
there actual sales, expenses
 To collect from any person liability for any internal revenue tax
 To evaluate tax compliance

 To compromise the liabilities of the taxpayers

 Insolvency and bankruptcy
  Excessive assessments

NON DELEGATED POWERS OF COMMISSIONER OF INTERNAL REVENUE

 The power to recommend the promulgation of rules and regulations Secretary of
Finance
- That is the power to interpret tax laws

 The power to issue rulings of the first impression or to reverse, revoke, or modify anyu
existing rulings of the Bureau
 Rulings of the first impression
- If there are any circumstances, you will ask the BIR, what the appropriate tax
treatment of this specific transaction is.
- If it is the first time for the BIR to encounter such case or request. It is the
commissioner who should issue the rulings of first impression, first time that
there is a certain case. Unique from all other cases

BUT IF IT IS A RECURRING RULING, IT CAN NOW BE DELEGATED

 The power to compromise or abate any tax liability

EXCEPT:
 assessments are issued by the regional offices involving basic deficiency tax of
500,000 or less and ;
 Minor criminal violations discovered by regional and district officials

 The power to assign or reassign internal revenue officers to establishments where

articles subject to excise tax are produced or kept.
 If there is an excisable product like cigarettes, there is always a BIR employee
there who will observe the production because excise taxes are imposed to
certain part of the production. TRAVEL ORDER.
 DIFFERENT TYPES OF TAXPAYERS

IMPORTANCE OF CLASSIFICATION
 The application of the following tax concepts differ in accordance with the classification
of taxpayers:
- Gross income for tax purposes ( is it taxable, is it exempted, is it non-taxable,
is it subject to final taxes, it depends on the taxpayer)
- Exclusions from gross income (there are taxpayers who are not taxable on
thee certain income and taxpayers who are taxable on that certain income)
 Exemptions
 Deductions
 Income tax rates

PERSON FOR TAX PURPOSE

PERSON- an individual, trust, estate, corporation (NIRC SEC. 22 A)

INDIVIDUAL TAXPAYERS
 Citizenship
- Citizens
- Aliens
 Residency
- Residents
- Non- residents
 Engaged to business in trade, or profession
- Engaged in trade, business or profession
- Not engaged in trade, business or profession

CITIZENS
 Those are citizens of the Philippines at the time of adoption of 1987 constitution
 Those whose fathers and mothers are citizens of the Philippines
 Those born before January 17, 1973 of Filipino mothers, who elect Philippine citizenship
upon reaching the age of maturity
 Those who are naturalized in accordance with law
SUB-CLASSIFICATION OF CITIZENS
 Resident citizen ( regular tax )
 A Filipino citizen residing permanently in the Philippines
 Stays outside the Philippines for less than 183 days during the particular taxable
year
- 183 days is a total accumulated/aggregate days in a year, If the intention is
not clear, they use the number of days as the basis whether he or she is a
resident or non-resident citizen of the Phil
 Non-resident citizen ( non-taxable ) ex: OFW & SEAMN
 A Filipino citizen residing permanently abroad or works abroad most of the time
 Stays outside the Philippines for 183days or more during a particular taxable
year
 A citizen with a definite intention to reside abroad
 A citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment

WHO HAS BEEN PREVIOUSLY CONSIDERED AS NIRC AND WHO ARRIVES IN THE
PHILIPPINES AT ANY TIME DURING THE YEAR TO RESIDE PERMANENTLY IN THE
PHILIPPINES :

- Be treated as NRC
- With respect to his income derived from sources abroad until the date of his
arrival in the Philippines

Because resident citizen are taxable on their global income. However, if they are non-
resident, they are only taxable on their income in the Philippines.

ALIENS
- Individual who are not citizens of the Philippines
 Special Alien
 Because is train law, the classification of special alien is already eliminated
 Resident alien
 Non- resident alien
 ( NRA-ETB ) Engaged in trade, business o profession w/in the Philippines
 ( NRA-NETB ) Not engaged in trade, business or profession
Resident Alien (RA)

 A foreigner residing in the Philippines

 Stays in the Philippines for more than 1 year w/out indefinite intention of staying here in
the Philippines

Non-Resident Alien (NRA)

NRA-ETB Engaged in trade, business or profession (more than 180 days; TAXABLE; regular tax)

 There must be a regularity in the income

- An alien who is not a citizen and who is not a resident of the Philippines but
has a business, particularly a sole proprietorship, established and operating
in the Philippines
- A non-resident alien who come to the Philippines and stays for an aggregate
period of more than 180 days during the taxable year

NRA-NETB Not engaged in trade, business or profession (less than 180 days; 1-180 days; subject
to final tax)

 There is no regularity in the performance of personal services within the Philippines

