TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 1

CONCEPT AND PURPOSES OF TAXATION GR, Not subject to set-off Subject to set-off

Governed by special Governed by the ordinary

TAXATION – the inherent power of the sovereign exercised prescriptive periods in NIRC. periods of prescription.
through legislature to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objectives of the TAX LICENSE FEE
government.
Imposed to raise revenue Imposed for regulation and
PURPOSES OF TAXATION control

Collected under the power Collected under the police

PRIMARY: To raise funds or property to enable the State to of taxation power
promote general welfare and protection of the people.
Amount is unlimited Amount is limited to the
SECONDARY [PRREP]: necessary expenses of
1. Promotion of General Welfare e.g. salary of law enforcers regulation and control.
for the protection of the people; if taxes is used to implement
the police power; Non-payment does not Non-payment makes the
make business illegal business illegal
2. Regulation of Activities/Industries e.g. regulation of the
price of onion; Normally paid after the Normally paid before the
3. Reduction of Social Inequality start of the business. commencement of the biz.
4. Encourage Economic Growth e.g. tax holidays (exemption
to pay taxes) to encourage investors or in economic zones
DISTINCTIONS OF THE THREE INHERENT POWERS
(lower to zero taxes to encourage investors to contribute for
the economic growth);
As to who exercises the power, taxation and police power is
5. Protectionism e.g. protection of the production or market of
exercised by the government or its political subdivisions; while
the local products against foreign products (imported) they
in eminent domain, it is the government or public service
would tax those imported products in order to protect the local
companies and public utilities.
products so that people would buy them because it is way
cheaper.
As to purpose, taxation is to raise revenue in support of the
government, police power is for the promotion of general
TAX TARIFF/CUSTOM DUTIES welfare through regulations, while eminent domain is to
facilitate taking of private property for public purpose.
All embracing term One kind of tax
As to the objects, taxation and police power are imposed
Persons, property, Goods that are imported or
upon community or class or individuals while eminent domain
privilege transactions exported
is imposed on an individual as the owner of a particular
property.
TAX TOLL
As to the impairment of contracts, tax laws generally do not
Enforced proportional A consideration paid for the impair contracts unless the government is a party to the
contribution from persons use of a road, bridge or the contract granting exemption while in police and inherent
and property for public like, of a public nature. powers, contracts may be impaired.
purpose/s
THEORIES AND BASES OF TAXATION**
Demand of Sovereignty Demand of Proprietorship

Amount is unlimited
May be imposed by the
State only
TAX
Obligation created by law
latest is CREATE law
Not Assignable
Generally payable in money
Amount is limited to the cost
and maintenance of public
improvement
May be imposed by private
individuals or entities.
DEBT
Obligation based on contract
express or implied.
Assignable
Payable in kind or in money
1. Lifeblood Theory – taxes are the lifeblood of the nation
through which the government agencies continue to operate
and with which the State effects its functions for the welfare of
its constituents. [CIR vs. CTA, GR 106611, 7/21/1994]
2. Necessity Theory – the theory behind exercise of the
power to tax emanates from necessity. Without taxes, the
government cannot fulfill its mandate of promoting general
welfare and well-being of people. [Gerochi vs. DOE, GR
159796, 7/17/2007]
3. Benefits-Protection/Received Theory – taxes are what we
pay for a civilized society. Without taxes the government would
be paralyzed for lack of motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of
one’s earned income to the taxing authorities, every person

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
who is able must contribute his share in the running of the
government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended
to improve the lives of the people and enhance their material
and moral values [CIR vs. Algue L028896, 2/17/1988] –
Symbiotic relationship.
JURISDICTION OVER SUBJECT AND OBJECTS
GR: Taxation is TERRITORIAL because it is only within the
confines of its territory that a country, state or sovereign may
give protection.
PRINCIPLES OF A SOUND TAX SYSTEM [FAT]
1. Fiscal Adequacy – revenue must be sufficient to meet
government/public expenditures and other public needs.
2. Administrative Feasibility – the tax system should be
capable of being effectively administered and enforced with the
least inconvenience to the taxpayer. [Diaz vs. SOF, G.R. No.
193007, 7/19/2011]
3. Theoretical Justice – must take into consideration the
taxpayer’s ability to pay.
Ability to Pay Theory (Art. 6, Sec. 28, 1987 Constitution):
(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the
Government.
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes
shall be exempt from taxation.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
A tax law will retain its validity even if it is not in consonance
with the principles of fiscal adequacy and administrative
feasibility.
However, if a tax runs contrary to the principle of theoretical
justice, such violation will render the law unconstitutional.
LIMITATIONS IN TAXATION (TWO KINDS)
(1) Inherent; and (2) Constitutional
(1) INHERENT LIMITATIONS [PITIE]
1. Public Purpose
2. Inherently Legislative
3. Territorial
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
2
4. International Comity
5. Exemption of government entities, agencies and
instrumentalities
1. PUBLIC PURPOSE
• The proceeds of tax must be used:
a. for the support of the State
b. for some recognized objective of the government or to
directly promote the welfare of the community.
• Public purpose does not only pertain to those purposes which
are traditionally viewed as essentially government-functions
but also includes those designed to promote social justice (ex.
social housing).
Test in determining public purpose:
1. Duty test – whether the thing to be furthered by the
appropriation of public revenue is something which is the duty
of the State as a government to provide.
2. Promotion of General Welfare Test – whether the
proceeds of the tax will directly promote the welfare of the
community in equal measure.
• Determination when an enacted law is for public purpose lies
in the Congress.
• However, this will not prevent the court from questioning the
propriety of such a statute on the ground that the law enacted
is not for public purpose.
• If the tax measure is not for public purpose, the act amounts
to confiscation (will go to the other two inherent powers of the
State).
2. INHERENTLY LEGISLATIVE
GR: Only the legislature has the full discretion (non-delegable)
as to (who, what, how, where): [KAMPS]
a. Persons, property, occupation or business to be taxed
provided these are all within the State’s jurisdiction.
b. Amount or rate of tax
c. Kind of tax to be imposed (income tax, vat, tariff)
d. Method of collection (withhold, voluntary filing)
e. Situs of tax (where to pay the taxes, which regional
district offices are covered)
XPNs: Delegations to LAP:
1. Delegation to LGU (Art. X, Sec. 5 Constitution)
• Power of LGUs to create its own sources of revenue and to
levy taxes, fees and charges.
Section 5. Each local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
• Art. X, Sec. 5 does not change the doctrine that municipal
corporations do not possess inherent powers of taxation. What
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
it does is to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue and they
no longer have to wait for the statutory grant of these powers.
2. Delegation to the President – the authority of the President
to tariff taxes, import, or export quotas, tonnage and wharfage
dues or other duties and imposts (Art. VI, Sec. 28 [2] supra)
3. Delegation to the Administrative Agencies – when the
delegation relates merely to administrative implementation that
may call for some degree of discretionary powers under xxx
Section 6. Local government units shall have a just share, as
determined by law, in the national taxes which shall be
automatically released to them.
NOTE: This is debatable because some authors said that the
Administrative Agency is only for implementation of tax laws;
ministerial. But some authors claimed that delegation to Admin
Agencies is not really delegation.
• The purpose of such law can be determined in its whereas
clause.
Congressman Mandanas et al v. Exec. Sec. Ochoa,
G.R. No. 199802/208488, 4/10/2019
HELD: Sec. 6 Art. X of the 1987 Constitution textually
commands the allocation to the LGUs of the just share in
the national taxes. Sec. 6 embodies three (3) mandates:
1. The LGUs shall have a just share in the national taxes.
2. The just share shall be determined by law.
3. The just share shall be automatically released by the
LGUs.
Congress has exceeded its constitutional boundary by
limiting to the NIRTs the base from which to compute the just
share of LGUs. Although the power of Congress to make
laws is plenary in nature, congressional lawmaking remains
subject to limitations stated in the 1987 Constitution. Thus,
the phrase “national internal revenue taxes” engrafted in
Sec. 284 is undoubtedly more restrictive than the term
“national taxes” written in in Sec. 6.
NOTE: Regardless of who collects, the LGU has a share.
3. TERRITORIAL
GR: Taxation may be exercised only within the territorial
jurisdiction of the taxing authority.
XPNs:
1. Where the tax laws operate outside the territorial
jurisdiction. Ex. Income earned abroad by RA.
2. Where tax laws do not operate within the territorial
jurisdiction of the State. NOTE: within PH but not
taxable (Ex. economic zones are not taxable in some
charges because they are not within the territory of
the PH; Embassies have no RPT).
4. TREATY AND INTERNATIONAL COMITY
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
3
International Comity – the respect accorded by nations to
each other because they are sovereign equals (par in parem
non habet imperium). Thus, the property or income of a foreign
state may not be subject to taxation by another state.
5. EXEMPTION OF GOVERNMENT ENTITIES, AGENCIES
AND INSTRUMENTALITIES
GR: The government is exempt from tax.
XPN: When it chooses to tax itself.
• National government (agency and instrumentality) is exempt
from local taxation, RPT.
MIAA’s Airport lands and buildings are exempt from real estate
tax imposed by local governments. [MIAA vs. CA, GR 155650,
2006]
• GOCCs perform proprietary functions. Hence, they are
subject to taxation except: [GSP-Water]
(1) GSIS; (2) SSS; (3) PHIC; and (4) Local Water Districts.
(2) CONSTITUTIONAL LIMITATIONS
Provisions directly affecting taxation [PUPCreNeMULVeN]
1. Prohibitions against imprisonment for non-payment of Poll
tax (Sec. 20, Article III);
2. Uniformity and equality of taxation (Sec. 28 [1], Art. VI];
3. Grant by Congress of authority to the President to impose
tariff rates (Sec. 28 [2], Article VI];
4. Prohibition against taxation of Charitable, religious, and
educational entities (Sec. 28 [3], Article VI];
5. Prohibition against taxation of non-stock, Non-profit
educational institutions (Sec. 4 [3][4], Art. XIV)
6. Majority vote of Congress for grant of tax exemption.
7. Prohibition on Use of tax levied for special purpose.
8. President’s Veto power on appropriation, revenue, tariff bills.
9. Non-impairment of jurisdiction of the Supreme Court.
10. Grant of power to LGUs to create its own sources of
revenue. [NOTE: 7,8,9,10 no discussions/slides?]
Provisions indirectly affecting taxation: [FREND]
1. Due Process
2. Equal Protection
3. Religious Freedom
4. Non-impairment of obligations of contract
5. Freedom of the press (no slides/discussion)
A. PROVISIONS DIRECTLY AFFECTING TAXATION
1. PROHIBITION AGAINST IMPRISONMENT FOR
NON-PAYMENT OF A POLL TAX
No person shall be imprisoned for debt or non-payment of a poll
tax. (Art. III, Sec. 20)
Poll tax – levied on persons who are residents within the
territory of the taxing authority without regard to their property,
business or occupation.
2. UNIFORMITY AND EQUALITY
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The rule of taxation shall be uniform and equitable. The congress
shall evolve a progressive system of taxation (Art. VI, Sec. 28 [1])
Uniformity – all taxable articles or kinds of property of the
same class shall be taxed at the SAME RATE; tax operates
with the same force and effect in every place where the subject
is found.
Equitability – when the burden of taxation falls on those better
able to pay.
Equality – when the burden of tax falls equally and impartially
upon all the persons and property subject to it.
Progressive Taxation – when the tax rate increases as the
income of the taxpayer increases; those who are able to pay
more should shoulder the bigger portion of the tax burden.
The Constitution does not prohibit regressive taxes.
(increase in income = decrease in tax). Progressive is
encouraged but regressive is not prohibited.
3. GRANT BY CONGRESS OF AUTHORITY TO THE
PRESIDENT TO IMPOSE TARIFF RATES
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework
of the national development program of the Government. (Art. VI,
Sec. 28 [2])
Flexible Tariff Clause – authority given to the President to
adjust tariff rates under Sec. 1608 of RA No. 10863 (Customs
Modernization and Tariff Act of 2016)
4. PROHIBITION AGAINST TAXATION OF RELIGIOUS,
CHARITABLE AND EDUCATIONAL ENTITIES
Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes
shall be exempt from taxation. (Art. VI, Sec. 28 [3])
It is NOT the use of income from the real property that is
determinative of whether the property is used for tax exempt
purposes. NOTE: What is contemplated here is the RPT.
Rules on Taxation of NS Corporations for Charitable &
Religious Purposes:
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
4
EXEMPT = If Operating exclusively for
charitable and religious purposes and where
not part inures to the benefit of any member
organizer, officer or any specific person.
TAXABLE = If Income of whatever kind and
INCOME TAX
nature from any of their properties (real or
personal) or from any other activities for
profit regardless of the disposition made of
such income (Sec. 30 [e]).
Donations received = considered as
income but NOT TAXABLE (excluded).
Generally not subject to tax provided that
not more than 30% of the said bequests,
ESTATE TAX devises, legacies, or transfers shall be used
such institutions for administrative purposes
i.e. salary, maintenance of the building.
Donations are not subject to tax provided
DONOR’S TAX that no more than 30% of the said bequests,
devises, legacies, or transfers shall be used
such institutions for administrative purposes.
5. PROHIBITION AGAINST TAXATION OF NON-STOCK,
NON-PROFIT EDUCATIONAL INSTITUTIONS
(3) All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively (ADE) for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
(4) Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall be
exempt from tax.
Art. XIV, Sec. 4(3) Art. VI, Sec. 28(3)
Grantee NS/NP educational Religious,
institution educational,
charitable
Tax Exemptions All taxes and duties Real Property Tax
Granted
Art. XIV, Sec. 4(3) does not require that the revenues and
income must also be sourced from educational activities
related to the purposes of an educational institution.
6. MAJORITY VOTE OF CONGRESS FOR GRANT OF TAX
EXEMPTION
Exemptions may be created:
1. By the constitution
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
2. By the statue, subject to limitations as the Constitution
may provide.
B. PROVISIONS INDIRECTLY AFFECTING TAXATION
1. DUE PROCESS
a. Substantive Due Process
1. Tax must be for public purpose.
2. Imposed within the territorial jurisdiction.
b. Procedural Due Process – no arbitrariness or oppression
either in the assessment or collection of the taxes.
Violations of Due Process:
1. Tax amount to confiscation of property.
2. Subject of confiscation is outside the jurisdiction of
the taxing authority.
3. Law is imposed for a purpose other than for a public
purpose.
4. Law which is applied retroactively imposes unjust
and oppressive taxes.
5. The law is in violation of the inherent limitations.
2. EQUAL PROTECTION
Applies only to persons or things identically situated and does
not bar a reasonable classification of the subject legislation.
Requisites for valid classification: To be reasonable, the
classification (a) must be based on substantial distinctions
which make for real differences; (b) must be germane to the
purpose of the law; (c) must not be limited to existing
conditions only; and (d) must apply equally to each member of
the class – There must be compliance with all these conditions.
3. RELIGIOUS FREEDOM
The RPT of religious organizations is violative of the
non-established clause. Neither the purpose nor the effect of
the exemption is the advancement or the inhibition of religion;
and it constitutes neither personal sponsorship of, nor hostility
to religion. [Walz vs. Tax Commission, 397 US 664]
4. NON-IMPAIRMENT OF OBLIGATION OF CONTRACT
On contractual exemption – when the State grants an
exemption on the basis of contract, consideration is presumed
to be paid to the State and the public is supposed to receive
the whole equivalent thereof.
Rules regarding non-impairment of obligation and
contract with respect to the grant of Tax Exemptions:
• If grant is merely a spontaneous concession by the legislature
= EXEMPTION may be revoked.
• If without payment of any consideration or assumption of new
burden (mere gratuity and exemption/franchise) = may be
REVOKED
• If constitutes a binding contract and for valuable
consideration (bilateral exemption) = Government CANNOT
unilaterally revoke the exemption
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
5
STAGES OR ASPECTS OF TAXATION [LARP]
1. Levy or imposition (tax legislation)
2. Assessment and Collection (tax administration)
3. Payment
4. Refund
1. LEVY OR IMPOSITION (TAX LEGISLATION)
Enactment of law by Congress authorizing the imposition of
tax. This cannot be delegated.
2. TAX ADMINISTRATION (ASSESSMENT AND
COLLECTION) – The act of assessing and collecting taxes is
administrative in character and therefore can be delegated.
3. PAYMENT
GR: Tax shall be paid by the person subject thereto at the time
the return is filed. (Sec. 56 (A) (1) NIRC)
XPN: When the tax is due is in excess of P2,000 the
taxpayer other than a corporation may elect to pay the tax in
2 equal installments in which case, the first installment shall be
paid at the time the return is filed and the second
installment, on or before October 15 following the close of
the C.Y., if any installment is not paid on or before the date
fixed for its payment, the whole amount of the tax unpaid
becomes due and payable together with the delinquency
penalties. (Sec. 56 (A)(2), NIRC)
4. REFUND
The recovery of any alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to be
without authority, or of any sum alleged to have been
excessively, or in any manner wrongfully collected.
Proof of remittance is not necessary for claim of refund. What
is needed is the proof that taxes were withheld from its interest
income. [PAL vs. CIR, G.R. No. 206079-80, 1/17/2018]
REQUISITES OF A VALID TAX
1. It should be for a Public purpose.
2. It should be Uniform.
3. It should be within the Jurisdiction of the taxing authority.
4. Tax must not violate the inherent and constitutional
limitations on the power of taxation.
NOTE: These four requisites must be present.
KINDS OF TAX [BiGPRO]
1. As to Burden or Incidence
2. As to Graduation
3. As to Purposes
4. As to Tax Rates
5. As to Object
1. AS TO BURDEN OR INCIDENCE
(1) Direct and (2) Indirect
2. AS TO GRADUATION
1. Progressive – a tax rate which increases as the tax base or
bracket increases.
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 6

