LESSON 1 TAXATION, EMINENT DOMAIN, POLICE POWER

DEFINED
Taxation
Taxation
- the process of raising income to defray the
necessary income to defray the necessary - the power by which the sovereign raises
expenses of the government revenue to defray the necessary expenses
of government
Purpose of Taxation
Eminent Domain
Principal
- the power of the state to take private
- to raise revenue for the government needs property for public use upon payment of just
Secondary compensation
- expropriation
- to reduce excessive inequalities of wealth
- protective tariff on imported good maybe Police Power
imposed to protect local procedures against - the power of the state to enact laws to
foreign competitors promote public health, public morals, public
- to encourage the growth of home industries safety, and the general welfare of the
through the proper use of tax exemptions people
and tax incentives
- to implement the police power of the state in
promoting the general welfare
Compensation
Basis of Taxation
Taxation Police Power Em. Dom.
Necessity protection and maintenance property is
benefits oh healthy taken for the
- the government cannot exist without the
economic public
means to pay its expenses
standards of
Reciprocal duties of protection and support society
between the state and its inhabitants
- the state collects taxes from the subjects of Purpose
taxation
Taxation Police Power Em. Dom.
- the citizen pays to be secured in the
for the support to promote the property is
enjoyment of the benefits of an organized
society of the general taken for the
government welfare public
Basic Principles of a Sound Tax System
Fiscal Adequacy Person involved
- sources of revenue should be sufficient to Taxation Police Power Em. Dom.
meet the demands of public expenditures whole citizenry whole citizenry on the
regardless of business condition individual
property
Equality or Theoretical Justice owner
- tax burden should be proportionate to the
taxpayer’s ability to pay
Relation to impairment clause to the constitution
Administrative Feasibility
Taxation Police Power Em. Dom.
- tax laws should be capable of convenient, inferior superior inferior
just, and effective administration

1
BALCITA, DIANNE C.
Authority o maybe required to pay income tax
on the net rentals, real estate tax on
Taxation Police Power Em. Dom. assessed value of the land, and
only by the only by the the community tax, also on the
government government government assessed value of the land
and may be by
the public Forms Of Escape from Taxation
service
Shifting
corp./public
utilities if - transfer of the tax burden to another who
granted bears it
Capitalization
Amount of imposition
- future taxes on the property sold are
Taxation Police Power Em. Dom. capitalized at the time of purchase and
no limit limited to the no imposition deducted in lump sum from the selling price
cost regulation
Transformation

