Tax Law Bala Sa Bar Series

BALA SA BAR SA TAX TR3Z NOTES SERIES
TITLE I. GENERAL PRINCIPLES AND LIMITATIONS OF TAXATION

A. CONCEPT AND PURPOSE OF TAXATION
1. Definition- Taxation is the act of laying taxes, the process and means by which the sovereign, through its lawmaking body raises income to defray the necessary expenses of
government. It is merely a way of apportioning the cost of the government among those who in some measures are privilege to enjoy its benefits and therefore must bear its
burden. AS A POWER, Taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.
Nature
1. It is an attribute of sovereignty
2. It is legislative in character
3. It is nor delegated to executive or judicial department except when allowed by the Constitution, exercised by the LGU or delegation refers only to admin matters
4. Subject to Constitutional and Inherent Limitations
2. Purpose
1. To provide Funds or property with which to promote the general welfare and protection of its citizens. (Taxation) (Revenue)
2. Aside from raising revenues for governmental needs taxation may also be exercised to attain various social and economic (non-revenue) objectives. (Regulatory).
3. Thus taxation includes every imposition of change or burden by the sovereign power upon persons, property or property rights for the use and support of the government
and to enable it to discharge its appropriate functions (General Welfare)
3. Distinguish: tax and other forms of exactions

1. Tax distinguishes from Toll
TOLL- has been defined as sum of money for the use of something, generally, applied to the consideration which is paid for the use of a road, bridge or the like of a public
nature.
Tax Toll
➢ A tax is a demand of sovereignty ➢ A toll is a demand for proprietorship
➢ Tax is paid for the support of the government ➢ A toll is paid for the use of another’s property
➢ While there is generally no limit on the amount of tax that may be ➢ Amount of toll depends upon the cost of construction of maintenance of
imposed. the public improvement used to assure toll operators a reasonable
➢ A tax may be imposed by the government margin of income
➢ A toll may be imposed by either the government or private individuals
or entities as an attribute of ownership.
2. Tax distinguish from penalty.
Penalty-penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious. Hence, the violation of tax laws may give rise to imposition of penalty.
Tax Penalty
➢ A tax is generally intended to raise revenue. A tax may be imposed only ➢ A penalty is designed to regulate conduct. A penalty may be imposed by
by the government. the government or private individuals or entities.
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3. Tax distinguished from Special Assessment
Special Assessment- is an enforced proportional contribution from owners of lands especially or peculiarly benefitted by public improvements. The rule is that an exemption
from taxation does not include exemption form special assessment. But the power to tax carries with it the power to levy a special assessment.
i. A special assessment is levied only on land
ii. It is not a personal liability of the person of the person assessed, his liability is limited only to the land involved.
iii. It is based wholly on benefits (not necessity)
iv. It is exceptional both time and place. A tax on the other hand has generally application
4. Tax distinguished from License or Permit

License Fee or Permit- is a change imposed under the police power (infra) for purposes of regulation. License is in the nature of a special proceedings, of a permission or
authority to do what is within its terms. It makes a lawful act which would otherwise be unlawful.
Tax License Fee
➢ Tax is an enforced contribution assess by sovereign authority to defray ➢ License fee is the legal compensation or reward of an offer for specific
public expenses. services
➢ Tax is levied for revenue ➢ It is imposed for regulation
➢ Tax involves the exercise of the taxing power. ➢ It involves an exercise of police power
➢ Generally, there is no limit on the amount of tax that are to be imposed. ➢ It is the amount that should be limited to the necessary expenses of
➢ Tax is imposed also on persons and property. inspection and regulation.
➢ Failure to pay a tax does not necessarily make the act or business illegal. ➢ It is imposed on the right to exercise or privilege.
➢ Failure to a pay license fee makes the act or business illegal
5. Tax distinguished from Tariffs and Customs Duties

Tax Tariffs
➢ An all-embracing term to include various kinds of enforced contributions ➢ Only a kind of tax therefore limited coverage
imposed upon persons for the attainment of public purpose ➢ Goods, imported or exported.
➢ Object is persons or property.
6. Tax distinguished from Debt

Tax Debt
➢ Obligation created by law ➢ Obligation based on contract, express or implied.
➢ Not assignable ➢ Assignable
➢ Payable in money or in kind ➢ Payable in kind or in money.
➢ Not subject to set off ➢ Subject to set off
➢ May result in imprisonment ➢ No imprisonment (except when debt arises from a crime)
➢ Bears interest only if delinquent ➢ Interest depends upon the written stipulation of the parties.
➢ Governed by the special prescriptive period provide for in the NIRC ➢ Governed by the ordinary periods of prescription.
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B. DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN
Eminent Domain Police Power

is the power of the state or those to whom the power has been delegated to take Has been referred to as the power of the state to exact such laws in relation to
private property for public use upon paying to the owner a just compensation to persons and property as may promote public health, public morals, public safety
be ascertained according to law and the general prosperity and welfare of its inhabitants.
DISTINCTION BETWEEN THE THREE
As to the authority which exercise the power ➢ Taxation and Police Power may be exercised only by the state through the
government or its political subdivision
➢ Eminent domain may be granted to public service companies or public
utilities.
As to purpose ➢ Taxation, the property is taken for support of the government.
➢ Police Power, the use of property is regulated for the purpose of promoting
the general welfare.
➢ Eminent Domain, the property is taken for public use or benefit must be
compensated.
As to persons affected ➢ Taxation and police power operate upon a community or a class of entities or
individuals.
➢ Eminent domain operates on an entity or individual as the owner of a
particular property.
As to effect ➢ Taxation, the money contributed in the concept of taxes becomes part of the
public fund.
➢ Police Power, there is no transfer of title at must there is restraint on the
injurious use of property.
➢ Eminent Domain, there is transfer of the right to property whether it be of
ownership of a lesser right.
As to benefit received ➢ Taxation, it is assumed that the person affected receives the equivalent of
the tax in the form of protection and benefits it receives from the government
as such.
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➢ Police power, the person affected receives no direct and immediate benefit
but only such as may arise from the maintenance of a health economic
standard of society and is often referred to as “damnum absque injuria”
damage without injury.
➢ Eminent Domain, the person affected receives the market value of the
property taken from him.
As to amount of imposition ➢ Taxation, there is generally no limit on the amount of tax that may be
imposed.
➢ Police Power, the amount imposed should not be more than sufficient to cover
the cost of the license and the necessary expenses of police surveillance/
inspection examination or regulation as nearly as the same can be estimated.
➢ Eminent Domain, there is no amount imposed but rather the owner is paid
the market value the property is taken.
As to relationship to the Constitution ➢ Taxation, there is generally no limit on the amount of tax that may be
imposed.
➢ Police Power, the amount imposed should not be more than sufficient to cover
the cost of the license and the necessary expenses of police surveillance/
inspection examination or regulation as nearly as the same can be estimated.
➢ Eminent Domain, there is no amount imposed but rather the owner is paid
the market value the property is taken.
C. THEORY AND BASIS OF TAXATION

1. Life Blood Theory- taxes are the lifeblood of the state. The existence of government is a necessity; it cannot exist nor endure without the means to its expense; and for the
purpose means, the government has the right to compel; all its citizens and property within its limits to contribute in the form of taxes
2. Necessity theory- the exercise of the power to tax emanates from necessity, because without taxes, government cannot fulfill its mandate of promoting the general welfare and
well-being of the people.
3. Benefits-received theory- taxes are what we pay for a civilized society. Hence, despite the natural reluctance to surrender part of their-earned income to the government, every
person 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 moral and material values. This symbiotic relationship is the rationale of taxation and should despite the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.
D. JURISDICTION OVER SUBJECT AND OBJECTS

