CHAPTER 1: INTRODUCTION TO TAXATION
What is Taxation?
As a state power?
As a process?
As a mode of cost distribution?
What is the theory of taxation?
What is the basis of taxation?
Presumption on the receipt of
benefits?
What is the benefit received
theory?
What is the ability to pay
theory?
What is vertical equity?
What is horizontal equity?
What is the lifeblood doctrine? Without taxes, the government would be paralyzed. Taxes are the
What is the implication of the
lifeblood doctrine?
What are the inherent powers of Taxation (right to sustenance), police power (right to protection), eminent
the state?
What is police power?
What is eminent domain?
What is the purpose of the three  Taxation – support the government (private/property rights)
powers?
What is their amount of
imposition?
What is their order of
A state power, a legislative process, and a mode of government cost
distribution
It is an inherent power of the state to enforce a proportional contribution
from its subjects for public purpose
A process of levying taxes by the legislature of the state
Sate allocates its costs or burden to its subject who are benefited by its
spending
A government cannot exist without funding
The government provides benefits like public services and the people
provide the funds to the government.
There is mutuality of support between the people and the government.
Receipt of benefits is conclusively presumed. Taxpayers cannot avoid
payment under the defense of absence
of benefit received. Direct receipt of government services is not a
precondition to taxation.
More benefits received, more taxes to pay
Contribution is based on the capacity to sacrifice, those who have more
should be taxed more even if they
benefit less from the government. Those who have less shall contribute
less even if they benefit more.
Extent of one’s ability to pay is directly proportional to the level of his tax
base (gross concept)
Ex. A = 200k income, B = 400k income // B should be taxed more
Considers particular circumstance (net concept)
Ex. A&B = 300k income, A = 200k expenses, B = 50k expenses // B has less
expenses = taxed more
lifeblood of the government.
1. Tax is imposed even without Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. Government reserves the right to choose objects of taxation.
4. Courts are not allowed to interfere with collection of taxes.
5. In income taxation: income received in advance is taxable upon
receipt, deduction for capital expenditures and prepayments is not
allowed, lower amount of deduction is preferred when claimable
expense is subject
to limit, higher tax base is preferred when there are multiple tax bases
domain (right to property)
Enact laws to protect the well-being of the people
 Take private property for public use after paying just compensation
- requires public improvement
 Police power – protect the general welfare
(private/property rights and liberty)
 Eminent domain – public use (private/property
rights)
 Taxation – unlimited (based on government needs)
 Police power – limited (cover cost of regulation)
 Eminent domain – no amount (just compensation)
1. Police power
 importance?
What is their relationship to the  Superior: police power and eminent domain
Constitution?
What are their limitations?
What are their similarities?
What is the scope of taxation?
2. Taxation
3. Eminent Domain
 Inferior: taxation
 Taxation – constitutional and inherent limitations Police power –
public interest and due process
 Eminent domain – public purpose and just compensation
1. necessary attributes of sovereignty
2. inherent
3. legislative in nature
4. ways that State interferes with private rights and properties
5. exists independently of the Constitution, exercisable even without
Constitutional grant
6. presupposes compensation to the persons affected
7. exercise of the LGU may be limited to the national gov’t.
Comprehensive, plenary, unlimited, and supreme

What are the inherent limitations 1. Territoriality

of taxation? 2. International comity
(TIPEND) 3. Public purpose
4. Exemption of government
5. Non-delegation of taxing power
6. Double taxation
What is territoriality of taxation? Government can only demand tax within its territorial jurisdiction.

What are the two-fold obligations filing of returns and payment of taxes
of withholding of taxes on expenses and remittance to the government
taxpayers?
What is the exception to the  Income taxation – resident citizens and domestic corporations are
territoriality principle? taxable on income derived within and outside PH
 Transfer taxation – resident citizens, nonresident citizens, and resident
aliens are taxable on transfers located within or outside PH

What is international comity? Co-equal sovereignty, all nations are deemed equal with one another
do not tax income and properties of other governments
give primacy to treaty obligations over own domestic tax laws

What is public purpose? Intended for the common good. Not exercised for private interests.

What does exemption of the Government does not tax itself as it will not raise additional funds but only
government mean? impute additional costs.
Government properties, and income from essential public functions are
not subject to taxation. Income of activities for profit is subject to tax.
What is non-delegation of The legislative taxing power is vested exclusively in Congress. What has
power? been delegated cannot be further
delegated.

What are the exceptions to the 1. LGU are allowed to tax, to exercise fiscal autonomy
rule of non- delegation? 2. President is empowered to fix tariffs to be flexible to trade conditions
3. Other cases the require expedient and effective administration

Constitutional Limitations (16)

1. What is observance of due No one should be deprived of his life, liberty, or property without due
process of law? process of law.

What is due process? Right to be heard

What is substantive due Tax must be imposed only for public purpose, collected under authority of
process? a valid law, by the taxing power
who have jurisdiction

What is procedural due No arbitrariness in assessment and collection of taxes and government
process? shall observe taxpayer’s right to notice
and hearing

When is assessment made? Within three years from due date of filing the return or from date of actual
filing, whichever is later
When is collection made? Within five years from date of assessment

2. What is equal protection of Taxpayers should be treated equally in terms of rights and obligations.
law? Applies where taxpayers are under the
same circumstances.

3. What is uniformity rule in Taxpayers under dissimilar circumstances should not be taxed the same
taxation?

4. What is progressive system Tax rates increase as tax base increases.

of taxation?

5. What is non-imprisonment No one shall be imprisoned because of poverty and inability to pay debt
for non- (acquired in good faith).
payment of debt or poll tax?

Is non-payment of tax equals Non-payment of tax comprises public interests while non-payment of debt
non-payment of comprises private interests.
debt?
 The Constitutional guarantee of non-imprisonment for non-payment of poll tax applies only to basic
community tax. Non-payment of additional community tax
is an act of tax evasion punishable by imprisonment.

6. What is non-impairment of State shouldn’t set aside its obligations from contracts by exercising
obligation and taxation power. Exemptions granted
contracts? under contracts should be honored.