2. Regressive – the tax rate decreases as the tax base or

bracket increases. Poll/Capitation/Community Tax = residence of taxpayer

3. Proportionate – a tax of a fixed percentage of the amounts
of the base. Ex. VAT and other percentage taxes.
3. AS TO PURPOSES
1. Government/Fiscal or Revenue – tax imposed solely for
the general purpose of the government.
2. Special/Regulatory or Sumptuary – tax levied for specific
purpose i.e. to achieve some social economic ends. Ex. tariff
and certain dues on imports
Property Tax (real property) = location of the property
Property Tax (personal property)
tangible = location of the property
intangible = domicile of the owner (mobilia sequntur personam)
XPNs:
1. When the property has acquired a business situs in another
jurisdiction.
2. When an express provision of the statute for another rule
(Sec. 104 of the NIRC)

3. AS TO TAX RATES
EXCISE TAX
1. Specific – tax of a fixed amount imposed by the head or
number or by some standard of weight measurement. Ex. Criteria Income Tax Donor’s Tax
excise tax on cigar, cigarettes, and liquors.
2. Ad Valorem (according to value) – tax based on the value Place (applied to NRA, (applied to NRA)
of property with respect to which the tax assessed. Ex. real NRFC, NRC) from Taxed on properties
estate tax, income tax, donor’s and estate tax. sources of income situated within PH.
derived within PH.
3. Mixed – choice between ad valorem and specific tax
Nationality (applied to RC, DC) (RC, NRC)
depending on the condition attached.
From sources of Taxed upon their
income derived within properties wherever
5. AS TO OBJECT and without PH. situated.
1. Personal/Poll/Capitation Tax – a fixed amount imposed
upon all persons, or upon all persons of a certain class or Residence (applied to RA, RFC) (Applied to RA)
residents within a specified territory, without regard to their sources of income Taxed upon their
property or occupation. Ex. Cedula or CTC derived within PH. properties wherever
situated.
2. Property Tax – imposed on property in proportion to its
value or in accordance with some other reasonable VAT = place where the transaction is made.
classification. Ex. RPT, local transfer tax DST = Excise tax (where the transaction is made)

3. Privilege/Excise Tax – a charge upon the performance of
an act, the enjoyment of a privilege, or engaging in a
profession. Ex. Income Tax
GENERAL CONCEPTS OF TAXATION
DOUBLE TAXATION — Refers to income tax being paid twice
on the same source of income. Double taxation occurs when
income is taxed at both the corporate level and personal level,
as in the case of stock dividends. Double taxation also refers to
the same income being taxed by two different countries.

PROSPECTIVITY OF TAX LAWS 1. Indirect/Broad Sense – when some of the elements of

GR: Tax laws must only be imposed prospectively.
XPN: If the law expressly provides for retroactive application.
Retroactive application is allowed if it will not amount to denial
of due process (always the case even if it is not a tax law).
NOTE: Sec. 246, NIRC Non-retroactivity of Rulings with the
BIR and CIR (with XPNs). The BIR and CIR rulings in query,
cases, etc. are different from tax laws and there is also no
retroactive application.
IMPRESCRIPTIBILITY
GR: Taxes are imprescriptible by reason that it is the lifeblood
of the government.
XPN: Tax law may provide for statute of limitations. (ex.
Assessment – 5, 10 years)
SITUS OF TAXATION
The place or authority that has the right to impose and collect
taxes. Ex. National Internal Revenue Taxes (NRIT) = BIR;
Tariffs and customs = BOC; Local taxes = LGU
direct double taxation are absent.
2. Direct/Strict Sense – the same property is taxed twice
when it should be taxed only once.
NOTE: If all of the elements are present, then it is a direct
double taxation in a strict sense but if some elements are not
present, then it is called an INDIRECT double taxation in its
broad sense (Ex. income tax for OFW)
There is no Constitutional prohibition against double taxation in
the Philippines. It is something NOT favored but it is
permissible provided that other constitutional requirements are
not violated.
Tax treaties may be used as relief for double taxation either:
1. Exemption method
2. Credit method
ESCAPE FROM TAXATION

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
Shifting of Tax Burden – Ex. VAT, percentage tax
Impact of Taxation Incidence of Taxation
The statutory liability to pay Burden of taxation; who has
the tax. the economic cost of tax.
On the seller to whom the On the final consumer.
tax is imposed.
TAX AVOIDANCE
A scheme where the taxpayer uses a legally permissible
alternative method of assessing taxable property or income, in
order to avoid or reduce tax liability. It is a tax saving device
sanctioned by law.
Ex. Choosing what percentage of tax 8%, 40%, etc.
EXEMPTION FROM TAXATION
The grant of immunity, express or implied, to particular persons
or corporations, from a tax upon property or an excise tax
which persons or corporations generally within the same taxing
districts are obliged to pay.
It is the legislature, unless limited by a provision by the
Constitution, which has the full power to exempt any person,
corporation, or class of property from taxation.
Taxation is the general rule, exemption is the exception.
❖ Personal in nature and covers only taxes for which
the grantee is directly liable.
❖ Strictly construed against the taxpayer.
❖ Not presumed; burden on the claimant.
❖ Generally revocable unless founded on contracts
which are protected by the non-impairment clause.
TAX EXEMPTION TAX ASSUMPTION
Grant of immunity from Merely allows shifting the burden
paying tax. of taxation to another duty.
EQUITABLE RECOUPMENT (not applicable in PH)
A principle which allows a taxpayer, whose claim for refund has
been barred due to prescription, to recover said tax by setting
off the prescribed refund against a tax that may be due and
collectible from him. Only allowed in common law countries.
PROHIBITION ON COMPENSATION AND SET-OFF
Compensation/Set-off – takes place when two persons, in
their own right, are credits and debtors of each other.
GR: No set-off is admissible against the demand for taxes
levied for general or local government purposes.
• Because the Government and taxpayer are not creditors and
debtors of each other (Philex Mining v. CIR, 1998)
XPNs: Where both the claims of the government and the
taxpayer against each other have already become due,
demandable, and fully liquidated.
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
7
COMPROMISE
Persons allowed to compromise tax obligations:
1. BIR Commissioner
a. When a reasonable doubt as to the validity of the
claim against the taxpayer exist (40%); OR
b. The financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax (10%). [Sec.
204 (A)]
2. Collector of Customs – custom duties
3. Customs Commissioner – fines, surcharges, forfeitures.
TAX AMNESTY – general pardon or intentional overlooking by
the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law.
[Asia International Auctioneers, Inc. v. CIR]
• It is never favored or presumed in law; construed against the
taxpayer.
• Disallowed when the taxpayer is assessed on his capacity as
withholding agent.
AMNESTY EXEMPTION
Immunity from all criminal, civil, Immunity from civil
and administrative obligations liability only
arising from non-payment of taxes
Applied retroactively (complete Applied prospectively
eradication)
CONSTRUCTION AND INTERPRETATION OF TAX LAWS,
RULES AND REGULATIONS
TAX LAWS
GR: Tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.
XPN: Unless a statute imposes a tax clearly.
TAX EXEMPTION AND EXCLUSION
GR: Statutes granting tax exemptions are construed
strictissimi juris against the taxpayers and liberally in favor
of the taxing authority.
XPNs:
1. If the grantee is a political subdivision or instrumentality;
2. Exemption granted to NAPOCOR;
3. Erroneous payment of tax because of law for government
exaction.
TAX RULES AND REGULATIONS
• The construction placed by the office charged with the
implementing and enforcing the provisions of a Code should be
given controlling weight unless such interpretation is clearly
erroneous.
• A rule or regulation (IRR or RMC) must be consistent with the
provisions of the enabling statute.
• Revenue Memorandum Circulars (RMC) must not override,
supplant, or modify the law.
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
• The government is not estopped from collecting taxes legally
due because of mistakes or errors of its agents. But like other
principles of law, this admits of exceptions in the interest of
justice and fair play, as where injustice will result to the
taxpayer. [CIR v. CA, G.R. No. 117982 (1997)]
PENAL PROVISIONS OF TAX LAWS
Statutes of limitations receive strict construction in favor of
the government and limitations in such cases will not be
presumed in the absence of clear legislation.
NON-RETROACTIVE APPLICATION TO TAXPAYERS
Tax laws, rules, and regulations operate prospectively unless
otherwise legislatively intended.
GR: BIR rules that revoke, modify, or reverse the ruling or
circular shall NOT be given retroactive application if such
would be prejudicial to the taxpayer.
XPNs:
1. Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
BIR;
2. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is based;
3. Where the taxpayer acted in bad faith;
4. If the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have
retroactive operation as to affect past transactions because a
wrong construction of the law cannot give rise to a vested right
that can be invoked by a taxpayer.
II. NATIONAL TAXATION
A. TAXING AUTHORITY
POWERS AND DUTIES OF THE BIR
1. Assessment and collection of all NIRT, fees, and charges;
2. Enforcement of all forfeitures, penalties and fines;
3. Execution of judgments in all cases decided in its favor;
4. Give effect and administer the supervisory and police
powers conferred to it by the NIRC and other laws;
5. Recommend for the effective enforcement of the provision of
NIRC.
POWERS OF THE COMMISSIONER
1. Interpret tax laws and to decide cases (Sec. 4)
2. Obtain information and to summon or examine and take
testimony of persons (Sec. 5)
3. Make assessments and prescribed additional requirements
for tax administration and enforcement.
4. Assign internal revenue officers and other Employees.
5. Suspend the business operations of a taxpayer for violations
of tax rules.
6. Terminate the taxable period for reasons provided in the
NIRC.
7. Make or amend a return in case the taxpayer fails to file a
return or files a false or fraudulent return.
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
8
8. Examine returns and determine tax due.
9. Prescribe any additional requirements for the submission or
preparation of financial statements accompanying tax returns.
10. Inquire into bank deposits of:
a. Decedent to determine his gross income;
b. A TP who filed an application to compromise payment
of tax liability by reason of financial incapacity.
c. Request for the supply of tax information from a
foreign tax authority pursuant to an international
convention.
11. Delegate powers vested upon him to subordinate officials
with rank equivalent to Division Chief or higher.
12. Prescribe property values.
13. Take inventory of goods of any taxpayer and place any
business under observation or surveillance.
14. Register tax agents.
15. Suspend the business operations of a taxpayer for
violations of VAT rules.
In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
b. Failure to file a VAT Return as required under Sec. 114;
c. Understatement of taxable sales or receipts by 30% or more
of his correct taxable sales or receipts for the taxable quarter.
• Failure of any person to register as required under Sec. 236
• The temporary closure of not less than 5 days and shall be
lifted only upon compliance with whatever requirements
prescribed by the CIR in the closure order.
POWERS OF THE BIR WHICH CANNOT BE DELEGATED
1. To recommend promulgation of rules and regulations by the
Secretary Of Finance (SOF);
2. To issue ruling of first impression or to reverse, revoke, or
modify an existing rule of the BIR;
3. To assign or reassign internal revenue officers to
establishments where articles subject to excise tax are kept.
RULE-MAKING POWER OF THE SECRETARY OF FINANCE
• To promulgate all needful rules and regulations for effective
enforcement of the NIRC.
LARGE TAXPAYER
1. VAT: VAT paid/payable of at least P100,000 for any quarter.
2. Excise Tax: at least P1M for the preceding taxable year.
3. Corporation Income Tax: at least P1M for the preceding TY
4. Withholding Tax: at least P1M for the preceding TY.
NOTE: SOF may modify or add to the above criteria.
B. INCOME TAX
INCOME TAXATION
In the nature of excise taxation system; taxation on the
exercise of privilege to earn yearly points from various sources.
Income Tax – a tax on yearly profits arising from property,
profession, trade or business.
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 9