 If he merely engaged in causal or isolated transactions within the Philippines
 He was not stayed in the Philippines during the calendar for a period exceeding 180days

CORPORATION
 Domestic Corporation – Business Partnership excluding GPP
 Foreign Corporation
- Resident FC
- Non-resident FC
 Business partnership
- Ordinary Partnership – those who engaged in business
- General professional partnership

DOMESTIC CORPORATIONS – subject to tax w/in and w/out the Phil; regular tax

 Created or organized in the Philippines or under its laws

 Domestic corporations, in general
 Proprietary education institution and hospitals
 Government-owned or controlled corporations, agencies or instrumentalities
 As long as they are registered in SEC

FOREIGN CORPORATIONS (subject to tax w/in the Phil only)

 A corporation which is organized in other countries, not just in the Phil and existing
other than Philippine law
 It is a corporation organized and existing by virtue of a foreign law

Resident Foreign Corporations (RFC) – subject to regular tax

 If they are engaged in trade or business within the Philippines

Non-resident Foreign Corporations (NRFC) - subject to final tax

 If they are not engaged in trade or business

PARTNERSHIPS
 Two or more persons
- Bind themselves
- To contribute money, property or industry to a common fund
- With the intention of dividing the profits among themselves

CLASSIFICATION

 Taxable Partnerships
 Created for the purpose of obtaining profits from the conduct of trade or
business
 If there is an intention to generate profit, that is what we called a business
partnership, then that is taxable treated as a corporation
 Exempt Partnerships
 Formed for the purpose of exercising the partner common profession and no
part of income of which is derived from engaging in any trade or business
 If the partnership is created as GPP, not subject to taxes
ESTATE
- Refers to the total value of all assets and liabilities left by an individual death

Ex: IF A dies, what will B, C, and D do?

They will inherit the property, however, it is not automatic, it will take years before B, C and D
can acquire the property by inheritance

If an estate generates income, this becomes taxable because it might generate income, while it
is transferred to the heirs.

If now, the property is distributed to the heirs, then the estate will now be taxable to the heirs
as an individual

B (trustee)

A (trustor)

C (beneficiary)

If the property is still in trust agreement to B, is it possible to generate income?

Yes, because it will still generate income in the hands of trustee

TRUST

 Agreement created by or otherwise where the property of a grantor is being transferred

to the trustee or administrator for purposes of management or conservation of the
property

TRUSTEE

 Refers the person who manages and preserves the property in trust. The trustee is also
known as the fiduciary, administrator or executor

Grantor

 Refers to the owner of the property who established the trust

Beneficiary

 Refers to the person who will succeed to or receive the property in trust
IRREVOCABLE TRUST- the trust is taxable

REVOCABLE TRUST- not taxable to the trustor on an individual capacity

GROSS INCOME – refers to all income derived from whatever source, including (but not
limited to)

1. Compensation income
2. Business income, including income from practice of profession
3. Passive income (such as interest income, royalty income, prizes and winnings and cash
or property dividend income)

Gross income is all income subject to tax. Net income refers to gross income less the allowable
deductions and exemptions. Taxable income is the pertinent items of gross income specified in
the NIRC, less deductions, if any, authorized for such types of income.

Return of capital- payment or return, received from an investment that is not considered a
taxable event and it not taxed as income. This happens when an investor receives their original
investment back

For example, on retirement and permanent life insurance policies; regular investment accounts
return gains first

Return on capital- is the return earned on invested capital and it is taxable

Example, you invested 100,000 and received a 6% return annually (6,000), then your return on
capital would be 6%

In other words, the return on capital is the amount of money that you receive each year as a
result of making your initial investment.

Final tax- always subject to final withholding tax and not included in the income tax
model/formula. Once the income is taxed, it will not be taxed again, neither does the tax need
to be adjusted.

Exempt- not subject to any taxes and excluded in the computation of income tax.
Compensation income earners, self-employed and SEP whose annual taxable incomes are
250,000 or less are exempt from the PIT.

Basic- subject to certain deductions and included in the income tax formula/model
Income Tax Model
- Included are only those items subject to basic tax
- Items subjected to final withholding taxes will not be included because final
taxes cannot be tax again

Computation of tax due:

Gross income xx

Less: Allowable deductions xx

Net taxable income xx

Apply: tax rate %%

Income tax due xx

Less: tax credit, if any xx

Income tax still due/payable xx

GROSS INCOME
Classified into three as to taxability

- Subject to basic tax

- Subject to final tax
- Subject to exempt tax

You have to identify first in the gross income, is it subject to BT, FT or ET because that will have
an effect on the computation income tax still due or payable.