7. What is free worship rule?
8. Exemption of religious,
charitable/educational
entities, non-profit
cemeteries,
churches/mosques, lands,
buildings, and
improvement from
property taxes
Exercise of religion is not subject to taxation. Tithes or offerings are not
subject to taxation.
Primarily used (actual, direct, exclusive)
Doctrine of use: only properties actually devoted for
religious/charitable/educational activities are exempt from real property
tax
Doctrine of ownership: properties of religious/charitable/educational
entities whether or not used are exempt from real property tax (NOT
APPLIED IN PH)

9. What is non-appropriation
of public funds for any system
of religion?
- To highlight separation of church and state government should not favor
any system of religion
- Compensation to priests/imams/religious ministers working with
military/penal institutions/orphanages/leprosarium is not considered
appropriation

10. Exemption from taxes of
revenues/assets of non-profit
educational institutions
(grants/endowments/donation
s/contributions
for educational purposes)
- applies only on revenues/assets that are actually, directly, exclusively
used for educational purposes
government educational institutions are exempt from income tax
private educational institutions have 10% income tax

11. Requirements for passage - Constitution requires: majority vote of all Congress members
law granting tax exemption? in approval of an exemption law: absolute majority (all 126) Congress
members
withdrawal of tax exemption: relative majority (quorum majority 64)
12. What is non-diversification - Tax collection should only be for public purpose, never for private
of tax purpose
collections?

13. What is non-delegation - Taxation power is vested exclusively in Congress

powers of taxation?
delegation is made only in expedient/effective
administration/implementation of assessment/collection of taxes &
aspects that are non-legislative
implementing administrative agencies: Department of Finance, Bureau of
Internal Revenue (BIR)
issues: revenue regulations/ ruling orders/ circulars, to interpret/clarify the
application of the law
not allowed to introduced new legislations

14. What is non-impairment of - all cases involving taxes can be raised to and be finally decided by SC of
the jurisdiction PH
of the SC to review tax cases?

15. Where does appropriations, - Exclusively in House of Representatives, but Senate may propose/concur
revenues, tariff bills originate? with amendments
laws that add income to national treasury & allow spending must originate
from HR (while senate may concur with amendments)

16. What can each LGU do? shall exercise the power to create its own sources of revenue & have just
share in national taxes
constitutional recognition of the local autonomy of LGUs

STAGES OF THE EXERCISE OF TAXATION POWER

1. What is levy or imposition? impact of taxation (legislative act)
enactment of tax laws by Congress

Congress is composed of?  House of Representatives – where tax bills originate

 Senate – tax bills cannot exclusively originate here each may have their
own versions of a proposed law which is approved by both bodies

What are the matters of  Object

legislative discretion in the
exercise of taxation?
 Tax rate/ amount
 Purpose for levy (public use)
 Kind of tax
 Appointment between national and local gov’t
 Situs
 Method of collection

2. What is assessment and incidence of taxation (administrative act)

collection? implemented by administrative branch
implementation: involves assessment/determination of tax liabilities
SITUS OF TAXATION
What is situs? Place of taxation
tax jurisdiction that has the power to levy tax upon tax object
frame of reference w/e object is w/in or outside

What is business tax situs? Businesses are subject to tax where the business is conducted.

What is income tax situs in
services?
What is income tax situs on
sale of goods?
What is property tax situs?
Service fee are taxed where they are rendered.
Gain on sale is taxed in place of sale.
Properties are taxable in their location.

What is personal tax situs? Persons are taxed in their place of residence.

FUNDAMENTAL DOCTRINES IN TAXATION

1. What is Marshall Doctrine? “The power to tax involves the power to destroy.”
instrument of police power
discourage/prohibit undesirable activities/occupation
not included if used solely to raise revenues

2. What is Holme’s Doctrine? “Taxation powers is not the power to destroy while the court sits.”
- may be used to build/encourage beneficial activities by granting tax
incentives
3. What is prospectivity of tax tax laws are prospective
laws? ex post facto/ law that retroacts is prohibited by Constitution
income tax laws may operate retrospectively if intended by Congress under
certain justifiable operations

4. What is non-compensation - taxpayer cannot delay payment of tax to wait for resolution of lawsuit
or set-off? involving a pending claim from gov’t
5. What is non-assignment of - tax obligations cannot be assigned/transferred by contract
taxes?

6. What is imprescriptibility in  Prescription – lapsing of a right due to passage of time right to collect
taxation? taxes does not prescribe unless law provides for prescription

When does tax prescribe?  tax prescribes if not collected w/in 5 years from assessment
in absence of assessment: prescribes if not collected by judicial action w/in
3 years from date return is required
taxes due w/o tax return/ filed fraudulent returns do not prescribe

7. What is Doctrine of - any misrepresentation by one party to another who relied in good faith
Estoppel? will be held true and binding against the person who made representation
gov’t is NOT subject to estoppel error of gov’t employee does not bind the
government
8. What is judicial non-
interference?
9. What is strict construction of  “taxation is the rule, exemption is the exception.”
tax laws?
What are vague tax laws?
What are vague exemption
laws?
DOUBLE TAXATION
What is double taxation?
What is the primary element of - Same object
double
taxation?
What are the secondary
elements of double taxation?
What are the two types of
double taxation?
What is direct double taxation? 
What is indirect double
taxation?
How is double taxation
minimized? (4 ways)
What is provision of tax
exemption?
What is allowing foreign tax
credit?
What is allowing reciprocal tax
treatment?
What does entering into
treaties or bilateral
agreements mean?
 courts are not allowed to issue injunction (court order to cease an
action) against collection of tax
anchored on the Lifeblood Doctrine
when the language of the law is clear, there is no room for interpretation,
only room for application
when law is vague: Doctrine of strict legal construction – interpret based
on a literal and narrow definition
 Construed against gov’t, in favor of taxpayers (CGFT)
- means no tax law, obligations arising is not presumed
 Construed against taxpayers, in favor of gov’t (CTFG)
means no exemption law, claim for exemption is strictly construed
when exemption is claimed, must be shown it’s impossible to doubt
(clearest grant of organic statute)
- Same taxpayer is taxed twice by same jurisdiction for the same thing
 Type of tax
 Purpose
 Jurisdiction
 Period
 Direct
 Indirect
illegal
 occurs when all elements of double taxation exist
 legal, not prohibited
 at least one secondary element is not common for both impositions
 provision of tax exemption
 allowing foreign tax credit
 allowing reciprocal tax treatment
 entering into treaties and bilateral agreement
 Only one tax law is allowed, exempted from the other tax law
 Foreign tax payment is deductible against domestic tax due
 Provisions that impose reduced tax rates; exemption if the foreign
country also gives same treatment to Filipino non-residents
 Lower tax rates if both countries engage in transaction with each other
What does escapes from Means available to taxpayer to limit/avoid taxation
taxation mean?
What are the two categories of results to loss of government revenue
escapes from does not result to loss of government revenue
taxation?