Global Tax System – where the tax system views indifferently iii. PH citizen who works and derives income from
the tax based and generally treats in common all categories of abroad and whose employment thereat requires him
taxable income of the individual. to be physically present abroad most of the time
during the taxable year.
Schedular Tax System – systems employed where the iv. A citizen who has been previously considered as
income tax treatment varies and is made to depend on the kind NRC and who arrives in PH at any time during the TY
or category of taxable income of the taxpayer. to reside permanently in PH shall be treated as NRC
for the TY in which he arrives in PH with respect to his
FEATURES OF PHILIPPINE TAX INCOME income derived from sources abroad until the date of
his arrival in PH.
1. Direct Tax
2. Progressive Tax • The taxpayer shall submit proof to the Commissioner of his
3. Comprehensive (Adopts citizenship, residence, and intention of leaving PH to reside permanently abroad or to
source principles) reside or return in PH as the case may be.
4. Semi-schedular or semi-global system
2. ALIENS
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX LAW a. Resident Alien (RA) – an individual whose residence
1. Citizenship is within PH who is not a citizen thereof.
2. Residence
3. Source b. Non-Resident Alien (NRA) – an individual whose
residence is not within PH and who is not a citizen
GENERAL PRINCIPLES OF INCOME TAXATION thereof.
i. Engaged in Trade/Business (ETB)
TAXPAYER WITHIN PH WITHOUT PH
ii. Not Engaged in Trade/Business (NETB)
RC (Resident Citizen) / /
3. SPECIAL CLASS OF INDIVIDUAL EMPLOYEES
NRC (Non-Resident Citizen) / x a. Minimum Wage Earner

RA (Resident Alien) / x 4. CORPORATIONS

a. Domestic
NRA (Non-Resident Alien) / x b. Foreign
i. Resident Foreign Corporation (RFC) – a foreign
DC (Domestic Corp) / /
corporation ETB and has a presence in PH.
ii. Non-Resident Foreign Corporation – a FC, ETB
FC (Foreign Corp) / /
which has no presence in PH but derives income
therein.
TYPES OF PHILIPPINE INCOME TAX c. Joint Venture
d. Partnership
1. Minimum Corporate Income Tax (MCIT)
2. Capital Gains Tax (CGT) 5. ESTATES
3. Final Withholding Tax (FWT) 6. TRUSTS
4. Fringe Benefit Tax (FBT)
5. Branch Profit Remittance Tax (BPRT) IMPORTANCE OF KNOWING CLASSIFICATION
6. Improperly Accumulated Taxable Income (IAET) To determine the applicable [GrIDEE]:
7. Normal Corporate Income Tax (NCIT) 1. Gross income
8. Graduated Income Tax on Individuals 2. Income Tax Rates,
9. Optional Income Tax of 8% for Individuals 3. Deduction.
10. Special Income Tax on certain Corporations 4. Exclusions from Income
5. Exemptions
KINDS OF TAXPAYERS
TAXABLE PERIOD [FisCalShort]
1. CITIZEN 1. Calendar Period
a. Resident Citizen (RC) 2. Fiscal Period
i. Engaged in business/practice of profession. 3. Short Period
ii. Not engaged in business/practice of profession.
iii. Mixed Income Earner = both i and ii CALENDAR PERIOD – the 12 consecutive months starting
from January 1 and ending December 31.
b. Non-Resident Citizen (NRC)
i. Citizen who has physical presence abroad with a Instances when calendar year shall be the basis of
definite intention to reside therein. computing income:
ii. PH citizen who leaves PH during the TY to reside 1. When the TP is individual.
abroad, either as an immigrant or for employment on 2. When the TP does not keep books of account.
a permanent basis.

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 10

3. When the TP has no annual accounting period.
4. When the TP is an estate or a trust.
FISCAL PERIOD – a period of 12 months ending on the last
day of any month other than December.
CLAIM OF RIGHT DOCTRINE/DOCTRINE OF OWNERSHIP,
COMMAND AND CONTROL
A taxable gain is conditioned upon the presence of a claim of
right to the alleged gain and the absence of a definite
unconditional obligation to return or pay.

SHORT PERIOD – a period less than 12 months. DOCTRINE OF PROPRIETARY INTEREST (ECONOMIC
1. When the corporation is newly organized and commences BENEFITS TEST)
operations on any day within the year. Income is taxable to the extent that the taxpayer is
2. When the corporation changes its accounting period. economically benefited.
3. When the corporation is dissolved.
4. When the CIR, by authority, terminates the TY of a TP. SEVERANCE TEST – income is recognized when there is
5. In case of final return of the decedent and such period ends separation of something which is exchangeable value.
at the time of his death.
RULES ON DETERMINATION OF SITUS
WHEN INCOME IS TAXABLE [ERR]
1. Existence of Income
KINDS OF INCOME TAX SITUS
2. Realization of Income
3. Recognition of Income Service or compensation Place or performance of
income service.
EXISTENCE OF INCOME – there must be income before
there is taxation. Rent Location of property (real or
personal)
Receipts not considered as income:
1. Advance payments or deposits for payments. Royalties Place of use of intangibles
2. Increments resulting from revaluation of property.
Merchandising Place of Sale
3. Money or property borrowed.
4. Security advances and security deposits. Gain on sale of personal Place of Sale
property purchased and not
RECOGNITION OF INCOME produced
1. Actually receipt.
Gain on sale of REAL Location of property
2. Constructive receipt – when money consideration or its property
equivalent is placed at the control of the person who rendered
Mining income Location of mines
the service without restriction by the payor.
Farming income Place of farming activities
Ex. deposits in banks, issuance by the debtor of a notice to
offset any debt and acceptance by the seller, transfer of the Gain on sale of domestic Income within the
amounts retained by the payor to the account of the contractor, stock Philippines.
undistributed share of a partner in the profits.
Interest Residence of the debtor
TESTS IN DETERMINING WHETHER INCOME IS EARNED
1. Realization Test Gain on sale of transport Place of activity that
document produces the income
2. Claim of Right Doctrine or Doctrine of Ownership, Command
or Control. Manufacturing:
3. Economic Benefit Test or Doctrine of Proprietary Interest. a. Produced in whole within a. Income purely within
4. Severance Test. and sold within

REALIZATION TEST – there is no taxable income unless b. Produced in whole without b. Income purely without
income is deemed realized. Revenue is generally recognized and sold without
when both conditions are met:
c. Produced within and sold c. Income partly within and
1. The earnings process is complete; AND without partly without
2. An exchange has taken place.
d. Produced without and d. Income partly within and
ALL EVENTS TEST – Requires that the right to income or sold within partly without
liability be fixed and determined with reasonable accuracy.
However, this test does not demand that the amount of income Dividend Income from:
a. Domestic Corporation a. Income within
or liability be known absolutely, only that a taxpayer has at his
b. Foreign Corporation (if for
disposal the information necessary to compute the amount with the 3-year period preceding
reasonable accuracy. [CIR vs. Isabela Cultural Corp. G.R. the declaration of dividend,
172231, 2/12/2007] the ratio of such
corporation’s PH income to

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 11

e. Interest on loans at less than the market rate

the world (total) was:
i. Less than 50%
ii. 50% to 85%
iii. More than 85%
f. Membership fees
i. Entirely without g. Expenses for foreign travel
ii. Proportionate** h. Holiday and vacation expenses
iii. Entirely within i. Educational assistance to the EE or his dependant
j. Life or health insurance

GROSS INCOME NOTE: Fringe Benefits are for Managerial ONLY. 'Fringe
benefits' are defined as any goods, services, or other benefits
GROSS INCOME (NIRC, Sec. 32[A]). furnished or granted in cash or in kind by an employer to an
Except when otherwise provided, gross income means all individual employee, except rank and file employees, such as,
income derived from whatever source, including but not but not limited to: housing expense account, vehicles etc.
limited to the following items: (CG2I-R2DAP3)
3. PROFESSIONAL INCOME
1. Compensation for services in whatever form paid, Fees received by a profession from practice of profession,
including, but not limited to fees, salaries, wages, commissions provided that there is no ER-EE relationship between him and
and similar items. his clients.
2. Gross income derived from the conduct of trade or
business or the exercise of a profession. 4. INCOME FROM BUSINESS (no slide)
3. Gains derived from dealing in property.
4. Interests 5. INCOME FROM DEALINGS IN PROPERTY
5. Rents
6. Royalties Ordinary Assets:
7. Dividends 1. Stock in trade of the TP or other property of a kind
8. Annuities which would properly be included in the inventory of
9. Prizes and Winnings the TP if on hand at the close of the taxable year.
10. Pensions and 2. Property held by a TP primarily for sale to costumers
11. Partner’s distributive share from the net income of the in the ordinary course of business.
general professional partnership 3. Property used in the trade or business of a character
NOTE: The above enumeration of gross income under NIRC, which is subject to the allowance for depreciation.
is not exclusive. 4. Real property used in trade and business.

Capital Assets:
GROSS INCOME NET INCOME TAXABLE INCOME Property held by a TP other than ordinary assets.

All income Gross income Items of gross income

Ordinary Income: includes the gain derived from the sale or
derived from less allowable specific in the Code
whatever source. deductions. less deductions exchange of ordinary assets.
authorized for such
types of income. Ordinary Loss: Loss that may be sustained from the sale or
exchange of ordinary assets.
SOURCES OF INCOME
Capital Gain: Gain derived from the sale or exchange of an
1. Compensation Income
asset not connected in trade or business.
2. Fringe Benefits
3. Professional Income
Capital Loss: Loss that may be sustained from the sale or
4. Income from Business
exchange of an asset not connected in trade or business.
5. Income from Dealings in Property
6. Passive Investment Income
Presumed Gain: The law presumes that the seller of real
7. Annuities, proceeds of life insurance, or other types of
property classified as capital asset realized gains, which is
insurance.
taxed at 6% of the selling price or the FMV (assessed value
8. Prizes and awards
from the Assessor’s office or the zonal value from the BIR)
9. Pensions, retirement benefit, or separation pay
whichever is higher.
10. Income from whatever source.

RULES ON CAPITAL ASSET

1. COMPENSATION INCOME
All enumeration for services rendered by an employee for INDIVIDUAL CORPORATION
his employer unless specifically excluded under the NIRC.
Holding Period • Available • Not available
2. FRINGE BENEFIT Rule – Assets
a. Housing must be held for • Gain to be taken into • 100%
one year and account
b. Expense account
one day to be
c. Vehicle of any account entitled to • 100% – CA must have
d. Household personnel

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 12

7. If there is no full utilization, the portion of the gains

long-term capital been held for 12 months
gain treatment. or less. presumed to have been realized shall be subject to
GGT.
• 50% – CA has been 8. The 6% CGT shall be deposited with an AAB subject
held for more than 12 to release upon certification by the RDO that the
months. proceeds of the sale have been utilized.

