TAXATION- OVERVIEW
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TAXATION
- It is the inherent power of the state
to demand contributions for public
purposes.
- A mode by which the state allocates
its costs or burden to its subjects
who are benefited by its spending.
INHERENT— the mere fact
— The mere fact that the state
exist, the power of taxation also
exist.
— The state will die if it doesn’t
exercise the power of taxation.
ABSOLUTELY FOR PUBLIC PURPOSES
ONLY  it is not general since di pwede
gamitin ng mga politicians for their own
personal interest.
GENERALLY — there is an exemption to the
rule.
ABSOLUTELY — no ifs, no buts.
TAXES — are the enforced proportional
contributions from persons and property
levied by the law-making body of the state
(the legislative) by virtue of its sovereignty
for the support of the government and all
public needs
EXAMPLE OF PULBIC
INTEREST IN USAGE OF TAX
What benefits do the public enjoy if the
government function?
 Infrastructures
 Public order and safety
 Education
 Helps control inflation and economy
 Shifting of wealth
INFLATION — Pagtaas ng bilihin sa
Mercado (market)
WHY DO WE NEED TO PAY TAX?
THEORIES OF TAXATION
Necessity Theory
- Funds are needed by the
government
Benefits Received Theory
- This follows the symbolic
relationship doctrine. Subjects
should pay taxes for government
services received. These services are
necessary for the subjects to enjoy
the benefits of an organized society.
- The mere fact that you are in the
Philippines, you enjoy the benefits
projects and shits by the tax money
(ex. Public roads/highway, relief
goods, public hospitals, public
plazas, etc.) HAHA
Life Blood Theory ( IM P ORTANT)
- Taxation is the lifeblood of the
government. The government
cannot survive without it.
PURPOSE OF TAXATION
PRIMARY
- To provide funds or property which
to promote the general welfare and
protection of its citizens and to
enable it to finance its multifarious
activities.
Biggest revenue of government — taxes
(then custom duties, licenses, regulatory
fees, renewal fees)
TAXATION- OVERVIEW
SECONDARY
a. To protect local industries through
imposition if custom duties
b. To reduce inequalities in wealth and
income by adopting progressively higher tax
rates.
c. To prevent inflation or ward off
depression by increasing or decreasing
taxes, respectively.
d. To promote and protect some enterprise
or industry by giving tax exemptions and
tax incentives.
- TAX EXEMPTIONS — you don’t
impose tax at all.
- TAX INCENTIVES — you impose tax
to a subject but you will give
incentives (ex. Lower tax rates, tax
credit, tax refund)
CATEGORIES OF TAXATION
1. STATE POWER
2. LEGISLATIVE PROCESS
3. MODE OF COST CONTRIBUTION
LEGISLATIVE PROCESS
— Senate & Congress
— All tax laws should originate on
our legislative process.
BRANCHES OF GOVERNMENT
 Legislative—Makes laws (Congress,
comprised of the House of
Representatives and Senate)
 Executive—Carries out laws
(president, vice president, Cabinet,
most federal agencies)
 Judicial—Evaluates laws (Supreme
Court and other courts
ESSENTIAL CHARACTERISTICS OF
TAXES
 It is an enforced contribution —
responsibility to pay taxes.
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 It is generally payable in money.
 It is proportional in character.
 It is levied on persons or property.
 It is levied by the state that has
jurisdiction over the person.
 It is levied by the law-making body
of the state.
 It is levied for public purpose or
purposes.
 It is commonly required to pay at
regular periods.
THREE INHERENT POWERS OF THE
STATE
— the power of the state to exact
proportional contribution from its people to
cover the cost of government expenditures.
POWER OF EMINENT DOMAIN
- The power of the state to take
private property for public use upon
payment of just compensation.
- For example gagamitin ng
government yung property mo to
build a highway since nakaharang
siya sa gagawin nila, wala ka
magagawa kahit sabihin mo na
galling pa sa mga ancestors mo yun.
You are bound to sell that property
to the government.
POWER OF TAXATION
- Most important power of the state.
- The power of the state by which the
sovereign raises revenue to defray
the necessary expenses of the
government.
POLICE POWER
- Most superior inherent power of the
state.
- The power of the state to enact laws
to promote public health, public
morals, public safety, and the
general welfare of the people.
 TAXATION- OVERVIEW
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DISTINCTIONS OF THE THREE