What are those that results to tax evasion

loss of revenue?
What is tax evasion? (tax
dodging)
What is tax avoidance? (tax
minimization)
What is tax exemption? (tax
holiday)
All forms of tax exemption can be revoked by Congress except those granted by the Constitution and
those granted among contracts.
What are those that do not
result to loss?
What is shifting?
What are the three kinds of
shifting?
What is forward shifting?
What is backward shifting?
What is onward shifting?
What is capitalization?
What is transformation?
What is tax amnesty?
What is tax condonation? (tax Forgiveness of the tax obligation, under certain justifiable grounds
remission)
tax avoidance
tax exemption
- act/trick to illegally reduce/avoid payment
- reduces/totally escapes taxes by legal means
immunity/privilege/freedom from being subject to tax
may be granted by Constitution, law, contract
shifting
capitalization
transformation
Transferring tax burden to others
forward
backward
onward
Follow the normal flow of distribution
- manufacturer to wholesalers to retailers to consumers
Reverse of forward
- common with non-essential commodities (buyers have considerable
market power/have many substitute)
Any tax shifting, exhibits forward/backward shifting
Adjustment of value caused by tax rates
Elimination of wastes/losses to form savings, to compensate for tax
imposition/increases
General pardon granted by the government
absolute forgiveness/waiver by gov’t to collect
retrospective in application
 Amnesty vs. Condonation
Civil and criminal liabilities Civil liabilities only
Retrospective operation Prospective to any unpaidbalance (portion of paid will not be refunded)
(forgiving past violations)
Conditional upon taxpayer to No payment
pay a
portion of tax
You have obligation but you
did not pay
(mistake/intentional)

TRUE FALSE
Legislature has limited discretion to tax where there If the law is repealed, taxes assessed before repeal of
are no constitutional the law may no
restrictions, provided property is w/in territorial longer be collected.
jurisdiction.
Exercise of eminent domain and police power can be
expressly delegated
to LGU

QUIZZER NOTES:

1. Requires public improvement: eminent domain

2. Strongest inherent power: taxation
3. Constitution is not the source of inherent powers
4. Power to tax is not absolute, it is subject to inherent & constitutional limitations
5. Eminent domain can be exercised by public utility companies
6. All inherent powers are legislative in application & interfere with private rights and property (police
power + liberty)
7. Ultimate result determines whether it is for public purpose or not, public purpose is determined by the
use of tax money, if it benefits the community in general = for public purpose
8. Aspects of taxation – levying/imposition/collection of tax are processes which constitute tax system
9. Assessment – official action of an officer ascertaining the amount of tax due, not a function of
Congress
10. Valuation of property for taxation – executive function
11. Commissioner of Internal Revenue can: interpret tax laws & decide tax cases, issue summons and
subpoena, make assessment and prescribe additional requirements
12. Power of taxation of LGUs is a delegated power granted by a provision in the Constitution.
13. LGU can exercise their taxing power by local legislation (local legislative and local executive branch)
The Constitution requires that all revenue bills shall originate exclusively frotax liability?
14. m the House of Representatives.
15. What is the main source of revenue for the local government? Who assesses
 CHAPTER 2: TAXES, TAX LAWS, AND TAX
ADMINISTRATION
Taxation Law

− Refers to ANY LAW that arises from the exercise of the taxation power of the state.
A) Types of tax law

 Tax Laws
 Laws that provide for the assessment and collection of taxes.
 National Internal Revenue Code
 Tariff and Customs Code
 Local Tax Code
 Real Property Tax Code

 Tax Exemption Laws

 Laws that grant certain immunity from taxation
 Minimum Wage Law
 Omnibus Investment Code of 1987 (E.O. 226)
 Barangay Micro-Business Enterprise (BMBE) Law
 Cooperative Development Act

B) Sources of Taxation Laws

 Constitution
 Statutes and Presidential Decrees
 Judicial Decisions or Case Laws
 Executive Orders and Batas Pambansa (EO and BP)
 Administrative Issuance
 Local Ordinances
 Tax Treaties and conventions with foreign countries
 Revenue Regulations

Types of Administrative Issuances

1) Revenue Regulations
− Issuances signed by the Secretary of Finance
− Upon recommendation of the Commissioner of Internal Revenue
− That specifies, prescribe or define rules and regulations for the effective enforcement of
provisions of the National Internal Revenue code and related statutes.
− They are formal pronouncements intended to clarify or explain the tax law and carry into effect its
general provisions by providing details of administration and procedure.
− Has the force and effect of a law, but intend to expand or limit the law’s application; otherwise it is VOID.
2) Revenue Memorandum Orders (RMOs)
− Issuances
 That provide Directives or instructions
 Prescribe guidelines
− It outlines
 Processes
 Operations
  Activities
 Workflows
 Methods
− Procedures necessary in the implementation of
 Stated policies
 Goals
 Objectives
 Plans
 Programs of the Bureau of all areas of operations except auditing.

3) Revenue Memorandum Rulings (RMRs)

− Rulings, opinions and interpretation of the CIR with respect to the provisions of the Tax Code and
other tax laws
− As applied to specific set of facts, with or without precedents (guides)
− Which the CIR may issue from time to time for the purpose of providing taxpayers guidance on tax
consequences in specific situations.
 BIR rulings CANNOT contravene issued RMRs otherwise the rulings are null and void ab initio.

4) Revenue Memorandum Circulars (RMCs)

− Issuances that publish pertinent (relevant or relatable) and applicable portions as well as amplifications
(increases) of laws, rules and regulations and precedents issued by BIR and other agencies/offices.