The limited powers of sovereignty are confined to objects within the respective spheres of governmental control. These objects are the proper subjects or objects of taxation and none
else.
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1. Tax laws cannot operate beyond a State’s territorial limits
2. The gov’t cannot tax a particular object of taxation which is not within its territorial jurisdiction
3. Property outside the State’s jurisdiction does not receive any protection of the State
4. If a law is passed by Congress, it must see to it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority.
E. PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy-which means that the sources of revenue should be sufficient to meet the demands of revenue should be sufficient to meet the demands of public expenditure.
2. Theoretical justice- equality which means that the tax burden should be proportionate to the taxpayer’s ability to pay
3. Administrative feasibility- which means that the tax law should be capable of convenient, just and effective administration, as well as easy compliance by taxpayer.
F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

CONSTITUTIONAL
1. Due Process of Law INHERENT
2. Equal Protection of the laws 1. Requirement that levy must be for public purpose
3. Rule of Uniformity and Equity in taxation 2. Non-delegation of the legislative power of tax
4. No imprisonment non-payment of poll tax 3. Exemption from taxation of government entities
5. Non-impairment of the obligation of contracts 4. International Comity
6. Non infringement of religious freedom. 5. Territorial Jurisdiction
7. No appropriation for religious purpose.
8. Exemption of religious, charitable and educational entities, non-profit cemeteries
and churches from PROPERTY TAXATION
9. Exemption of non-stock and non-profit educational institutions from TAXATION
10. Concurrence by a majority of all members of Congress for the passage of law
granting tax exemptions
11. Power of the President to VETO any particular item or items in a revenue or tariff
bill
12. Non-impairment of the jurisdiction of the Supreme Court in tax cases.
CONSTITUTIONAL
Due Process of Law ➢ A tax which is imposed for private purpose for which is beyond the
jurisdiction of the government to collect and levy offends due process
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➢ If a tax law is judicially declared invalid, any tax which is levied under it
cannot of course be enforced as this will infringe due process. If the tax has
already been paid it should be refunded.
➢ A tax payer may not be deprived of his property for non-payment of taxes
without giving notice to him as required by law of his tax liability as well as
of the sale of public auction of such property to satisfy the taxes as this will
amount to denial of due process, the giving of notice is part of due process.
➢ A tax which denies a taxpayer a fair opportunity to assert his substantial
rights before a competent tribunal is invalid.
➢ The procedure prescribed on land for paying the tax or contesting the same
must be reasonable/ and not unjust or oppressive to the taxpayer,
otherwise, due processes of law will be violated although the tax levy itself
is valid.
Equal Protection of the laws ➢ What the constitution prohibits is class legislation which discriminates
against some and favors others. As long as there are rational or reasonable
grounds for so doing, congress may, therefore group the persons or
properties to be taxed and it is sufficient, if all of the same class are subject
to the same rate and the tax is administered impartially upon them.
➢ Where the statute or ordinance in question applies alike to all persons, firms
or corporations belonging to one class are treated alike, there is no
infringement of the constitutional guarantee.
Rule of Uniformity and Equity in taxation ➢ The rule of taxation is that it shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
➢ Uniformity means all taxable articles and properties of the same class shall
be taxed at the same rate, requires the uniform application and operation.
➢ Equity means equality in burden without discrimination of the tax in every
apportionment of the place where the subject of it is found the, tax burden
among the taxpayers.
➢ Progressive system of taxation means that tax laws shall place emphasis on
direct rather then indirect taxation, with the ability to pay as the principal
criterion
Prohibition against imprisonment for non-payment of poll tax. ➢ A person cannot be sent to prison for failure to pay the community tax the
only penalty for delinquency is the payment of surcharge in the form of
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interest which shall be added to the unpaid amount, from the due date until
it is paid.
➢ But he can become subject to imprisonment for violation of the community
tax law other than for non-payment (falsification).
Prohibition against impairment of obligation of contracts ➢ When a tax exemption based on a contract is revoked by a later taxing
statute
Prohibition against infringement of religious freedom ➢ No law shall be made respecting an establishment of religion or prohibiting
the free exercise thereof
Prohibition against appropriation for religious purpose ➢ The above limitation is based on the requirement that taxes can only be
levied for a public purpose.
Exemption of religious, charitable and educational entities, non-profit ➢ The exemption covers only property taxes and not other taxes.
cemeteries and churches from PROPERTY TAXATION ➢ “Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, cemeteries and all lands buildings
and improvements actually directly and exclusively used for charitable or
educational purposes shall be exempt from taxation”.
➢ TEST OF EXEMPTION- It is the use of the property not the ownership. Thus,
a property leased by the owner to another who uses it exclusively for
religious purpose is exempt from property tax but the owner is subject to
income tax on rents received.
➢ NATURE OF USE- To be exempt, the property must be actually, directly and
exclusively used for the purpose.
➢ SCOPE OF EXEMPTION- It extends to facilities which are incidental to or
reasonably necessary for the accomplishment of said purposes
Exemption of non-stock and non-profit educational institutions from ➢ All revenues and assets of non-stock, non-profit educational institutions
TAXATION used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties
➢ Subject to conditions prescribed by laws all agents, endowments, donations
and contributions used actually, directly and exclusively for educational
purposes shall be exempt from taxes.
➢ The exemption covers income, property and donor’s tax.
➢ To be exempt, it must be used actually, exclusively and directly for
educational purpose.
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➢ In case of religious and charitable entities and non-profit cemeteries the
exemption is limited to property tax.
➢ Congress is authorized to grant similar exemptions to proprietary (for profit)
educational institutions subject to limitations provided by law including
restrictions on dividends and provisions for reinvestments. The restrictions
are designed to insure that the tax-exemptions benefits are used for
educational purposes.
➢ Lands, buildings and improvements actually, directly and exclusively used
for educational purposes are exempt from property tax, whether the
educational institutions is propriety or non-profits.
Concurrence by a majority of all members of Congress for the passage of ➢ Legislative Procedures.
law granting tax exemptions
Power of the President to VETO any particular item or items in a revenue ➢ The president shall have the power to veto any particular item or items in
or tariff bill an appropriate, revenue of tariff bill, but the veto shall not affect the item
or items to which he does not object.
Non-impairment of the jurisdiction of the Supreme Court in tax cases ➢ Congress cannot take away from the supreme court the power given to it
by the constitution as the final arbiter of tax cases.
➢ Constitutions Art. VIII Sec.2. The Congress shall have the power to define,
prescribe and apportions the jurisdiction of the various court but may not
deprive the Supreme Court of its jurisdiction over cases enumerated in Sec.
5. “The Supreme Court shall have the following powers xxx (2) review,
revise, reverse, modify or confirm on appeal or certiorari, xxx final
judgments and orders of lower courts in xxx all cases involving the legality
of any tax, imposts, assessments or toll or any penalty imposed in relation
thereto.
INEHERENT
Levy must be for public purpose ➢ It means a purpose affecting the inhabitants of the state or taxing district
as a community and not merely as individuals.
o For the support of the government.
o For any of the recognized objects of government
o To promote the welfare of the community.
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➢ The test is not as to who receives the money, but the character of the
purpose for which it is expended.
➢ Taxpayers has the right to question purpose of tax but a taxpayer is not
relieved from the obligation of paying a tax.
Non-delegation of the legislative power to tax ➢ The power of taxation being purely legislative, Congress cannot delegate
the power to others.
➢ Exception
o Delegation to the President. Our Constitution expressly allows
congress “to authorize the President to fix within specified limits and
subject to such limitations and restrictions as it may impose, tariff
rates, imports or export, quotas tonnage and wharfage dues.
o Delegation to LGU. Under the new constitution each local
government unit is now expressly given the power to create its own
sources of revenue to levy taxes subject to such limitations as may
be provided by law.
o Delegation to administrative agencies. Those which are not
legislative includes:
▪ The power to value property for purposes of taxation
pursuant to fixed rules.
▪ The power to assess and collect taxes.
▪ The power to perform any of the immovable details of
computation, appraisement, and adjustment, and the
delegation of such details
Exemption from taxation of Government Entities and Instrumentalities ➢ Agencies and instrumentalities of the government are generally exempt
from taxation
➢ Exemption applies only to government entities through which the
government immediately and directly exercises, its sovereign powers.
➢ With respect to GOCC performing proprietary functions, they are generally
subject to tax in the absence of tax exemptions provisions in their charters
or the special laws creating them. Such corporations are private and not
public corporations.
International Comity ➢ Under international comity, the property of a foreign state or government
may not be taxed by another.
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➢ Based on the following
o Sovereign equality among states.
o Usage among states.
o A foreign government may not be sued without its consent.
Territorial Jurisdiction ➢ General Rule: A state may not tax property lying outside its borders.
➢ Exceptions: A person may be taxed where there is between him and the
taxing state, a privity of relationship, justifying the levy. Thus, a citizen’s
income may be taxed even if he resides abroad as the personal jurisdiction
of his government over him remains.
➢ The fundamental Basis of the right to tax is the capacity of the government
to provide benefits and protection to object of the tax
G. STAGES OR ASPECTS OF TAXATION