INHERENT POWER OF THE STATE

EMINENT POLICE
TAXATION
DOMAIN POWER
Liberty and
Regulates Property Property
property
Public penalties, and fines connected
Exercised by Government Government
companies therewith, including the execution of
Property
Public use Destroyed Public use
judgments in all cases decided in its
taken favor by the Court of Tax Appeal
Concrete,
Concrete, and the ordinary courts (under
full and
Compensation Intangible full and fair judiciary). The Bureau shall give
fair
equivalent
equivalent effect to an administer the
Limit
Market Cost of
No limit supervisory and police powers
Value License conferred to it by the internal
revenue code or other law.
SIMILARITIES OF THREE POWERS Republic Act No. 10963
- They are all necessary attributes of - Tax Reform for Acceleration and
sovereignty Inclusion (TRAIN LAW)
- They are all inherent to the state - Amending numerous sections of the
- They are all legislative in nature Republic Act No. 8424, National
- They are all ways in the state interferes Internal Revenue Code of 1997
with private rights and properties
- They all exist independently with the
constitution and are exercised by the DIFFERENT TYPES OF TAX
government even without Constitutional
grant Income Tax
- They all presuppose an equivalent form of - Is a tax imposed on all yearly profits
compensation received by the persons arising from property, profession,
affected by the exercise of the power trades or offices or as a tax on a
- The exercise of these powers by the local person’s income and profits.
government units may be limited by the - Broad category of tax
national legislative
UNDER INCOME TAX
Kahit walang batas or Constitution, the
power of taxation still exists. 1. CAPITAL GAINS TAX — tax imposed
on the gains presumed to have been
realized by the seller from the sale,
Bureau of Internal Revenue (BIR) exchange, or other disposition of
capital assets located in the
- The BIR shall be under the Philippines.
supervision and control of the
Department of Finance and its 2. WITHHOLDING TAX — is the tax
powers and duties shall comprehend withheld from individuals receiving
the assessment and collection of all purely compensation income.
national internal revenue taxes, — Kapag na-receive mo na yung
fees, and charges, and the sweldo mo, ikakaltas na ng
enforcement of all forfeitures, employer mo yung tax agad doon
TAXATION- OVERVIEW
para hindi mo na kailangan mag file
ng tax separately .
3. FINAL WITHHOLDING TAX — is a
tax will be deducted at source is
final. The taxpayer receives the
income net of tax and there would
be no need for him/her to file an
income tax return to report the
same (Ex. Passive income subject to
final withholding tax)
OTHER TAXES (NOT UNDER INCOME
TAX)
1. DOCUMENTARY STAMP — is a tax
on documents, instruments, loan,
agreements, and paper evidencing
the acceptance, assignment, sale or
property incident thereof.
2. DONOR’S TAX — is a tax on
donation or gift, and is imposed on
the gratuitous transfer of property
between two or more persons who
are living at the time of the transfer.
3. ESTATE TAX — a tax on the right of
the deceased person to transmit
his/her estate to his/her lawful heirs
and beneficiaries at the time of
death and on certain transfers which
are made by law as equivalent to
testamentary disposition.
4. VALUE-ADDED TAX — is a business
tax imposed and collected from the
seller in the course of trade or
business on every sale of properties
(real or personal) lease of goods or
properties (real or personal) or
vendors of services. It is an indirect
tax, thus, it can be passed on the
buyer.
Real property — immovable (ex.
Land, buildings, house)
Personal Property — movable (ex.
Jewelries, cars, cellphones)
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5. PERCENTAGE TAX — A business tax
imposed on persons or entities who
sell or lease goods, properties, or
services in the course of trade or
business where gross annual sales
or receipts do not exceed a certain
threshold and are not VAT -
registered
TYPES OF TAXABLE INCOME
1. PASSIVE INCOME — without any
further action on the part of the taxpayer.
(Ex. Dividends, Interest income on bank
deposits)
2. CAPITAL GAINS — arise from the sale
of 2 types of capital assets,
a. Real property in the Philippines
classified as capital asset.
b. Shares of domestic corporations
(provided the seller or taxpayer is
not a dealer in securities)
3. REGULAR/RETURNABLE INCOME
a. Compensation
b. Trade, business, or practice of
profession
c. Ordinary gains
d. Other taxable income ( if di siya
nagfafall under passive and capital
gains)
BASIC PRINCIPLE OF A SOUND TAX
SYSTEM
by the author and it is NOT constitutional
1. Fiscal Adequacy — sources of
revenue should be sufficient to meet
government expenditures
2. Equality or theoretical Justice —
the tax burdens should be
proportionate to the taxpayer’s
ability to pay.
3. Administrative Feasibility — tax
law should be capable of convenient,
just, and effective administration.
TAXATION- OVERVIEW
LIMITATIONS ON THE POWER OF
TAXATION
a. Constitutional Limitations — are
those provided for in the constitution
or implied from its provisions.
b. Inherent Limitations — are
restrictions to the power to tax
attached to its nature.
CONSTITUTIONAL LIMITATIONS
 Due process of law — there must be a
valid law
 Equal protection of laws — “no
persons shall be deprived of the same
protection of laws”
 Rule of uniformity and equity in
taxation—“the Congress shall evolve a
progressive system of taxation”
 Prohibition against infringement of
religious freedom—“no law shall be
made respecting the establishment of
region; or prohibiting the free exercise
thereof”
 Prohibition against appropriation for
religious purposed
 Exemptions of religious, charitable,
and educational entities
 Exemptions of non-stock, non-profit
educational institutions
 Grant of tax exemption
 Power of the President to veto any
appropriation, revenue, or tariff bill
 Non-impairment of the Supreme court
jurisdiction
 Revenue bill shall originate exclusively
from the House of Representatives
 Prohibition against infringement of
press freedom
INHERENT LIMITATIONS
 PURPOSE — Taxes may be levied only
for public purpose;
 TERRITORIALITY — The state may tax
persons and properties under its
jurisdiction;
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 INTERNATIONAL COMITY — The
property of a foreign state may not be
taxed by another;
 EXEMPTION — Governmental agencies
performing governmental functions are
exempt from taxation;
 NON-DELEGATION — The power to
tax being legislative in nature may not
be delegated.
TIP: memorize the INHERENT Limitations
since mas konti siya para malaman mo yung
the rest Constitutional Limitation na <333
DELEGATION OF POWER OF TAXATION
-exemptions to non-delegation rule
 DELEGATION TO THE PRESIDENT —
congress may authorize, by, law, the
President to fix: tariff rates; import
and export quotas; tonnage and
wharf age due; and others within
the national development program.
 DELEGATION TO LOCAL
GOVERNMENT UNITS — congress
may grant to a municipal corporation
to power to tax certain matters, it
can also provide for exemptions or
even take back the power
 DELEGATION TO ADMINISTRATIVE
AGENCIES — delegation, by law, to
Fiscal Incentives Review Board
(FIRB) the review and restoration
tax exemption privileges and
granting of tax incentives to GOCCs.
ASPECTS OF TAXATION
a. Levy or imposition – Impact of taxation
b. Assessment of Tax
Incidence of Taxation
c. Payment of tax
TAXATION- OVERVIEW
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 LEVYING OF IMPOSITION OF TAX CANON OF A TAX