5) Revenue Bulletins (RB)

− Refer to periodic issuances, notices and official announcements of the Commissioner of internal revenue
− that consolidate (combine) the BIR’s position on certain specific issues of law or administration
− In relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the
guidance of the public.
6) BIR Rulings
− Official positions of the BIR to queries (inquiries) raised by taxpayers and other stakeholders relative
to clarification and interpretation of tax laws
− Merely advisory or information service to taxpayer such that none of them is binding except to the
addressee (receiver) and may be reversed by the BIR at any time.

Types of Rulings

1) VAT value added tax rulings

2) ITAD international tax affairs division rulings
3) BIR rulings
4) DA Delegated Authority Rulings

GAAP vs. Tax Laws

− GAAP are not laws but mere conventions (agreements) of financial reporting
− Tax laws includes rules, regulations and rulings prescribe (set) the criteria for tax reporting
(A special form of financial reporting)
− GAAP is intended to meet the common needs while Tax laws are to meet specific needs of tax
authorities.
− Taxpayers normally follow GAAP in recording transactions in their books
 − Taxpayers are mandated (required) to follow tax law in preparation and filing of tax returns in cases of
conflict with GAAP.

Nature of the Philippine Tax Laws

− Civil and NOT political in nature.

− Effective even during periods of enemy occupation
− They are laws of occupied territory
− Tax payments made during enemy occupation is valid

Internal Revenue Laws

− Not penal (disciplinary) in nature

− They do not define crime
− Their penalty provisions are merely intended to secure taxpayer’s compliance.

Tax

− Enforced proportional contribution levied (imposed) by the lawmaking body of the state
− To raise revenue for public purpose.
Elements of a Valid Tax

1) Must be levied by the taxing power having jurisdiction over the object of taxation
2) Must not violate constitutional and inherent limitations
3) Must be uniform and equitable
4) Must be for public purpose
5) Must be proportional in character
6) Must be generally payable in money

Classification of Taxes

A) As to Purpose
 Fiscal or Revenue Tax (imposed for general purpose)
 Regulatory (to regulate business conduct acts and transactions)
 Sumptuary (levied to achieve some social or eco objective)

B) As to Subject Matter
 Personal, Poll or Capitation (tax to residents of a particular territory)
 Property Tax (tax on properties, real or personal)
 Excise or Privilege Tax
(Tax imposed upon the performance of an enjoyment of a privilege or engagement in an
occupation)

C) As to Incidence
 Direct Tax
 When both impact and incidence of taxation rest upon the SAME taxpayer
 The statutory (legal) taxpayer is the economic taxpayer
 Indirect Tax
 When tax is paid by any person OTHER THAN the one intended to pay the same
 Occurs in cases of business taxes where the statutory is not the economic taxpayer
 Statutory taxpayer is named by the law to pay the tax
  Economic Taxpayer is the one that actually pays the tax

D) As to amount
 Specific Tax
 Tax of a fixed amount imposed on a PER UNIT basis (per kilo, meter etc.)
 Ad Valorem
 Tax of a fixed proportion imposed upon the VALUE of the tax object
E) As to Rate
 Proportional Tax
 Flat or fixed rate tax
 Use of this emphasizes (highlights) EQUALITY as its subjects all with the SAME rate
regardless of their ability to pay
 Progressive or Graduated Tax
 Imposes increasing rates as tax base increases
 Use of this results in EQUITABLE taxation because it gets more tax those who are more
capable (rich) than the poor
 Regressive Tax
 Decreasing rates as tax base increases
 Opposite of progressive and regarded as ANTI POOR
 Violates the constitutional guarantee of progressive taxation
 Mixed Tax
 Tax manifest tax rates
 Combination of any of the above types of tax

F) As to imposing authority
 National Tax (imposed by national government)
 Income Tax (on annual income, gains and profits)
 Estate Tax (on transfer of properties of a decedent upon DEATH)
 Donor’s Tax (transfer of properties by LIVING donor)
 VAT (consumption tax collected by VAT business taxpayers)
 Other Percentage Tax (collected by Non-VAT business taxpayers)
 Excise Tax (for SIN products and non-essential commodities)
^ must be differentiated from PRIVILEDGE tax which is also excise tax
 Documentary Stamp Tax
^ Tax on documents or instruments evidencing acceptance, assignment, sale or transfer of an
obligation, right or property etc.
 Local Tax (imposed by municipal or local government)
 Real Property Tax
 Professional Tax
 Business Tax, Fees and Charges
 Community Tax
 Tax on Banks and other financial institutions
Distinction of Taxes with similar terms

1) Tax vs. Revenue

− Amount IMPOSED is tax and amount COLLECTED is revenue by government.
2) Tax vs. License Fee
− Tax has broader subject
− Tax emanates (originates) from taxation power imposed upon any object
 − License Fee emanates from police power and imposed to REGULATE the exercise of a privilege
such as commencement of a business or a profession.
− Tax is imposed AFTER business commencement while License is BEFORE
− Tax is post-activity imposition while License is pre-activity imposition

3) Tax vs. Toll

− Tax is levy of government and a demand of sovereignty (power)
− Tax depends upon the needs of the government
− Toll is charged for the use of other’s property and a demand of ownership
− Toll depends upon the value of the property leased
− Both government and private entities impose toll but ONLY government can impose tax

4) Tax vs. Debt

− Tax arises from law while debt arises from private contracts
− Non−payment of tax leads to imprisonment while debt does not
− Debt can be subject to set off while tax is not
− Debt can be paid in kind (dacion en pago) while tax is generally payable in money
− Tax draws interest only when taxpayer is delinquent while debt draws interest when it is
stipulated in the contract or when debtor incurs delay

5) Tax vs. Special Assessment

− SA is imposed on land only while tax is upon persons, property or privileges
− Basis of SA is the benefit in terms of the appreciation in land value caused by public
improvement while tax is levied without expectation of direct benefit
− SA does not become a personal obligation of the land owner and would NOT result to
imprisonment

6) Tax vs Tariff
− Tax is broader and tariff is imposed only on imported on exported commodities.

