REVIEWER: TAXATION
Police power – for promoting public welfare
MODULE 1
Taxation - a process or means by which the
sovereign state through its law-making body
imposes burdens upon subjects and objects
within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objectives
of the government.
- an inherent power in every sovereign
state as it is essential to the existence of
every government. Therefore, even if
not mentioned in the constitution, the
state can still exercise its power.
- of all the powers of the government.
Taxes are the lifeblood of the
government, without which, it cannot
subsist.
Purposes of Taxation
 Primary: Revenue or Fiscal Purpose - To
provide funds or property with which to
promote the general welfare and
protection of its citizens and to finance
its multifarious activities.
 Secondary: Regulatory - employed as a
devise for regulation or control by
means of which certain effects or
conditions envisioned by the
government may be achieved:
- Promotion of general welfare
- Reduction of social inequality
- Economic growth
Theory: LIFEBLOOD THEORY OR NECESSITY
THEORY
- The power of taxation proceeds upon
the theory that the existence of the
government is a necessity.
Basis: BENEFIT RECEIVED OR RECIPROCITY
THEORY
- The State collects taxes from the people
to be able to perform its functions of
governance.
Three Inherent Powers of the State
1. Taxation power – for raising revenue to defray
the necessary expenses of the government.
2.
by restraining and regulating the use of liberty
and property.
3. Eminent domain – to acquire private property
for public purposes upon payment of fair and
just compensation.
Scope of the Power of Taxation
• Comprehensive – covers person,
businesses, activities, professions, rights
and privileges.
• Unlimited – in the absence of
limitations prescribed by law or the
constitution, the power of taxation is
unlimited & comprehensive.
• Plenary – BIR may avail of certain
remedies to ensure collection of taxes.
• Supreme – in so far as the selection of
the subject of taxation.
Limitations on the State’s Power to Tax
1. Inherent Limitations – restrictions
arising from the very nature of the
power to tax itself.
2. Constitutional limitations - These
limitations are intended to protect
individual rights and liberties, establish
a system of checks and balances, and
ensure that government actions adhere
to the principles and values outlined in
the constitution.
Aspects of Taxation
1. LEVYING (Legislative Function) involves
the enactment of a tax law by Congress
and is called impact of taxation.
2. ASSESSMENT(Executive Function)
involves the determination of the tax
liabilities of taxpayer.
3. COLLECTION (Executive Function)
involves the actual taking of the amount
assess as payable
Classifications of Taxes
1. As to taxing authority
 National
 Income tax
  Estate tax  Proportional
 Donors’ tax  Progressive or graduated
 Value added tax  Regressive
 Other percentage tax  Mixed
 Excise tax Principles of Sound Tax System
 Documentary stamp tax 1. Fiscal Adequacy – revenue raise
necessary to fund public service must
2. As to taxing authority be adequate to meet government
 Local - taxes imposed by local expenditures.
government units 2. Theoretical Justice or Equity – the tax
 Real property tax burden should be proportionate to
taxpayer’s ability to pay.
 Professional tax
3. Administrative Feasibility – tax laws
 Business taxes, fees & must be capable of effective and
charges efficient enforcement. A good tax
 Community tax system requires informed stakeholders
who understand how taxes are
 Tax on banks & other assessed.
 financial institutions Situs of Taxation – means “place” of taxation.
2. As to scope Factors to consider
 National a. Subject matter
 Local b. Nature of tax
3. As to subject matter or object c. Citizenship
 Personal, poll or capitation d. Residence
 Property e. Sources of income
 Excise f. Place of excise, business or occupation
4. As to who bears the burden Examples of Situs Rules
 Direct a. Business tax situs
 Indirect b. Income tax situs on services
5. As to determination of amount c. Income tax situs on sales of goods
 Specific d. Property tax situs
 Ad valorem e. Personal tax situs
6. As to purpose Means of Avoiding or Minimizing the Burden of
Taxation
 Primary, fiscal or revenue
purpose a. Shifting – transfer of the burden of a tax
by the original payer or the one on
 Secondary, regulatory, special or
whom the tax was assessed or imposed
sumptuary
to someone else.
7. As to graduation or rate
 b. Transformation – an escape from
taxation where the producer or
manufacturer pays the tax and
endeavor to recoup himself by
improving his process of production
thereby turning out his units of
products at a lower cost.
c. Tax Evasion – is the use of illegal or
fraudulent means to defeat or lessen
the payment of a tax.
d. Tax avoidance – is the exploitation by
the taxpayer of legally permissible
alternative tax rates or methods of
assessing taxable property or income in
order to avoid or reduce tax liability.
e. Capitalization – the reduction in the
selling price of income producing
property by an amount equal to the
capitalized value of future taxes that
may be paid by purchaser.
f. Tax Exemption – also know as tax
holiday, refers to the immunity, privilege
or freedom from being subjected to a
tax which others are subject to.