(IMPACT OF TAXATION)
— passage of tax laws by the
legislative (exercised by Congress)
 ASSESSMENT AND COLLECTION
— enforcing the obligation on the part
of the taxpayer
— Assessment is the process of
determining the tax due
— Exercised by the BIR
 PAYMENT OF TAX
— the act of the taxpayer in settling
his tax obligations
-Quality of Good Taxation
a) Proportionate to one’s ability to pay—
equality and ability
b) Certain and not arbitrary — when,
where, and how much to pay
c) Convenient to pay — in convenient
time or manner
d) Economical to collect — cost-efficient
DOUBLE TAXATION
DIRECT DOUBLE TAXATION

CLASSIFICATION OF TAXES a) Same subject or object

b) Same taxing authority
 As to subject matter c) Same jurisdiction
 As to who bears the burden d) Same purpose
 As to determination or amount
 As to purpose “Although not prohibited by the Constitution it is
 As to authority imposing the tax or not favored and may be violation of equal
protection of laws”
scope
 As to graduation or rate INDIRECT DOUBLE TAXATION

- Example is the double taxation of

DIFFERENT TYPES OF TAX corporations
- Other example is when business tax
NATIONAL TAX
is imposed by the municipal
a) Income tax government prior to the issuance of
b) Estate and Donor’s tax a business license to a taxpayer for
c) Value added tax engaging in an advertising business.
d) Excise tax His income from his advertising
e) Other percentage tax business shall later be imposed
f) Documentary stamp tax income tax by the national
government.
LOCAL TAX - Another example is when an item of
a) Real property tax income is taxed in the Philippines
b) Professional tax and the same income is taxed in
c) Business taxes, fees, and charges another country, there is only a case
d) Community tax of indirect double taxation which is
e) Tax on banks and other financial not legally prohibited because taxes
institutions are imposed by different taxing
authorities.
TAXATION- OVERVIEW
USUAL METHODS AVOIDING THE
OCCURRENCE OF DOUBLE TAXATION
1. Allowing reciprocal exemptions either
by law or by treaty;
2. Allowance of tax credit for foreign
taxes paid;
3. Allowance of education for foreign
taxes paid;
4. Reduction of the Philippine tax rate
FORMS OF ESCAPE FROM
TAXATION
SHIFTING
- Transfer of burden of tax by the
statutory taxpayers to another
- Ex. Nagbenta ka ng car then
nagkaroon ka ng gain, pwede mo i-
shift s buyer yung tax upon
agreement between both parties :>
CAPITALIZATION
- Reduction in the selling price by an
amount equal to future taxes to be
paid by future buyer
- Tataasan mo yung selling price like
idadagdag mo na dun yung tax haha
TRANSFORMATION
- Not increasing the selling price but
strives to recover the tax through
more efficient production
- Minimize mo yung production cost.
Same price pero mas maliit yung
production like yung size ng product
ganun
- Ex. Jollibee, lumiit yung servings ng
chicken nila to minimize production
cost, pero same prize.
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TAX EVASION
- Occurs when the taxpayer resorts to
unlawful means to lessen or to get
away with his tax liability
- Fraudulent or illegal means of
reducing tax dues
- Also known as “tax dodging”
- Ex. Under declaration of sales,
overstatement of expenses, and
backdating an important document.
TAX AVOIDANCE
- Reduction or totally escaping
payment if taxes through legally
permissible means
- Also known as “tax minimization”
TAX EXEMPTION
- Grant of immunity from a tax
- may be based on contract
- may be based on some ground of
public policy
CONSTRUCTION OF TAX LAWS
I. Revenue are not political in nature
II. Civil, not penal, in nature
III. Legislative intent must be considered
IV. Doubt in tax statutes are to be construed
strictly against the government
V. Tax exemptions are to be construed
against the tax payer
VI. Generally prospective in operation
VII. Tax are special laws
Taxpayer’s Suit
“Taxpayers have the right to question the
validity of tax measures or illegal
expenditures of public money. In the proper
court”
TAXATION- OVERVIEW
“But a taxpayer is not relieved from the
obligation of paying tax because of his
belief”
“For collection of taxes would be hampered
and may result to a paralysis of important
government functions”
SOURCES OF TAX LAWS
 THE CONSTITUTION
 STATUTORY ENACTMENTS SUCH AS:
— National Internal Revenue Code (NIRC)
— Customs Modernization and Tariff Act
(CMTA)
— Local Government Code
— CREATE ACT
— TRAIN LAW
 EXECUTE ORDERS AND LOCAL TAX
ORDINANCES
 TAX TREATIES AND INTERNATIONAL
AGREEMENT
 JUDICIAL DECISIONS OF:
— Supreme court
— Court of Tax Appeals
 RULES AND REGULATIONS
— BIR Rulings  less general
interpretations of tax laws
— Revenue regulations signed by the
secretary of Finance
TAXES VERSUS OTHERS
SUBSIDY — Differs from tax because tax is
a burden while subsidy is an aid by the
government to an individual or private
enterprise
REVENUES — refers to all funds or income
derived by the government including taxes
INTERNAL REVENUES — taxes imposed
other than duties on imports and exports
TARIFFS — The duties payable on goods
imported or exported. The rem tariff and
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custom duties are used interchangeably in
the tariff and custom code
DEBTS — Arises from contract, payable in
kind of money, subject to setoff, interest
depends upon the agreement of the parties,
no imprisonment unless the debt arises
from crimes.
CUSTOM DUTIES — imposed on imported
or exported goods. It is also one of the
taxes
LICENSE FEE — emanates from police
power. The purpose is regulatory and the
amount is limited to expenses of regulation
and control. Imposed on the exercise of a
right or privilege. Non-payment of license
makes the business illegal
PENALTY — imposed as a punishment
because of injurious acts by the government
or by private individuals. It may arise from
contract and maybe paid in kind.
TAX AMNESTY
- A general pardon or intentional
overlooking by the state of its
authority to impose penalties on
persons otherwise guilty of tax
evasion of tax laws. The purpose is
to give a chance to reform and
become part of the society with a
clean state
TAX CONDONATION
- Means to remit or desist or refrain
from exacting or imposing a tax. It
cannot extend to refund of taxes
already paid when obtaining
condonation
-
TAXATION- OVERVIEW
-MAIRA <33