7) Tax vs. Penalty

− Tax is for the support of the government while penalty is to discourage an act
− Penalty can be imposed by both government and private entities while tax is for gov only
− Penalty may arise from both law or contract while tax is only from law only

Tax System

− Methods or schemes if imposing, assessing and collecting taxes

− Includes all the tax laws and regulations, means of their enforcement and government offices, bureaus
and withholding agents
− Which are part of the machineries of the government in tax collection
− Philippine tax system is subdivided into 2
 National Tax system
 Local Tax system
− Types of Tax systems
A) According to Imposition
 Progressive (employed in income of individuals and transfer of properties)
 Proportional (employed in taxation of corporate income and business)
 Regressive (not employed in the Philippines)
 B) According to Impact
 Progressive
 Emphasizes DIRECT tax and cannot be shifted
 Encourages economic efficiency
 it leaves no other resort for taxpayers than to be efficient
 Impacts more upon the RICH
 Regressive
 Emphasizes INDIRECT taxes
 Shifted by businesses to consumers and it is ANTIPOOR
^ It is believed that the Philippines have a dominantly regressive tax system despite the
constitutional guarantee of progressive taxation due to the prevalence (occurrence) of
business taxes.

Tax Collection systems

A) Withholding system on income tax

− Payer deducts the tax on income BEFORE giving it to the payee and then remits it to the gov.
 Creditable withholding tax
 Withholding tax compensation
^ estimated by gov that employers will withheld against employee compensation income
^intended to support the self-assessment to LESSEN the burden of lump sum tax payment of
taxpayer
^also provides for a possible 3rd party check for the BIR to check non−compliance taxpayers
 Expanded Withholding Tax
^ estimated by gov to be deducted on certain income payments made by taxpayers
engaged in business
 Final Withholding Tax
 System wherein payors are required to deduct the FULL TAX on certain income payments
 Intended for the collection on income with HIGH RISK of non- compliance

Similarities of Creditable and final

− On both cases, payor withholds a fraction of the income then remits in to gov
− By collecting at the moment cash is available, both serve to minimize flow problems to the taxpayer
and collection problems of the government

B) Withholding system on business tax

− When national government purchases from private suppliers
− Law required withholding of the relevant business tax
 C) Voluntary Compliance System
− Self-assessment method
− Taxpayer himself determines his income, reports it then pays the tax to government
 Tax here will be reduced by
 Withholding tax on compensation withheld by employers
 Expanded withholding taxes withheld by suppliers for goods or services
− Taxpayer shall pay the government any tax balance after credit and claim refund or tax credit
for excessive tax withheld

D) Assessment or Enforcement system

− Government identifies non−compliance taxpayers,
− Assesses their tax dues including penalties
− Demand their voluntary compliance or
− Enforce collection by coercive (strong) means such as summary proceeding or judicial proceedings if
necessary.
Principles of sound tax system

− Adam Smith, government should adhere (follow) these to evolve a sound tax system
1) Fiscal Adequacy
 Sources of funds must be enough to cover costs or else the government will be
paralyzed.
2) Theoretical Justice or Equity
 Should consider taxpayer’s ability to pay cause should not be oppressive or unjust
3) Administrative Feasibility
 Tax laws should be capable of effective administration to encourage compliance
 Should make it easy to comply by avoiding administrative bottlenecks (blockages) and
compliance costs
 Applications of this
^ E−filing and payment
^ Substituted Filing systems for employees
^ Final withholding tax on non-resident aliens
^ Accreditation (authorization) of authorized agent banks in filing and payment of taxes

Tax Administration

− Management of the tax system

− National tax system is entrusted to the BIR under the supervisions and administration of the
department of finance

Chief Officials of the BIR

1) 1 Commissioner
2) 4 Deputy Commissioners
 Operations Group
 Legal Enforcement Group
 Information System Group
 Resource Management Group

Powers of the BIR

1) Assessment and Collection

2) Enforcement of all forfeitures, penalties and fines and judgment in all cases favored by court
 3) Giving Effect to and administering supervisory and police powers
4) Provision and distribution of documents to proper officials
5) Issuance of receipts and clearances
6) Assignment of internal officers and employees to other duties
7) Submission of annual report to congress
Powers of the Commissioner (45−47)

1) Interpret the provisions of the NIRC that will be reviewed by the Secretary of finance
2) To decide tax cases subject to exclusive appellate jurisdiction
3) To obtain information and to summon, examine and take testimonies of persons to effect tax collection
4) To make assessment and prescribe additional requirement for tax administration and
enforcement
5) To examine tax returns and determine tax due thereon
6) To conduct inventory taking and surveillance
7) To prescribe presumptive gross sales and receipts for taxpayers when they fail to issue receipts or their
declaration of return is not correct
8) To terminate tax period
9) To prescribe real property values (zonal value)
10) To comprise tax liabs of taxpayers
11) To inquire into bank deposits
12) To Accredit and register tax agents
13) To refund or credit internal revenue taxes
14) To cancel tax liabs on certain cases
15) To prescribe (recommend) additional procedures or documentary requirements
16) To delegate his powers to any subordinate officer

Non-delegated power of the CIR

1) Power to recommend promulgation (declaration) of rules and regulations to the secretary

2) Power to issue rulings of first impression to reverse existing rulings of the bureau
3) Power to comprise or abate any tax liability
4) Power to assign or reassign officers

Rules in assignments of revenue officers to other duties

1) Officers cannot stay in establishments where excisable articles are kept for more than 2 years
2) Cannot remain in the same assignment for more than 3 years
3) Assignment to special duties shall not exceed 1 year

Agents and Deputies for the collection of NIR taxes

1) Commissioner of customs and subordinates

2) Head of the appropriate government offices and his subordinates
3) Banks duly accredited by the commissioner
Other agencies tasked with tax collections or incentives

1) Bureau of customs
− Tasked to administer collection of tariffs and the VAT on importation
2) Board of Investments
 − Tasked to lead the promotion of investments in the Philippines by helping Filipinos and foreigner
to venture in desirable areas of eco activities

3) Philippine Economic Zone Authority

− Created to promote investment in export-oriented manufacturing industries in the Philippines
− Supervises the grant pf both fiscal and non-fiscal incentives
− Their enterprises enjoy tax holidays and is also an attached agency of the DTI

Local Government Tax Collecting Units

− Provinces, municipalities, cities and barangays also impose taxes to rationalize their fiscal
autonomy

Taxpayer classification for purposes of tax administration

1) Large taxpayers
− Under supervision of the Large taxpayers services of the BIR national office, their criteria

A) As to payment
 VAT 200,000 per quarter for the preceding year
 Excise 1 million tax paid for the preceding year
 Income 1 million annual income tax paid for the preceding year
 Withholding 1 million annual withholding tax payment
 Percentage 200,000 per quarter for the preceding year
 Documentary Stamp 1 million aggregate amount per year