1. Levy- the enactment of a law by the Congress imposing a tax
2. Assessment/Collection- this is the act of administration and implementation if the tax law by the executive department through admin agencies
3. Filing/Payment- the act of compliance by the taxpayer including option, schemes or remedies as may be legally available to him.
Tax Administration- The process by which the power of tax is exercised.
H. REQUISITES OF A VALID TAX

1. It should be for a public purpose
2. It should be uniform
3. That either the person or property being taxed within the jurisdiction of the taxing authority.
4. The tax must not impinge on the inherent and constitutional limitations on the power of taxation.
I. KINDS OF TAXES
KINDS OF TAX AS TO
As to Objects 1. Personal/ Poll or Capitation Tax- a fixed amount imposed upon all persons or
upon all persons of a certain class, residents within a specified territory without
regard to their property or occupation.
2. Property Tax- tax imposed on property, whether real or personal, in proportion
either of its value, or in accordance with some other reasonable method of
apportionment.
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3. Privilege/Capitation Tax- a charge upon the performance of an act the enjoyment
of a privilege, or the engaging in an occupation. An excise tax is a tax that does
not fall as property tax.
As to burden and Incidence 1. Direct Tax- are demanded form the very person who, as intended should pay the
tax which cannot shift to another.
2. Indirect Tax- are demanded in the first instance from one person with the
expectation that he can shift the burden to someone else, not as tax but as part
of the purchase price
As to Tax Rates 1. Specific- tax of a fixed amount imposed by the head or number or by some
standard of weight or measurement. E.g., excise tax on cigar, cigarette and
liquors.
2. Ad Valorem- tax based on the value of the property with respect to which the tax
is assessed. It requires the intervention of assessors or appraisers to estimate
the value of such property before the amount can be determined.
3. Mixed- a choice between ad valorem and/or specific demanding on the condition
attached.
As to Purposes 1. General/ Fiscal or Revenue- tax imposed solely for the general purpose of the
government. E.g., income tax and donor’s tax.
2. Special/ Regulatory or Sumptuary- tax levied for specific purpose i.e., to achieve
some social or economic ends e.g., Tariffs and certain duties on imports.
As to Scope or Authority to impasse 1. National Tax- tax levied by the national government. E.g., income tax, estate tax,
donors’ tax, VAT, other percentages taxes and documentary stamp tax.
2. Local or Municipal- a tax levied by a local government. E.g., real estate and
community tax
As to graduation 1. Progressive- a tax rate which increases on the tax base or breach increases. E.g.,
Income tax, estate tax and donor’s tax.
2. Regressive- a tax rate decreases as the tax base or bracket increases.
3. Proportionate- a tax of a fixed percentage of amounts of the base (value of the
property or amount of gross receipts etc.) E.g., VAT and other percentage taxes
J. GENERAL CONCEPTS IN TAXATION
1. Prospectivity of tax laws- Tax laws operate prospectively whether they enact or amend or repeal. Revenue statutes are substantive laws and in no sense must their application
be equated with that of remedial laws.
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Exception: Tax laws may only be given retroactive application if the legislature expressly or impliedly provides that it shall be given retroactive application.
There is violation of due process when the tax law imposes harsh/oppressive tax.
On BIR Rules and regulations that revoke modify or reverse a ruling or circular. The general rule is that it shall not be given retroactive application if the revocation modification
or reversal will be prejudicial or reversal will be prejudicial to the taxpayers.
Exception:
a. If such not be given retroactive application if the revocation modification or reversal will be prejudicial to the taxpayer.
EXCEPTION TO THE EXCEPTION:
a. The taxpayer deliberately mistakes or omits material facts from his return or any document required by the BIR.
b. The facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based.
c. The taxpayer is in bad faith.
b. 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 vestal right that can be involved by a taxpayer.
c. Retroactive application of revenue laws may be allowed if it will not amount to denial of due process. There is s violation of due process when the tax laws impose harsh
and oppressive tax.
2. Imprescriptivity of Taxes
General Rule: Taxes are imprescriptible by reason that it is the lifeblood of the government.
Exception: Tax laws may provide for statute of limitations in particular, the NIRC and LGU provides for the prescriptive periods of assessment and collection. Tax laws provide for
statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers from only unreasonable examinations investigation or assessments.
Note: Although the NIRC provides for the limitations in the assessment and collection of taxes imposed, such prescriptive period will only be applicable to those taxes that were
returnable. The prescriptive period shall start from the taxpayer files the tax return and declares his liability.
3. Situs of taxation
Situs of taxation literally means the place of taxation. The state where the subject to be taxed has a situs may rightfully levy and collect the tax; and The situs is necessarily in the
state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs.
Factors that Determine Situs:

a. Nature of the tax; d. Citizenship of the taxpayer;
b. Subject matter of the tax (person, property, act or activity) e. Residence of the taxpayer;
c. Possible protection and benefit that may accrue both to the government and f. Source of income.
the taxpayer;
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SITUS OF INCOME TAX SITUS OF PROPERTY TAX
TAXPAYER SOURCE OF INCOME KINDS OF PROPERTY SITUS
CITIZENSHIP RESIDENCY WITHIN OUTSIDE REAL PROPERTY Where is it located (lex rei sitei)
THE PHIL THE PHIL TANGIBLE PROPERTY Where property is physically located
Filipino Resident Taxable Taxable although the owner resides in another
Filipino Non-resident Taxable Non- jurisdiction; or place of sale or transaction
taxable INTANGIBLE PERSONAL Domicile of the owner. Moibilia sequuntur
Alien Resident Taxable Non- PROPERTY personam (movable follow the persons)
taxable ➢ RECEVIABLES Exceptions: When property has acquired a
Alien Non-Resident Taxable Non- ➢ BAND DEPOSITS business situs in another jurisdiction; or
taxable ➢ BONDS When the law provides for the situs of the
➢ PROMISSORY NOTE subject of tax (e.g., Sec 104, NIRC)
➢ MORTGAGE LOANS Franchise, patents, copyrights, trademarks
SITUS OF BUSINESS TAX ➢ JUDGMENTS AND – situs is the place of the country where
KINDS OF BUSINESS TAX SITUS CORPORATE STOCKS such intangibles are exercised. Receivables
VAT Where transaction is Domicile residence of debtor or the Bank
made (i.e. where the deposits – Location or the depository bank
good/service is
sold/perform and
consumed)
Sale of Real Property Where the real property is
located
Sale of Personal Property Where the personal
property was sold
SITUS OF EXCISE TAX