Capital Loss • Capital losses are • Same; XPN: TAX-FREE EXCHANGES:

Limitation allowed only up to the Rule 39 (c)
extent of capital gains
1. Transfer to a controlled corporation – no gain or loss
Net Capital • Allowed for a period of • Not allowed shall be recognized if property is transferred to a corporation
Loss Carry Over 1 year by a person in exchange for stock or unit of participation in
such corporation of which as a result of such exchange, said
person, alone or together with others, not exceeding 4 persons
Net Operating Loss Carryover (NOLCO)
gains control of said corporation.
• Arises from ordinary transactions meaning involving ordinary
assets.
2. Merger of Consolidation – no gain or loss if in pursuance
of a plan of merger or consolidation:
• Allows carryover of operating loss in 3 succeeding taxable
a. A corporation which is a party to the merger or
years of 5 years in case of mining companies.
consolidation, exchanges property solely for stock in a
corporation which is a party to the M/C.
Tax Treatment of Capital Gains and Losses
b. A shareholder exchanges stock in a corporation which
Sales of Shares of Stock Sale of Real Properties/Land is a party to the M/C, solely for the stock of another
and/or Buildings in PH corporation also a party to the M/C.
c. A security holder of a corporation which is a party to
• Traded on Stock Exchange • CGT the M/C exchanges his securities xxx
6/10 of 1% of the Gross
Selling Price • No loss is recognized because
gain is presumed 6. PASSIVE INVESTMENT INCOME
• Not Traded on SE • An income derived from any activity in which the TP has no
CGT, 15% of Final Tax • 6% of the higher amount active participation or involvement.
between: Income subject to final tax: income where the tax due is fully
1. GSP (Gross Selling Price) or collected through the withholding tax system (the payor of the
2. FMV (Fair Market Value)
income withholds the tax and remits it to the government as a
a. Zonal Value
b. Assessed Value final settlement of the income tax due on said income and the
recipient is no longer required to include income subject to final
tax as part of his gross income in his income tax returns).
5. Sale of Principal Residence
Intercorporate Dividend – when a dividend is declared by
Principal Residence – dwelling house, including the land on one corporation and received by another corporation
which it is situated, where the individual and members of his which is a stockholder to the former.
family reside, and whenever absent, the said individual intends
to return.
NATURE OF INCOME DC RFC NRFC
• Actual occupancy is NOT considered interrupted or
Interest from any Short-term Shall be
abandoned by reason of temporary absence due to travel or
currency bank interest: considered
studies or work abroad or such similar circumstances. deposits, yield, or any 20% 20% as part of
other monetary gross
Sale of Principal Residence is TAX EXEMPT (6% CGT) if: benefits from deposit Long term income
1. Sale of disposition of the old actual principal substitutes and from interest: subject to
residence. trust fund and similar 30% 30% NCIT.
2. By a citizen or resident alien. arrangements and
Royalties derived
3. Proceeds from which are fully utilized in acquiring or
from sources within
constructing a new principal residence within 18 PH.
calendar months from the sale or disposition.
4. Notify the CIR within 30 calendar days from the date NOTE: Interest income or yield earned by DC from sources
of sale or disposition through a prescribed return of outside PH shall not be subject to final tax of 20% but
his intention to avail the tax exemption. included in the gross income and subject to NCIT.
5. Can be availed of once every 10 years.
6. The historical cost or adjusted basis of his old Interest Income 15% 7.5% Exempt
derived under the
principal residence shall be carried over to the cost
expanded foreign
basis of his new principal residence. currency deposit
system.

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 13

Interest derived by 10% 10% Exempt Received by a DC and RFC Not subject to tax
depository bank
under the expanded Received by a NRFC Subject to 15% FWT (30%
foreign currency NCIT before but reduced
deposit system from due to stock sparing rule)
foreign currency loans
granted to residents
other than offshore Tax Sparing Rule
banking units (OBUs). Dividends received shall be subject to 15% FWT, provided, that
the country in which the corporation is domiciled either:
NOTE: If granted to non-residents, OBUs, local commercial (1) allows a tax credit of 15% against the taxes dues from the
banks or branches foreign banks authorized by BSP to foreign corporation for taxes deemed paid; OR
transact = EXEMPT (2) does not impose income tax on such dividends; otherwise
the dividend shall be subject to 30%. **[CIR vs. Wander
Interest received by Philippines, Inc. G.R. No. L-8375, 4/15/1988]
NRFC on foreign loans – – 20%
(NIRC, Sec. 28 [5a]) TAX TREATMENT OF DIVIDEND INCOME

Dividends received Exempt Exempt 15% Subject to basic tax 1. Dividends from FC
from DC (subject to 2. Share in the income of a GPP
(inter-corporate tax sparing 3. Share in income of an exempt JV
dividend) rule)
Subject to final tax 1. Cash and/or property dividends
Tax-Exempt Interest Income: actually or constructively received by
individuals from DC or from a joint
1. From bank deposits if the recipient are the ff: stock company, insurance or mutual
a. Foreign government fund company and regional operating
b. Financing corporations controlled, owned, or financed HQ of multinationals.
by the government.
2. Inter-corporate dividends from DC
2. Regional or international financing institutions established by by NRFC.
foreign governments;
3. Share of an individual in the net
3. On loans extended to any of the above-mentioned entities; income (after tax) of an association,
joint account, or a JV or consortium
4. On bonds, debentures and other certificate of indebtedness taxable as corporation for which he is
received by any of the above-mentioned entities; a member or co-venturer.

5. On bank deposit maintained under the expanded foreign Exempt from tax Inter-corporate dividends received
currency deposit; from DC by another DC and RFC.

6. From a long-term investment or deposit with a maturity
period of 5 years or more.
A. DIVIDENDS [CLiPS]
1. Cash Dividend
2. Property Dividend
3. Stock Dividend
GR: Stock dividends represent capital and do not constitute
income to its recipient. So that the mere issuance thereof is not
subject to income tax as they are nothing but enrichment
through increase of capital investment.
XPNs:
a. change in shareholder’s equity, right or interest in the net
assets of the corporation.
b. recipient is other than the shareholder (ex. creditor).
c. cancellation or redemption of shares of stock
d. Distribution of treasury shares
e.. Dividends declared in the guise of treasury stock dividend
to avoid the effects of income taxation.
f. Different classes of stocks issued.
4. Liquidating Dividend – return of capital, hence, not income.
1. Dividends received from DC
B. ROYALTY INCOME – share of the earnings from the
invention, book or play, paid to inventor, writer, etc for the right
to make, use, or publish the same.
SUBJECT TO 10% FINAL TAX
Royalties on books, other literary works and musical
composition from sources within the Philippines.
SUBJECT TO 20% FINAL TAX
Royalties derived from sources within the Philippines
other than royalties subject to 10% final tax.
SUBJECT TO BASIC TAX
Royalties derived by RC and DC from sources without PH.
C. RENTAL INCOME
Prepaid Rent: taxable income by the lessor in the year
received, if received under a claim of right and without
restriction as to its use, regardless of the method of accounting
employed.
Security Deposit: recognized as income at the time it is
applied; not income to the lessor until the lessee violates any

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
provision of the contract.
Rates subject to Special Rate:
1. Those paid to non-resident cinematographic film owners or
lessor or distributors = 25% of its gross income from all
sources within PH. (Sec. 28[B][2], NIRC)
2. Those paid to non-resident owner or lessor of vessels
chartered by PH national = 4.5% of gross rentals (Sec.
28[B][3], NIRC)
3. Those paid to non-resident owner or lessor of aircraft,
machineries, and other equipment = 7.5% of gross rental or
fees (Sec. 28[B][4], NIRC)
D. PROCEEDS OF LIFE INSURANCE
GR: Amounts received under a life insurance, endowment or
annuity contract paid to the beneficiaries upon the death of the
insured are EXCLUDED from the gross income.
XPNs:
1. If such amounts, when added to amounts already received
before the taxable year under such contract, exceed the
aggregate premiums or considerations paid, the EXCESS
should be included as gross income.
2. Interest payment thereon if such amounts are held by the
insurer under an agreement to pay interest shall be taxable.
XPN:XPN: Proceeds taken by a corporation on the life
insurance policies on the life of an executive to indemnify it
against loss in case of his death do not constitute taxable
income.
Income Taxation Estate Taxation
No need for the Concept of revocability or
determination of revocability irrevocability in the designation
of the beneficiary for of beneficiary is necessary to
purposes of exclusion of determine whether the life
such proceeds from the insurance proceeds are included
gross income. in the gross estate or not.
E. PRIZES AND AWARDS
Amount of money in cash or in kind received by chance or
through luck and is generally taxable (because this is
considered as passive income) except if specifically mentioned
under exclusions from computation of gross income under
NIRC or special laws.
EXEMPT FROM TAX
1. Prizes and award made primarily in recognition of:
a. Religious charitable;
b. Scientific;
c. Educational artistic, literary; or
d. Civic achievement.
Provided the recipient was:
a. Selected without any action on his part to enter the
contest or proceeding (not constituting gains from
labor); AND
b. Not required to render substantial future services
as a condition to receive the prize/award.
2. All prizes and awards granted to athletes in local and
international sports competitions and tournaments, whether
held in the PH or abroad and sanctioned by their respective
national sports association.
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
14
3. PCSO/Lotto winnings.
NOTE: Only exempt if the amount is P10,000 or less for RC,
NRC, and RA (Sec. 25[B][1], NIRC). Always exempt for
NRA-ETB (Sec. 25[A][2], NIRC). Always subject to tax for
NRA-NETB (Sec. 25[b], NIRC).
NRA = Non-Resident Alien
ETB = Engaged in Trade or Business
NETB = Not Engaged in Trade or Business
SUBJECT TO BASIC TAX
1. Prizes and Other winnings derived by resident citizens
and domestic corporations from sources without the PH.
2. Prizes and Winnings received by corporations from
sources within the Philippines.
3. Prizes received by individuals from sources within the PH
amounting to P10,000 or less.
SUBJECT TO 20% FINAL TAX
1. Prizes received by individuals (except NRA-NETB) from
sources within PH exceeding P10,000.
2. Other winnings from sources within PH regardless of
amount (other than PCSO and Lotto winnings for NRA-ETB)
3. PCSO and Lotto winnings exceeding P10,000 for RC,
NRA and RA.
INCOME FROM ANY SOURCE
• All income not expressly exempted from the class of taxable
income under our laws from part of taxable income; source
may be legal or illegal; Examples:
1. Gains arising from expropriation of property.
2. Gains from gambling.
3. Gains from embezzlement or stealing money.
4. Money received under solutio indebiti (mistake of payment).
5. Exercise of stock options.
6. Condonation of indebtedness for a consideration.
Income If an individual performs services for a creditor,
who in consideration thereof, cancels the debt;
income to the extent of compensation of his
services.
Gift If the creditor merely desires to benefit a debtor
without any consideration therefore.
If a corporation to which a stockholder is indebted
forgives the debt.
• An insolvent debtor does not realize income resulting from
the cancellation or forgiveness of indebtedness when he
becomes insolvent. However, he realizes income when he
becomes solvent.
Recovery of Accounts (Receivable) Previously Written Off
Ex. A supplier corporation has accounts receivable from a
certain debtor who was unable to pay the debts. The
corporation has the option to write off the AR but in the event
the debtor becomes solvent again and is able to pay the debt,
that is called recovery of accounts previously written off. The
payment will be recognized as income.
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
Tax Benefit Rule or Equitable Doctrine of Tax Benefit
If a taxpayer recovers a loss or expense that was deducted in
the previous year, the recovery must be included in the current
year’s gross income up to the extent that it was previously
deducted.
Coverage:
1. Recovery of bad debts (those that can’t be collected).
2. Receipt of tax refund or credit.
XPN: Income Tax (except FBT), Estate Tax, Donor’s Tax,
Special Assessments, VAT and Stock Transactions Tax.
Debts – borrowed money is not part of taxable income
because it has to be repaid by the debtor.
James Doctrine – even though the law imposes a legal
obligation upon an embezzler or thief to repay the funds, the
embezzled or stolen money still forms part of the gross
income since the embezzler or thief has no intention of
repaying money.
EXCLUSIONS
EXCLUSIONS (NON-TAXABLE INCOME)
• Flow of income not considered as part of gross income due to
the ff:
1. It does not come within the definition of gross income.
2. It is exempted by the constitution or by statute.
Construction: In the nature of tax exemptions; strictly
construed against the taxpayer and liberally in favor of the
government.
EXCLUSIONS UNDER THE CONSTITUTION
1. Income derived by the government or its political subdivision
if the source of income is from any public utility or from the
exercise of essential governmental functions.
2. All revenue and assets of NS/NP educational institutions
used Actually, Directly, and Exclusively for educational
purposes.
EXCLUSIONS UNDER THE NIRC
1. Gifts, Bequests and Devises
2. Life Insurance Proceeds
3. Amount Received by Insured as Return of Premium
4. Retirement Benefit, pensions, gratuities, etc.
5. Income exempt under treaty
6. Compensation for injuries or sickness
7. Miscellaneous Items:
a. 13th month pay and other benefits
b. Prizes and awards
c. Prizes and awards in sports competitions
d. Income derived by foreign government
e. Income derived by the government or its political
subdivisions
f. GSIS, SSS, Philhealth, and other contributions
g. Gains from sale of bonds, debentures or other
certificate of indebtedness.
h. Gains from redemption of shares in mutual funds.
1. Gifts, Bequests and Devises
• Value of property subject of gifts, bequests and devises are
EXCLUDED.
• Income from such property = INCLUDED
Gift: transfer not in the ordinary course of business which is
not made for full and adequate consideration in money or
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
15
money’s worth.
Bequests: gift of personal property
Devise: gift or real property
• Regardless of whether donation inter vivos or mortis causa,
EXCLUDED from income.
Gift Tax (Donor’s Tax) Test – when a person gives a thing or
right to another and it is not a “legally demandable obligation”
then it is treated as a gift and excluded from gross income.
2. Life Insurance Proceeds
Insurance on human life and insurance appertaining thereto or
connected therewith.
Conditions for Exclusion:
1. Proceeds of life insurance policy
2. Paid to the heirs or beneficiaries
3. Upon the death of the insured
4. Whether in a single sum or otherwise
Rationale: partakes the nature of an indemnity or
compensation rather than gain to the recipient.
Exceptions to Exclusions:
1. Agreement between the insurer and the insured to the effect
that the amount shall be withheld by the insurer under an
agreement to pay interest thereon; only the interest is taxable.
2. Life insurance policy is used to secure money obligations.
3. LIP was transferred for valuable consideration.
4. Recipient of the proceeds is the business partner of the
deceased and insurance was taken to compensate the
partner-beneficiary for any loss of income that may result from
the death of the insured partner.
5. The recipient of the insurance proceeds is a partnership in
which the insured is a partner of the deceased and the
insurance was taken to compensate the partnership for any
loss of income that may result from the death of the insured
partner.
6. The recipient is a corporation in which the insured was an
employee or officer.
3. Amount Received by Insured as Return of Premium
(Insurance is outlived by the Insured)
• In order that the life insurance proceeds may be totally
exempt from income taxation, the insured must die (Life
Insurance Proceeds)
• If he survives, there is only exemption on the portion of the
proceeds representing the return of premiums previously paid
is excluded. (Return of Premium)
4. Retirement Benefit, pensions, gratuities, etc.
1. Retirement benefits under RA No. 7641
2. Social Security benefits, retirement, gratuities,
pensions and other similar benefits.
3. Retirement received by officials and Employees (EE)
of private firms, in accordance with a reasonable
private plan maintained by the Employer (ER).
4. Benefits from the US Veterans Administration
5. GSIS Benefits
6. SSS
7. Separation Pay
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
Where the retirement plan is established in the CBA or other
applicable employment contract (RA 7641)
Receive benefits as earned under existing laws and the CBA.
Conditions to avail the exemption under a Reasonable Private
Benefit Plan (RPBP):
1. The RPBP must be approved by the BIR;
2. The retiree must have been in the service of the same ER for
at least 10 years at the time of retirement;
3. The private EE or official must be at least 50 years old at the
time of retirement;
4. The benefits must have been availed once.
In the absence of a RPBP or Agreement providing for
retirement benefits of EE in the establishment
a. Optional:
1. An EE upon reaching the age of 60 or more but not more
than 65;
2. Served at least 5 years in the said establishment;
3. Entitled to retirement pay equivalent to 1/2 month salary
for every year of service.
b. Mandatory:
1. An EE upon reaching the age of 65 years;
2. Served at least 5 years in the said establishment;
3. Entitled to retirement pay equivalent to 1/2 month salary
for every year of service.
NOTE: This provision is also found in the Labor Code.
Separation Pay
1. Amount received by an official, EE or by his heirs.
2. From the Employer (ER).
3. As a consequence of separation of official/EE from service:
a. Because of death, sickness or disability, OR
b. For any cause beyond the control of the official/EE.
Terminal Leave Pay – amount received arising from the
accumulation of sick leave or vacation leave credits.
5. Income Exempt Under Treaty
Most Favored Nation Clause
• This grants to the contracting party treatment not less
favorable than which has been or may be granted to the most
favored among other countries.
• It allows the taxpayer in one state to avail more liberal
provisions granted in another treaty to which the country of
residence of such taxpayer is also a party; provided that the
subject matter of taxation is the same as that in the tax treaty
under which the taxpayer is liable.
6. Compensation for injuries or sickness
1. Amounts received through accident or health insurance or
Workmen Compensation’s Act as compensation for personal
injuries or sickness.
2. Amounts of any damages received whether by suit or
agreement on account of such injuries or illness.
Rationale: Mere compensation for injuries or sickness suffered
and not income.
7. Miscellaneous Items:
a. 13th month pay and other benefits
Provided that the total exclusions shall not exceed P90,000.
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
16
b. Prizes and awards
1. Primarily in recognition of scientific, civic, artistic, religious,
educational, literary, or charitable achievement.
2. The recipient was selected without any action on his part to
enter the contest or proceeding.
3. He is not required to render substantial future services as a
condition to receiving the prize or award.
c. Prizes and awards in sports competitions
1. All prizes and awards
2. Granted to athletes
3. In local and international sports tournaments or competitions
(may be held locally or internationally).
4 Sanctioned by their national sports associations.
NSA – duly accredited by the PH Olympic Committee
d. Income derived by foreign government
1. It must be an income derived from investments in PH.
2. It must be derived from loans, bonds, or other domestic
securities, stocks, or interests on deposits in banks.
3. The recipient of such income must be a:
a. Foreign government
b. Financing institutions owned, controlled, or financed
by foreign government OR
c. Regional or international financing institutions
established by foreign governments.
e. Income derived by the Gov’t or its political subdivisions
The source of income must be from any public utility or from
the exercise if any essential government functions.
• GOCCs performing governmental functions = EXEMPT
• GOCCs performing proprietary functions = TAXABLE
XPNs: GSIS, SSS, PHIC, Local Water Districts (RA No. 8424)
g. Gains from sale of bonds, debentures or other
certificate of indebtedness.
• Must be with maturity of more than 5 years.
DEDUCTIONS
• Amounts authorized by law to be subtracted from pertinent
items of gross income to arrive at the taxable income. (Sec.
34)
Nature: strictly construed against the taxpayer (same as
exemptions and exclusions; there must be proof).
RULES:
1. Deductions must be paid or incurred in connection with the
taxpayer’s trade, business or profession.
Matching Concept of Deductibility – deductions must
“match” the income.
• Ordinary and necessary expenses must have been paid or
incurred during the taxable year for it to be deductible from
gross income. [CIR v. Isabela Cultural Corp. GR 172231,
2/12/2007
2. Must be supported by adequate receipts or invoices; XPN:
Standard Deductions
3. The withholding and payment of tax required must be
shown.
NOT ALLOWED TO CLAIM DEDUCTIONS
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 17