B) As to Financial Conditions and results of operations

 Gross Receipts or sales 1 million total annual gross sales or receipts
 Net worth 300m total net worth at the close of each calendar year
 Gross Purchases 800m total annual purchases for the preceding year
 Top Corporate Taxpayer listed and published by the SEC

2) Non-Large Taxpayers
- Under the supervision of the respective revenue district offices where the taxpayer is situated

Automatic classification of taxpayers as large taxpayers

1) All taxpayers under large taxpayer’s service

2) Group of companies of a large taxpayer
3) Surviving company in case of merger or consolidation of a large taxpayer
4) Corporation that absorbs a large taxpayer company
5) Corp with authorized capitalization 300m with SEC
6) Multinational enterprise with 300m authorized capitalization
7) Publicly listed Corp
8) Universal, commercial and foreign banks
9) Corporate taxpayers with at least 100m authorized capital in banking, insurance etc.
Corporate Taxpayers engaged in production of metallic materials
 CHAPTER 3: INTRODUCTION TO INCOME TAX
ITEMS THAT ARE TAXABLE INCOME:

1. Return on Capital
2. Recovery of Lost Profits
• Proceeds of Crop or Livestock Insurance
• Guarantee Payments
• Indemnity received from Patent Infringement Suit
3. Bilateral/Onerous Transactions (Sale and Barter)
4. Gains/Income derived between relatives, corporations and between a partner and the partnership.
5. Income between affiliated companies such as between a holding or a parent company and its
subsidiaries and between sister companies
6. Rendering of Services
7. Gains from Gamblings
8. Income received in Non-cash Properties
9. Embezzlement of Swindling

*Any LOSS PROFITS that is recovered in any way is an income and therefore TAXABLE

ITEMS THAT ARE INCOME TAX EXEMPT:

1. Life
2. Health
3. Human Reputation (Defame, alienation, breach)
4. Return of Lost Capital
5. Not Benefits
• Receipt of a Loan
• Discovery of Lost Properties
• Receipt of Money or Property
6. Gratuitous/Unilateral Transactions (Succession,Donation, Transfer of Property) - *Only subject to TRANSFER
TAX
7. Sales of Home Office to its Branch Office
8. Income of Proprietorship Business
9. Unrealized Gains or
Holding Gains 10.
CLASSIFICATION RULES FOR INDIVIDUALS

1. Intention
• Documents for Short Term (Tourist Visa) – shall not result in reclassification
• Documents for Long Term (Immigration Visa and Working Visa) – automatic reclassification

INDIVIDUAL INTENTION CLASSIFICATION/TAXPAYER

Alien Came to the Philippines with a Tourist Visa Non-Resident Alien
Citizen Went to abroad with Tourist Visa Resident Citizen
Alien Came to the Philippines with an Immigration Visa Resident Alien (upon arrival)
Citizen Went to abroad with a 2-year Working Visa Non-resident Citizen (upon departure)

2. Length of Stay – (applicable if documents are absent)

INDIVIDUAL LENGTH OF STAY CLASSIFICATION TAXPAYER

Citizen Staying in the Philippines Resident Resident Citizen
Citizen At least 183 days abroad Non-Resident Non-Resident Citizen
 Alien More than 1 year in the Philippines as to the Resident Resident Alien
end of the taxable year.
Alien Not more than 1 year but more than 180 Non-Resident Alien Non-Resident Engaged in
days in the Philippines Engaged in Trade or Trade or Business (NRA-
Business NETB)
Alien Not more than 180 days in the Philippines Non-Resident Alien Not Non-Resident Not Engaged
Engaged in Trade or in Trade or Business (NRA-
Business NETB)

TAXABLE ESTATES AND TRUST

1. ESTATES
• Under Judicial Settlement – taxable on the income of the properties
• Under Extrajudicial Settlement – tax exempt entities - *only taxable to the heirs*
2. TRUST
• Revocably Designated – taxable to the trust
• Irrevocably Designated – tax exempt entities - *only taxable to the grantor/trustor*

CORPOARATE INCOME TAXPAYERS

• Partnerships (no matter how created or organized)

• Joint Stock Companies
• Joint Associations
• Joint Account
• Insurance Companies
*However, the term doe NOT included General Professional Partnerships and a Joint Venture or Consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the government*

1. Domestic Corporation – organized in accordance with Philippine Laws

2. Foreign Corporations – is one organized under a foreign law
• Resident Foreign Corporations (RFC) – operates in the PH
• Non-Resident Foreign Corporations (RFC) – does not operate in PH
OTHER CORPOARATE INCOME TAXPAYERS

1. One-Person Corporation (OPC) – with a single stockholder who may be a natural person
2. Partnership
• General Professional Partnership (GPP) – tax exempt from corporate income - *partners are
tax individually based share in income of the partnership.
• Business Partnership – taxable as a corporation
3. Joint Venture
• Joint Venture or Consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the government - – tax exempt from
corporate income -
*venturers are tax individually based share in income of the venture
 All other joint ventures - taxable as a corporation

4. Co-ownership
• Limited to property preservation or income collection - – tax exempt from corporate income - *co-
owners are tax individually based share in income of the co-owned property*
• Reinvests the income of the co-owned property to other income producing properties or
ventures - taxable as a corporation
IMPORTANT NOTE!!!

*Resident Citizen and Domestic Corporation are taxable on all income within and without the Philippines*

OTHER INCOME SITUS RULES

A. GAIN ON SALE ON PROPERTIES

1. Personal Property
• Domestic Securities – presumed earned within the Philippines
• Other Personal Properties – earned in the place where the property is sold.
2. Real Property – earned where the property is located.
B. DIVIDEND INCOME
1. Domestic Corporation -presumed earned within
2. Foreign Corporation
• Resident Corporation – depends on the pre-dominance test.
o At least 50% - earned within
o Less than 50% - earned abroad
• Non-Resident Corporation – earned abroad
C. MERCHANDISING INCOME – earned where the property is sold
D. MANUFACTURING INCOME – earned where the goods are manufactured and sold

PRODUCTION DISTRIBUTION
Within Within Earned within PH
Without Without Earned without PH
Within Without P. Income – within PH D. Income – without PH
Without Within P. Income – without PH D. Income – within PH
 CHAPTER 6: CAPITAL GAINS TAXATION
Classification of Taxpayer’s Properties
1. Ordinary Assets – assets used in business
- Assets held for sale such as inventory.
- Assets held for use such as supplies and items of PPE like buildings, property improvements,
and equipment.
2. Capital Assets – any asset other than ordinary assets.
- Personal assets of individual taxpayers that are not used in business
- Business assets—financial assets such as cash, receivables, prepaid expenses, and
investments. Intangible assets such as patents, copyrights, leasehold rights, and franchise
rights.