KAYA NYO YAN TANGINA NYO

INCOME TAXATION
-MAIRA <33

2. Realized Benefit — Actual or constructive

receipt.

EXAMPLE OF CONSTRUCTIVE RECEIPT OF

REALIZED INCOME:
INCOME
a. Credit to an account owned by the
- All wealth which flows into the taxpayer
taxpayer other than a mere return of b. Declaration of a share of the profits
capital and include gains. of a GPP
- Return OF capital — bumalik lang c. Offsetting a debt
yung puhunan mo d. Cancellation of debt in payment of
Why is income taxed? service

- Income is the best measure of a EXAMPLE ILLUSTRATION:

taxpayer’s ability to pay ABC purchased goods for P300 and sold
BASIC DEFINITIONS: them for P500. The P500 consideration is
analyzed as follows:
GROSS INCOME
— refers to what is income for taxation Selling price (total consideration
500
purposes received)
— gross income less allowable deductions Cost (Value of inventory forgone) (300)
is equal to taxable income Mark-up (Gross income) 200
Return ON capital
TAXABLE INCOME
Return on capital that increase net worth is
— as the pertinent items of gross income
income subject to income tax
that are subject to tax after allowable
deductions
UNREALIZED BENEFIT — Kapag di mo pa
TAX BASE
hawak yung tinubo nung capital
— the value of certain goods or property
— utang
for taxation purposes
— ni-return yung goods
— tax base X tax rate = tax due
REALIZED INCOME — Kapag na render mo
CAPITAL
na yung service
— is a fund or property existing at one
distinct point of time UNREALIZED INCOME — Kapag di pa na
earn yung income
— Kapag nagbayad na pero di pa
CHARACTERISTICS OF GROSS
na-render yung service
INCOME (TWO REQUISITES)
1. Return ON capital
— result in increased net worth at the
moment of its generation
— may dumagdag sa puhunan mo may
bumalik other than the capital
INCOME TAXATION
NET INCOME
- Gross income less statutory
deductions
- The statutory deductions are, in
general, though not exclusively,
expenditures other can capital
expenditures, connected with the
production of income
- In the case of a taxpayer other than
a corporation, net income means
gross income less deductions
- Ordinary net income is to be
computed in accordance with the
method of accounting regularly
employed in keeping the books of
the taxpayer.
o Pinaka common yung cash
basis
TYPES OF GROSS INCOME
GROSS INCOME — an income derived
from whatever source, including but not
limited to
1. Compensation for services in whatever
form paid, including, but not limited to
fees, salaries, wages, commissions,
and similar items
2. Gross income derived from the
conduct of trade or business or
exercise of a profession
3. Gains derived from dealings in
property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distribute share from the net
income of the general professional
partnership
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WHICH DO NOT CONSTITUTE GROSS
INCOME?
1. Return OF capital
2. Unrealized income
3. Those exempted by the constitution,
statues or treaty or contract
CAPITAL
- There are capital that have infinite
value and are incapable of pecuniary
valuation. Anything received as
compensation for their loss is
deemed a return OF capital.
- EX. 1) Life; 2) Health; 3) Human
reputation.
- Ex. Life insurance — lahat ng
marereceive ng beneficiaries mo
once you die, hindi siya magiging
part ng gross income and it is not
taxable
TYPES OF INCOME TAXPAYERS
1. INDIVIDUALS
A. Citizen
a. Resident Citizen (PH resident and
a Filipino)
b. Non-resident Citizen (A Filipino
but not PH resident, ex. OFW)
B. Alien
a. Resident Alien (PH resident
foreigner)
b. Non-Resident Alien (Foreigner
doesn’t reside at PH)
-Engaged in trade/business
-Not engaged in trade or
business
C. Taxable Estates and Trusts
INCOME TAXATION
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2. CORPORATIONS SOURCES OF INCOME SUBJECTED