Kinds of Exemptions
a. As to basis:
 Constitutional – originates from
the constitution
 Statutory – emanates from
legislation
b. As to form:
 Express – expressly granted by
statute
 Implied – persons, property, or
rights are deemed exempt as
they fall outside the scope of
the taxing provision itself
c. As to extent:
 Total – absolute immunity
 Partial – collection of a part of
the tax is dispensed with.
MODULE 2
General Classification Rule for Individuals
1. Intention
 The intention of the taxpayer regarding
the nature of his stay within or outside
the Philippines shall determine his
appropriate residency classification.
 The taxpayer shall submit to the CIR of
the BIR documentary proofs such as
visas, work contracts and other
documents indicating such intentions.
2. Length of Stay
In default of such documentary proof, the
length of stay of the taxpayer is considered:
a. Citizen staying abroad for a period of at
least 183 days are considered as non-
resident.
b. Aliens who stayed in the Philippines for
more than 1 year as of the end of the
taxable year are considered resident.
c. Aliens who are staying in the Philippines
for not more than 1 year but more than
180 days are deemed non-resident
aliens engaged in business.
d. Aliens who stayed in the Philippines for
not more than 180 days are considered
non-resident aliens not engaged in
trade or business
Classifications of Individual Taxpayers Based on
Residency
1. Citizen – under the Constitution:
a. Citizens of the Philippines at the
time of the adoption of the
Constitution on February 2,
1987
b. Born with father and mother as
Filipino citizens
c. Born before January 17, 1973 of
Filipino mother who elects
Philippine citizenship upon
reaching the age of majority
d. Acquired Philippine citizenship
after birth in accordance with
Philippine laws. (Naturalized)
 2. Resident Citizen (RC) – Filipino citizen
residing in the Philippines
3. Non-Resident Citizen (NRC) – is a citizen
who:
a. Establishes the fact of his
physical presence abroad with
the definite intention to resides
therein;
b. Leaves the Philippines during
the taxable year to reside
abroad:
 As immigrant
 For
employment
on a
permanent
basis
 For work
(derives
income) whose
employment
requires him to
be physically
abroad most of
the time during
the taxable
year.
c. Those who shall have stayed
outside the country for 183 or
more by the end of the year.
4. Resident Alien (RA)
 Individual whose residence is
WITHIN the Philippines but is
NOT citizen thereof.
 Actually present in the
Philippines and who is not mere
transient or sojourners.
 Live in the Philippines with no
definite intention as to his stay.
 Comes to the Philippines for a
definite purpose the nature of
which requires an extended stay
for the accomplishment of such
purpose.
5. Non-Resident Alien (NRA)
 Individual whose residence is
NOT in the Philippines and who
are NOT citizen thereof.
 Comes to the Philippines for
definite purpose, which in its
nature maybe promptly
accomplished.
 Are mere transients or non-
residents.
 Sub-classification
 Engage in trade or
business
 Not-engage in trade or
business
Non-Resident Alien (sub-classification)
a. Engage in trade or business (NRA-ETB)
 Stayed for an aggregate
period of more than
180 days during the
taxable year
 Have business income
in the Philippines
b. Not-engage in trade or business (NRA-NETB)
 Comes to the
Philippines for a
definite purpose which
in its purpose can be
promptly accomplished
 Stayed for an aggregate
period for 180 days or
less (NOT more than)
during the taxable year
 Not deriving business
income
Classifications of Individual Taxpayers As to
How income is Earned
1. Pure Compensation Income Earner
Refers to any individual who is a recipient of
wages/salaries and his/her sole source on
income is thru employer-employee relationship,
thus are referred to as “employee”. Employees
are group accordingly:
  As to functions (managerial,
supervisory, rank & file)
 As to taxability (MWE, regular
employees)
Types of Employees as to Functions
 Managerial – those who are given
powers or prerogatives to lay down and
execute managerial policies and/or to
hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline.
 Supervisory – those who effectively
recommend such managerial actions if
the exercise of such authority is not
merely routinary or clerical in nature
but requires the use of independent
judgement.
 Rank and File – those who hold neither
managerial nor supervisory function.
Types of Employees as to Taxability
 Minimum Wage Earners – refer to
workers in the private sector who is
paid with a statutory minimum wage
(SWS) rates, or to an employee in the
public sector with compensation
income of not more than the SWS rates.