ALLOWABLE DEDUCTIONS
Two types

- OSD (optional standard deduction)

- Itemized deductions
Where we will be presenting line per line our actual expenses as compared to OSD wherein it is
the law that sets the percentage of your allowable deductions regardless of actual deductions
that you have incurred for your business

You have your net taxable income and you apply your tax rate then you can get your income tax
due

__________________________________________________________________________

In computing you income tax due, it will now depend on the type of taxpayer (individual,
partnership, corporation, estates, or trusts)

You have to really know to the identity of our taxpayer because the manner of computing taxes
would really matter depending on the type of taxpayer

EXEMPT- if the item is exempted, that is not subject to any taxes so it will be excluded on the
computation of your taxes. It will not be part of this income tax model.

If the problem clearly says as how much is the exempt items of gross income, obviously, you
should compute how much your exempt gross income is.

WITHHOLDING TAX
- Final withholding tax
- Creditable withholding tax

A Supplies goods B The law says that B should withhold taxes before the payment of
100,000 100,000.
If B required by law to withhold 10% of any payments made to the
supplier. Therefore, A receives only 90,000.

The 10% can be considered final or creditable withholding tax

PROPER TREATMENT of 10,000 (10%) it will now depend if it is subject to final withholding tax
or creditable withholding tax
1. If it is final withholding tax – from the term “final”, it is already the tax. Therefore, the
assumption there is that when A received income of 100,000 or the net of 90,000, it is
already assumed that all the income tax pertaining that 100,000 where already withheld
by b in the amount of 10,000. It is a final tax. It cannot be tax again.
2. If it is creditable withholding tax- the taxes withheld here by the customer=, that is only
considered as an advance payment. If ang 10,000 (10%) kay creditable, it is not yet the
 tax because it just considered as an advance tax payment. So therefore, katong income
nadawat sa A will still subjected to taxes
SA INCOME TAX MODEL
Gross income – 100,000 cause the total income is 100,000
Tax credit- 10,000 (10%) na advance payment because the tax credit will be a reduction from
your income tax due

Apply creditable withholding tax

Income subjected to basic taxes may be subjected to creditable withholding tax, so not
all subject to basic tax are subject to creditable w/h tax, but all income subject to final tax will
be subject to final withholding tax

COMPENSATION INCOME
- Income that is typically derived from employment. It is an employer-
employee relationship
- If you receive something because you are an employee of a certain business
then it is considered as compensation income
The general rule here, in all the items of income is that they are subject to basic
taxes unless it clearly say that they are exempted or they are subject to final tax
Tanan ma receive may be in CASH or in KIND, it is still considered a
remuneration/compensation subject to basic tax

Regular Compensation Income

- fixed remuneration due to be received by an employee every period such as
BASIC SALARY
- meaning you received it regularly, every day or every week or every month
or every 15th week, you don’t need to exert extra effort for you to receive
that compensation that is fixed remuneration

Supplementary Compensation Income

- Performance-based remunerations to an employee in addition to regular
compensation with or w/out regard to the payroll period
- Meaning you receive it because you exerted extra effort and you will not
receive it regularly, it depends on your performance
Example:
Overtime – compensation for work performed beyond regular working hours
Hazard- additional compensation for employees performing dangerous work like the electrical
power-line installers and repairer
Honoraria- payment for a service which normally has no set price like honorarium given to a
guest speaker in a high school graduation ceremony
Working in a holiday

13th month pay

- Is additional compensation mandated by law to be given to “rank and file”
employees (non-managers). 13month pay is equal to an employee’s one
month basic salary. However, if the employee has not worked for the entire
year, this amount is prorated
Other benefits like bonuses, cash gifts, they are not required by law but rather paid
voluntarily by the employer

TYPES OF EMPLOYEES

Regular Employees
- An employee subject to the regular progressive income tax or subject to
basic tax
Special employees
- Special aliens subject to the final tax on compensation income
- NRA-NETB
- Remove because of train law
Minimum Wage Earners
- An employee who is a recipient of minimum wage and is exempt from
income taxation
- Tax exempt but there are certain conditions they need to meet

REGULAR COMPENSATION INCOME

- Salary
Compensation that is normally quoted on a per month basis and is paid
periodically like twice a month for the performance of a regular work. E.g.
salary of a teacher
- Wage
Compensation that quote on a per hour basis and is paid based on the
number of hours worked like wages of a manual laborer
Part of your salary is your mandatory contributions
For example, you receive a salary of 20,000 per month; do not expect a 20,000 per month
because you need to pay mandatory contributions like SSS, GSIS
SSS- private employed
GSIS- employees of the government

Mandatory GSIS, SSS, PhilHealth, Pag-ibig contribution and union dues are considered as tax-
exempt contributions (mandatory only)

Union Dues- organization of employees, kung nay union ang company that you are working and
you are required to contribute for that union, that union dues is tax exempt
Loan- they are not contribution so they are not deductible; they are still part of the taxable
income

Withholding tax- that is not deductible; that is actually the tax; that is the result of the tax on
the gross taxable compensation

13th month pay

Is additional compensation mandated by law to be given to “rank and file” employees (non-
managers). 13month pay is equal to an employee’s one month basic salary.