Situs of Taxation - affected through the process of production

- place of taxation
1. Person/ individual
a. Community tax – residence of the
person
b. Income tax
i. Legal residence
ii. Place where the income is
derived
c. Estate Tax – residence of the
decedent upon his death
d. Donor’s tax – residence of the donor
at the time of donation
2. Property
a. Real property – location of the
property
b. Tangible personal property –
location of the property
c. Intangible personal property
(royalties, copyrights, etc.) –
domicile of residence of the owner
3. Business and occupation – where the act is
performed or where the occupation is
engaged in
Double Taxation
- the same property is taxed twice
- Direct double taxation
o taxing twice by the same authority,
for the same purpose, in the same
year
o prohibited by the constitution
o violates the rule of uniformity
- Indirect double taxation
o not prohibited
BALCITA, DIANNE C.
- tax is transformed into gain
Evasion
- also known as ‘tax dodging’
- using of illegal means (hiding or false
income, etc.)
Avoidance
- also known as ‘tax minimization’
- using of legally permissible methods to
reduce tax liability
Nature of Taxation
- inherent in sovereignty
- essentially a legislative function
- subject to constitutional and inherent
limitations
LESSON 2
Limitations on the power of tax
Constitutional Limitations
a. Due process of Law – prohibits the
state from utilizing any unfair form of
assessment or review
b. Equal Protection of the law – all
person should be treated alike
c. Rule of Uniformity and Equity
i. Uniformity – all taxable
subjects belonging to the
same class be taxed at the
same rate or measure
ii. Equity - the appointment of
the tax burden among the
2
 taxpayers be just or equitable
considering the taxpayer’s
ability to pay the burden
iii. Ability to pay – the subject of
the state must contribute
government support in
proportion to the revenue
income
d. No imprisonment for non-payment of
poll tax – cannot be imprisoned for
failure to pay community tax
e. Non-impairment of the obligation of
contracts – obligation of a contract is
impaired when its terms and
conditions are change by law or by a
party without the consent of the
other
f. Progressive system of taxation – tax
rates increase as the tax base
increases
g. Non-infringement of religious
freedom – free exercise of religion
and does not subject its exercise to
taxation
h. No appropriation of public funds or
property for the benefit of any
church, sect, or system of religion –
to highlight the separation of religion
and the State
i. Exemption from taxes of the
revenues and assets of non-stock,
non-profit educational institutions
including grants, endowments,
donations, or contributions for
educational purposes.
j. Exemption from taxation of
cemeteries, churches, personages,
or convents appurtenant thereto, as
well as all lands, buildings and
improvements used exclusively for
religious, charitable, and educational
purposes.
k. Concurrence by a majority of all the
members of the Congress for the
passage of a law granting tax
exemption.
l. President’s power to veto separate
items in revenue or tariff bills.
m. President’s power to fix under
certain conditions tariff rates,
important and export quotas,
tonnage and wharf age dues and
other duties or imports.
n. Non-impairment of the jurisdiction of
the Supreme Court to review in tax
cases. – all cases involving taxes
BALCITA, DIANNE C.
can be raised to and be finally
decided by the Supreme Court of the
Philippines
o. Non-diversification of tax collections
– tax collections should be used only
for public purpose
p. Non-delegation of the power of
taxation
q. Appropriations, revenue, or tariff bills
shall originate exclusively in the
House of Representatives, but the
Senate may propose or concur with
amendments.
r. Each local government unit shall
exercise the power to create its own
sources of revenue and shall have a
just share in the national taxes.
Inherent Limitations
a. Requirement that levy must be for public
purpose.
b. Non-delegation of the legislative power
to tax.
c. Exemption from taxation of government
entities.
d. International Comity – certain
representatives and property of foreign
states found within one territory be
exempt from taxation
e. Territorial Jurisdiction – effective and
enforceable only within its territorial
limits
LESSON 3
Definition of taxes
- enforced proportional contributions levied by
the law-making body of the state for the
support of the government and all the public
needs
Essential Characteristics of Taxes
1. an enforced contribution
2. payable in the form of money
3. laid by some rule of appointment usually
based on the ability to pay
4. levied by the state which has jurisdiction
over the person or property
5. levied on the persons or property and on
acts, transactions, rights, or privileges
6. levied by the law-making body of the state
7. levied for public purpose
3
 - Local or municipal
o real property taxes, municipal
license
Nature and Classification of Taxes As to graduation or rate
As to subject matter - Proportional
- Personal, poll or capitation o fixed percentage
o imposed on individual regardless to - Progressive
their property/occupation o the tax increases as the tax base
- Property increases
o imposed on property o graduated tax
- Excise - Regressive
o imposed upon the performance of an o tax decreases as the tax base
act, the enjoyment of privilege, or increases
the engaging in an occupation o no regressive tax in the Philippines

As to who wears the burden Tax Distinguished from Other Charges of Fees

- Direct From license fee

o demanded from the person who is TAX LICENSE
intended or bound to pay it
- for revenue - for regulatory
- Indirect
purposes purposes
o imposed on goods before they reach
- taxing power - police power
the customer
- non-payment does - non-payment
o value-added tax, etc.
not make a makes the
As to determination business or act act or
illegal business
- Specific illegal
o imposed and based on a physical
unit of measurement
o by head/number, weight, length, or From toll
volume
TAX TOLL
- Ad valorem
o fixed proportions of the value of - a demand of - a demand of
property with respect to which tax is sovereignty proprietorship
- compensation
assessed
for use of
o needs an independent appraiser
another’s
As to purpose property
- General/ Fiscal/ Revenue
o imposed for the general purposes of From penalty
government
o income tax, valued added tax, and TAX PENALTY
practically all business tax, etc. - to raise revenue - to regulate
- Special or regulatory conduct
o imposed for a special purpose - imposed by the
regardless of whether revenue is government
raised or not and by private
o intended to achieve some social or entity
economic end
As to authority From Special Assessment