Subject to final tax on their gross income:

(1) NRA Not Engaged in Trade or Business; (2) NRFC
When income is purely compensation:
(1) RC; (2) NRC; (3) RA
Return of Capital – while in general, the nomenclature of “cost
of sales or cost of goods sold” is applied, the return of capital
has different components depending upon the nature of the
business being taxed.
EXCLUSIONS UNDER THE CONSTITUTION
1. Itemized Deductions (ID)
2. Optional Standard Deduction (OSD)
Substantial Rule – The TP shall substantiate the expense
being deducted with sufficient evidence such as official receipts
or other adequate records showing:
1. The amount of expense being deducted; and
2. The direct connection or relation of the expense being
deducted to the development, management, operation, and/or
conduct of the trade, business, or exercise of a profession.
Cohan Principle – TPs may use estimates when they can
show that there is some factual foundation on which to base a
reasonable approximation of the expense, they can prove that
they had made a deductible expenditure but just cannot prove
how much the expenditure was. [Cohan vs. CIR, F (2d) 540]

RMC No. 23-2000 – If there is showing that expenses have

ITEMIZED OSD been incurred but the exact amount thereof cannot be
ascertained due to absence of receipts and vouchers of the
Definition List every item In lieu of IDs: expenditures involved, the BIR will make an estimate of
of business Presumed as a fixed deduction that may be allowed in computing the TP’s taxable
expense percentage of gross income income bearing heavily against the TP whose inexactitude is of
for corporations and gross his own making. The disallowance of 50% of the TPs
sales or gross receipts of claimed deduction is valid.
individuals.
INCLUSIONS IN COMPENSATION FOR SERVICES
Deductions Deductible Individuals: 40% of total ALLOWED AS DEDUCTIONS:
items allowed sales/revenues/receipts/fees
by law . 1. Wages, salaries, commissions, professional fees,
Corporation: 40% of Gross vacation-leave pay, retirement pay, and other compensation.
Income 2. Bonuses in good faith.
• The election to claim either OSD or itemized deductions must 3. Persons and compensation for injuries if not compensated
be signified in the income tax return filed for the first quarter of for by insurance or otherwise.
the taxable year. The choice shall be irrevocable for the 4. Grossed-up monetary value of fringe benefit (for managerial
taxable year for which the return is made. and supervisory employees) provided for, as long as the final
tax imposed has been paid.
• Unless the corporation signified in his return to elect OSD, it
shall be considered as having availed itself of itemized Travelling/Transportation Expenses
deduction. 1. Reasonable and necessary expenses;
2. Incurred or paid while away from home; and
REQUIREMENTS FOR DEDUCTIBLE ITEMS 3. In pursuit of trade, business, or profession.
1. Specific provision of law allowing deductions.
2. Requirements for deductibility must be met. NOTE: Includes transportation, meals and lodging.
3. Proof of entitlement; burden of proof is on the TP. Rental Expense
4. Must not have been waived. 1. Aliquot part of the amount used to acquire leasehold over
5. Withholding and payment of tax must be shown. the number of years the lease will run.
6. Ordinary and necessary expenses. 2. Taxes and other obligations of the lessor paid by the lessee.
7. Legitimate and legal expenditure. 3. Annual depreciation of the cost of the leasehold
8. No limitation as to amount of expense; must be reasonable. improvements introduced by the lessees over the remaining
period of the lease or over the life of the improvements, which
ITEMIZED DEDUCTIONS [CRIPLEDD - TB] period is shorter.
1. Expenses
2. Interest Entertainment, Amusement, and Recreation Expense
3. Taxes 1. Individuals engaged in business including estates and trusts.
4. Losses 2. Individuals engaged in the practice of profession.
5. Bad Debts 3. Domestic corporation.
6. Depreciation 4. RFC
7. Depletion of oil and gas wells and mines 5. GPPs including its members
8. Charitable and other contributions
9. Research and Development Ceiling:
10. Contributions to Pension trusts For TPs engaged in sales of 0.5% of net sales (gross
goods and properties sales less sales return and
1. EXPENSES allowance)
a. Ordinary and necessary expenses.
b. Paid or incurred during the taxable year. For TPs engaged in sale of 1% of net revenue
c. In carrying on or which are directly attributable to, the services including exercise
development, management, operation, and/or conduct of the of profession and use or
trade, business or exercise of a profession. lease of premises.
d. Substantiated by proof.
e. Reasonable. For TPs deriving income Apportionment Formula:
f. Not against public policy, public morals or law. from both sale of goods and
g. If subject to withholding taxes, proof of payment to BIR.

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 18

services.
Advertising and Promotional Expenses
Advertising to stimulate the
CURRENT sale of
merchants or services
Advertising to stipulate the
FUTURE sale of merchants
or services
Advertising to promote the
sales of shares of stock or to
create a corporate image
Other Business Expenses Allowed by Special Laws as
Deductions
Non-Deductible Taxes
NetSales or Net Revenue / 1. Income tax provided by NIRC
Total Net Sales or Revenue 2. Estate tax and donor’s tax
x Actual Expenses 3. Special assessments (taxes assessed against local benefits
of a kind tending to increase the value of the property
assessed).
4. Stock transaction tax (tax on sale, barter, exchange of
Deductible as business shares of stock exchange or though IPO)
expenses. 5. Final taxes
6. Presumed CGT (6%)
7. VAT (12%)
Must be SPREAD over a
reasonable period of time
that it helped earn the TAX CREDIT TAX DEDUCTION
income.
Subtracted from tax due Subtracted from income before
NOT deductible as an tax.
advertisement.
Reduces the TP’s tax Reduces the TP’s income upon
liability peso for peso which tax liability is computed.
TAX CREDIT FORMULA:

1. Discounts granted by establishments for seniors and PWDs. Gross Income xxx
2. A lawyer or professional partnerships rendering actual FREE Less: Allowable Deductions xxx
legal services.
3. Private companies that employ PWDs as Regular Net Income Before Taxes xxx
Employees, apprentices or learners. x Income Tax Rate xxx
4. Qualified business enterprise that promotes green jobs.
INCOME TAX PAYABLE xxx
2. INTEREST Less: Taxes Paid xxx
1. There must be an indebtedness.
2. The indebtedness must be that of the TP. INCOME TAX DUE xxx
3. The interest must be legally due and stipulated in writing.
4. Interest must be paid or incurred during the taxable year. TAX DEDUCTION FORMULA:
5. The indebtedness must be connected with the TP’s trade or Gross Income xxx
business or exercise of profession. Less: Tax Deduction xxx
6. The interest arrangement must not be between related TPs.
7. The allowable deduction have been reduced by an amount Net Income Before Taxes xxx
of 33% of the interest subject to tax. x Income Tax Rate xxx

• CIR powers do not include the power to impute theoretical
interest.
• Interest paid in advance through discount or in case of cash
basis, the TP is allowed as deduction in the year the debt is
paid.
• Interest on loans used to acquire capital equipment or
machinery: TP is given the option to claim it as deduction or
treat it as capital expenditure (assets).
Interest Arbitrage (33%) – The TPs otherwise allowable
deduction for interest expense shall be reduced by an amount
equal to 33% of the interest income subject to final tax. [Sec.
34(B)(1)].
This is to specifically address the tax arbitrage arising from the
difference between the 20% final tax on interest income and
the normal corporate income tax rate under which interest can
be claimed as deduction:
FORMULA: (30% NCIT - 20% FT) / 30% = 33.33%
3. TAXES (as deductions)
Requisites:
1. Payments must be for taxes;
2. Must be impose on and payable by the TP;
3. Paid or incurred within the taxable year in connection with
TP’s trade business or professions;
4. Taxes are not specifically excluded by law from being
deducted from the TPs gross income.
INCOME TAX PAYABLE xxx
Foreign Tax Credit – The right of the income TP to deduct
from income tax payable the foreign tax he has paid to a
foreign country subject to certain limitations.
Purpose: To avoid double taxation
Not allowed to claim Tax Credit:
1. Alien individuals
2. FC
3. NRC
• Taxes paid and subsequently refunded previously claimed as
deduction (refund) shall be included as part of gross income in
the year of receipt to the extent of income tax benefit of said
deduction.
4. LOSSES
REQUISITES:
1. Loss belongs to the TP;
2. Actually sustained and charged off during the taxable year;
3. Evidenced by a closed and completed transaction;
4. Not compensated by insurance or other forms of indemnity;
5. Not claimed as deduction for estate tax purposes in case of
individual TPs;
6. Must be connected with the TPs trade, business or
profession, or incurred in any transaction entered into for profit
though not connected with his trade, business or professions;
7. If it is casualty loss, it is evidenced by a declaration of loss