Other benefits
Include Christmas bonus, productivity incentive bonus, loyalty award,

Thirteenth month pay and other benefits are not taxable if the total amount received is

RENT
- Leasing properties of any kind. It is a passive income but subject to regular
income tax
- As what discussed last time, this is an exemption to the general rule which
we said that all passive income is subject to final tax but the exemption to
that rule is the rent income because thou it is in the nature of a passive
income but actually it is treated as an active income because if you are a
lessor you have to maintain your property compared to interest and
dividends for example that you will just be sitting there and income just
come in too your bank account.
Rent income includes:
 Obligations of the lessor that are assumed by the lessee
As what I’ve remembered on the discussion on lease obligation of lessor there are
assumed by the lessee
Example: We have the real property taxes or insurance, these real property taxes or
insurance , these are the obligation are assumed by the lessee or paid by the lessee then
that would be an income on the part of the lessor and an expense on the part of the lessee.
IT MUST BE STIPULATED IN THE CONTRACT
 ADVANCE RENTALS
 Item of gross income upon receipts if:
- Unrestricted or
- Restricted to be applied in future years or upon the termination of the lease
Advance payments are prepaid rentals are considered as income if it is unrestricted or
restricted to be applied for future lease payments.
Unrestricted meaning it is not applied for a specific item or it will not be return at the
end of the year. Kung nay agreement nga that advance rental will be a return at the end
of contract then it is not considered as an income.
However, if it is restricted, it is part in the gross income if it is applied to future years or
upon the termination of the lease. Example, some of your contracts, your deposits will
be considered as your payment of your last month rent. That’s why sometimes in a lease
contract, you have to manifest that you don’t want to continue your lease anymore
within 30days before you finally end the lease of the said property so that, within that
30 days the deposit will be used, if that is the stipulation then that will be considered as
part of gross income.

The question is WHEN SHOULD BE PART OF THE GROSS INCOME AT THE TIME IT IS
COLLECTED? In the point of view of the lessor
- It is part of the gross income when it is collected regardless as to when it will
be applied. However, it is not part of the gross income if the stipulation there
is, is it will be returned at the end of the lease contract
 Not an item of gross income if
- It constitutes a loan
If it constitutes a loan, it will be a return at the end of the lease contract
- It is a security deposit to guarantee payment or rent subject to contingency
which may or may not happen
Sometimes the lease, the advance rentals or the deposit that you make may be used if
they are any damages of the property, when you leave the property, so, that will be
 used by the lessor to repair the damages. In that case, it will not be part of the gross
income
IT WILL BE PART OF GROSS INCOME IF IT IS APPLIED TO FUTURE LEASE PAYMENTS
IT IS TAXABLE AT THE TIME IT IS COLLECTED

 Leasehold improvement made by the lessee on the lease property

- Leasehold improvements also part of rent income because it is also an
increase in value of the property. For example, imohang gipa-abagnan
pagsugod is just a vacant lab and what was return to you is already with
house improvements. There is a stipulation that all improvements introduce
to the property will be turnover to the lessor at the end of the leasehold
contract, in that case, that would be an income on the part of the lessor since
that is considered as an increase in wealth and it is a realized benefit because
it will becomes now the property of the lessor

HOW SHOULD WE RECOGNIZE INCOME FROM LEASEHOLD

IMPROVEMENTS

Outright method
Under the outright method, from the term itself “outright” means to recognize one time
at the time when such building or improvements are completed.
Sometimes, the commencement of the lease, it may come earlier than the completion
of the building and improvements. So then, if you think one year pa after ma complete ang
building and improvements then one year pa after nimo ma recognize ang income under the
outright method.
How much is the income? It is the FAIR MARKET VALUE AT THE DATE OF COMPLETION.
If the fair market value at the date of completion is 4million pesos then at the time the building
and improvements are completed then you will recognize an income of 4million pesos.