KIND OF EXCISE TAX SITUS
INCOME TAX Source of the income, nationality or residence of taxpayer (Sec. 23, NIRC)
Occupation – where the occupation is engaged in
Transaction where the transaction took place
DONORS TAX Location of property; nationality or residence of donor
ESTATE TAX Location of property; nationality or residence OF deceased
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4. Double taxation
There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but is permissible, provided some other constitutional requirement is
not violated
As to scope
a. Domestic Double Taxation- when the taxes are imposed by the local/ national government within the same state.
b. International Double Taxation- refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods.
Interpretation
a. Doubts as to whether double taxation has been imposed should be rescinded in favor of the taxpayer. To avoid injustice or unfairness.
b. Double taxation occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.
c. Strict sense (Direct Double Taxation)- it violated the equal protection clause of the Constitution.
a. Taxing Twice
b. By the same taxing authority
c. Within the same jurisdiction or taxing district or locality
d. For the same purpose
e. In the same period
f. Same subject matter or property
g. Of the same kind and character of tax.
d. Broad sense- Broad sense (indirect double taxation)- is taxation other than direct duplicate. It extends to all cases in which there is burden of two or more pecuniary
estimations.
e. Tax treaties as relief from double taxation
Tax Treaties- an agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned.
Methods resorted to by a tax treaty in order to eliminate double taxation.
a. An exclusive right to tax is conferred in one of the contracting states, however for other items of income or capital both states are given the right to tax although the
amount of tax that may be imposed by the state if sources is limited.
b. The state source is given full or limited right to tax together with the state of residence. In this case, the treaty with the state of residence. In this case, the treaty
makes it incumbent upon the state of residence to allow relief in order to avoid double taxation. Two ways under this method namely:
i. Exemption method, the income or capital which is taxable in the state of source or situs is exempt in the state of residence although in some instances it may
be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital. (This may be done by using the tax deduction
method, which allows foreign income taxes to be deducted from gross income, in effect exempting the payment from being further taxed). The focus here is
on the income or capital itself.
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ii. The credit method- although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter.
5. Escape from taxation

a. Shifting of tax burden- Is the taxpayer of the burden of tax by the original payer or one on whom the tax was assessed or imposed to another or someone else without
violating the law.
Kinds of Shifting
a. Forward shifting- this takes place when the burden of the tax is transferred from the factor of production through the factors of distribution until it finally settles on
the ultimate purchaser or consumer.
b. Backward shifting- this is affected when the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of
production.
c. Onward shifting- this occurs which tax is shifted two or more times either forward or backward.
b. Distinguish: tax avoidance and tax evasion

Tax Evasion-Is a scheme where the taxpayer was illegal or fraudulent means to defend or lesson payment of taxes. It’s a scheme used outside of those lawful means and
when availed of it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Elements:
a. Cause of action is unlawful
b. Accompanying state of mind which is described as being evil in bad faith, willful or deliberate and not accidental
c. End to be achieved, the payment of less than that known by the taxpayer to be legally due or in paying no tax when it is shown that a tax is due.
Evidence
a. Failure of taxpayer to declare for taxation purpose his true and actual income derived form business for 2 consecutive years.
b. Substantial under declaration of income in the income tax for 4 consecutive years coupled by intentional overstatement of deductions.
Tax Avoidance-Tax avoidance is a scheme where the taxpayer uses, legally permissible alternative method of assessing taxable property or income, in order to avoid or
reduce tax liability. The taxpayer uses tax saving device or means sanctioned or allowed by law. So the law is not violated in any way.
This may include:

• Capitalization- The reduction in the prize of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay.
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• Transformation- is the method of escape from taxation whereby the manufacturer or purchaser upon whom the tax has been imposed, fearing the loss of his market
if he should add the tax to the price, pays the tax/endeavors to recoup himself by improving his process of production, thereby turning out his units of products of a
lower cost.
6. Exemption from taxation- Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax
which persons and corporations generally within the state or taxing district are obliged to pay.
Nature: As to Object
a. An exemption from taxation is a mere personal privilege of the grantee 1. Personal- granted directly in favor of certain person
b. It is generally revocable by the government unless the exemption is 2. Impersonal-granted directly in favor of a certain class of property.
founded on the contract.
c. It implies a waiver on the part of Government of its right to collect what Rationale
otherwise would be due. 1. Regulatory Purpose
d. It is not necessarily discriminatory so long as the exemption has a 2. Police Power
reasonable foundation or rational basis. 3. Compensatory Purpose (Social Justice)
Thus. Taxation is the rule and exemption is the exception. The burden proof rests
upon the party claiming exemption. Revocation of Tax Exemption
Since taxation is the rule and exemption is the exception, the exemption may thus
Kinds of Tax Exemption be withdrawn at the pleasure of the taxing authority.
1. Constitutional
2. Statutory Restrictions on revocation of Tax Exemption
3. Contractual 1. Non-impairment clause
4. Implied 2. A municipal franchise once granted as a contract cannot be altered or
5. Treaty amended except by actual consent of the parties concerned.
6. Licensing Ordinance 3. Adherence to form. If the exemption is granted by the Constitution, its
revocation may be affected through constitutional amendment only.
As to extent 4. Where the tax exemption grant is the form of a special law and not by a
a. Total- connotes absolute immunity general law even if the terms of the general act are broad enough to include
b. Partial- one where a collection of a part of the tax is dispensed with. the codes in the general law unless there is manifest intent to repeal or alter
the special law.
7. Equitable recoupment-It is a principle which allows taxpayer, whose claims for refund has been barred due to prescription, to recover said tax by setting-off the prescribed
refund against the tax that may be due and collectible from him. Under this doctrine the taxpayer is allowed to credit such refund to his existing tax liability. Equitable recoupment
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is allowed only in common countries not in the Philippines. Jurisprudence rejects it since it may work to tempt both parties to delay and neglect their respective pursuits of legal
action within the period set by law.
8. Prohibition on compensation and set-off- Compensation or set-off take place when two persons, in their own right, are creditors debtors of each other. No set-off is admissible
against the demands for taxes levied for general or local governmental purposes, taxes for the simple reason that the government and the taxpayer are not creditors and debtors
of each other, debts are clue to the government in its corporate capacity, while taxes are due to government in its sovereign capacity.
Exception: Where both the claims of the government and the taxpayer against each other have already become due and demandable and fully liquidated, compensation takes
place by operation of law and both obligations are extinguished to their concurrent amounts. In case of the taxpayer claim against the government, the government must have
appropriated the amount thereto.
9. Compromise- Compromise is a contract whereby the parties by reciprocal concessions, avoid litigations or put an end to one already commenced. It implies mutual agreement by
the parties in regard to the thing or object subject matter which is to be compromised. Compromise are generally allowed and enforceable when the subject matter thereof is not
prohibited from being compromises and the person entering such compromise is duly authorized to do so. Persons allowed to enter into a compromise of tax obligation
BIR Commissioner as expressly authorized by the NIRC and subject the following conditions:
➢ When a reasonable doubt as to validity of the claim against the taxpayer exists.
➢ The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
➢ Collectors of Customs- with respect to custom duties limited to cases where the legitimate authority is specifically granted such as in the remission of duties.
➢ Custom Commissioner- subject to the approval of the secretary of finance to cases involving the imposition of fines surcharges and forfeitures.
10.Tax amnesty- Tax amnesty being a 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 laws. It partakes of an absolute waiver by the government of its right to collect what is due to it and to give tax evaders who wish to relent a chance to start
with a clean state.
K. CONSTRUCTION AND NTERPRETATION OF TAX LAWS, RULES AND REGULATIONS