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
filed within 45 days with the BIR.
KINDS/TYPES OF LOSSES:
1. Ordinary Loss: Incurred in trade, business or profession.
2. Casualty Loss: Loss connected with trade, business or
profession arising from fire, storm, shipwreck, or other casualty
or from robbery, theft, or embezzlement.
Net Operating Loss Carry Over (NOLCO)
• Excess of the allowable deduction over gross income of the
business in a taxable year.
• If it has not been previously offset as deduction from gross
income, it shall be carried over as a deduction from gross
income for the next 3 consecutive taxable years immediately
following the year of such loss.
• First in, First out basis. (deduct first the previous years)
Ex: 2019 Loss not declared, can be declared and spread over
in 3 taxable years.
Conditions:
1. The TP was not exempt from income tax in the year of such
net operating loss; AND
2. There has been no substantial change in the ownership of
the business or enterprise (merger or consolidation or business
consolidation with another person).
• Transferee is entitled to deduction of NOLCO if the
shareholders of the transferor/assignor gains control of:
1. At least 75% or more in nominal value of the outstanding
issued shares or paid up capital of the transferee or assignee,
if a corporation.
2. At least 75% or more interest in the business of the
transferee/assignee, if not a corporation.
Persons NOT entitled to NOLCO:
1. Individuals engaged in trade or business or in the exercise
of his profession (implication: corporation).
2. Domestic and RFC subject to normal income tax or
preferential tax rates.
3. Estates and Trusts.
• If the TP is (1) subject to MCIT or Minimal Corporate Income
Tax 2% of Gross Income or (2) claims OSD: cannot claim
NOLCO; 3-year period shall continue to run.
4. OBUs for a foreign banking corporation and FCDU of a
domestic banking corporation.
5. Enterprise registered with the BOI enjoying the income tax
holiday incentive.
6. PEZA-registered enterprises.
7. SBMA-registered enterprises.
8. FC engaged in international shipping or air carriage
business in the Philippines.
9. Any person, natural or juridical, enjoys exemption from
income tax.
CAPITAL LOSSES (Jan 31 vid)
• Losses from sale or exchange of capital assets.
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
19
• Deductible to the extent of capital gains only; cannot be
deducted from ordinary gains
Securities Becoming Worthless (Capital Assets)
• Shares when offered for sale or requested for share
redemption, no amount can be realized (walay kitaon) by the
owner of the share.
• Considered as loss from sale or exchange on the last day of
such a taxable year.
NOTE: Securities referred to herein is not the ordinary assets
(broker that issues or buys securities which are ordinary
assets). If you are not a broker and a company with a different
merchandise and buys securities, these are capital assets.
NOTE: Ordinary assets, gain, loss vs. Capital asset, gain, loss.
Wagering Losses (Sugal) – deductible only to the extent of
gain or winnings deemed to apply only to individuals.
Non-Deductible Losses:
1. Losses not incurred in trade, profession or business or in
any transaction entered into.
2. Losses from sales or exchanges of property entered into
between related TPs are not deductible as provided under Sec.
36, NIRC but the gains are taxable.
3. Losses from exchanges of property in a corporate
readjustment.
4. Losses from illegal transactions (unlike in income).
5. Losses on voluntary removal of building on land purchased
with a view to erect another building. Such loss shall form part
of the cost of the new building to be erected (not a loss
deductible from the income).
Marcelo Doctrine – A loss in one line of business is permitted
as a deduction from gain in another line of business. [Marcelo
Steel Corporation vs. CIR, G.R. No. L-12401, 10/31/1960]
Ex. A has two lines of businesses (LOB). The textile business
incurs loss while the plastics LOB has gains. The losses in the
textile LOB can be deducted from the gains of the plastics
LOB. Provided that both businesses are owned by the same
person.
Bad Debts
Debts due to the TP actually ascertained to be worthless (dili
na gyud ma collect with certainty) and charged off in the books
of the TP within the taxable year except those:
1. Not connected with trade, business or profession;
2. Between related TPs
NOTE: Absence of creditor is not a bad debt.
Requisites (all of these must concur):
1. The debts are uncollectible despite diligent effort exerted by
the taxpayer which may be proved by: (a) sending of SOA; (b)
sending collection letters; (c) giving the account to the lawyer
for collection; (d) filing a collection case in court.
2. Existing indebtedness subsisting due to the TP which must
be valid and legally demandable.
3. Connected with the TP’s trade, business or practice of
profession.
4. Actually charged off in the books of accounts of the taxpayer
as of the end of the taxable year.
5. Actually ascertained to be worthless as of the end of the
taxable year.
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 20

6. Must not be sustained in a transaction entered into between 4. In an amount in excess of:
related parties. a. 10% – individual
b. 5% – corporation
Related Parties of the TP’s taxable income derived from trade, business, or
1. Members of the same family (brothers and sisters, whether profession computed without the benefit of this and the
whole of half-blood; spouse, ancestors, and lineal following subparagraphs.
descendants);
2. An individual and a corporation more than 50% in value of Contributions Deductible in Full [FANG]
the outstanding stock of which is owned, directly or indirectly, 1. Donations to the Government of the PH, or political
by or for such individual; subdivisions including fully-owned government corporation to
3. Two corporations more than 50% in value of the outstanding be used exclusively in undertaking priority activities in:
stock of each of which is owned, directly or indirectly, by or for a. Culture
the same individual; b. Health
4. The grantor and a fiduciary of any trust; c. Economic Development
5. The fiduciary of a trust and the fiduciary of another trust of d. Education
the same person is a grantor with respect to each trust; and e. Science
6. A fiduciary of a trust and a beneficiary of such trust. f. Human Settlement
g. Youth and Sports Development
Factors that will determine WON debts are bad debts:
1. The debtor has no property or visible income. NOTE: NEDA determines annually which will be considered as
2. The debtor has been adjudged bankrupt or insolvent. a priority activity.
3. There are numerous debtors with small amounts of debts
and further action on the accounts would entail expenses 2. Donations to Foreign institutions and international
exceeding amounts sought to be collected. organizations in compliance with treaties and agreements with
4. The debt can no longer be collected. the Government.
5. The collateral shares have become worthless. 3. Donations to accredited NGOs
a. Exclusively for [CHESS-CRAC]:
Effect of Recovery of Bad Debts i. Cultural
Recovery of bad debts previously allowed as deduction in the ii. Charitable
preceding years shall be included as part of the gross iii. Health
income in the year of recovery to the extent of the income tax iv. Educational
benefit of said deduction (Tax Benefit Rule) v. Scientific
vi. Social Welfare
Ex. Debtor paid P12,000 but TP already declared the previous vii. Character Building, Youth & Sports Development
debt of P10,000 as a bad debt. The gain or income recognized viii. Research
during the year when the debtor paid the P12,000 is P10,000. ix. Any combination of the above.

Depreciation
The gradual diminution in the useful value of tangible property
resulting from exhaustion, wear and tear and obsolescence.
Requisites:
1. The property must have a life of at least 1 year.
2. Must be used in trade, business or practice of profession.
3. Must have been charged off during the taxable year.
4. Depreciation method used must be reasonable and
consistent (i.e. straight line method).
5. Depreciation schedule should be attached in the ITR.
Goodwill
GR: Depreciation is NOT allowed. Not limited in duration.
XPN: If the goodwill is acquired through capital outlay and is
known from experience to be of value to the business for only
a limited period.
Charitable and other Contributions
1. Contribution or gifts paid or made during the taxable year.
a. To or for the use of government or any of its agencies
or any political subdivision thereof exclusively for
public purposes or to accredited DCs.
b. Associates organized and operated exclusively for
religious, charitable, scientific, youth and sports
development, cultural, or educational purposes or for
rehabilitation of veterans.
c. To social welfare institutions or to NGOs.
2. In accordance with the rules and regulations promulgated by
the SOF upon recommendation of the commissioner.
3. No part of the income inures to the benefit of any private
stockholder or individual.
b. Donation must be utilized not later than the 15th day
of the 3rd month following the close of taxable year.
c. Administrative expense must not exceed 30% of the
total expenses.
d. Upon dissolution, assets shall be transferred to
another non-profit domestic corporation or to the
State.
4. Donations of prizes & awards to Athletes. (Sec. 1, RA 7549)
Donations Subject to Limitation
1. Donations that are not in accordance with the priority plan;
2. Donations whose conditions are not complied with;
3. Donations to the Government of PH or political subdivision
exclusive for public purposes; and
4. Donations to domestic corporations organized exclusively
for scientific, educational, cultural, charitable, religious,
rehabilitation of veterans, and social welfare.
SPECIAL DEDUCTIONS
1. Private proprietary educational institutions – in addition to
the expenses allowed as deduction, they have the option to
treat the amount utilized for the acquisition of depreciable
assets for expansion of school facilities as:
a. Outright expense (the entire amount is deducted from
gross income); or
b. Capital asset and deduct only from the gross income
an amount equivalent to its depreciation every year.
(Sec. 34 [A][2], NIRC)
2. Estate and Trusts can deduct the:
a. Amount of income paid, credited or distributed to the
heirs/beneficiaries; and
b. Amount applied for the benefit of the grantor. (Sec.

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
61, NIRC)
• 20% PWD Discount
• Free Legal Assistance Act of 2010: 10% of Gross Income
• Expanded Senior Citizen Act of 2003 – this discount should
be considered as a deductible expense from gross income and
no longer as a tax credit. [CIR vs. Central Luzon Drug Corp.,
G.R. No. 159610, 2008]
Optional Standard Deduction (OSD)
Amount not exceeding:
1. 40% of the gross sales or gross receipts of a qualified
individual TP
2. 40% of the gross income of a qualified corporation.
May NOT avail of OSD:
1. NRA
2. NRFC
3. Exempt under NIRC and other special laws with no other
taxable income.
4. With income subject to special or preferential rates.
5. Juridical entities whose taxable base is gross revenue or
receipts.
INCOME TAX ON INDIVIDUALS
Classes of Individual Taxpayers:
1. Citizen
a. Resident
b. Non-resident
c. Overseas Contract Worker and
d. Seaman
2. Aliens
a. Resident (RA)
b. Non-resident (NRA)
c. Engaged in Trade or Business (ETB)
d. Not Engaged in Trade or Business (NETB)
3. Special Class of Individual Employees
4. Minimum Wage Earners
Non-Resident Citizen (NRC)
1. A citizen of PH who establishes from the satisfaction
of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein.
2. A citizen of PH who leaves the PH during the taxable
year to reside abroad either as an immigrant or to an
employment on a permanent basis.
3. A citizen of the PH who works and derives income
from abroad and whose employment thereat requires
him to be physically present abroad most of the time
during the taxable year.
4. A citizen has been previously considered as a NRC
and who arrives in PH anytime during the taxable
year to reside permanently in PH shall ALWAYS be
treated as a NRC for the entire taxable year in which
he arrives with respect to his income derived from
sources abroad until the date of his arrival in PH.
5. The TP shall submit proof to the Commissioner to
show his intention of leaving PH to reside
permanently abroad or to return to and reside in PH
as well as the case may be for the purpose of this
section.
Resident Alien (RA) – means an individual whose residence
is within PH and who is not a citizen thereof.
Non-Resident Alien (NRA) – means an individual whose
residence is NOT within PH and who is not a citizen thereof.
Minimum Wage Earner (MWE) – shall refer to a worker in the
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
21
private sector paid the statutory minimum wage, or to an
employee in the public sector with the compensation income of
not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned.
Special Classes of Aliens
1. Regional and Area – HQ and Regional Operating HQ for
multinational companies established in PH
2. Offshore Banking Units (OBUs) as established in PH; foreign
banks allowed to operate in the PH and to conduct foreign
currency transactions.
3. Petroleum Service Contractors and subcontractors in PH
These are not required to submit ITRs and rests upon the
Employer.
Taxable Income Formula:
Gross Compensation Income xxx
+Net Compensation Income xxx
+Net Business/Professional Income xxx
+Other Income xxx
TAXABLE INCOME xxx
• Difference is Taxable Income subject to graduated rates.
Fringe Benefits (BFT)
GR: The cost of life or health insurance and other non-life
insurance premiums borne by the ER are taxable fringe
benefits.
XPNs:
1. Contributions of the ER for the benefit of the EE to the SSS,
GSIS, or similar contributions, arising from provisions from any
existing law; and
2. Cost of premiums borne by the ER for the group of
insurance of EEs.
Stock Options
• Part of the payment for services of the EE for the services
they rendered which entitles them to buy their ER’s shares of
stock at an agreed price. (EE becomes shareholders)
• FMV of the shares at the time the EE exercise the stock
options – agreed exercise price = amount subject to FBT
De Minimis Benefits
Facilities or privileges furnished or offered by an ER to his EEs
(managerial, supervisory or Rank and File) that are relatively
small value and are offered or furnished by the ER merely as a
means of promoting the health, goodwill, contentment and
efficiency of the EEs.
Examples of De Minimis Benefits R.M. Circular 2018
1. Monetized (paid) UNUSED Vacation Leave Credits
Vacation Leave Sick Leave
Private EEs Exempt up to 10 Always taxable
days VL; excess
is subject to FBT
Government EEs Always tax exempt regardless of the
number of days whether VL or SL.
2. Medical Cash Allowance to Dependent of EEs
• Not exceeding P1500 per semester or P250/month
3. Rice Subsidy
• P2,000 or one sack of 50-kg rice/month amounting to not
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 22

more than P2,000.