TO TAX
A. Domestic Corporation

B. Foreign Corporation SOURCE OF INCOME

INDIVIDUAL WITHIN WITHOUT
a. Resident Foreign Corp.
THE PH THE PH
b. Non-resident Foreign Corp.
Resident Citizen / /
Non-resident
/
SITUS OF TAXATION Citizen
Resident Alien /
- Situs means place of taxation Non-resident
/
- The situs of taxation is determined Alien
by a number of factors

1. Subject matter — or what is being EXAMPLE:

taxed. He may be a person or it may be
a property, an act or activity;
2. Nature of tax — or which tax to
impose. It may be income tax, an
import duty, or a real property tax
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer.
THE FOLLOWING SITUS OF TAXATION
APPLY:
Edmon is a resident citizen then may
pinaparent siyang vacant building sa
Taiwan, then yung bayad dineposit through
bank transfer sakanya. He earned P20,000
rental income.
QUESTION: Is it taxable?
ANSWER: YES, since he’s a resident citizen,
it is taxable whether the source of income is
within or without PH.

1. PERSONS — residence of the taxpayer SITUS OF INCOME

2. REAL PROPERTY OR TANGIBLE
PERSONAL PROPERTY — location of the
property
3. INTANGIBLE PERSONAL PROPERTY — as
a rule, situs is the domicile of the owner
unless he has acquired a situs somewhere
4. INCOME — Taxpayer’s residence or
citizenship, or place where the income was
earned
5. BUSINESS, OCCUPATION AND
TRANSACTION — place where business is
operated, occupation being practiced and
transaction completed
- The situs of the income is the place
of taxation of the income or the
country which has jurisdiction to
impose the tax. For income tac
purposes, income may be taxed in
one or more or all of the following
places or countries:
1. The place where the taxpayer is a citizen
2. The place where the taxpayer is a
resident
3. The place where the income is earned or
derived.

6. GRATUITOUS TRANSFER OF PROPERT Y

— taxpayer’s residence or citizenship, or
location of the property.
INCOME TAXATION
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SAMPLE QUESTIONS: #2 explanation

a. Regular/returnable income
1. Particular, Income is taxed because:
b. Passive income
a. When a person receive income, it c. Taxable income
received benefit from the government.
3. Which is subject to income tax?
b. Other sources of government revenue
a. Compensation for personal injuries
may not be sufficient to shoulder
b. Investment income of foreign
government expenditures
government in the Philippines
c. It represents the primary source of
c. Income of resident aliens abroad
government revenue aside from business
d. Business Income from jueteng and sale
tax
of cocaine
d. It represents the best indicator of one’s
ability to pay #3 explanation
a. Infinite value yung health and di part of
2. Gross income means:
gross income
a. The pertinent item of income that is
b. International comity
subject to progressive rates
c. Territoriality (sources of income
b. The pertinent item of income that is
subjected to income tax)
subject to final tax rates
c. Income that can be subject to income
taxation
d. Income that are actually realized in cash
or property
INCOME TAXATION
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APPLICATION OF SITUS AND CATEGORIES OF INCOME AND TAX

CLASSIFICATION OF TAXPAYER
Mr. Yoso, is a Filipino residing in
Angeles City. He lent money to his
friend Ms. Malou Wang who is
currently based in Los Angeles,
California starting her business spa
business. The amount is 50,000 in
Philippine Peso.
A year passed and it’s time for Malou
to pay for her debt.
RATES
1. COMPENSATION INCOME —
Individuals earning purely compensation
income shall be taxed on the graduated
income tax rates (from 20%-35% effective
Jan 1, 2018 to Dec 31, 2022; from 15%-
35% effective Jan 1, 2023 onwards)
prescribes under Sec 24(A) of the tax code.
Total Compensation Income XXX
LESS: Mandatory Contribution
(XXX)
and/or non-taxable benefits
NET TAXABLE INCOME XXX

Accrued interest amounted to 10,000

pesos and transferred directly to his INCOME TAX RATES SEC 24(A)
bank account.

QUESTION:
WHAT IS THE TAXPAYER CLASSIFICATION
OF MR. YOSO?
-RESIDENT CITIZEN
HOW MUCH IS THE TAXABLE INCOME OF
MR. YOSO?
-P10, 000.00

WHERE IS THE SITUS OF TAXATION?

-LOS ANGELES, CALIFORNIA

NOTE: CHECK THE DATES SA PROBLEMS TO

DETERMINE WHICH RATES YOU WILL USE :>
INCOME TAXATION
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EXAMPLE OF GRADUATED INCOME TAX

SALARY 80,000 Inclusive of mandatory contribution and non-taxable allowance

MANDATORY CONTRIBUTION (3,000) SSS, Phil health, Pagibig

NON-TAXABLE ALLOWANCE (2,000) Laundry allowance, uniform allowance
TAXABLE COMPENSATION 75,000 MONTHLY
900,000 ANNUAL TAXABLE COMPENSATION

TAX DUE = a + (bxc) nasa table

Since between 800,000-2,000,000 yung annual taxable
Basic amount 130,000 compensation niya.