1. Tax Laws- Tax statutes and laws must be construed strictly against the government and liberally in favor of the taxpayer. In case of doubt. The imposition of a tax cannot be
presumed. This is because taxes are burdens on the taxpayer and should not be unduly imposed or presumed beyond what the statutes expressly and clearly provides.
Exception: Unless a statute imposes a tax clearly, expressly and unambiguously, the presumption mentioned in the general rule to cases involving the issue of the validity of the
tax law itself which, in every case is presumed valid. Legislative intention must be considered, and where the language of the tax statute is plain and where the taxpayer claims
exemption from payment.
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2. Tax Exemptions and Exclusions- Statutes granting tax exemption are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax refunds
are in the nature of tax exemption, which are construed in strictissimi juris against the taxpayer and liberally in favor of the government.
Exception:
➢ If the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled by the government in the course of its operation.
➢ It is recognized principle that the above rule does not apply to in the case of exemption in favor of the government political subdivision or instrumentality.
➢ Erroneous payment of the tax or absence of laws for the government’s exaction.
3. Tax Rules and Regulations. The construction placed by the office charged with implementing and enforcing the provisions of a code should be given controlling weight unless such
interpretation is clearly erroneous. In case of conflict between a statute and an administrative order, the former must prevail. To be valid an administrative rule or regulation must
conform not contradict the enabling law. Admittedly 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.
4. Penal Provisions of Tax Laws. In criminal cases, statutes of limitations are acts of grace a surrendering by the sovereign of its right to prosecute. They receive strict construction
in favor of the government and limitations in such case will not be presumed in the absence of clear legislation.
TITLE II. NATIONAL TAXATION

A. TAXING AUTHORITY
1. Jurisdiction, power, and functions of the Commissioner of Internal Revenue
Power and duties of the BIR Power of the Commissioner
1. Assessment and Collection of all the National Internal Revenue taxes, fees 1. Power to interpret tax laws and decide cases
and charges. 2. Power to obtain information and to summon/examine and take testimony
2. Empowerment of all forfeitures, penalties and fines of persons
3. Execution of judgement in all cases decided in its favor (by the CTA and
regular courts) Purposes/ Functions
4. Give effect and administer the supervisory and police powers conferred to • To ascertain correctness of the return
it by the NIRC and other laws. • To make a return where none has been made
5. Recommend to the Secretary of Finance a needful rules and regulations for • To determine liability of any person for any internal revenue tax
the effective enforcement of the provisions of the NIRC. • To collect such liability
• To evaluate tax compliance
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Scope of such powers administered by the BIR is vested in the Commissioner subject to the
1. To examine any book, paper or record or other data which may be relevant exclusive appellate jurisdiction of the CTA
or material to such inquiry
2. To obtain any information (costs, volume of production, receipts, sales, Power to Interpret:
gross income on a regular basis from any other person other than the • The NIRC
person under investigation and any office or officer of the national/local • Other tax laws.
government
3. Any person having in possession, custody and care the books of accounts, Power to decide on:
accounting records of entries released related to the business of the 1. Disputed assessment
taxpayer 2. Refunds of internal revenue taxes
4. Power to make assessments and prescribe additional requirements for tax 3. Fees or other charges and penalties imposed in relation thereto
administration and enforcement. 4. Other matters arising under the NIRC or other laws or portions thereof
5. Power to assign internal revenue officers and other employees. administered by the BIR.
6. Power to suspend the business operation of a taxpayer for violations of the
VAT rules. Non-retroactivity of rulings
The rulings of the BIR are not retroactive any revocation, modification ir reversal
Interpreting tax laws and deciding tax cases of any of the rules/ regulations promulgated or any of the rulings or circulars,
1. The power to interpret the provisions of the NIRC and other tax laws shall promulgated by the CIR shall not be given retroactive application if it will be
be under the exclusive and original jurisdiction of the commissioner, subject prejudicial to the taxpayer except in the following cases:
to revies by the Secretary of Finance. 1. Where the taxpayer deliberately misstates or omits material facts from his
2. The power to decide between disputed assessments, refunds of internal return or any document required of him by the BIR.
revenue taxes, fees or other charges, penalties imposed on relation thereto 2. Where the facts subsequently gathered by the BIR are materially different
or other matters arising under the NIRC or other laws or portions thereof, from the facts on which the ruling is based on
3. Where the taxpayer acted in bad faith.
2. Rule-making authority of the Secretary of Finance

Sec. 249 of the Tax Code, it is provided that the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of the tax code. The administrative power to provide regulations is likewise authorized by SEC 79-B and 551 of the
Revised Admin Code.
The most formal pronouncements of the Department of Finance in this respect are known as “Revenue Regulation”. They prescribe or define rules for the effective enforcement of
the tax code and related statutes. They are to be distindguished from the BIR rulings which state the official position of the BIR to queries raised by a taxpayer, on certain
provisions specific issues of law or administration in relation to the provisions of the tax code, relevant laws and other issuances of the BIR, clarifying or interpreting them.
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The power to recommend the promulgation of internal revenue rules and regulations by the Secretary of Finance is given only t o the commissioner. He is not allowed to delegate
such power to any of his subordinates
B. INCOME TAX
1. Definition, nature, and general principles
Definition- Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege, the privilege to earn yearly profits from various sources. It is a
system that does not provide for the taxation of property. It is a tax on the net income of the income received or realized in one taxable year. It is levied upon corporate and
individual incomes in excess of specified amounts, less certain deductions and/or specialized exemptions in cases permitted by law.
Nature and Purpose:

➢ It Is generally regarded as an excise tax (privilege tax) and not a tax on persons. Property, funds or profits. It is really a tax on the right to earn income by an individual
or entity for government needs.
➢ It is self-assessing or self-computed.
➢ It is imposed primarily to raise revenue.
a. Income tax systems