Sick Leave If paid or availed of as salary of an EE
4. Uniforms and Clothing Allowances notwithstanding his absence from work =
• Not exceeding P6,000/annum Vacation Leave TAXABLE

5. Actual Medical Assistance Service Monetized value of unutilized vacation

• Not exceeding P10,000 per annum Incentive leave credits of private EEs:
Leave 10 days and below = NOT Taxable
6. Laundry Allowance Any excess over 10D = Taxable
• Not exceeding P300/month
Sick leave credits of private EEs =
7. EE Achievement Awards Under an Established Written Taxable
Plan; Does not Discriminate in Favor of Highly Paid EEs.
• In the form of tangible personal property other than cash or Separation Pay Due to any cause beyond the control of
GC with an annual monetary value not exceeding P10,000. the EE = NOT Taxable

8. Gifts given during Christmas and Major Anniversary Financial assistance with the condition
Celebrations that EE has to leave the company =
• Not exceeding P5,000 per EE/annum TAXABLE

9. Daily Meal Allowance for OT Work Voluntary availed of by the EE = Taxable

• Not exceeding 25% of the basic minimum wage on a per
region basis. Backwages TAXABLE

10. Benefits received by virtue of CBA and Productivity Retirement TAX-EXEMPT If:
Incentive Scheme Benefits 1. SSS or GSIS retirement pays.
• Not exceeding P10,000 per EE/annum from the two items 2. Optional Retirement Plan subject to the
combined. following conditions:
a. Retirement program is approved
All “other benefits” are subject to income tax. by the BIR;
b. Must be a reasonable benefit
NOTE: The amounts pertained hereto are ceiling. Hence, in plan (fair and equitable for the
excess of the respective ceilings are considered as part of the benefit of the ALL EEs);
“other benefits” under Sec. 32[B][7][e] of the NIRC. c. Retiree is employed for at least
10 years in the company;
Sec. 32[B][7][e]: 13th month pay and other benefits are d. Retiree should be 50 years old
EXCLUDED from gross income, provided they do not exceed at the time of retirement;
P90,000. Any excess thereof is considered part of the e. Availed of for the FIRST time.
compensation income of an individual, hence, subject to
income tax. Terminal Leave NOT TAXABLE
Payments
Other Benefits Ceiling (non-taxable) 90,000
Less: 13th month 10,000
Taxation of (1) Business Income or Income from (2)
Practice of Profession
Excess for non-taxables 80,000
Less: Itemized De Minimis
1. Purely Compensation Self-Employed or Professionals
• If the rice subsidy for the year amounts to P3,000, P2,000 is Self-Employed Individuals Option:
non-taxable, and P1000 can be deducted from the P80,000. and/or Professionals 1. Schedular tax rate [Sec. 24
(A)(2)(a)]
• If the laundry allowance amounts to P500/month, P300 is With gross sales/receipts
non-taxable and the P200 can be deducted from the P80,000. and other non-operating 2. 8% of the gross
income sales/receipts and other
• Once all the itemized De Minimis have been deducted and it non-operating income in
exceeds P90,000, then the excess is now subject to income NOT more than P3M excess of P250,000.
tax.
Self-Employed Individuals
NOTE: Subtract first the 13th month from the P90K ceiling of and/or Professionals Schedular Tax Rate (no option
“other benefits” (non-taxable) before subtracting the other for 8%)
items. Example above. With gross sales/receipts
and other non-operating
Summary of Tax Implications of Employees (EEs) (Salary) income
Fixed Salary Taxable
MORE than P3M
Other Benefits 1st P90,000 is exempted from income
tax, any excess is taxable. 2. Mixed Income Earners (Employed and with Business)

Transportation/ No Liquidation = NOT Taxable ALL income from Corp. Schedular Tax Rate
Representation With Liquidation = Taxable
Allowance ALL income from business DO NOT Exceed P3M
or practice of profession Option:

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 23

• The Partners cannot further claim deductions from their

1. Schedular tax rate [Sec. 24 distributive share. But if the partner also derives income from
(A)(2)(a)] other sources, he/she can claim either ID or OSD.
2. 8% of the gross • Partners cannot avail of 8% income tax rate because the
sales/receipts and other distributive share from the GPP is already net of cost and
non-operating income in expenses.
excess of P250,000.
Non-Resident Alien Engaged in Trade of Business
EXCEEDS P3M = Schedular (NRA-ETB)
Tax Rate • Come to the PH and stay for an aggregate (not necessarily
consecutive) period of more than 180 days during any calendar
TAX TABLE/Schedular Tax Rate Sec. 24 (A)(2a) NIRC year.

• Taxed on their income derived from ALL sources WITHIN PH

Net Taxable Income at schedular rate subject to rule of reciprocity.
Tax Rate
Over But not over (On the Annual Income) Non-Resident Alien NOT Engaged in Trade of Business
(NRA-NETB)
250,000 0% • Received from ALL sources WITHIN PH.
• 25% on ALL income (No schedular tax rate)
250K 400K 15% of excess of 250,000
Aliens Employed by Regional HQs, Regional Operating
400K 800K 22,500 + 2% of excess over 400K HQs, OBUs, and Petroleum Service Contractors (Special
Aliens)
800K 2M 102,500 + 25% of excess over 800K • Professional income tax rates shall NO longer be applicable
to special aliens.
2M 8M 402,500 + 30% of excess over 2M • They are now subject to income tax rate.

8M 2,202,500 + 35% of excess over 8M Individual TPs Exempt from Income Tax (IT)

Minimum Wage Earner

8% Option
8% in excess of P250,000 in lieu of the graduated income tax
rates and the percentage tax.
NOT Qualified:
1. Purely compensation income earner.
2. VAT-Registered TPs, regardless of the amount of gross
sales/receipts and other non-operating income.
3. Non-VAT TPs whose gross sales/receipts and other
non-operating income exceed P3M VAT threshold.
4. TPs who are subject to Optional Percentage Taxes (OPT),
except those under Sec. 116.
5. Partners of GPP since their distributive share from the GPP
is already net of costs and expenses (basis of the 8% is gross).
6. Individuals enjoying income tax exemption.
• Once 8% Option is availed of, Optional Standard Deduction
(OSD) is NOT allowed; deductions will only be itemized
deduction.
Taxation of Partners in a General Professional Partnership
Partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
• GPP shall not be subject to income tax.
• Partners shall be liable for income tax only in their separate
and individual capacities.
• Exempt from the payment of income tax on their taxable
income.
• Holiday pay, OT pay, night shift differential (NSD), and hazard
pay shall likewise be exempt.
• However, “other benefits” exceeding P90,000 = Taxable on
excess benefits.
Soriano vs. SOF, G.R. No. 184450, 1/24/2017
R.A. No. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of the minimum
wage is determined by the wage boards, including the
corresponding holiday, OT, NSD, and hazard pays.
The treatment of bonuses and other benefits that an EE
received from the ER in excess of the P90,000 is taxable.
The treatment of this excess cannot operate to
disenfranchise the MWE from enjoying the exemption
granted by R.A. 9504.
Exemptions Granted under the International Agreements
• Those employed by Foreign Embassies/Diplomatic Missions
under the Vienna Convention on Diplomatic Relations.
NOTE: Consular relations are NOT EXEMPT because they are
actually acting in commercial capacity unlike in Diplomatic
relations because they are exercising governmental functions.

• Net income of the Partnership shall be computed in the

same manner as a corporation. INCOME TAX ON CORPORATIONS

• Partner’s distributive share, actually and constructively What is a Corporation? This includes:
(reflected on record) received, in the net income of the 1. Partnerships
partnership shall be reported as gross income. 2. Joint Stock Companies
3. Joint Accounts (Cuentas en Participación)
Deductions for GPP: 4. Associations; and
(1) Itemized expenses; OR (2) 40% OSD

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 24

5. Insurance Companies As a tax on gross income it prevents tax evasion and

Exclude:
1. GPP
2. JV or Consortium formed for purposes of undertaking
construction projects.
3. JV formed for the purpose of engaging in petroleum,
coal, geothermal and other energy operations or
consortium contracts with the government.
minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was
lowered. [CREBA vs. Hon. Exec. Sec. G.R. 160756,
3/9/2010]
NOTE: minimum (pinaka baba) if baba pa jud ani, MCIT is paid
by corporation

Corporate Recovery And Tax Incentives for Enterprise
ACT (CREATE ACT)
Policy of the State to develop the national economy towards
global competitiveness by implementing tax policies
instrumental in attracting investments which will result in
productivity enhancement, employment generation,
countrywide development, and a more inclusive economic
growth, while at the same time maintaining fiscal prudence and
stability.
Purpose of MCIT: designed to forestall the prevailing practice
of corporations of over claiming (ballooning) deductions in
order to reduce their income tax payments.
2% of gross income except: (1) income exempt from income
tax; (2) income subject to final withholding tax BUT from July 1,
2020 - Jun 30, 2023 rate is 1% — CREATE ACT.
Formula of MCIT: Gross Income = Gross Sales – Sales
returns, discounts, and allowances and COG/services.

TYPES OF CORPORATIONS • Taxable due will be the NCIT or MCIT whichever is higher.
1. Domestic Corporations (DC) Impose MCIT if:
2. Resident Foreign Corporations (RFC) 1. Taxable income is 0.
3. Non-Resident FC (NRFC) 2. Taxable income is negative.
4. Special Types of Corporations 3. MCIT is greater than NCIT due.
Special RFC: Coverage: DCs and RFCs subject to NCIT. Those subject to
i. Depositary Banks special or preferential rates are not included.
ii. International Carriers
iii. Offshore Banking Units (OBUs) If operations are partly covered under the special income tax
iv. Regional or Area HQs and Regional Operating HQs of system, the MCIT will apply only on operations covered by the
multinational companies. regular income tax system.
Special NRFC: Commencement: beginning 4th Taxable year immediately
i. NR cinematographic film owners, lessors or distributors. following the year which such corporation commenced its
ii. NR owners or lessors of vessels chartered by PH nationals. business operations.
iii. NR lessors of aircraft, machinery and equipment.
Ex: A corporation incorporated on Jan. 1, 2019. In its first 3
TAXES IMPOSED ON DOMESTIC CORPORATIONS (DC) years, the corporation is given a leeway to declare zero tax
1. Normal Corporate Income Tax (NCIT) payable (implication that there are losses since the company is
2. Minimum Corporate Income Tax (MCIT) just starting) but in the 4th year, regardless if it generates
3. Gross Income Tax (not commonly used) income or incurs loss, the corporation will have to pay taxes.
4. Improperly Accumulated Earnings Tax NOTE: MCIT will apply or only covers the regular income tax
5. Final Tax on Passive Income system.
1. Regular/Normal Corporate Income Tax (NCIT) Sec. 27 4. Improperly Accumulated Earnings Tax – (No retain 100%
of earning except on 3 instances. However, under the CREATE
• Effective July 1, 2020 = 25% income tax rate; used to be 30% act, this is repealed).
• If the net taxable income does not exceed P5M and the total Proprietary Educational Institutions and Non-Profit
assets (excluding land on which the office, plant, and Hospitals
equipment are situated) do not exceed P100M = 20% Any private school maintained and administered by private
individuals or groups with an issued permit to operate from the
ILLUSTRATION: DepEd of the CHED or TESDA, as the case may be, in
accordance with existing laws and regulations.
Gross Sales (for the year) P1,000,000
Less: Sales Returns/Allowances/ 100,000 Rate (Sec. 27): 10% on taxable income except those covered
Discounts/COGS/COS in Subsection D (Passive Income).
Gross Income P 900,000 From July 1, 2020 to June 30, 2023 = 1% only (CREATE Law)
Less: Allowable Deductions P 400,000
CIR vs. St. Lukes’ Medical Center G.R. No. 195909 **
Net Taxable Income P 500,000
x Tax Rate (20%) The only qualifications for hospitals are that they must be (1)
proprietary and (2) non-profit.
NCIT Due on or before April 15 P 100,000

NOTE: Tax rate is 20% since the NTI does not exceed P5M.
Proprietary = private
2. Minimum Corporate Income Tax (MCIT)