- National TAX SPECIAL

o internal revenue taxes, custom ASSESSMENT
duties - levied on - levied only on
person, land
4
BALCITA, DIANNE C.
 properties, or - not a personal e. Administrative rulings, opinions, and
exercise of liability circulars (as those rendered or issued by
privilege the Commissioner of Internal Revenue of
- personal liability the Secretary of Finance)
- general f. Judicial decisions (as those rendered by the
application Supreme Court and Court of Tax Appeals)
g. Provincial, city, municipal and barrio
ordinances
From revenue h. Treaties
TAX REVENUE i. Legislative materials
- amount - all income Liberal interpretation
imposed by the collections of
government for the government - adapted in favor of the taxpayers and
public use against the government
- the intent or meaning of the tax law is
doubtful
From Custom Duties
Existing Tax Laws in the Philippines
TAX CUSTOM DUTIES
- broader than - taxes levied National
custom duties upon - The National Internal Revenue Code
- includes custom commodities - The Tariff and Custom Code
duties - imported or - Special Laws
exported o Special Science Fund Law
o Narcotic Drug Law
From debt o Special Education Fund Law
o Sugar Adjustment Act
TAX DEBT o Peace and Order Fund Law
- cannot be - arises from
assigned contract Local
- not subject to - can be - Municipal Autonomy Act
set-off assigned - Barrio Charter
- liable for - subject to set- - Assessment Law
imprisonment if off - Charter Cities
not paid - no - Local Government Code
- under Tax code imprisonment
- under Civil National Internal Revenue taxes under the
Code and other Administration of the Bureau of Internal
special laws Revenue.
1. Income tax
LESSON 4 2. Transfer taxes
3. Value added tax
Tax Laws 4. Other percentage tax
- any law which provides for the assessment 5. Excise taxes
and collection of taxes to defray the 6. Documentary stamp taxes
expenses of the government 7. Such Other taxes as are thereafter maybe
imposed and collected by the BIR
Sources of Tax Law
National Taxes and Fees transferred to the
a. Constitution Province, Cities, and Municipalities
b. Statutes (enactments by the legislative
body) - Occupation tax
o on all persons engages in the
c. Presidential decrees
d. Rules and regulations (as those issued by exercise of their profession or calling
the Secretary of Finance Implementing tax - Amusement Tax on Admission fees
laws)
5
BALCITA, DIANNE C.
 - Fees for sealing and licensing of weights
and measures
o collected from storeowners who use
weighing scale or meter and meter
stick
- Community tax
o formerly known as residence tax
o formerly a national tax
Power and Duties of the BIR in the General
(under the supervision and control of the
Department of Finance)
1. To assess and collect all national revenue
taxes, fees, and charges.
2. To enforce all forfeitures, penalties and
fines connected therewith.
3. To give effect to and administer the police
power conferred to it by law.
4. Assignment of internal revenue officers and
other employee to other duties.
5. Provision and distribution of forms, receipts,
certificates, stamps, etc. to proper officials.
6. Issuance of receipts and clearance.
7. Submission of annual report, pertinent
information to Congress and reports to the
Congressional Oversight Committee in
matters of taxation.
Chief Officials of the BIR
- One Commissioner of Internal Revenue
- Four Deputy Commissioner
o Operations Group
o Legal Enforcement Group
o Information System Group
o Resource Management Group
Power of the Commissioner of Internal Revenue
a. To interpret the provision of the NIRC,
subject to the review by the Secretary of
Finance.
b. To decide tax cases, subject to the
exclusive appellate jurisdiction of the Court
of Tax Appeals.
c. To obtain information and to summon,
examine, and take testimony of persons to
effect tax collection.
d. To make an assessment and prescribe
additional requirement for tax administration
and enforcement.
e. To examine tax returns and determine tax
due thereon.
f. To conduct inventory taking or surveillance.
g. To prescribe presumptive gross sales and
receipts for a taxpayer.
h. To terminate tax period when taxpayer is:
BALCITA, DIANNE C.
1. Retiring from business
2. Intending to leave the Philippines
3. Intending to remove, hide, or
conceal his property
4. Intending to perform any act tending
obstruct the proceeding for the
collection of tax or render the same
ineffective
i. To prescribe real property values
j. To compromise tax liabilities of taxpayers
k. To inquire into bank deposits, only under
the following instances:
1. Determination of the gross estate of
a decedent.
2. To substantiate the taxpayer’s claim
of financial incapacity to pay tax in
an application for tax compromise.
l. To accredit and register tax agents
m. To refund or credit internal revenue taxes.
n. To abate or cancel tax liabilities in certain
cases.
o. To prescribe additional procedures or
documentary requirements.
p. To delegate his power to any subordinate
officer with a rank equivalent division chief
of an office.
MODULE 2
LESSON 1 INTRODUCTION TO INCOME
TAXATION
Income
- regarded as the best measure of taxpayers’
ability to pay tax
Income taxation
- also referred to as gross income
- under NIRC
Gross income
- taxable income
- return on wealth or property that increases
the taxpayer’s net worth
- certain item of gross income – deductions
and personal exemptions allowable by law
Item of income
- item gross of income
- not exempted by law, contract, or treaty
Elements of gross income
1. It is a return on capital that increases net
worth.
6
 2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.
Capital
- any wealth or property
Capital with infinite value
- Life
- Health
- Human reputation
Realized benefit
- benefit – any form of advantage derived by
the taxpayer
- not benefits, hence not taxable
o receipt of loan
Types of Income Taxpayers
o discover of lost property
o receipt of money or property
- realized – means earned
Requisites of a realized benefit
- There must be an exchange transaction.
- The transaction involves another entity.
- It increases the net worth of the recipient.
Basis of exemption of unrealized income
Normally, taxpayers will have the ability to pay
when their income materializes in an exchange
transaction since tax is generally payable in money.
This does not mean, however, that only income
realized in cash is subject to tax. Income realized in
non-cash properties are, in effect, received in cash
but the taxpayers used the same to acquire non-
cash property. Income received in non-cash
considerations is taxable at the fair value of the
property received. Moreover, exempting income
realized in non-cash consideration would open a
wide avenue for tax evasion.
Mode of Receipt/Realization Benefits
1. Actual receipts
o actual physical taking of the income
in the form of cash property
2. Constructive receipts