Spread-Out method
Under spread out method, you will recognize income every year during the duration of
the lease contract
How much will be recognize every year? We have the annual income; it is the book
value at the end of the lease term divided by the remaining term of the lease
IS OUTRIGHT AMOUNT NOT SAME WITH SPREAD OUT?
IF YOU ARE THE LESSOR, ONCE MA RECOGNIZE NA ANG INCOME, YOU WILL ALSO DEPRECIATE
THE PROPERTY THROUGH DEPRECIATION. MABAWI RA SA DEPRECIATION ANG EXPENSE NATO.
NAG 4M TA INCOME BUT IT WILL BE LOWER DOWN OR SPREAD OUT PUD SIYA THROUGH
DEPRECIATION. AT THE END OF THE 15YRS LEASE TERM, ANG INCOME NALANG SA OUTRIGHT
WILL BE EQUAL TO SPREAD OUT METHOD

IF THERE IS A TERMINATION OF LEASE CONTRACT BEFORE THE

EXPIRATION OF THE LEASE TERM
With the fault of the lessee, therefore it will now be turnover to the lessor at the earliest time,
earlier than the expected time that you can turnover. It is considered as an additional income
on the part of the lessor

OUTRIGHT
Additional income = 0/zero
Because under the outright method, you have already recognized the entire income at
the time was completed. So along the way, if it is pre-terminated there will be no additional
income there because again you have already, imo nang gi-angkun ang property at the time it
was completed

SPREAD-OUT
Additional income= that would be the fair market value at the time it was terminated
minus the income that you have already recognized.
For example, every year you will recognize 50,000 pesos. At the end of the 4 th year, the
contract was terminated and the fair market value there is the 500,000. So the additional
income is 500,000 minus 50,000 times 4, that is 200,000. Then the additional income is 300,000
pesos.

LOSS OF PROPERTY BEFORE END OF LEASE TERM

- Wala nay moabot na property adto kay lessor so therefore that would be a
loss on the part lessor
OUTRIGHT
That would be
EQUAL TO THE FAIRMARKET VALUE AT THE TIME OF COMPLETON
LESS: ANY DEPRECIATION, IF DEPRECIATION IS RECOGNIZED SO THE NET AMOUNT
THERE WILL RECOGNIZE AS LOSS
BUT AT THIS POINT WE WILL JUST HAVE TO DISREGARD DEPRECIATION
 LOSS IS EQUAL TO THE INCOME RECOGNIZED

SPREAD OUT
INCOME YOU HAVE ALREADY RECOGNIZE
For example, you will be recognizing 50,000 every year. At the end of the 4 th year, the
property was loss due to fire or whatever reason then the loss there will be equal to 200,000.

BOTH METHOD, THE LOSS THAT YOU WILL RECOGNIZE, IF THE PROPERTY WAS LOSS BEFORE
THE END OF THE LEASE TERM IS EQUAL TO THE INCOME ALREADY RECOGNIZED

ROYALTIES
- Payments or portion of proceeds paid to the owner of a right, such as an oil
right or a patent for the use of it, or a portion of the proceeds from the work
of an author or composer. Generally, subject to Final tax
When it comes to royalties, it is important to know the recipient of the royalty and the source
of royalties.
If the recipient of royalty is a corporation other than NRFC regardless of the source of the
royalty, the final tax there is 20%
NRFC and NRA-NETB, they are subject to 25% final taxes
However, if the recipient of the royalty is an individual except NRA_NETB, you have to know the
source of the royalty 10% if coming from books, literary works and musical compositions

ACTIVE ROYALTIES- meaning they make it as a business it is already subject to BASIC TAX

DIVIDENDS
Any distribution made by a corporation to its shareholders out of its earnings or profits
and payable to shareholders, whether in money or in other property.

IF THE DIVIDENDS COMES FROM DOMESTIC CORPORATION, IF ITS IS SUBJECT TO FINAL TAX
EXCEPT IF IT IS RECEIVE BY ANOTHER CORPORATION THAT IS EXEMPTED, THIS IS WHAT WE
CALLED INTERCORPORATE DIVIDENDS.

WHEN CAN WE CONSIDER THE INCOME AS WITHIN THE PHILIPPINES?

If the income, the declarant of the dividend is the NRFC automatically it is considered as outside
the Philippines. Therefore, if the recipient is NRC, RA, NRA, RA, FC, it is non-taxable kay income
outside man. The NRC, NRA, RA, FC are taxable only w/in the Philippines.
KUNG ANG RECIPIENT KAY SI RC, DC – taxable 100% BASIC

If the declarant of the income of the dividend is RFC, you have to know there what the income
is w/in and how much is income w/out. Because income w/in is taxable while income w/out is
non-taxable.
How we will know kung income w/in or w/out na siya? we will use the pre-dominance test

PRE-DOMINANCE TEST
- The gross income in the Philippines for 3 years
Divided by
Gross income world for 3yrs
= if the result here is 50% or less than is income w/out Phil
= if the income is more than 50% up to 85% it is partly w/out and partly w/in
How much the income w/in that is the resulting percentage multiply by the dividends declared
– (% x dividends)
= if it is more than 85% it is considered income w/in the phil

