TAX PRINCIPLES

“Taxes are the lifeblood of the Government and their prompt and certain availability are an imperious
need”. (CIR vs. Pineda)
“Taxation is the indispensable and inevitable price for civilized society; without taxes, the government
would be paralyzed”. (CIR vs Algue)
“Revenues derived from taxes are intended primarily to finance the government and its activities and are
thus exempt from execution”. (Mun. of Makati vs. CA)

I.
ASPECTS OF TAXATION
The rule on taxation embraces the following aspects:
1. LEVY which is the act of imposition by the legislature such as by its enactment of the law. The term is
understood to include not only the mandate on when and how the tax is imposed but also, whenever it
may be appropriate, the grant of tax exemptions, tax amnesties, or tax condonations.
2. ASSESSMENT AND COLLECTION which is the act of administration and implementation of the tax law
by the executive through its administrative agencies. Assessment here means notice and demand for
payment of tax liability.
3. PAYMENT which is the act of compliance by the taxpayer, including such options, schemes or remedies
as may be legally open or available to him.

II.
DISTINGUISH “DIRECT TAXES” FROM “INDIRECT TAXES”
DIRECT TAXES are demanded from persons who are primarily burdened to pay them. It is a tax
for which a taxpayer is directly liable on the transaction or business it engages in.
INDIRECT TAXES are levied upon transactions or activities before the articles’ subject matter
thereof reaches the consumers to whom the burden of the tax may ultimately be charged or shifted.

III.
“Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and nonprofit
cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation”.
The tax exemption covers real property taxes only because this constitutional provision
expressly states the nature of the use of the property and not the ownership is the basis of the
exemption.
IV.
TAXABLE INCOME defined in Section 31 of the NIRC, is derived from each taxable year:
-from all sources within or without the Philippines by every individual citizen of the Philippines
residing therein;
-from all sources within the Philippines by an individual citizen of the Philippines who is residing
outside of the Philippines including overseas contract workers; and
-from all sources within the Philippines by an individual alien who is a resident of the Philippines.
-means the pertinent items of gross income specified in NIRC, less deductions, if any, authorized
for such types of income by this Code or other special laws.

Section 24 NIRC (tax rates)

Tax Schedule Effective January 1, 2023 and onwards:
- Not over P250,000 – 0%
- Over 250,000 – 400,000 – 15% of the excess over 250,000
- Over 400,000 – 800,000 – 22,500 + 20% of the excess over 400,000
- Over 800,000 – 2,000, 000 – 102,500 +25% of the excess over 800,000
- Over 2,000,000 – 8,000,000 – 402,500 +30% of the excess over 2,000,000
- Over 8,000,000 – 2,202,500 + 35% of the excess over 8,000,000

OPTIONAL INCOME TAX

- Self-employed individuals and/or professionals shall have the option to avail of an eight
percent (8%) tax on gross sales or gross receipts and other non-operating income in excess
of 250,000 in lieu of the graduated income tax rates under the NIRC.
Tax rates on certain PASSIVE INCOME
1. BANK DEPOSIT AND TRUST FUNDS– 20% final tax
2. ROYALTIES – 10% final tax
3. PRIZES exceeding 10,000 (except PCSO lotto winnings shall be exempt) – subject to Sec24
4. Interest under the expanded foreign currency deposit system – 15% final tax

GROSS INCOME
(inclusions)
1. Compensation for services in whatever form paid;
2. Gross income derived from the conduct of trade or business or the exercise of the profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
(exclusions)
1. Life Insurance
2. Amount received by Insured as Return of Premium
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness
5. Income except under Treaty
6. Retirement benefits, Pensions, Gratuities
7. Miscellaneous items
-Income derived by the Government and Foreign Government,
-Prizes and awards in recognition of educational or charitable,
-Prizes and awards in Sports competition,
-13th month pay and other,
-GSIS, SSS and other contributions,
-gains from sale bonds,
-gains from redemption of shares in mutual funds and
-gains from sale of Gold.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME

A. EXPENSES
1. Ordinary and necessary – reasonable allowance for salaries or other compensation for
personal services actually rendered to the taxpayer, costs of materials and supplies, transportation
expenses, reasonable and legitimate representation expenses and ordinary repairs or maintenance costs
due to wear and tear.

V.
I will disallow the expense. A bonus is ordinary and necessary where said expenditure is
appropriate and helpful in the development of the taxpayer’s business which are directly attributable to
the operation, management and/or conduct or business.
To determine the reasonableness of the bonus it must be commensurate [to the amount and
quality of the services performed by the officials and employees with relation to the business. Other
factors are payment must be made in good faith, the character of the taxpayer’s business and the
volume and amount of its net earnings.
Since the business suffers from a net operating loss, I will rule that the extra bonus is an
unreasonable expense.

a. Taxation, being inherent in sovereignty, need not to clothed with any constitutional authority for it to
be exercised by a sovereign State. Instead, constitutional provisions are meant and intended more to
regulate and define, rather than to grant.
b. GR: Taxes cannot be the subject of compensation set-off because taxes are not a contractual
obligation but arise out of duty to the government and the government and the taxpayer are not
mutually creditors and debtors of each other.

B. INTERESTS – the amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer’s profession, trade or business.
C. TAXES – taxes paid or incurred within the taxable year
D. LOSSES – sustained during the taxable year and not compensated for insurance or other forms of
indemnity incurred in trade, business or profession.
E. BAD DEBTS – debts due to the taxpayer actually ascertained to be worthless and charged off within
taxable year except those not connected with business, trade or profession.
F. DEPRECIATION – reasonable allowance for the exhaustion, wear and tear including reasonable
allowance for obsolescence of property used in the trade or business.
G. DEPLETION OF OIL AND GAS WELLS AND MINES – reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method.
H. CHARITABLE AND OTHER CONTRIBUTIONS – contributions or gifts actually paid or made within the
taxable year to, or for the use of the Government of the Philippines or any of its agencies exclusively for
public purposes or associations organized and operated exclusively for religious, charitable or
educational purposes.
I. RESEARCH AND DEVELOPMENT – paid or incurred by him within the taxable year in connection with
his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital
account.
J. PENSION TRUSTS – an employer maintaining a pension trust to provide for the payment of reasonable
pensions to his employees during taxable year.
K. ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF CERTAIN PAYMENTS – any amount paid or
payable which is otherwise deductible from, or taken into account in computing gross income or for
which depreciation or amortization may be allowed under NIRC.
L. OPTIONAL STANDARD DEDUCTION (OSD) – an individual subject to tax under Sec 24 may elect a
standard deduction in an amount not exceeding 40% of his gross sales or gross receipts.