o no actual physical taking of the
income, but the taxpayer is
effectively benefited
Inflow of wealth without increase in net worth
- a person that does not increase his net
worth is not income due to the total absence
of benefit
BALCITA, DIANNE C.
Exempted by law from taxation
1. Income of qualified employee trust fund
2. Revenues of non-profit non-stock
educational institutions
3. SSS, GSIS, PAG-IBIG, or PHILHEALTH
benefits
4. Salaries and wages of minimum wage
earners and qualified-senior citizen
5. Regular income of Barangay-Micro
Business Enterprises (BMBEs)
6. Income of foreign governments and foreign
government-owned and controlled
corporations
7. Income of international missions and
organizations with income tax immunity
A. Individuals
1. Citizen
a. Those who are citizens of the
Philippines at the time of adoption of
the Constitution on February 2, 1987
b. Those whose fathers or mothers are
citizens of the Philippines
c. Those born before January 17,
1973, of Filipino mothers who
elected Filipino citizenship upon
reaching the age of majority
d. Those who are naturalized in
accordance with the law
- Resident citizen
o residing in the Philippines
- Non-resident citizen
o who establishes to the satisfaction of
the Commissioner the fact of his
physical presence abroad with a
definite intention to reside therein
o who leaves the Philippines during
the taxable year to reside abroad
o who works and derives income from
abroad
o who has been previously considered
as non-resident citizen and who
arrives in the Philippines at any time
during the taxable year to reside
permanently in the Philippines
2. Alien
- Resident alien
o who is residing in the Philippines but
is not a citizen
- Non-resident alien
o who is not residing in the Philippines
and who is not a citizen
7
 o engaged in trade and businesses Note that:
▪ stayed in the Philippines of A trust that is irrevocably designated by the grantor
more than 180 days is treated in taxation as it is an individual taxpayer.
o not engaged in trade and The income of the property held in trust is taxable
businesses to the trust. Trust that are designated as revocable
▪ not more than 180 days by the grantor are not taxable entities and are not
considered as individual taxpayers. The income of
General classification rule for individuals properties held under revocable trusts is taxable to
Intention the grantor not to the trust. When the trust
agreement is silent as to revocability of the trust,
- submit BIR documentary proofs the trust is presumed to be revocable.
Length of stay B. Corporations
- partnerships
RESIDENT NON-RESIDENT 1. Domestic corporation
- aliens who - citizen staying o organized in accordance with
stayed in the abroad for a Philippine laws
Philippines for period of at 2. Foreign corporation
more than 1 least 183 days o one organized under a foreign law
year as of the o Resident foreign corporation
end of the ▪ operates and conducts
taxable year business in the Philippines
- - aliens who are through a permanent
staying in the establishment
Philippines for ▪ i.e., branches
not more than 1 o Non-resident foreign corporations
year, but more ▪ does not operate or conduct
than 180 days business in the Philippines
are deemed
non-resident Special corporations
engaged in - domestic or foreign corporations which are
business subject to special tax rules or preferential
- - aliens who tax rates
stayed in the
Philippines for Other Corporate Taxpayers
not more than
180 days are 1. Partnerships
considered non- - owned by two or more persons
resident aliens - General Professional Partnership
not engaged in o formed for the exercise of a common
trade or profession
business o not a taxable entity but partners are
taxable
- Business partnership
3. Taxable estates and trusts o formed for profit
- Estate o taxable as corporation
o properties, rights, and obligations of 2. Joint Venture
a deceased person not extinguished - a business undertaking for a particular
by his death purpose
- Trust - Exempt joint ventures
o arrangement whereby one-person o formed for the purpose of
(grantor or trustor) transfers (i.e., undertaking construction projects or
donation) property to another person engaging in petroleum, coal,
(beneficiary), which will be held geothermal and other energy
under the management of a third operations
party (trustee or fiduciary) o under a service contract with the
Government
8
BALCITA, DIANNE C.
 o tax-exempt but ventures are taxable o earned with very minimal or even
- Taxable joint ventures without active involvement of the
o all other joint ventures are taxable as taxpayers
corporations ▪ Interest income from banks
3. Co-ownership ▪ Dividends from domestic
o formed for the purpose of preserving corporations
the same and/or dividing its income ▪ Royalties
o limited to property - Active Income
▪ not taxable o income arises from transactions
o reinvests the income requiring a considerable degree of
▪ taxable effort
▪ Compensation income
The Residency and Citizenship Rule ▪ Business income
Taxpayers who are residents and citizens of ▪ Professional income
the Philippines such as resident citizen and 2. Capital gains taxation
domestic corporations are taxable on all income - imposed on the capital gain on the sale,
from sources within and without the Philippines. exchange, and other disposition of certain
capital assets
Basis of the extraterritorial taxation - not all capital gains are subject to capital
gains tax
The extra-territorial tax treatment of resident
- applies only to two types of capital assets:
citizens and domestic corporations is also intended
domestic stocks and real property
as safety net to the potential loss of tax revenues
- Ordinary assets
brought by situs relocation or the practice of
o directly used in the business, trade,
executing or structuring transactions such that
or profession of the taxpayer
income will be realized abroad to avoid Philippine
- Ordinary gains
income taxes.
o gains arise from the sale, exchange,
The issue of international double taxation and other disposition of capital
assets
The rule on extraterritorial taxation on 3. Regular income taxation
resident citizens and domestic corporations - general rule in income taxation and covers
exposes these taxpayers to double taxation. all other income such as:
However, the NIRC allows a tax credit for taxes - Active income
paid in foreign countries. In fact, resident citizens - Gains for dealings in properties
and domestic corporations pay minimal taxes in the o Dealings in ordinary assets
Philippines on their foreign income because of the o Dealings in other capital assets not
tax credit. subject to capital gains tax
- Other income, active or passive, not subject
to final tax
LESSON 2 INCOME TAX SCHEMES,
ACCOUNTING PERIODS, ACCOUNTING Accounting period
METHODS, AND REPORTING - the length of time over which income is
Income taxation schemes measured and reported