(900,000-800,000=100,000)  yung excess sa 800,000

Additional +30,000 100,000 x 30% (additional rate doon sa excess) = 30,000
Tax on compensation = ANNUAL TAX, naka deduct na yan agad before mo pa
withheld by the employer
=160,000
mareceive yung compensation.

13,333.33 = MONTHLY TAX, 160,000/12= 13,333.33

TAKE HOME PAY:

Salary XXX
LESS: Mandatory Contributions (XXX)
LESS: Monthly Tax on
(XXX)
Compensation
TAKE HOME PAY XXX

Salary 80,000
LESS: Mandatory Contributions 3,000
LESS: Monthly Tax on Compensation 13,333.33
TAKE HOME PAY 63,666.67
INCOME TAXATION
-MAIRA <33

2. BUSINESS INCOME ARISES FROM SELF-EMPLOYMENT OR PRACTICE OF

PROFESSION

— This shall not include income from performance of services by the taxpayer as an employee.
(Di siya isasama under compensation income since self-employed meaning ikaw yung boss and
walang employer-employee na nagaganap.)

Individual earning income purely from self-employment and/or practice of profession

who’s Gross Sale/Receipts and Other Non-Operating Income (GSRONOI) do not exceed the
3,000,000 VAT Threshold shall have option to avail of

A. Graduated rates — 24(A) of tax code as amended (yung table kanina); or

B. 8% tax of GSRONOI in excess of 250,000PHP * in lieu of the graduated income tax

rates under the Section 24(A) and the percentage tax under Section 116 of the tax code as
amended.

GROSS SALES
 Goods
 Kahit inutang pa yan, isasama na siya sa sales

GROSS RECEIPTS
 Services
 Hindi ilalagay sa gross receipts if di pa nababayaran yung service na nirender mo into
cold money

SAMPLE COMPUTATION:

Gross Sales/Receipts P XXX

LESS: Cost of Sales (XXX)
GROSS INCOME P XXX
LESS: Operating Expenses (XXX)
TAXABLE INCOME (if graduated rates, option 1) P XXX
INCOME TAXATION
-MAIRA <33

EXAMPLES: (marami examples sa book :> para mas maintindihan or para mas mailto kayo
HAHJAHAHAHAHHA eto mga examples madaling intindihan)
1. Ms. EBQ operates a convenience store while she offers bookkeeping services to
her clients. In 2018, her gross sales amounted to P800,000, in addition to her
receipts from bookkeeping services of P300,000. She already signified her intention
to be taxed at 8% income tax rate in her 1 st quarter return. Her income tax liability
for the year will be computed as follows:

Gross Sales — Convenience Store P 800,000

Gross Receipts — Bookkeeping 300,000
Total Sales/Receipts P 1,100,000
LESS: Amount Allowed as Deduction under Sec. 24(A)(2)(b) 250,000
TAXABLE INCOME P 850,000

Tax Due: P 68,000

8% x P850,000

* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000
* Taxpayer’s source of income is purely from self-employment, thus she is entitled to the
amount allowed as deduction of P250,000 under Sec. 24(A)(2)(b) of the Tax Code, as
amended.

2. Ms. RPSV is a prominent independent contractor who offers architectural and

engineering services. Since her career flourished, her total gross receipts amounted
to P4,250,000 for taxable year 2018. Her recorded cost of service and operating
expenses were P2,150,000 and 1,000,000 , respectively. Her income tax liability will
be computed as follows:

Gross Receipts — Architectural & Engineering Services P 4,250,000

LESS: Cost of Service 2,150,000
GROSS INCOME P 2,100,000
LESS: Operating Expenses 1,000,000
TAXABLE INCOME P 1,100,000

TAX DUE:
On P800,000 (basic amount) P 130,000
On Excess (1,100,00-800,000) x 30% 90,000
INCOME TAX DUE: P 220,000

*The gross receipts exceeded the VAT threshold of P3,000,000; subject to graduated income
tax rates; liable for business tax – VAT, in addition to income tax (YUNG TABLE RATE SA
SECTION 24(A) !!!!
INCOME TAXATION
-MAIRA <33

3. MIXED INCOME EARNER — there are individuals who earn income from both
compensation and from self-employment (Business or practice or profession).

They shall be subject to the following taxes:

1. On compensation income — at graduated rates; plus

2. On income from business or practice of profession shall be subject to the following:

2.a. If GSRONOI do not exceed the VAT threshold of P3.0M —

 either at graduated rates or
 8% of GSRONOI in lieu of graduated rated and percentage tax, at the option of the
taxpayer.
2.b. If GSRONOI exceed the VAT threshold — at graduated rates.