 Supervisory – are those who is subject
to the regular progressive income tax.
Classifications of Individual Taxpayers As to
How income is Earned
2. Self Employed and/or Professionals (SEP)
 Self-employed is defined under
RA10963 (Train Law) as a sole proprietor
or an independent contractor who
reports income earned from self-
employment.
 Professional is a person formally
certified by a professional body
belonging to a specific profession by
virtue of having completed a required
course of studies and/or practice,
whose competence can usually be
measured against an establish set of
standards.
3. Mixed Income Earners
 Refers to a compensation-earner who at
the same time is engaged in business or
practice of profession.
Other Classifications
Overseas Contract/Filipino Worker (OCW) or
(OFW) - Defines as Filipino citizen employed in
foreign countries who are physically present in a
foreign country as a consequence of their
employment thereat.
- OCW or OFW must be duly registered to
the POEA with a valid OEC and MARINA
(for seafarers or seamen).
- OCW or OFW are considered as NRC for
tax purposes.
- Income by an OCW or OFW are earned
outside the country and therefore is
exempted from Philippine income tax.
Some Definition of Terms (Rev. Reg. 8-2018)
1. Compensation income. In general,
means all remunerations for services
performed by an employee for his
employer under an employer-employee
relationship, unless specifically excluded
by the Code.
2. Compensation income earners.
Individuals whose source of income is
purely derived from an employer-
employee relationship.
3. Employee. An individual performing
services under employer-employee
relationship.
4. Employer. Any person for whom an
individual performs or performed any
services, of whatever nature, under an
employer-employee relationship.
5. Fringe benefits. Means any goods,
services or other benefit furnished or
granted in cash or in kind other than the
basic compensation by an employer to
an individual employee except rank and
file employee as defined herein.
6. Gross receipts. Refers to the total
amount of money or its equivalent
representing the contract price,
compensation, service fee, rental or
royalty, including the amount charged
 for materials supplied with the services
and deposits and advance payments
actually or constructively received
during the taxable period.
7. Gross sales. Refers to the total sales
transactions net of VAT, if applicable
reported during the period, without any
other deductions.
8. Taxable income. Refers to the pertinent
items of gross income specified in the
Code, less deductions, if any, authorized
for such type income by Code or other
special laws.
9. VAT threshold. Refers to the ceiling
fixed to determine VAT registrable
taxpayer. The VAT threshold is set at
P3,000,000.
TYPES OF INCOME
1. Ordinary or regular
- Ordinary or Regular refers to income
such as:
- Compensation income (salaries & wages
- Business income
- Income from practice of profession
- Income from sale and/or dealings of
property
- Passive income (other than those
subject to final taxes)
- Regular income are subject to
Graduated Tax Table/Rates
2. Passive income derived from Philippine
source
• Passive income are earned with very
minimal involvement from the taxpayer
and are generally irregular in timing and
amount.
• Specific passive incomes derived from
Philippines sources:
• Interest income
• Dividend Income
• Royalties
• Prizes
• Other winnings
• Passive income are subject to Final
Withholding Tax (FWT)
3. Capital gains subject to capital gains
tax
- Capital gains are income from sale of
capital assets
- Sale of shares of stocks of a domestic
corporation not traded in the local stock
exchange.
- Sale of real property in the Philippines
- Capital gains are subject to Capital Gains
Tax (CGT)
Module 3
• Why is income subject to tax?
Income is regarded as the best measure of the
taxpayer’s ability to pay tax. It is an excellent
object of taxation in the allocation of
government costs.
• What is income for taxation purpose?
The tax concept of income is simply referred to
as “gross income” under NIRC. A taxable item of
income is referred to as an “item of gross
income” or “inclusion in gross income”.
Income refers to all earnings derived from
service rendered (labor), from capital (business
or investment) or both including gain derived
from sale or exchange of personal or real
property either ordinary or capital assets
Elements of Gross of Income
• It is a return of capital that increase net
worth
 • Rule of Thumb: income =
increase in net worth.
• Net worth (or capital) = assets –
liabilities
• It is a realized benefits
• The term “benefit” means any
form of advantage derived by
the taxpayer. There is benefit
when there is an increase in the
net worth of the taxpayer. An
increase in net worth occurs
when one receives income,
donation or inheritance.