Asset Classification is Relative

The classification of assets/properties as ordinary/capital assets depends upon the nature of the
taxpayer’s business and its usage by the business.

Real and Other Properties Acquired (ROPA)

These are ordinary assets of banks because they normally acquire and sell it in their normal
course of business. However, ROPA in the form of domestic stocks held by banks are capital assets.

Property Previously Used in Business

Case 1: Taxpayer is not engaged in real estate business. – The ordinary asset shall be converted into a
capital asset upon showing proof that the same have not been used for more than two years.
Case 2: Taxpayer is engaged in real estate business. – The property shall continue to be an ordinary asset
despite abandonment or discontinuance of use.

Property Acquired to be Used in Business

Case 1: Taxpayer is not engaged in real estate business. – A property acquired for future use in business,
even though this is later thwarted by circumstances beyond the taxpayer’s control, does not lose its
character as an ordinary asset.
Case 2: Taxpayer is engaged in real estate business. – The property shall remain as an ordinary asset
even discontinued from use (because of ongoing civil war) and even if they change the nature of their
real estate business.

Disposal of Property
Properties that are disposed will base its asset classification depending on the acquirer’s intention
of usage.

Exempt Non-Business Operation

Real properties used by an exempt corporation in its exempt operations are considered capital
assets. Exempt corporations are not businesses.
Non-profit entities are taxable to income tax when they engage in a profit-oriented or
commercial activity.
 Types of Gains on Dealings in Properties
1. Ordinary Gains – arises from sale, exchange, and other disposition including pacto de recto
sales, and other conditional sales of ordinary assets.
2. Capital Gains - arises from sale, exchange, and other disposition including pacto de recto sales,
and other conditional sales of capital assets.

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

1. Capital gains on the sale of domestic stocks sold directly to buyer.
2. Capital gains on the sale of real properties not used in business.

• Gains from other capital assets are subject to regular income tax.

Capital Gain on the Sale, Exchange, and Other Disposition of Domestic Stocks Directly to Buyer

 Domestic stocks are evidence of ownership (rights to ownership) in a domestic

corporation regardless of its features, such as:
1. Preferred stocks
2. Stock rights
3. Stock options
4. Common stocks
5. Stock warrants
6. Unit of participation in any association, recreation, or amusement club.
Capital gains tax also covers exchange of domestic stocks in-kind and other dispositions:
1. Foreclosure of property in debt settlement
2. Pacto de retro sales – sale with buy back agreement
3. Conditional sales
4. Voluntary buy back of shares of issuing corporation
Modes of Disposing Domestic Stocks – may be sold, exchanged, or disposed:
1. Through the Philippine Stock Exchange (PSE)
2. Directly to buyer

➢ Tax on Domestic Sale of Domestic Stocks Through the PSE

The sale of domestic stocks classified as capital assets (of non-dealer in stocks) through the PSE is
subject to a stock transaction tax of 60% of 1% of the selling price. – Effective January 01, 2018.
The stock transaction tax applies regardless of the existence of a gain or loss on the sale of
transaction.
Then, the net capital gain is exempt from CGT or to RIT.
➢ Directly to Buyer
Nature of the capital gains tax (CGT):
1. Universal Tax – applies to all taxpayers (regardless of classification) disposing stocks classified as
capital assets. By situs, the gain on sale of domestic stocks is within and tax applies even if the
sale is executed outside the Philippines.
2. Annual Tax – imposed on the annual net gain on the sale of domestic stocks directly to buyer.

Selling Price xxx

Less: Basis of stocks disposed xxx
Selling expenses xxx
Documentary stamp tax xxx xxx Net
Capital Gain (Loss) xxx
Note: Documentary stamp tax is deducted if paid by the seller.
Selling price shall mean:
• Cash sale – total consideration received.
• If partly money and partly in property – money + fair value of property received.
• In case of exchanges – fair value of property.
Tax Basis of Stocks
• Cost of acquisition = Cash paid + obligations assumed on the property + direct
acquisition costs
• If acquired by purchase – specific identification, moving average method, and FIFO METHOD
• Gift/donation – whichever is lower of fair value at the time of gift and the basis in the hands
of the donor/the last preceding owner by whom it wasn’t acquired by gift.
• Acquired for inadequate consideration – amount paid by the transferee to the property
• Acquired under tax-free exchanges – the substituted basis of the stocks
Stocks Sold for Inadequate Consideration
The excess of the fair value of the stocks over the selling price is a gift subject to donor’s tax if so
intended by the seller as a donation.

The Capital Gains Tax Rate

1. Foreign Corporation – 5% to 10% CGT
2. Individuals and Domestic Corporation – 15% CGT
Tax Compliance Under the Old Law
1. Transactional CGT – Capital gains or losses are required to be reported after each sale, exchange,
and other dispositions through the CGT return (BIR Form 1707). The deadline is within 30 days
after each transaction. If under installment method, within 30 days after each installment.
2. Annualized CGT – For foreign corporations, CGT is recomputed on the annual net gains then
previous tax payments are treated as tax credit thereto. After such credit, a residual tax due is
paid while (excess transactional payments are claimed as tax refund or tax credit).
- For other taxpayers, the change to a 15% flat rate would mean 15% CGT when the
transaction resulted to a gain but would also instantly mean 15% CGT refundable when the
transaction resulted to a loss.
 - The problem is the incidence of a transactional loss under a flat tax rate would instantly mean
tax refund if transactions are separately accounted for similar to the NIRC procedure.
- Suggestion, the best procedure is to offset losses first with subsequent gain during the year.
Further tax payments shall be made only when subsequent gains eventually exceed losses.