DI NA AQ MAGLALAGAY EXAMPLE NASTRESS NA AQ TIGNAN NIYO BOOK PAGE NO. 60 T^T

KAYA NYO YAN TANGINA NYO

FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

NON-RESIDENT PERSONS NOT

ENGAGED IN BUSINESS IN THE
PHILIPPINES
FEATURES OF FINAL INCOME
TAXATION - Non-resident aliens not engaged in
trade or business (nra-netbs) and
1. Final Tax
non-resident foreign corporations
2. Tax Withholding at Source
(nrfcs), have high risk of non-
3. Territorial Imposition
compliance.
4. Imposed on certain passive income
and person not engaged in business NRA-
INCOME
in the Philippines NETB
ON TAXABLE INCOME FT 25%
THE FINAL WITHHOLDING TAX ON PASSIVE INCOME
SYSTEM In general, interest,
- It imposes upon the person making royalties, prizes, and other FT 25%
winnings.
income payments the responsibility
Cash and/or property
to withhold the tax. FT 25%
dividends
- Tax withheld at source. The amount
ON CAPITAL GAIN
of tax that is withheld by a
Sale of shares of stock not
withholding agent is constituted 15%
traded in stock exchanged
from the payee on said income. Sale of real property 6%
- The final withholding tax system is
INHERENTLY TERRITORIAL. It
applies only to certain passive TAX RATES
income earned from sources within
the Philippines. **A technique from Sir Win (YouTube)

PASSIVE INCOME Is Your Relative Playing With

Dota/Strike?
- Earned with very minimal
involvement from the taxpayer and (GENERAL RATES W/O EXEMPTIONS)
is generally irregular in timing and I  Interest
amount. Y  Yields
- “Their existence can be difficult to R  Royalties 20%
predict while their amount may be P  Prizes
difficult to determine. Thus, the final W  Winnings
withholding at source is the most
favored scheme in taxing items of
passive income” D  Dividends
10%
S  Shares in Income
PASSIVE INCOME  FINAL TAX  REMIT

Withholding
Payee BIR
agent/payor
FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

RESIDENT CITIZEN NON-RESIDENT ALIEN ENGAGED

ON PASSIVE INCOME NON-RESIDENT CITIZEN IN TRADE OR BUSINESS IN THE
RESIDENT ALIEN PH (NRA-ETB)

INTEREST from any currency bank

deposit and yield or any other
monetary benefit from deposit 20% 20%
substitutes and from trust funds and
similar arrangements

INTEREST INCOME from a

depository bank under the Expanded 15% (TRAIN)
Exempt
Foreign Currency Deposit System NRC – Tax exempt
(FCDS)

INTEREST INCOME from long-term

deposit or investment in the form of
savings, common or individual trust
funds, deposit substitute, investment
management accounts (IMA) and
other investments evidenced by Exempt (0%) Exempt (0%)
certificates in such form prescribed by
the BSP with the 5 year term or
longer

IF deposit is pre-terminated before

the fifth year, the corresponding final
tax shall be:

4 years to less than 5 years 5% 5%

3 years to less than 4 years 12% 12%
Less than 3 years 20% 20%

ROYALTIES
Royalties, in general 20% 20%

Royalties on books, literary works, 10% 10%

and musical composition

PRIZES
Prizes in general 20% 20%
Prizes amounting to 10,000 or less
are subject to the graduated income Not subject to FT Not subject to FT
tax schedule in Sec 24 (A).
FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

WINNINGS
Winnings in general 20% 20%

Philippine Charity Sweepstakes Office

(PSCO) winnings

Under TRAIN law:

More than P10,000 20% Exempt* (Amended in
P10,000 or less Exempt Exempt)

Under CREATE Act:

More than P10,000 20% 20%* (Sec 5, CREATE;
eff. Apr. 11, 2021)
P10,000 or less Exempt Exempt

CASH AND/OR PROPERTY

DIVIDENDS actually or constructively
received from a domestic corporation,
joint stock company, insurance, mutual
fund companies, and regional operating
headquarter of a multinational company
or;
10% 20%
SHARES
 Partnership (except a general
professional partnership)
 Associating
 Joint Account
 Joint Venture

^^(all after tax)

RECEPIENT OF DIVIDENDS
SOURCES OF DIVIDENDS INDIVIDUALS CORPORATIONS
DOMESTIC CORPORATION 10% FINAL TAX* EXEMPT**
FOREIGN CORPORATION REGULAR TAX REGULAR TAX

EXCEPTIONS
*NRA-ETB IS SUBJECT TO A 20% FINAL TAX ON DIVIDEND
NRA-NTEB IS SUBJECT TP 25% FINAL TAX

**NRFC (NON-RESIDENT FOREIGN CORPORATION) SUBJECT TO 30% GENERAL FT RATE

FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

FINAL TAX IMPOSED ON INCOME OR E. Personal Equity and Retirement

GAIN SHALL NO LONGER BE Account Act of 2009 (R.A. 9505)
INCLUDED AS TAXABLE INCOME
SUBJECT TO THE GRADUATED RATES. F. Compensation income of Philippine
Nationals and Alien Individuals
- The final tax is imposed without any
employed by Foreign Governments,
deduction and is withheld at source. The
embassies, diplomatic missions, and
amount received by passive income earner
international organizations situated in
is net of the final tax. The final tax on
the Philippines Memorandum Circular
passive income is remitted by the payor
31-2013, amended by Revenue
who serves as the withholding agent to the
Memorandum Circular 73-2013
BIR. For example, if the prize in the painting
(Manipulation of Internal Comity)
competition is 50,000PHP the amount to be
received by the winner will be only be
40,000PHP.