• It is not exempted by law, contract or
treaty
• An item of gross income is not
exempted by the Constitution,
law, contracts or treaties from
taxation
Income that are Exempted by law
 Income of qualified employee trust fund
 Revenues of non-profit non-stock
educational institution
 SSS, GSIS, Pag-ibig or PhilHealth benefits
 Salaries and wages of minimum wage
earners and qualified senior citizen
 Regular income of Barangay Micro-
business Enterprises (BMBEs)
 Income of foreign governments and
foreign government owned and
controlled corporations
 Income of international missions and
organizations income tax immunity.
The gain must be realized or received
• Realization of gain may take the
form of actual receipt of cash or
as a constructive receipt of
income.
Mode of Receipt/Realization Benefits
• Actual receipts
Actual receipts involves actual physical taking of
the income in the form of cash or property
• Constructively receipt
Constructive receipt involves no actual physical
taking of the income but the taxpayer is
effectively benefited.
• Offset of debt of the taxpayer in
consideration for the sale of
goods or service
• Deposit of the income to the
taxpayer’s checking account.
The person may withdraw the
said amount credited in his
favor anytime w/out any
substantial limitations or
conditions.
• Matured detachable interest
coupons on coupon bonds not
yet encashed by the taxpayer.
• Increase in the capital of a
partner from profit of the
partnership.
Taxable Income Valued as follows:
Income received are:
• Cash received for income earned;
• FV of property received;
• FV of share of stocks (at the date the
income was earned);
• FV of the service received (in the
absence of any stipulated price)
• FV of the promissory note received:
• FV of note, if interest bearing
• Discounted value of note, if
non-interest bearing
Categories of Income
• Compensation income – gain derived
from labor, especially employment
(salaries & commission)
• Professional or business income – value
derived from an exercise of profession,
business or utilization of capital, and
from conversion of assets. (sale of
assets used in trade or business)
 • Passive income (final tax) – taxpayer
merely waits for the amount to come in.
(royalty, interest, prizes, winnings)
• Capital gains (capital gains tax) – sale of
assets not used in trade or business
(sale of family home, sale or personal
property)
The Tax Model on Compensation Income
Gross compensation income Pxxx
Less: Non-taxable compensation xxx
Taxable compensation income Pxxx
Gross compensation income generally includes
all remunerations received under an employer-
employee relationship.
Composition of Taxable Compensation Income
1. Regular compensation: pertains to fixed
remunerations received by the
employee every payroll period.
Regular compensation includes fixed
remunerations due to be received by an
employee every period such as:
a. Basic salary
b. Fixed allowances such as COLA, fixed
housing allowances, representation,
transportation, and other allowances
paid to an employee every payroll
period.
Allowances which are fixed in amounts and are
regularly received as part of the basic salaries or
wages and are part of regular compensation.
Exception Rule on taxability of Allowances
a. Ordinary and necessary allowances for
travelling, representation or
entertainment expenses of employees
incurred in the pursuit of employer’
trade, business or profession.
b. The expense is subject to accounting or
liquidation.
c. Any excess advances are returned to the
employer.
2. Supplemental compensation: pertains
to other performance-based pays to
employees with or without regard to
payroll period.
An adjunct category to the supplemental
compensation, 13th month pay and other
benefits, is necessary to contain incentive pays
and all other taxable employee benefits not
classified as regular or supplemental
compensation.
13th month pay not exceeding P90,000 is
an exclusion from gross income. The excess
above P90,000 is added to supplemental
compensation and is referred to as “other
benefits.”
Benefits Required by the Nature of, or
necessary to, the Trade, Business or Conduct of
Profession of the Employer
1. Necessity travelling, transportation,
representation, or entertainment
expenses that are subject to an
accounting or liquidating.
2. Allowances which essentially constitute
reimbursement to government
personnel for expenses they incurred in
the performance of their official duties,
such as:
a. Representation and
Transportation Allowance
(RATA) of public officers and
employees.
b. Personnel Economic Relief
Allowance (PERA)
c. Reasonable amounts of
reimbursement or advances to
employees for travelling and
representation
3. Reasonable amounts of
reimbursements or advances to
employees for travelling and
representation which are pre-computed
on a daily basis and which are paid to
any employee while on assignment or
duty.
Benefits for the Convenience or Advantage of
the Employer
Benefits or allowance which are intended for
the furtherance of the interest of the
employer’s business or to ensure its smooth
operations are likewise exempt from income
tax. This is referred to as the “convenience of
the employer rule.”
1. Work-related mobile phone allowance
and transportation allowance.
2. Outstation allowance for employees
who will be out from office site at least
8 hours.
3. Grant of housing privilege to employees
working at distant or remote facilities.
4. Car incentives to employed on-call. Ex.
medical doctors
5. Scholarship grants to employees under
contract to remain in service for a
specified period upon completion of the
study.