I. Global-all income received by the taxpayer are grouped together, without any distinction as to the type or nature of income and after deducting therefrom expenses
and allowable deductions are subject to tax at a graduated rates (e.g. Professional Income, Compensation Income, Income not subject to final withholding tax)
II. Schedular- under the schedular tax system, different types of income are subject to different set of income tax rates (E.g. income subject to FWT)
III. Others-All compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to
arrive at the gross income, and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates or normal corporate
income tax. With respect to such income the computation is global. For those other income not mentioned above,
b. Features of the Philippine income tax law
I. Direct Tax – The tax burden is borne by the income recipient upon whom the tax is imposed.
II. Progressive – The tax rate increases as the tax base increases. It is founded on the ability to pay principle and is consistent with Sec. 28, Art. VI, 1987 Constitution.
III. Comprehensive – The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle,
and the source principle. Any of the three principles is enough to justify the imposition of income tax on the income of a resident citizen and a domestic corporation
that are taxed on a worldwide income.
IV. Semi-Schedular or Semi-Global Tax System – The Philippines follows the semi-schedular or semi-global system of income taxation, although certain passive
investment incomes and capital gains from sale of capital assets (namely: (a) shares of stock of domestic corporations, and (b) real property) are subject to final
taxes at preferential tax rates.
c. Criteria in imposing Philippine income tax
I. Citizenship (Nationality Principle)- a citizen of the Philippines Is subject to Philippine Income Tax
1. On his worldwide income, if he resides in the Philippines.
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2. Only on his income from sources within the Philippines, if he qualifies as a non-resident citizen.
II. Residence (Domicile Principle)- a resident alien is liable to pay Philippine’s income tax on his income from sources within the Philippines but is exempt form tax on
his income form sources outside the Philippines
III. Source Principle- an alien is subject to Philippine income tax because he derives income from sources within the Philippines. A non-resident alien or non-resident
foreign corporation is liable to pay Philippine income tax on income form sources within the Philippines
d. General principles of income taxation
I. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines
II. A non-resident citizen is taxable only on income derived from sources within the Philippines
III. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within
the Philippines.
IV. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines.
V. A domestic corporation is taxable on all income derived from sources within and without the Philippines.
VI. A foreign corporation, whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines
e. Types of Philippine income taxes
I. Minimum corporate income tax (MCIT)
II. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as capital asset
III. Capital gains tax on sale or exchange of real property located in the Philippines classified as capital asset
IV. Final withholding tax on certain passive investment incomes
V. Final withholding tax on income payments made to non-resident individuals or corporations
VI. Fringe benefit tax (FBIT)
VII. Branch profit remittance tax
VIII. Improperly accumulated earnings tax (IAET)
IX. Normal corporate income tax on corporations
X. Graduated income tax on individuals.
XI. Optional income tax of 8% for individuals
XII. Special income tax on certain corporations
f. Kinds of taxpayers
I. Individual Taxpayers
1. CITIZENS
a. Resident Citizens (RC)
b. Non-resident Citizens (NRC)
1. PH citizen who establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein.
2. PH citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
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3. PH citizen 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. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the PH for
not less than 183 days during such taxable year.
4. PH citizen previously considered as a non-resident citizen and who arrives during the taxable year to reside permanently in the PH - Treated as NRC with
respect to his income derived from sources abroad until his arrival in the PH
2. ALIENS
a. Resident Alien – An alien actually present in the Philippines who is not a mere transient or sojourner is a resident for income tax purposes.
a. No/Indefinite Intention = RESIDENT: If he lives in the Philippines and has no definite intention as to his stay, he is a resident. A mere floating intention
indefinite as to time, to return to another country is not sufficient to constitute him a transient.
b. Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient.
Exception: Definite Intention but such cannot be promptly accomplished; If his purpose is of such nature that an extended stay may be necessary for itsnot
accomplishment, and thus the alien makes his home temporarily in the Philippines, then he becomes a resident.
b. Non-resident Alien a. Engaged in trade or business within the Philippines - If the aggregate period of his stay in the Philippines is more than 180 days during any
calendar year. [Sec. 25(A)(1), NIRC] b. Not engaged in trade or business within the Philippines If the aggregate period of his stay in the Philippines does not exceed
180 days.
II. Juridical Persons

1. Corporations: Includes all types of corporations, partnerships (no matter how created or organized), joint stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, whether or not registered with the SEC. Excludes general professional partnerships (GPP); joint ventures or consortiums formed for
the purpose of (1) undertaking construction projects or (2) engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the government. Domestic corporations A corporation created and organized in the Philippines or under its laws. [Sec. 22 (C),
NIRC]
2. Foreign corporations: A corporation which is not domestic. [Sec. 22 (D), NIRC]

a. Resident foreign corporations – Foreign corporation engaged in trade or business within the Philippines. [Sec. 22 (H), NIRC]
b. Non-resident foreign corporations – Foreign corporation not engaged in trade or business within the Philippines. [Sec. 22 (I), NIRC] DOING BUSINESS – implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. Includes:
a. soliciting orders,
b. service contracts
c. opening offices, whether called "liaison" offices or branches
d. appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period totaling 180 days or more
e. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines.
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Excludes:
1. mere investment as a shareholder in domestic corporations, and/or the exercise of rights as such investor
2. having a nominee director or officer to represent its interests in such corporation
3. appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
3. Estates and Trusts: Income tax imposed on individuals shall apply to income of estates or of any kind of property held in trust. Taxable income of the estate or trust is
computed in the same manner as an individual, subject to certain special rules
Exceptions: (1) Employee’s trust (2) Revocable trusts (3) Income for Benefit of Grantor
4. Estate: Refers to all the property, rights and obligations of a person which are not extinguished by his death and those which have accrued thereto since the opening of
the succession.
5. Trust: An arrangement created by will or an agreement under which legal title to property is passed to another for conservation or investment with the income therefrom
and ultimately the corpus (principal) to be distributed in accordance with the directions of the creator as expressed in the governing instrument. [DE LEON
6. General Partnerships: A partnership which is not a general professional partnership. Treated as a corporation.
7. General Professional Partnerships (GPP): A partnership 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. The partners themselves, not the partnership, shall be liable for income tax in their separate and individual capacities. Each
partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. [Sec. 26, NIRC]
8. Joint venture and consortium: Essential factors of a joint venture or consortium:

1. Each party must make a contribution, not necessarily of capital but by way of services, skill, knowledge, material or money;
2. Profits must be shared among the parties.
3. There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise.
4. There is a single business transaction.
9. A joint venture or consortium is treated as a corporation, except those formed for the purpose of:
1. Undertaking construction projects, or
2. engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the
Government.
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10. Co-ownership: There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Co-ownerships are not subject to tax as a
corporation if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom, in which case each co-owner is taxed
individually on his distributive share in the income of the coownership.
Tax Return- A form on which a taxpayer makes an annual statement of income and personal circumstances used by the tax authorities to assess liability for tax
Tax Filing- the act of submitting the tax return with the proper taxing authority.
Importance of knowing the classification of taxpayer
1. Gross income
2. Income tax rates
3. Exclusion from gross income
4. Exemptions
5. Deductions
g. Taxable period-Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed. Taxable
year includes, in the case of return made for a fractional part of a year under the provisions of Title II (Tax on Income), the period for which such return is made.
I. Calendar Year – An accounting period of 12 months ending on the last day of December.
II. Fiscal Year – An accounting period of 12 months ending on the last day of any month other than December
III. Short Period – An accounting period which starts after the first month of the tax year or ends before the last month of the tax year (less than 12 months). Instances
when the taxpayer may have a taxable period of less than 12 months
1. When the corporation is newly organized and commenced operations on any day within the year.
2. When the corporation changes its accounting period
3. When a corporation is dissolved
4. When the CIR by authority terminates the taxable period of a taxpayer.
5. In case of final return of the decedent and such period ends at the time of his death
General rule: Taxable income shall be computed based on the taxpayer’s annual accounting period, which may be fiscal year or calendar year
Exception: Taxable income shall be computed based on the basis of calendar year only:
1. If the taxpayer's annual accounting period is other than a fiscal year;
2. If the taxpayer has no annual accounting period;
3. If the taxpayer does not keep books of accounts; or
4. If the taxpayer is an individual
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2. Concept of Income
a. Definition of Income-income refers to all wealth which flows into the taxpayer other than as mere return of capital. It includes all the forms of income specifically described
as gains and profits including gains derived from the sole or other disposition of capital. Income is a flow of service rendered by capital by payment of money form it any
benefit rendered by a fund of capital in relation to such fund through a period of time.
Nature and Purpose