IF WITH TAX SPARING RULE

- The tax Sparing Rule applies to NRFC, if the recipient is NRFC is 25% or 15% if
there tax sparing rule
Tax Sparing Rule
Is also known as reciprocity, meaning the other countries will also grant a lower rate for
Filipinos, Filipino corporations who earn income or dividends there.
For example, Filipino Domestic Corporation in US is treated as NRFC, what if that Filipino
corporation owns some shares of stocks in a US company and that US company declares
dividends. The recipient is a NRFC. If US government or US tax laws grant a lower tax rate, if the
recipient is a Filipino corporation, moingon pud si Filipino corporation “OKAY, ang mga
americans companies pud diri that will earn dividends here in the Philippines will also be giving
a lower rate. So that is reciprocity. THERE IS AGREEMENT, MUTUAL AGREEMENT BETWEEN
TWO COUNTIRES/ SOVERIEGNS

IF THERE IS A TAX SPARING RULE, 15% WILL APPLY. If there is none, the problem is silent, it is
assumed to be there is no reciprocity there that is 25%
DIVIDENDS RECEIVED BY DOMESTIC CORPORATION FROM FC CAN BE EXEMPTED
IF THE FOLLOWING CONDITIONS ARE MET:

- The dividends received are reinvested in the business operation of the DC

here in the Phil. Within next-taxable year
You have to prove it to the BIR that you have invest it
- Dividends received by DC from FC is used for working capital, capital
expenditures
- DC holds 20% shares from a FC and it is uninterrupted meaning for several
years, wala nachange and iyahang percentage of ownership

ANNUITIES
It is coming from insurance company. If the part of your payment will be returned to the
ensured that will be partly taxable and not taxable using the concept here the return of
premium or return on premium

Lets say, the total premium payments is 500,000 pesos and the annuity given by the insurance
company, shall we say 800,000 pesos. Therefore, the 500,000 is not taxable because it is just a
mere return of capital while 300,000 pesos is taxable that is a return a premium.

EXEMPT PRIZES
Prizes received by a recipient without effort on his part to join a contest. Meaning you
did not apply for it, you did not joint it, you did not exert effort for that price, you were just
selected by organizational to have that price so that is non-taxable.
It must be sanctioned by the national sport organization to be exempted from taxes

WINNINGS
Winnings, it is a contest that if you win a contest, if there is really an effort on your end
to win that prize. When you buy tickets like LOTTO tickets or raffle tickets
DEALINGS IN PROPERTIES
- This still a composition of gross income
- It is any disposal of properties; any disposition of properties may it be by sale
or an onerous transfer of property
Nature and Concept
*Gains from dealings in properties
- income derived from sale or exchange of assets
Therefore, it pertains to an onerous transfer of property

When we say gain, it is the selling price over Costs

GAINS= Excess of selling price over costs

Loss would be other way around, if your cost is higher than your selling price, therefore there is
a loss
LOSS= Excess of Cost over Selling Price

The measurement of gains/loss for sale of property -----and exchange of property

Sale of property Exchange of property (if selling price is not available it is

Selling price xx FM value xx the FM value of the property
Less: Cost xx Less: cost xx received minus cost)
Gain/loss xx Gain/loss xx

HOW SHOULD WE DETERMINE THE COST OF THE PROPERTY

In determining the cost of the property, it will depend how the property was acquired

MODE OF ACQUISITION MEANING OF COST

1. PURCHASE Acquisition Cost – Cost

attributable to sale
- It can be acquired by purchased. imohang gipalit, so imohang gipalit ang property, obviously, the
cost of the property is the acquisition cost of the property less the cost attributable to the sale paid
by the seller

2. INHERITANCE FMV @ the date of

Inheritance
-meaning from someone who died then you are the one who inherited the property. The cost there
is the FMV at the date of inheritance, meaning at the time of the owner of the property regardless
as to when it was actually sold, it will not matter because the cost there would be at the time of
inheritance
If you sell it in year 2021 then you inherited the property way back in 1990 then the cost there
would be the value of the property in 1990, not in year 2021.

3. DONATION FMV @ the date of gift OR

the value in the hands of
the donor (whichever is
lower)
For example, on the year 2000, A purchase 2million pesos, therefore the cost here on the books of A
is 2million pesos. A died on 1005 and transfer the property to B when the FMV was 2.5million pesos.
The cost of property in the hands of B is 2.5million pesos. Now, B donated the property to C in year
2020 when the value of the property was 5million pesos. Then C sold the property in 2021
amounting to 7million pesos. The cost of the property in the hands of C is 2.5million pesos.

4. WITH LESS CONSIDERATION The amount paid for the property

Purchase for less than the adequate consideration

If the selling price is significantly lower than the fair market value meaning you’re selling the
property lower than its actual value
Example, the FMV is 4million pesos and you have only acquired the property by 2million pesos then
it is considered as an acquisition for less than adequate consideration

HOW DO WE TAX THE GAINS/LOSS

First step for us to know how to tax the disposal gain/loss of the property is we have to know the
classification of assets

Assets are classified as:

-ordinary
-capital

We should know the classification of assets before we can proceed in determining kung unsay
proper tax ana

WHY IS IT IMPORTANT TO CLASSIFY?