6. Housing privilege of military officials of
the AFP located or near the military
camps.
Paid Vacation and Sick Leave Allowances
The paid absences of an employee applied
against his vacation or sick leave credits and are
normally received as part of the regular salary
therefore becomes part of the regular
compensation.
Non-compensation Items
1. Fees. Retainer fees of consultants,
talents, and directors who have no
management function in the business.
What the recipient receives are
professional income, not compensation
income.
2. Commissions to non-employees such as
independent sales agents are business
income to the sales agent.
3. Tips and gratuities. Tips and gratuities
paid directly to an employee by
customers of the employer which are
not accounted for by employer,
therefore, are not considered as
compensation.
Supplementary Compensation or additional
compensation includes performance-based
remunerations to an employee in addition to
the regular compensation with or without
regard to the payroll period.
The following are the additional compensation:
1. Overtime pay
2. Hazard pay
3. Night shift differential pay
4. Holiday pay
5. Commissions
6. Fees, including director’s fees (if
director is an employee)
7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10. Gains on exercise of stock options
11. Profit sharing and taxable bonuses
Profit Sharing (taxable bonus)
Profit sharing is a reward for churning the
business to post a profit. It is a compensation
for controlling all the factors that influence
profit such as marketing and sales, productivity
and administrative factors.
Productivity incentive bonus
The Productivity Incentives Act of 1990 (RA
6971) encourages private employers to set-up
productivity incentive programs.
A productivity incentive is linked to
improvements in productivity usually in terms of
cost savings through waste reduction, efficient
labor utilization, or increase in volume of
production.
Non-Taxable Compensation
A. Mandatory Deductions
These includes employee’s mandatory
contributions to GSIS, SSS, Philhealth, HDMF,
and Union dues.
A. Exempt Benefits
  Benefits excluded and/or
exempted under the NIRC and
special laws.
De Minimis Benefits
 Benefits exempt under treaty or
international agreements
 Benefits necessary to the trade,
business, or conduct of
profession of the employer
 Benefits for the convenience or
advantage of the employer
Exempt Benefits
under the NIRC, as amended and Special Laws
A. Remunerations received as incidents of
employees
a. Exempt retirement benefits
under RA7641 including exempt
retirement gratuities to
government officials and
employees
b. Exempt termination benefits
c. Benefits from US Veterans
Administration
d. Social security, retirement
gratuities, pensions and similar
benefits from foreign
government agencies and other
institutions, private or public
e. Benefits from SSS under the SSS
Act of 1954, as amended
f. Benefits from GSIS under the
GSIS Act of 1937 as amended
B. De Minimis Benefits
are facilities or privileges such as entertainment,
medical services, or courtesy discounts on
purchases that are relatively small value and are
furnished by the employer merely as a means of
promoting the health goodwill, contentment, or
efficiency of his employees.
De minimis benefits are petty fringe benefits
exempt from income tax.
C. 13th month pay and other benefits not
exceeding P90,000.
D. Certain benefits of Minimum Wage
Earners
a. Monetized unused vacation leave
credits of private employees not
exceeding 10 days during the year.
b. Monetized unused vacation and sick
leave credits paid to government
officials and employees.
c. Medical cash allowance to dependents
of employees not exceeding P1,500 per
employee per semester or P375 per
month.
d. Rice subsidy not exceeding P2,000 or 1
sack of 50-kg rice per month amounting
to not more than P2,000
e. Uniform and clothing allowance not
exceeding P6,000 per annum
f. Actual medical assistance given not
exceeding P10,000 per annum such as
medical allowance to cover medical and
healthcare needs, annual
medical/executive check-up, maternity
assistance and routine consultations.
g. Laundry allowance not exceeding P300
per month.
h. Employees achievement awards which
must be in the form of a tangible
personal property other than cash or
gift certificate with an annual monetary
value not exceeding P10,000.
i. Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum.
j. Daily meal allowance for overtime work
and night/graveyard shift not exceeding
25% of the basic minimum wage.
k. Benefits received by an employee by
virtue of a collective bargaining (CBA)
and productivity incentive schemes
provided that the total annual monetary
value received from the two (2) items
above combined, do not P10,000 per
employee per taxable year.
Taxable De Minimis Benefits
 Excess de minimis over their regulatory
limits
 Other benefits of relatively small value
that are NOT included in the list of de
minimis benefits
Treatment of Taxable De Minimis Benefits
 For rank and file employees – taxable de
minimis is treated as other
compensation income under the
category “13th month pay and other
benefits”
 For managerial and supervisory
employees – taxable de minimis is
treated as fringe benefit subject to final
fringe benefit tax