- mutually exclusive coverage Types:

3 income taxation schemes Regular accounting period

1. Final income taxation - 12 months

- final taxes - Calendar
- taxes are withheld or deducted at source o from January 1 to December 31
- taxpayer receives income net of tax o allowed to both individual and
- applicable only to certain passive income corporate taxpayer
- Passive income - Fiscal
o 12-month period that does not end
on December 31
o allowed only to corporates
9
BALCITA, DIANNE C.
Short accounting period
- less than 12 months
- such as:
o Newly commenced business
o Dissolution of business
o Change of accounting period by
corporate taxpayer
o Death of the taxpayer
o Termination of the accounting period
of the taxpayer by the Commissioner
of Internal
o Revenue
Accounting Methods
The general methods
- Accrual Basis
o income is recognized when earned
regardless of when received
o expense is recognized when
incurred regardless of when paid
- Cash Basis
o income is recognized when received
o expense is recognized when paid
Installment method
- gross income is recognized and reported in
proportion to the collection from the
installment sales
Percentage of Completion Method for Construction
Contracts
- estimated gross income from construction is
reported based on the percentage of
completion of the construction project
Outright and Spread-out method
- income derived Leasehold improvement
o are tangible improvements made by
the lessee to the property of the
lessor
- Outright method
o lessor may report as income the fair
market value of such buildings or
improvements subject to the lease at
the time when such buildings or
improvements are complete
- Spread-out method
o The lessor may spread over the life
of the lease the estimated
depreciated value of such buildings
or improvements at the termination
of the lease and report as income for
each year of the lease an aliquot
part thereof
BALCITA, DIANNE C.
Crop year basis
- farming income is recognized as the
difference between the proceeds of harvest
and expenses of the particular crop
harvested
Income Tax Reporting
Self-assessment method
- government relies on the good faith of
taxpayers in the preparation of their tax
returns
Types of income tax-related returns filed to the
government
- Income tax returns
- Withholding tax returns
- Information returns
Types of income tax return
- Capital gains tax return
- Regular income tax return
The Withholding System
- tax to the recipient of the income payments
Where To File Income Tax Return
Manual filing system
- by paper document
- office where the taxpayer is registered or
required to register:
o An authorized agent banks
o Revenue collection officer
o Duly authorized city or municipal
treasurer
Electronic Filing and Payment System (eFPS)
- paperless tax filing system
- developed and maintain by BIR
Penalties For Late Filling Or Payment Of Tax
Surcharge
- 25% of the basic tax for failure to file or pay
deficiency tax on time
- 50% for willful neglect to file and pay taxes
Interest
- 20% per annum
Delay Period Factor
every day no. of days/ 365
every month no. of months/ 12
10
 every year 1 - Share in the net income of a business
partnership, taxable associations, joint
ventures, joint accounts, or co-ownership
Compromise penalty - Royalties, in general
- amount paid in lieu of criminal prosecution - Prizes exceeding P10,000
over a tax violation - Winnings
- Informer’s tax reward
Penalties For Non-Filing Or Late Filing Of - Interest income on tax free corporate
Information Return covenant bonds
For each failure to file a separate information Final Tax on Individual And Corporations
return, statement, or list, or keep any record, or
supply any information required by the Code or by 1. Interest income or yield
the Commissioner on the date prescribe therefore, On Interest Individuals Corporations
unless it is shown that such failure is due to Income
reasonable cause not to willful neglect, shall be From Banks
subject to a penalty off P1,000 for each such - short- 20% 20%
failure. Provided that amount imposed for all such term
failure during a calendar year shall not exceed deposits
P25,000.00
- long- exempt Regular
term income tax
deposits
LESSON 3 From non-bank
FINAL INCOME TAXATION - short- Regular Regular
term income tax income tax
The Final Withholding System deposits
- long- Regular Regular
- imposes the person making income term income tax income tax
payment the responsibility to withhold tax deposits
- tax which will be deducted at source
- inherently territorial
2. Dividends
Rationale of Final Income Taxation
- ay distribution made by a corporation to its
- relieves the taxpayer of the obligation to file shareholders out of its earnings and
an income tax return payable to its shareholders