Installment Payment of CGT

a. Selling price should exceed ₱1,000
b. Initial payment does not exceed 25% of the selling price

Special Tax Rules in Capital Gain or Loss Measurement

1. Wash sales of stocks
2. Tax-free exchanges
a. Exchange of stocks pursuant to a merger or consolidation
b. Transfer of stocks resulting in corporate control

➢ Wash Sales Rule – Involves the sale of shares at a loss, but the same shares were effectively re-
acquired 30 days before or 30 days after the losing sale by a covering acquisition.
- The loss from the losing sale shall be deferred and added to the tax basis of the replacement
shares because the loss is a fake loss.
- If replacement shares are less than the shares sold, only the portion covered with
replacement shares shall be a deferred loss and the portion without replacement shares is a
deductible realized loss.
➢ Tax-Free Exchanges
Merger or Consolidation – Gain or losses on share-for-share swaps pursuant to a plan of merger or
consolidation will not be recognized for taxation purposes.
Initial Acquisition of Control – Gain or loss shall not be recognized. The law views the initial
acquisition of corporate control by not more than five persons as an investing transaction, rather
than an income-generating transaction.
➢ Exchange Not Solely for Stocks – If stocks are exchanged not solely for stocks but with other
considerations such as cash and other properties, the gains but not losses are recognized up to the
extent of cash and other properties received.
Total consideration received/selling price xxx
Less: Cost of stocks exchanged xxx
Indicated gain xxx

Regulatory Formula on Tax Substituted Basis

Tax basis of old shares exchanged xxx
+ Gain recognized on the transfer xxx
- Cash or other properties received xxx
Tax basis of the new shares received xxx

1. Domestic stocks sold by a security dealer – CGT is nil because domestic stocks are ordinary
assets to a security dealer.
2. Sale of domestic bonds by a non-dealer of securities – CGT is nil because domestic bonds are
debt instruments, not an equity instrument like stocks.
 3. Exchange of stocks for other securities (domestic stocks for bonds) – gains are subject to CGT
because it is not a share-for-share swap pursuant to a plan of merger or consolidation.
4. Issuance of stocks in exchange for properties is not subject to CGT because it does not
represent investment in the shares of another corporation. Share premium is part of
corporate capital, not an income.
5. Sale of stocks ex-dividend – Between the date of record and the date of payment, the seller
receives the dividends. The price of stocks on those dates includes only the selling price of the
stocks.
6. Sale of stocks dividend-on – Between the date of declaration and the date of record, the
buyer shall receive the dividends. Selling price = price of the stocks + dividends on the stocks.
Note: Dividends are subject to 10% FT.

• Search for Persons not Liable to the 15% CGT.

Sale, Exchange, and other Disposition of Real Property Classified as Capital Asset Located in the
Philippines
- Subject to a tax of 6% of the selling price or the fair value, whichever is higher.
Under the NIRC, the fair value of real property is whichever is higher of the
a. Zonal Value, which is the value prescribed by the CIR for real properties for purposes of
enforcement of internal revenue laws, and
b. Fair Market Value, as shown in the schedule of market values of the Provincial and City Assessors.
Normally, only land has zonal value but both land and improvements have fair market value.
Nature of the 6% Capital Gains Tax
a. Presumption of capital gains – 6% CGT applies even if the sale transaction resulted to a loss. Gain
is always presumed to exist. The basis of taxation is whichever is the highest of the selling price,
zonal, value, and fair market value, not the actual gain.
b. Non-consideration to the involuntariness of the sale – applies in cases of expropriation sale,
foreclosure sale, dispositions by judicial order, and other forms of forced disposition.
c. Final tax – CGT shall be withheld by the buyer against the selling price and remit the same to the
government.
Scope and Applicability of the 6% CGT
• Within the Philippines > all individuals > domestic corporations only
• Outside the Philippines > not applicable
In cases when foreign corporations realize gains from the sale of real property classified as
capital assets, the capital gain shall be subject to the regular income tax.

Actual gains realized on the sale, exchange, and other dispositions of properties abroad are
subject to the regular income tax if the taxpayer is taxable on global income such as resident citizens and
domestic corporations.
For all other taxpayers, the capital gain realized abroad is exempt.

Exceptions to the 6% CGT

1. Alternate Taxation Rule – An individual seller of real property capital assets has the option
to be taxed at either:
a. 6% CGT or
 b. The regular income tax – If this is chosen, the actual gain is reported in the annual Regular
Income Tax Return.
This is possible only when:
a. The seller is an individual taxpayer.
b. The buyer is the government, its instrumentalities, or agencies including government- owned
and controlled corporations.
2. Exemption Rules
a. Exemption under the NIRC
b. Exemption under the special laws
Exemption to the 6% CGT Under the NIRC
The sale, exchange, and other dispositions of a principal residence (primary domicile) for the re-
acquisition of a new principal residence by individual taxpayers is exempt from the 6% CGT.
Requisites for exemption:
1. The seller must be a citizen or resident alien.
2. The sale must involve the principal residence of the seller-taxpayer.
3. The proceeds of the sale is utilized in acquiring a new principal residence.
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within 30
days of the sale through a prescribed return (BIR Form 1706) and a “Sworn Declaration of
Intent”.
5. The reacquisition must be within 18 months from the date of sale.
6. The capital gain (tax due) must be held in escrow in favor of the government.
7. The exemption can only be availed of once in every 10 years.
8. The historical cost/adjusted basis of the principal residence sold shall be carried over to the
new principal residence built or reacquired.
Note: Sale of principal residence must precede the acquisition of new to be exempt.
Capital Gains Tax Exemption Under Special Laws
Sale of land pursuant to the Comprehensive Agrarian Reform Program

1. Sale o socialized housing units by the National Housing Authority – for the
underprivileged and homeless citizens.
Payment of the 6% CGT in Installment
- Same as what is done in sale, exchange, and disposition of domestic stocks.

Deadline for CGT Return

- Filed through BIR Form 1706 and is due within 30 days from the date of sale or
exchange.
- For foreclosure sales, within 30 days from the expiration of the applicable statutory
redemption period.
- When installment, 30 days upon receipt of installment.
Documentary Stamp Tax on the Sale, Exchange, and Other Dispositions of Domestic Stocks Directly to
Buyer –
Documentary Stamp Tax on the Sale of Real Properties –