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
Non-proft = no net income or asset accrued to or benefits any
member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities
conducted not for profit.
Predominance Test – if the gross income from unrelated
trade/business activity exceeds 50% of the total gross
income from all sources = the entire taxable income shall be
subject to regular corporate tax rate (25%).
Unrelated trade/business/other activity – the conduct of
which is NOT substantially related to the exercise or
performance by such educational institution/hospital of its
primary purpose or function.
BIR Ruling 237-87: Related activities auxiliary activities
(school-owned canteen, cafeteria, dormitory and bookstore
within the school premises) = related activities.
NOTE: NOT related to their primary purpose. Any income
earned from these activities is taxable (RCTR) if it exceeds
50% of the entire income.
Government-owned or Controlled Corporations (GOCCs)
Any agency
• Organizes as a stock or NS corporation.
• Vested with functions relating to public needs whether
governmental or proprietary in nature.
• Owned by the government directly or through its
instrumentalities either wholly, or where applicable as in the
case of stock corporations, to the extent of at least 51% of its
capital stock.
GR: All GOCCs shall pay such rate of tax upon their taxable
income as are imposed upon corporations or associations
engaged in a similar business, industry, or activity (same as
other non-goccs rate).
XPNs: (Sec. 27[c])
1. GSIS
2. SSS (1&2 are considered as forced savings)
3. HDMF
4. Local Water Districts
Resident Foreign Corporations
A corporation organized, authorized or existing under the laws
of any foreign country, engaged in trade or business within the
Philippines.
Rate: 25% of the taxable income derived in the preceding
taxable year from all sources within the Philippines effective
July 1, 2020 (Before 30%).
XPNs:
1. International carriers = 2.5% of Gross PH Billings
2. Offshore Banking Units for income derived from foreign
currency transactions with non-residents, other offshore
banking units, local commercial banks = exempt; interest
derived from foreign currency loans to residents = 10% final tax
3. Regional or Area HQs = exempt
4. Regional Operating HQs = 10% of taxable income
Taxes Imposed on RFCs
1. NCIT
2. MCIT
3. Gross Income Tax
4. Final Tax on Passive Income
5. Interest from deposits and yields and royalties
6. CGT from sale of shares not traded in the stock
exchange.
7. Expanded Foreign Currency Deposit System
8. Inter-corporate dividends
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
25
9. Branch Profits Remittance Tax (BPRT)
Branch Profit Remittance Tax (BPRT)
• Any profit remitted by a branch office of a multinational
corporation to the head office is subject to 15% final tax based
on total profits applied or earmarked (set aside) for remittance
without deduction for the tax component.
• Income items which are not effectively connected with the
conduct of its trade or business in the Philippines are not
considered as branch profits/
Effectively connected – income arises from the business
activity in which the branch is engaged.
Otherwise it will be subject to the Normal Corporate Income
Tax rate of 25%
International Carriers
• Foreign airline corporation doing business in the PH which
has landing rights in any PH port to perform international air
transportation services or flight operations anywhere in the
world.
• Reciprocity may be invoked by an international carrier as a
basis for GBP tax exemption when its home country grants
income tax exemption to PH carriers.
Ex. PAL is exempted in other countries, then the airline of that
specific country who has given exemption to PH airline should
also be exempt.
Gross Philippine Billings – amount of gross revenue realized
from carriage of persons, excess baggage, cargo and mail
originating from the PH in a continuous and uninterrupted
flight. Irrespective of the place of sale or issue and the place
of payment of the ticket or passage document.
• An offline airline having a branch office or a sales agent in PH
which sells passage documents for compensation or
commission to cover off-line flights of its principal or head
office or for other airlines covering flights originating from PH
ports or off-line flights – not considered engaged in trade or
business as an international air carrier and is therefore not
subject to GBP tax.
• If an international carrier maintains flights to and from the PH
= 2.5% of its GBP
• If it does not have flights to and from the PH but nonetheless
earn income from OTHER activities in the country = 25%
Offline Carrier – any foreign carrier NOT certified by the Civil
Aeronautics Board, but who maintains office or who has
designated or appointed agents or employees in the PH, who
sells or offers for sale any air transportation in behalf of said
foreign air carrier and/or others, or negotiate for, or holds itself
out by solicitation, advertisements, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation.
Offshore Banking – A branch, subsidiary, or affiliate or a
foreign banking corporation located in an Offshore Financial
Center which is duly authorized by the BSP to transact offshore
banking business in the Philippines.
• Allowed to provide all traditional banking services to
non-residents in any currency other than PH national currency.
• Banking transactions to residents are restricted; forbidden to
make transactions in Peso.
• Only 1 OBU in PH: Taiwan Cooperative Bank
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 |
INCOME EXEMPT FROM TAX
1. Non-residents
2. Foreign currency transactions with branches of
foreign banks authorized by the BSP
3. Foreign currency transactions with OBUs in PH.
Income derived under Expanded Foreign Currency
Deposit = subject to 10% final tax.
NOTE: This is usually for INTERNATIONAL BANKS. Our
deposit here is regularly 20%.
Non-resident Foreign Corporations
• 25% of Gross Income from ALL sources within PH.
• NR Cinematographic filmowner, lessor or distributor = 25% GI
• NR owner or lessor of aircraft, machineries, and other
equipment = 7.5% of gross rentals or fees.
• Intercorporate dividends and CGT = 15%
CORPORATIONS EXEMPT FROM INCOME TAX
1. Labor, agricultural or horticultural organizations not
organized principally for profit.
a. Provincial fairs and like associations of a quasi-public
character, which are designed to encourage the development
of better agricultural and horticultural products through a
system of awards, prizes, or premiums, and whose income
derived from gate receipts, entry fees, donations, etc., is used
exclusively to meet the necessary expenses of upkeep and
operation, are thus exempt.
b. The holding of periodical race meets, the profits from which
may inure to the benefit of their shareholders, are not exempt.
Similarly, corporations engaged in growing agricultural or
horticultural products or raising livestock or similar products for
profits are subject to tax. [RR No. 2, Sec. 25]
2. Mutual savings banks and cooperative banks either
domestic or foreign, provided that:
a. No capital represented by shares;
b. Earnings, less only the expenses of operating are
distributable wholly among the depositors; and
c. It is operated for mutual purposes and without profit.
NOTE: If the deposits are made compulsory under contract
between the bank and the depositors and are operated for
speculation rather than for savings, the bank is not qualified as
a mutual savings bank.
3. A Beneficiary Society, Order or Association, provided:
a. It must be operated under the lodge system or for the
exclusive benefit of the members of society, with parent and
local organizations which are active;
b. There must be an established system of payment to its
members or their depended of life, sickness, accident, or other
benefits; and
c. No part of the net income inures to the benefit of the
stockholders/members.
4. Cemetery Companies, provided that:
a. It must be owned and operated exclusively for the benefit of
its owners; and b. It is not operated for profit.
5. Religious, Charitable, Scientific, Athletic, or Cultural
Corporations, provided that:
a. It is organized and operated for one or more specified
purposes; and
b. No part of its net income inures to the benefit of any private
stockholder or individual.
6. Business League, Chamber of commerce, or Board of
Trade, provided that:
a. It is an association of persons having some common
From the Discussions of Atty. Denise Christine Lim, CPA
University of Mindanao College of Law
26
business interests;
b. Its activities are limited to work for such common interests;
c. Not engaged in a regular business for profit; and
d. No part of the net income inures to the benefit of any private
stockholder or individual.
7. Civic League, provided that:
a. It is not organized for profit but operated exclusively for
purposes beneficial to the community as a whole. In general,
organizations engaged in promoting welfare of mankind;
b. Sworn affidavit filed with the BIR showing the following:
i. Character of the league or organization
ii. Purpose for which it was organized
iii. Actual activities
iv. Sources of income and disposition of the organization which
affects its right to exemption.
v. All facts relating to the operation of the organization which
affects its right to exemption.
vi. The copy of AOI, BLs and FS should be attached to the
Sworn Affidavit.
8. Government Educational Institutions
9. Mutual Fire Insurance companies and like Organizations
Requisites for Exemption:
a. Income is derived solely from assessments, dues and fees
collected from members; and
b. Fees collected from members are for the sole purpose of
meeting its expenses.
10. Farmers, Fruit Growers, or like Associations
Requisites for Exemption:
a. Formed and organized as sales agent for the purpose of
marketing the products of its members;
b. No net income to the members; and
c. Proceeds of the sale shall be turned over to them less
necessary selling expenses on the basis of the quantity of
goods produced by them.
The income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under the NIRC.
CIR v. St. Luke's Medical Center, Inc. 692 SCRA 66
St. Luke's fails to meet the indispensable requirement under
Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. It admitted paying patients from
which profit is derived.
To be exempt from income tax, Sec. 30 (E) of the NIRC
requires that a charitable institution must be organized and
operated exclusively for charitable purposes. Likewise, to be
exempt from income tax, Sec. 30 (G) requires that the
institution be “operated exclusively” for social welfare.
TAX ON OTHER BUSINESS ENTITIES; GENERAL
PARTNERSHIPS, GENERAL PROFESSIONAL PARTNERSHIPS,
CO-OWNERSHIPS, JOINT VENTURES, AND CONSORTIA
FILING OF RETURNS AND PAYMENT
a. Individual Return
b. Corporate Returns
c. Return on Capital Gains Realized From Sale of Shares
of Stock and Real Estate
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 27

following the close of the quarter during which the withholding

DEDUCTIONS was made.

v. 1/2 of the value of labor training expenses incurred for skills Annual Information Return – filed before January 31 of the
development of enterprise-based trainees enrolled in public year following the calendar year in income were paid or
senior high school, public technical vocational institutions and accrued.
duly covered by an apprenticeship agreement under the Labor
Code; not exceed 10% of direct labor wage Where:
1. AAB (Accredited Agent Bank)
Tax Arbitrage: Reduced by 20% 2. RDO (Revenue District Office)
3. Collection Agent
Tax-Free Exchanges: Not only merger or consolidation but 4. Duly authorized by the Treasurer where he is legally residing
reorganization; broader. 5. Office of the Commissioner

Filing of Returns and Payment NRC (Non-Resident Citizen):

1. Philippine Embassy
GR: The following are required to file an ITR: 2. Nearest Philippine Consulate
1. Resident Filipino Citizen 3. Mailed directly to CIR
2. NRC on his income within PH
3. RA on his income within PH CORPORATE RETURNS
4. NRAETB For 1st to 3rdQ quarter – within 60 days after the close of each
5. Individual deriving compensation concurrently from three quarters
two or more employers at any time during the taxable
year. FILING OF ANNUAL RETURN (FAR)
6. Individuals whose pure compensation income derived
from sources within PH exceeds P250,000. Quarterly return < tax due
1. Pay the balance
XPNs: File Information Return 2. Carryover the excess credit perpetually or
1. Individuals whose GI does not exceed his total 3. Be credited or refunded with the excess amount
exemptions.
2. Individual TP receiving purely compensation income Quarterly return > tax due
regardless of the amount from one ER; it shall be 1. Carried over and credited against the estimated
withheld (Substituted Filing) quarterly income tax liabilities of succeeding years
3. Individuals whose sole income has been subjected to
FWT. Where:
4. A MWE or individual who is exempt from tax 1. AAB (Accredited Agent Bank)
2. RDO (Regional District Office)
ITR FOR MARRIED INDIVIDUALS 3. Collection Agent
• Who do not derive income purely from compensation, file a 4. Duly authorized by the Treasurer where he is legally residing
return to include the income of both spouses. 5. Office of the Commissioner

• If impracticable to file 1 return = file separately but Contemplating dissolution or reorganization

consolidated by the BIR. Within 30 days after the adoption of a resolution or plan for its
dissolution render a correct return of BIR.
ITR For Unmarried Minors/Children
GR: Received by a living parent = included in the return of the Capital Gains
parent
XPNs: (1) When the donor’s tax has been paid; (2)When the Shares of stock
transfer of the property is exempt from donor’s tax. • Ordinary return = 30 days after each transaction
• Final Consolidated Return - on or before April 17 of the
Substituted Filing following year.
1. The EE received purely compensation income during the
taxable year. Real Property
2. From one ER. • 30 days following the sale or disposition
3. Tax due = tax withheld
4. ER files the annual information return
5. ER issues BIR Form 2316 WITHHOLDING TAX
a. Final Withholding Tax
WHEN AND WHERE TO FILE b. Creditable Withholding Tax
c. Fringe Benefit Tax
Basic Tax: On or before April 15th of each year d. Duties of a Withholding Agent

SE or in practice of profession: Required to file and pay Withholding Tax

estimated income tax every quarter: • Taxation at source.
1st quarter – May 15
2nd quarter – August 15 • Taxes imposed or prescribed by the NIRC are to be deducted
3rd quarter – November 15 and withheld by the payor-corporations and/or persons for the
FAR – April 15 of the succeeding year former to pay the same directly to the BIR/

FWT on Passive Income • Taxes are collected practically at the same time the
transaction is made or when the taxable transaction occurs.
Quarterly Return – not later than the last day of the month

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law
TAXATION REVIEWER | CYNDI SATORRE-BICERA | 2nd Sem SY 2022-2023 | 28

• Application for refund – withholding agent is considered a TP

• A way of collecting tax. because if he does not pay, tha tax shall be collected from him.

• Administrative feasibility. • Proof of Remittance is the responsibility of the WA.

Payee – TP; the person on whom tax is imposed.

Payor – agent of the government for the collection of tax to Persons Required to Withhold Taxes
ensure its payment.
Juridical Person WON engaged in trade or business.
• Duty to withhold is different from the duty to pay IT.
Individuals With respect to payments made in
• Deductions will be disallowed if no withholding tax as connection with his trade or business.
required by law or regulations was withheld and remitted to the
BIR within the prescribed dates. Individual WON ETB insofar as taxable sale,
Buyers exchange or transfer of real property is
When to Withhold: Arises at the time an income payment is concerned.
paid or payable or accrued or recorded as an expense or
asset, whichever is applicable in the payor’s books, whichever All Gov’t offices Including GOCCs
comes first.
Consequences of Failure to Withhold:
A. Final Withholding Tax (FWT)
1. Surcharges and penalties
• Liability for payment of tax rests primarily on the withholding
2. Upon conviction, to the total amount of tax not
agent as payor.
withheld or not accounted for or remitted; and
3. Any income payment which is otherwise deductible
• Withholding agent will be liable for deficiency.
from the payor’s gross income will not be allowed as
deduction.
• Payee is not required to file any ITR for that income.

B. Creditable Withholding Tax (CWT)

• Taxes withheld are intended to equal or at least approximate
the tax due of the payee.

• Still be included in the tax return.

• Liability to withhold arises from accrual not upon the actual

remittance.

CWT FWT

• Compensation Income • Passive Incomes

• Professional/Talent Fees • Fringe Benefits
• Rentals
• Cinematographic film
rentals and other payments
• Income payments to
certain contractors

C. Expanded Withholding Tax (EWT)

• Prescribed only for certain payors and is creditable against
the income tax due.

Ex: withholding tax on compensation

• The ER shall submit to the Commissioner on or before

January 31 of the succeeding year, an Annual Information
Return containing:
1. List of EEs
2. Total amount of compensation income of eac EE
3. Total amount of taxes withheld
4. Other info deemed as necessary

D. Duties of a Withholding Agent (WA)

1. Register – within 10 days after acquiring such status
with the RDO having jurisdiction over the place where
the business is located.
2. Deduct and Withhold
3. Remit the Tax Withheld
4. File Annual Return
5. Issue Withholding Tax Certificates

From the Discussions of Atty. Denise Christine Lim, CPA

University of Mindanao College of Law