Passive income Types of dividends:

Non-resident person General final tax rate - Cash dividends – paid in cash
not engaged in trade or - Property dividends – paid in non-cash
business properties including stocks or securities of
Non-resident alien not 25% another corporation
engaged in trade or - Scrip dividends – those paid in notes or
business evidence of indebtedness of the corporation
Non-resident foreign 25% - Stock dividends – paid in the stocks of the
corporation corporation
- Liquidating dividends – distribution of
corporate net asset
Passive Income Subject To Final Tax
Income that are not taxable:
- Interest or yield from bank deposit or
deposit substitutes Stock dividends
- Domestic dividends, in general - transfer of surplus to capital account
- Dividend income from a Real Estate
Investment Trust Liquidating dividends
- receipt of liquidating dividends is not viewed
as income but as exchange of properties
11
BALCITA, DIANNE C.
 Source Of Individuals Corporations - Prizes received by a recipient without any
Dividends effort on his part to join a contest. Examples
Domestic 10% final tax exempt include prizes from such awards as Nobel
corp. Prize, Most Outstanding Citizen, Most
Foreign corp. Regular tax Regular Tax Benevolent Citizen of the Year, and similar
awards.
- Prizes from sport competitions that are
Exempt Dividends sanctioned by their respective national sport
Inter-corporate dividends from domestic corporation organizations.