It is important to classify the asset whether as ordinary or capital because they have
different tax treatment and capital assets there has a special tax treatment

ORDNIARY ASSET
*If it is considered as inventory of the taxpayer then that is an ordinary asset. It is available for
sale--- it is part of inventory
For example, I have a real property and my business is selling real properties obviously, the
real property there is considered as an ordinary asset since by the nature of the real estate business
are considered as part of inventory which is available for sale.
*Property used in trade or business of a character which is subject to the allowance for
depreciation
So if you will be recording periodic depreciation of that said property then that property
is also considered as an ordinary asset.

*Real Property used in trade or business of the taxpayer

Example Land, land is not subject to depreciation. Land may also not part in inventory.
But if the land is used in trade or business like your office imo gihimo og warehouse then
therefore, that property now is considered used in business then it is an ordinary asset.

TO SUMMARIZE THE DEFINITION OF AN ORDINARY ASSET

There are 4 questions
1. Is the asset part of inventory?
2. Is the asset subject to depreciation?
3. Is the asset available for sale?
4. Is the asset is used in trade or business?

If the answer of this question is YES, Even one Yes, automatically the asset is an ordinary
But if all of the answers are No, then that is considered as a capital asset

CAPITAL ASSETS –is residual

According to the TAX CODE, capital assets are assets that are not ordinary. Pag-dili
ordinary assets obviously capital. That’s why if we go back to the 4 questions earlier. Kung kato
upat NO ang answer dili siya ordinary. That’s the time we classify it as a capital asset.

THE APPLICATION OF THIS CLASSIFICATION OF ASSET IS STATED IN RR 7- 2003

We have three types of real estate business(these business involves real properties)

RR number 7- 2003
Talks about a REAL ESTATE DEALER – they buy the property and sell the property
a REAL ESTATE DEVELOPER – they buy the property, they develop the property
before they sell the property
ex: CAMILLA HOMES they buy the lot then they
develop it before they will sell it
a REAL ESTATE LESSOR - they buy the property and they will rent the property
(ila paabangan)

RR number 7- 2003 specifically talks about how to properly classified the assets of these
businesses engaged in the sale or rent of real properties
Obviously, looking into the nature of each business, the inventory or the real property is
there is either part of inventory under Real estate dealer and real estate developer.
They part of inventory because it is available for sale. But for real estate lessor, it is a
property used in business. Therefore, generally if the real property owned by any of
these real estate business it is considered as an ordinary asset.

*all real properties acquires in the course of trade or business by a taxpayer habitually engaged
in the sale of real property
- Habitually means you are not into real estate business, dili ka real estate dealer, developer,
lessor. But you are considered as habitually engaged in the sale of the real property
WHEN ARE YOU CONSIDERED HABITUALLY ENGAGED IN THE SALE OF REAL PROPERTY?
 If you are seller of property REGISTERED with HLURB or HUDCC – these are housin
government agencies ( if you have authority to sell)
 more than 6 real property transaction in the previous year, whether taxable or not, IS
AN ORDINARY ASSET
* All real properties which are used or being used or have been previously used in trade or
business of the taxpayer NOT engaged in the real estate business – ORDINARY ASSET

*Real properties held by taxpayers changing business from real estate business to non-real estate
business – ORDINARY ASSET unless subsequently disposed to the buyer

* Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real
estate business, or formerly being used in the trade or business of a taxpayer engaged or not
engaged in the real estate business, which were later on abandoned and became idle –
ORDINARY ASSET

* Real properties formerly forming part of the stock in trade of a taxpayer not engaged in the
real estate business, which were later on abandoned and became idle for more than 2 years
prior to consummation of the sale or transaction. – CAPITAL ASSET

* Real property transferred through succession or donation to the heir or done who is not
engaged in If 1 yes = ordinary, all is no = capital asset the real estate business with respect to
the real property inherited or donated, and who does not subsequently use such property in
trade or business – CAPITAL ASSET

* Real property received as dividend by the stockholders who are not engaged in the real estate
business and who do not subsequently use such property in trade or business – CAPITAL ASSET
After knowing the classification of the assets. Ato na nacompute ang gain/loss, ato na
naclassify kung ordinary asset or capital asset. Now, we will determine what tyoe of
Gains/loss on dealings in Properties

TYPES OF GAINS/LOSSES on DEALINGS IN PROPERTIES

 Ordinary Gain/Loss – a result of the sale of a property from an ordinary asset
 Capital Gain/Loss- a result on the disposal or disposition of a capital assets