I. It is generally regarded as an excise tax (percentage tax) and not a tax on persons, property or funds or profits. It is really a tax on the right to earn income, by an
individual or entity for government needs
II. It is self-assessing or self-computed
III. It is imposed primarily to raise revenue.
b. When income is taxable
I. Existence of income- a primary consideration in income tax is that there must be income before there could be income taxation.
Not Considered as Income:
1. Advance payments or deposits for payments. Advances are not revenues of the period in which they are received but as revenue of the period or persons in
which they are earned.
2. Property received as compensation but subject to forfeiture
3. Assessments for additional corporate contributions
4. Increments resulting from revaluation of the property. Until the revalued property is disposed there is no income received.
5. Parent’s share in the accumulated and current equity on subsidiaries net earnings prior to distribution.
6. Money or property; Borrowed money has to be repaid by the debtor, On the other hand the creditor does not receive any income upon payment because it is
merely a return capital.
7. Money earmarked for some other persons but included in the gross income.
8. Increase in net worth resulting from adjusting entries.
Security Advances/ Security Deposits paid by a lessee to a lessor.

The amount received by the lessor as security advances or deposits is not considered income because it will eventually be returned to the lessee hence the lessor
did not earn gain or profit.
II. Realization of income- under the realization principal revenue is generally recognized when both of the following conditions are met:
1. The earning process if complete or virtually complete
2. An exchange has taken place
NOTE: The mere increase in the value of the property is not considered as income for tax purpose since it is an unrealized increase in capital.
Increase in the Net Worht of the Taxpayer:
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The increase in the net worth of a taxpayer is taxable if it is the result of the receipt of unreported or unexplainable tax income. However, if they are merely
shown as correction of errors in its entries in its books relating to its indebetedness to certain creditors which has been erroneously overstated or listed as
outstanding when they ahd in fact been duly paid, they are not taxable.
Note: If and when are substantial limitations or conditions under which payment is to be made, such does constitute constructively realized.
III. Recognition of income-when income considerd received for Phlippines income tax purposes
1. If actually received by taxpayer
2. If constructively received by taxpayer.
Actual vs Constructive
Actual Receipt- income may be actual receipt or physical receipt
Constructive Receipt- occurs when money consideration or its equivalent is placed at the control of the person who rendered the service without restriction
by the payor. The income is credited to the account of the taxpayer and set apart for him which can be withdrawn at any time without restrictions and/or
condition although not yet actually received by him physically or reduced to his possession is already taxable to him.
Examples of Constructive Receipt

➢ Deposits in banks, which are made available to the seller of services without restrictions
➢ Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payments for services rendered.
➢ Transfer of the amount retained by the payor to the account of the contractor
➢ Interest coupons that have matured and are payable but have not been encash.
➢ Undistributed shares of a partner in the profits of a general professional partnership.
c. Tests in determining whether income is earned for tax purposes

I. Realization test- there is no taxable unless income is deemed realized. Revenue is generally recognized when both conditions are met:
1. The earning process is complete or virtually complete
2. An exchange has taken place.
II. Claim of right doctrine or doctrine of ownership, command or control-a taxable gain is conditioned upon the presence of a claim of a right to the alleged gain and the
absence of a definite unconditional obligation to return or repay.
III. Economic benefit test or doctrine of proprietary interest-taking into consideration the pertinent provisions of law, income realized is taxable only to the extent that
the taxpayer is economically benefitted.
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IV. Severance test- income is recognized when there is separation of something which is of exchangeable value.
V. All events Test: (a) fixing of a right to income or liability to pay, (b) availability of the reasonable accurate determination of such income or liability.
d. Methods of accounting
I. Distinguish: cash and accrual method
1. Cash method – income, profits and gains earned are not included in gross income until received, and expenses are not deducted until paid. [ DE LEON]N.B.
“received” here includes actual and constructive receipt.
2. Accrual method – income, profits and gains are included in gross income when earned, whether received or not, and expenses are allowed as deductions
when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income. [DE
LEON].
3. Hybrid method – income and expenses are reported by employing the combination of cash and accrual method. Example: where a taxpayer is engaged in
more than one trade or business, he may use a different method of accounting for each trade or business. [DE LEON]
II. Special method: installment, deferred payment, percentage of completion (in long-term contracts)
1. Installment Basis [Sec. 49, NIRC] Taxpayer reports as income only a part of the gross profit to be realized from the sale on the instalment plan equivalent to
that proportion of the instalments received every year which the gross profit realized or to be realized when payment is completed bears to the contract price.
Income to be reported for the year = Instalment Received × Gross Profit/ Contract Price
Installment basis is available to: Dealers in personal property [Sec 49 (A), NIRC]; Casual Sellers of personal. property [Sec 49 (B), NIRC]; and Sellers of real
property [Sec 49 (B) & (C), NIRC]
2. Deferred Payment Sales

➢ Applicable when the initial payments exceed 25% of the selling price
➢ The income to be reported during the year of sale is the difference between the selling or contract price and the cost of the property, even though the
entire purchase price has not been actually received in the year of sale.
➢ The obligations of the purchaser received by the vendor are considered as equivalent of cash.
3. Percentage of completion [Sec. 48, NIRC] Income from long-term contracts is reported for tax purposes on the basis of percentage of completion. “Long-term
contracts” means building, installation or construction contracts covering a period in excess of 1 year. Gross income already earned though not yet received,
based on estimates of architects or engineers duly certified by them, is reported in a taxable year; and all deductions relating to such gross income for the
taxable year, even if not yet paid are taken into account. [DE LEON] Completed contract method – No longer allowed since January 1, 1998 as per RA 8424.
Cost of the contract is accumulated during the years of construction and deducted from the income of the contract in the year it is completed.
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e. Situs of Income-place of taxation
Income
1. Interest-Residence of the debtor
2. Dividends-Residence of the corporation declaring the dividends
3. Services-Place of performance
4. Rentals-Location of the property
5. Royalties-Place of use or exercise
6. Sale of Real Property-Location of realty
7. Sale of Personal Property
Tangible
• Manufactured w/in and sold w/o: Partly w/in and partly w/o the PH.
• Manufactured w/o and sold w/in: Partly w/in and partly w/o the PH
• Purchased w/in but sold w/o: Place of Sale
• Purchased w/o but sold w/in: Place of sale
Intangible
• General rule: Place of Sale
• Exception: Shares of stock of domestic corporations: Place of incorporation
Income from Sources within the Philippines
1. Interest derived from sources within the Philippines
2. Dividends from domestic/foreign corporation if more than 50% of its gross income for the 3 year period ending with the close of the taxable year prior to the
declaration of dividends was derived from sources within the Philippines
3. Compensation from services performed within the Philippines.
4. Rentals and Royalties from properties located in the Philippines or any interest in such property including rentals or royalties for the use if such or for the privilege
of using within the Philippines Intellectual Property Rights such as trademark copyrights and patents
5. Gain on sale of personal property other than shares of stock within the Philippines.
6. Gains on sale of real property located in the Philippines.
7. Gains on sale of shares of stock in a domestic corporation.
Income from sources without the Philippines.