- exempt from final tax Requisite of exemption

Dividends from cooperatives - The recipient was selected without any

action on his part to enter the contest.
- exempt from final tax - The recipient is not required to render
substantial future services as a condition to
Qualified foreign-sourced dividends receiving the price or reward.
- exempt from regular tax Amount of individuals corporations
3. Dividends from Real Estate Investment trust taxable prize
or REIT exceeding 20% final tax regular tax
- REIT 10,000
o publicly listed corp. established for not exceeding regular tax regular tax
the purpose of owning income 10,000
generating real estate assets
- 10% final tax
7. Winnings
The following recipients of REIT dividends are
exempt from the final tax: types of individuals corporations
winnings
- Non-resident alien individuals or non-
PCSO exempt exempt
resident foreign corporations’ entities to
winnings not
claim preferential tax rate pursuant to
exceeding
applicable tax treaty.
10,000
- Domestic corporations or resident foreign
corporations PCSO 20% final tax 20% final tax
- Overseas Filipino investors – exempt from winnings
REIT dividends tax until August 12, 2018 (7 exceeding
years from the effectivity of RR13-2011 10,000
which took effect on August 12, 2011) Other 20% final tax Regular Tax
4. Share In Net Income of Business winnings, in
Partnership, Taxable Associations, Joint general
Venture, Joint Accounts or Ownership
5. Royalties 8. Tax Informer Reward
source of individuals corporations - amount of cash reward: 10% or 1,000,000
passive limit
royalties Requisites of Tax Informer’s Reward:
books, literary 10% final tax 20% final tax
works, and - Definite sworn information which is not yet
musical in the possession of the BIR.
compositions - The information furnished lead to the
other sources 20% final tax 20% final tax discovery of fraud upon internal revenue
laws or provisions thereof.
- Enforcement results in recovery of
6. Prizes revenues, surcharges, and fees and/or
conviction of the guilty party or imposition of
Exempt prizes:
any fine or penalty.
- The informer must not be a:
12
BALCITA, DIANNE C.
 o BIR official or employee
o Other public official or employee
o Relative within the 6th degree of
consanguinity of those officials or
employee in a. and b.
9. Tax-Free Corporate Covenant Bonds
individuals corporations
tax on interest 30% final tax regular income
income on tax- tax
free corporate
Final Withholding Tax Return
- BIR Form 0619-F
Deadline and place for monthly manual filing:
- before the 10th day of the month
a. The authorized agent bank of the
revenue district office having
jurisdiction over the withholding
agent’s place of business
b. In places where there are no
authorized agent banks, to the
revenue collection officer
c. The authorized city or municipality
treasurer within the revenue district
where the withholding agent’s place
of business is located.
Monthly deadline for eFPS filing
- Group A – Fifteen (15) days following the
end of the month
- Group B – Fourteen (14) days following the
end of the month
- Group C – Thirteen (13) days following the
end of the month
- Group D – Twelve (12) days following the
end of the month
- Group E – Eleven (11) days following the
end of the month
Quarterly filing
- on or before the last day of the month after
each quarter
Asset Classification Rules
Entities Exempt from Final Income Taxation
a. Foreign government and foreign
government-owned and controlled
corporations
b. International missions or organizations with
tax immunity
c. General professional partnership
d. Qualified employee trust fund
BALCITA, DIANNE C.
a & b are exempt on grounds of international
comity
c & d are exempt from any income tax imposed
under the NIRC
LESSON 4 CAPITAL GAINS TAXATION
CLASSIFICATION OF TAXPAYER’S
PROPERTIES
1. Ordinary Assets
- Stock in trade of a taxpayer or other real
property of a kind which would properly
include in the inventory of the taxpayer if on
hand at the close of the taxable year
- Real property held by the taxpayer primarily
for sale to customers in the ordinary course
of his trade or business
- Real property used in trade or business of a
character in which is subject to the
allowance for depreciation
- Real property used in trade or business of
the taxpayer
- they are:
o Assets held for sale – such as
inventory
o Assets held for use – such as
supplies and items of property plant
and equipment like buildings,
property improvements, and
equipment
2. Capital Assets
- any asset other than the ordinary asset
- they are:
o Personal (non-business) assets of
individual taxpayers
o 2. Business assets of any taxpayers
which are:
▪ Financial assets – such as
cash, receivables, prepaid
expenses and investments
▪ Intangible assets – such as
patent, copyrights, leasehold
rights; franchise rights
a. A property purchased for future use in
business is an ordinary asset even though
this purpose is later thwarted by
circumstances beyond the taxpayer’s
control.
b. Discontinuance of the active use of the
property does not change its character
previously established as a business
property.
13
 c. Real properties used, being used, or have 1. Capital gains on the sale of domestic stocks
been previously used, in trade of taxpayer sold directly to buyer
shall be considered ordinary assets. 2. Capital gains on the sale of real properties
d. Properties classified as ordinary assets for not used in business
being used in business by a taxpayer not
engaged in the real estate business are Scope Of Capital Gains Taxation
automatically converted to capital assets Gains on dealings in Tax Rates
upon showing of proof that the same have capital assets
not been used in business or more than 2 Gain on sale, 15% capital gains tax
years prior to the consummation of the exchange, and other
taxable transaction involving such property. disposition
e. A depreciable asset is an ordinary asset of domestic stocks
even if it is fully depreciated or there is a directly to the buyer
failure to take depreciation during the period Sale, exchange, and 6% capital gains tax
of ownership other disposition of real
f. Real properties used by an exempt property in the
corporation in its exempt operations are Philippines
considered capital assets. Exempt Gains from other Regular income tax
corporations are not business capital assets
g. The classification of property transferred by
sale, barter or exchange, inheritance,
donation, or declaration of property Modes Of Disposing Domestic Stocks
dividends shall depend on whether or not
the acquirer uses it in business. Shares of stocks may be sold, exchanged or
h. For real properties subject of involuntary disposed:
transfer such as expropriation and 1. Through the Philippine Stock Exchange
foreclosure sale, the involuntariness of such (PSE) or
sale shall have no effect on the 2. Directly to buyer
classification of such real property
i. Change in business from real estate to non-
real estate business shall not change the
classification of ordinary assets previously A. Tax On Sale of Domestic Stocks Through
held. The PSE