Individuals Exempt from Income Tax

A. Non-resident citizen

B. Overseas contact worker, including

overseas seaman

C. Barangay Micro Business Enterprises

(R.A. 9178 or BMBE Law)
- like small sari-sari stores
- if di nag exceed sa 3,000,000PHP
threshold yung assets ng business
excluding land, property, ganun

D. Expanded Senior Citizen Act of 2010

FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

DIVIDENDS

“Dividends” means any distribution made by 2. A resident taxpayer received a P16,000

a corporation to its shareholders out of its
earnings or profits and payable to its
shareholders, whether in money or in other
property.
interest income from a bank. Determine the
final tax withheld at source.
SOLUTION:

TYPES OF DIVIDENDS:

1. Cash Dividends – Paid In Cash

2. Property Dividends – Paid In Non-
Cash Properties Including Stocks Or
Securities Of Another Corporation
3. Scrip Dividends – Those Paid In
Notes Or Evidence Of Indebtedness
Of The Corporation
4. Stock Dividends – Paid In Stock Of
The Corporation
5. Liquidating Dividends – Distribution
Of Corporate Net Asset
3. On January 1, 2016 Alice invested
P1,000,000 in Baguio bank’s 5-year time
deposit. The deposit pays 10% interest
annually. Alice pre-terminated the deposit
on July 1, 2019.
SOLUTION:

EXAMPLES: (from Sir Edmon)

ON INTEREST INCOME
1. A taxpayer earned the following interest
income from various deposits: ON DIVIDENDS

6-month time deposit 8,000 1. Calbayog company declared a total of

2-year time deposit 12,000
5-year time deposit 40,000
Required: compute for the final tax if the
taxpayer is an individual and if a
corporation.
P2,000,000 dividends. P800,000 is due to
corporate shareholders while P1,200,000 is
due to individual shareholders
Compute for the final tax to be withheld by
Calbayog Company

SOLUTION: SOLUTION:
FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

2. Aborian company declared a total of

P1,000,000 dividends in March 2014. An SOLUTION:
analysis of the recipient shareholders is as
follows:

Compute for the final tax to be withheld by

Aborian Company TAX INFORMERS REWARD
SOLUTION:
Cash reward may be given to any person
instrumental in the discovery of violations of
the national internal revenue code or
discovery and seizure of smuggled goods.
The tax informer’s reward is subject to 10%
final tax.

Amount of cash reward – whichever is lower

COMPREHENSIVE PROBLEM ON
PASSIVE INCOME
1. Helena Dela Cruz, single resident citizen,
has the following passive income exclusive
of final taxes for the year 2018:
of the following per case:
1. 10% of revenues, surcharges, or fees
recovered and or fine or penalty imposed
and collected or
2. 1,000,000

EXAMPLE:
Interest from bpi P75,000 Ms. Kristen provided information to the BIR
savings deposit leading to the recovery of 12,000,000php
Royalty from P80,000 unpaid taxes. The cash reward shall be
invention computed as follows:
Prize in a painting P50,000 10% cash reward (12m x 10%)
competition =1,200,000php
Dividends received P30,000
Cash reward limit = 1,000,000php
from a domestic
corp. Cash reward (whichever is lower)
=1,000,000php
Less: 10% fwt -100,000php

Net amount to be paid to tax informer

=900,000php
FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

From Sir Win’s Lecture 05

PASSIVE INCOME OF INDIVIDUALS: FINAL WITHHOLDING TAXES

Compute the final tax of the following passive income of resident citizen
individual (unless stated that it is not the case). Show your computation if any.

1. Interest income from bank deposit, 80,000

2. Prizes and winnings, 35,000

3. Royalties, 10,000

4. Royalties from musical composition by a non-resident alien, 9,000

5. Dividends from a domestic corporation, 25,000

6. Lotto winnings from PCSO, 130,000

7. Share in income of a partnership, 25,000

8. Prizes in Wowowin, 18,000

9. Interest income from long-term deposit with a bank with BSP Certificate preterminated
on its 3 ½ years, 18,000

10.Interest income from a bank under the Expanded Currency Deposit System by a
resident alien, 34,000

Answer key – next page

FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

ANSWER KEY

1. Interest income from bank deposit, 80,000

80,000 x 20% = 16,000

2. Prizes and winnings, 35,000

35,000 x 20% = 7,000

3. Royalties, 10,000
10,000 x 20% = 2,000

4. Royalties from musical composition by a non-resident alien, 9,000

9,000 x 10% = 900 (Art related 10% except NRA-ETB 25%)

5. Dividends from a domestic corporation, 25,000

25,000 x 10% = 2,500

6. Lotto winnings from PCSO, 130,000

130,000 x 20% = 26,000

7. Share in income of a partnership, 25,000

25,000 x 10% = 2,500

8. Prizes in Wowowin, 18,000

18,000 x 20% = 3,600

9. Interest income from long-term deposit with a bank with BSP Certificate
preterminated on its 3 ½ years, 18,000
18,000 x 12% = 2,160

10. Interest income from a bank under the Expanded Currency Deposit
System by a resident alien, 34,000
34,000 x 15% = 5,100
FINAL TAXATION – PASSIVE INCOME
-MAIRA <33

KAYA NIYO YAN TANGINA NIYO.