TAX TREATMENT

Ordinary Gains
100% taxable- part of gross income SUBJECT TO BASIC TAX
Ordinary Loss
100% deductible- part of Allowable deductions

CAPITAL GAIN (LOSS)

Capital asset is classified into three; Real Properties in Philippines, Domestic Shares of Stocks, Other
properties
- Subject to FINAL TAX
Real Properties in Philippines
Domestic Shares of Stocks
-Subject to BASIC TAX
Other properties (Real property located on abroad, personal property other than domestic
shares) NOTE: TAXATION SCHEME IN THE IMAGE BELOW
It may result to capital gain or capital loss. If the taxpayer is corporation . 100% of capital gain
and loss will be recognized. Dayun we will now get the net capital gain or net capital loss. NCG
is part of gross income and if it is NCL it is non-deductible--- it is forfeited in favor of the
government, wala nakay mahimo kay it is already forfeited.

If the taxpayer is an individual, you have to know the holding period, if it is short term or long
term. Short term period if it is less than or more than one year 100% capital gain or loss will be
recognized and if long term if it is more than one year 50% capital gain or loss will be
recognized. If the capital gain is higher than capital loss then it will result NET CAPITAL GAIN
then that is taxable. IF the capital loss is higher than capital gain then that is NET CAPITAL LOSS
and it is non-deductible AND we have we call NCLCO (net capital loss carry-over) and there is a
limitations, HOW MUCH TO CARRY-OVER we have three amounts and that would be whichever
is the lowest
1. NCL
2. Taxable income before NCL in the year of loss
3. NCG on the year of carry-over
*can only carry-over for 1 year*

HOLDING PERIOD- time of acquisition until disposition/ or time you will sell it.

Corporation FORFEITED in favor of the government, wala nakay mahimo kay it is already forfeited

NET CAPITAL LOSS CARRY-OVER- those net capital loss can be carried over nect year. It is only
for one year and it is carried over against net capital gain next year.
So next year, naa kay net capital gain, pwede ni nimo i-minus si NCLCO

Any net capital less that is not carried-over on the immediately following year will be forfeited in
favor of the government.

Itemized deduction
-these are the items provided by section 34 of the tax code
- there are 10 items which can be deducted from our gross income
we can easily memorize these items using this abbreviation
ExInTaLoba DepDep ChaRD PeT
Expenses
Interest taxes
Losses bad debts
Deprecication
Depletion
Charitable contribution
Research & development
Pension trust
These are the 10 itemized deductions which may claimed by the taxpayer if these items applied
to him. However, if the taxpayer cannot provide evidence or cannot substantiate these items or
if the taxpayer thinks that he would save taxes, if he would not claimed these items then may
be the optional standard deduction is good for him.

Itemized- Where we will be presenting line per line our actual expenses as compared to OSD
wherein it is the law that sets the percentage of your allowable deductions regardless of actual
deductions that you have incurred for your business

INCOME TAX on INDIVIDUALS

These only applies to basic taxes

For individual taxpayers, when we say subject to basic taxes It refers to the use of the income
tax tables.
After you computed the net taxable income, you will now look at the table kung asa siya
nabelong na bracket.

Now, the train law has introduce a new scheme for taxation for individual taxpayers. So the
individual taxpayers will now have options on how they will be subjected to tax other than the
tax table . so, individual can be classified into three:
1. Pure Compensation – the source of income is purely from compensation or employee-
employer relationship
2. Pure Business- income source is coming from business/ exercise of profession
3. Mixed income- he is receiving income from compensation and income from business.

Source of income tax treatment

COMPENSATION Graduated Tax (refer to Tax Table)

A business taxpayer is subject to
income tax at the same time, since
he is engaged in business is also subject
to business tax
there are two types of business tax:
VALUE ADDED TAX (VAT) – you will use VAT if the gross sales or receipts is more than 3million
Gross Sales is >3M
Use Tax Table (graduated rate)

Percentage tax – if the gross sales or receipt is less than 3 million

Taxpayer has the option to:
-Use graduated rate + 3 % of gross sales or receipts or;
- 8% of Gross sales or receipts, in
excess of 250,000 in
lieu of Graduated and
3% percentage tax

Tax credit
- Creditable withholding tax
- Advance tax payments
- Quarterly tax payment ( applicable to 2nd 3rd, annual ITR)
- Foreign tax payments
This tax payments only available if the taxpayer is a RC, DC why? Because RC, DC
are taxable on their income worldwide.
 So meaning, their income on abroad are also subject to tax in that country . The
taxes I paid abroad can be considered as a tax credit here in the Philippines
Allowable deductions – without limit

Tax credit – with limit

Pension Trust
Trust established to provide financial administration of a pension or retirement fund.