Types Of Gains On Dealings In Properties The sale of domestic stocks classified as

capital assets through the PSE is not subject to
1. Ordinary gain – arises from the sale, capital gains tax. It is subject to a stock transaction
exchange and other disposition including tax of 60% of 1% of the selling price effective
pacto de retro sales and other conditional
January 1, 2018. The old law imposed a rate of
sales of ordinary assets
50% of 1% on the selling price.
2. Capital gain – arises from the sale,
exchange, and other disposition including B. Capital Gains Tax On Sale, Exchange,
pacto de retro sales and other conditional And Other Disposition Of Domestic
sales of capital assets Stock Directly To Buyer
Type of Gain Applicable taxation
Nature of the CGT:
scheme
Ordinary gains Regular income tax 1. Universal tax
Capital gains General rule: Regular
income tax It applies to all taxpayers disposing stocks
Exception rule: Capital classified as capital assets regardless of
gains tax classification of the taxpayer. By situs, the gain on
sale of domestic stocks is within. The tax applies
even if the sale is executed outside the Philippines
There are only two types of capital gains subject to
capital gains tax:

14
BALCITA, DIANNE C.
2. Annual tax
It is imposed on the annual net gain on the sale of
domestic stocks directly to buyer
Net gain:
Selling Price
Less
Basis of stocks disposed
Selling expenses
Documentary stamp tax
on sale*
Net capital gain (loss)
The Capital Gains Tax Rate
The TRAIN law and CREATE law simplified
the rate to a 15% flat rate
Capital gains tax:
Selling Price
Less: Cost and expenses
Purchase cost
100,000
Commission expense
Documentary stamp tax
expense
Capital Gain
Multiply by:
Capital gain tax due
Tax Compliance
Transactional capital gains
BALCITA, DIANNE C.
Stocks are registrable securities which
requires BIR tax clearance prior to their transfer of
ownership. Filing of tax returns is a pre-condition to
tax clearance. The capital gains or losses are
required to be reported after each sale, exchange,
and other dispositions through the capital gains tax
P return, BIR Form 1707
xxx,xxx Annual capital gains tax
The 15% capital gains tax is an annual tax.
The CGT is recomputed on the annual net gains
P and reported through a final consolidated return
xxx,xxx (BIR Form 1707A) on or before the 15th day of
fourth month following the close of the taxable year
xxx,xxx
of the taxpayer.
Xxx,xxx xxx,xxx A. No loss scenario
Due to flat rate of 15% tax, there will be no
P capital gains tax payable in the final consolidated
xxx,xxx return if all transactions during the year resulted to
a gain. Filling of BIR Form 1707A may not even be
necessary
B. With loss scenario
If there are losing transactions, it is best to
offset losses first with subsequent gains. Residual
tax payable must be settled. No tax payment
should be made until the same turns into a net
P gain. This intra-period loss carry-over procedure is
240,000 necessary to avoid overpaying the government
every time there is a gain and unnecessary
workload for both the taxpayer and the BIR.
P BIR Tax Clearance
No registration of any document transferring
2,000 real property shall be affected by Register of Deeds
unless the Commissioner or his duly authorized
500 102,500 representative has certified that such transfer has
been reported, and the capital gains or creditable
withholding tax, if any, has been paid. (Sec. 58(E),
P NIRC). The certificate for purposes of this legal
137,500 requirement is referred to as the “Certificate
Authorizing Registration (CAR)”
15%
Nature Of The 6% Capital Gains Tax
P 20,625
Presumption of capital gains
The 6% capital gains tax applies even if the
sale transaction resulted to a loss. Gain is always
presumed to exist. The basis of taxation is the
15
selling price or fair value whichever is higher, not - Exemption under special laws
the actual gain. o Sale of land under the
Comprehensive Agrarian Reform
Non-consideration to the involuntariness of the
Program
sale
o Sale of socialized housing units by
The capital gains tax applies even if the sale the National Housing Authority
is involuntary or is forced by circumstance such as
in the case of expropriation sale, foreclosure sale,
disposition by judicial order, and other forms of
forced disposition. It also applies to conditional
sales and pacto de retro sales.
Final tax
The capital gains tax shall be withheld by
the buyer against the selling price of the seller and
remit the same to the government.
Scope And Applicability Of The 6% Capital
Gains Tax

Location of the Taxpayer

property
Individuals Corporations

Within the All Domestic

Philippines individuals corporation only

Outside the Not Not applicable

Philippines applicable

Exceptions To The 6% Capital Gains Tax

1. Alternative taxation rule
- An individual seller of real property capital
assets has the option to be taxed at either:
o .6% capital gains tax
o The regular income tax
2. Exemption rules
- Exemption under the NIRC
o The sale, exchange and other
disposition of a principal residence
for the acquisition of a new principal
residence by individual taxpayers is
exempt from the 6% capital gains
tax
o Principal residence
▪ means the house and lot
which is the primary domicile
of the taxpayer

16
BALCITA, DIANNE C.