1. Interest and dividends derived from sources other than those within the Philippines.
2. Compensation for services performed outside the Philippines.
3. Rentals and Royalties from properties located outside the Philippines or any interest in such property including rentals or royalties for the use of or for the privilege
of using outside the Philippines intellectual property rights such as trademarks, copyrights, patents, etc.
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Income derived partly within and Partly without the Philippines
Gains profit or income other than those enumerated above shall be allocated or apportioned to sources within or without the Philippines.
3. Gross Income
a. Definition
Except when otherwise provided, gross income means all income derived from whether source, including but not limited to the following items:
I. Compensation for services in whatever form paid including but not limited to fees, salaries, wages, commissions and similar items.
II. Gross income derived from the conduct of trade or business or the exercise of a profession.
III. Gains derived from dealings the property
IV. Interest
V. Rents
VI. Royalties
VII. Dividends
VIII. Annuities
IX. Prized/Winnings
X. Pensions
XI. Partners distributive share from the net income of the general professional partnership.
Thus, gross income means all income of whatever kind/derived by a taxpayer from whatever source but not including exempt income (exclusions) and items of gross income
(passive income) subject to final income tax. The law defines the term under the global concept by including compensation income,
All forms of income not expressly falling under any of the items enumerated below such as those derived from expropriation of one’s property and from gambling and other
illegal transactions are taxable. The intent of the law in stating that gross income, “means all income” is to make the concept of income for purpose of taxation all inclusive,
without exceeding other items not mentioned but which are includible in the determination of gross income.
b. Distinguish: gross income, net income, and taxable income
Net Income Taxation-net income taxation is a system of taxation where the income subject to tax may be reduced by allowable deductions
Taxable Income or Net Income- this refers to the pertinent items of gross income specified in the NIRC less the deductions and/or personal and additional exemptions, if
any authorized for such types if income by the NIRC or other special laws.
BASIS GROSS INCOME NET INCOME
AS TO DEDUCTIONS ALLOWS NO DEDUCTIONS ALLOWS DEDUCTIONS
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AS TO EXEMPTIONS GRANTS NO EXEMPTIONS GRANTS EXEMPTIONS
AS TO TAX BASE GROSS INCOME NET INCOME
ADVANTAGES/DISADVANTAGES SIMPLIFIES THE INCOME TAX CONFUSES/COMPLEX FILING OF

SYSTEM INCOME TAX RETURN
SUBSTANTIAL REDUCTION IN VULNERABLE TO CORRUPTION ON
CORRUPTION AND TAX EVASION ACCOUNT OF MARGINOF
SINCE THE EXERCISE OF DISCRETION IN THE GRANT OF
DISCRETION TO ALLOW OR DEDUCTIONS
DISALLOW DEDUCTIONS IS
DISPENSED WITH
MORE ADMINISTRATIVELY PROVIDES EQUITABLE RELIEFS IN
FEASIBLE THE FORM OF DEDUCTION
EXEMPTION TAX CREDIT
DOES AWAY WITH WASTAGE OF TAX AUDIT MINIMIZES FRAUD.
MAN POWER AND SUPPLIES
c. Sources of income subject to tax

I. Compensation income- includes all renumeration for services rendered by an employee for his employer unless specifically excluded under NIRC.
II. Fringe benefits- is any good, service or other benefit furnished or granted by an employer, in cash on in kind in addition to basic salaries , to an individual employee,
except a rank and file employee such as but not limited to:
HEV-HIM-HEEL
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel such as maid, driver and others
5. Interest on loans at less than market rate to the extent of the difference between the market rate and the actual rate granted
6. Membership fees, dues and other expenses athletic clubs or other similar organization.
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
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10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
III. Professional income- refers to the fees received by a professional from the practice of his profession provided that there is no employer-employee relationship
between him and his clients. The existence or nonexistence of employer-employee relationship is material to determine whether the income is a compensation income
or professional income. If the employer-employee relationship is present, when it is considered compensation income otherwise it is a professional income.
Professional income shall be subject to creditable withholding tax rates prescribed.
IV. Income from business- business income refers to income derived from merchandizing, mining, manufacturing and farming operations. Business is only activity that
entails time and effort of an individual or group of individuals for purposes of livelihood or profit.
Gross Income derived from business- the term “gross income” derived from business shall be equivalent to gross sales less sales return, discounts and allowances
and cost of goods sold. In the case of taxpayers engaged in the sale of service. “Gross Income” means gross income receipt less sales return allowances and
discounts.
Costs of goods sold- it includes all business expenses directly incurred to produce the merchandise to bring them to their present location and use such as invoice
cost of the goods sold for a trading concern or cost of production for a manufacturing concern.
Cost of Services- all directs cost and expenses necessarily incurred to provide the service required by the customers and clients including:
1. Salaries and employee benefits of personnel consultants and specialists directly rendering the service.
2. Cost of facilitates directly utilized in providing the service.
V. Income from dealings in property

1. Distinguish ordinary asset and capital asset
Ordinary Asset- refer to properties held by the taxpayer used in the connection with his trade or business which includes:
1. Stock in trade of the taxpayer or other property of a kind which would property be included in the inventory of the taxpayer if on hand at the close
of taxable year.
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business.
3. Property used in the trade or business of a character which is subject to the allowance for depreciation provided in the NIRC.
4. Real property used in trade or business of the taxpayer (SOUR)
Examples of Ordinary assets:

1. The condominium building owned by a realty company the units of which are for rent or for sale.
2. Machinery/equipment of a manufacturing concern subject to depreciation.
3. The motor vehicles of a person engaged in transportation business.
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Capital Assets- include property held by the taxpayer (whether or not connected with his trade or business) other than (SOUR) above.
Example of Capital Assets
1. Jewelry not used for trade or business.
2. Residential houses and lands owned and uses as such
3. Automobiles not used in trade or business
4. Stock/ Securities held by taxpayer other than decisions of securities.
Construction and Interpretation of Capital Assets- The general rule has been laid down that the codal definition of a capital assets must be narrowly construed
while the exclusions from such definitions must be interpreted broadly.
2. Types of gains
ORDINARY INCOME VIS-À-VIS CAPITAL GAIN.
1. If the asset involved is classified as ordinary, the entire amount of the gain from the transaction shall be included in the computation of gross income [Sec
32(A)], and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See Allowable Deductions from Gross Income – Losses.
2. If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income. (See
Capital Gains and Losses).
These rules do not apply to:

• real property with a capital gains tax (final tax), or
• shares of stock of a domestic corporation with a capital gains tax (final tax).
ACTUAL GAIN VIS-À-VIS PRESUMED GAIN

Presumed Gain: In the sale of real property located in the Philippines, classified as capital asset, the tax base is the gross selling price or fair market value,
whichever is higher. The law presumes that the seller makes a gain from such sale. Thus, whether or not the seller makes a profit from the sale of real
property, he has to pay 6% capital gains tax.
Actual Gain: The tax base in the sale of real property classified as an ordinary asset is the actual gain.
3. Special rules pertaining to income or loss from dealings in property classified as capital asset (loss limitation rule, loss carry-over rule, holding period rule)
a. Capital Loss Limitation Rule-Losses from sale or exchanges of capital assets shall be allowed only up to the extent of the gains from such sales or exchanges
(NIRC, Sec. 39 (C)). Thus, under this capital loss limitation rule, capital loss is deductible only up to the extent of capital gain. The taxpayer can only
deduct capital loss from capital gain. If there is no capital gain, then no deduction is allowed because you cannot deduct capital loss from ordinary gain.
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Rationale: To allow the deduction of non-business (capital) losses from business (ordinary) income or gain could mean the reduction or even elimination
of taxable income of the taxpayer through personal, non-business-related expense, resulting in substantial losses of revenue to the government
(Mamalateo, 2014).
Wherethe capital loss limitation rule will not apply:

➢ If a bank or trust company is incorporated under the laws of the Philippines,
➢ a business whose substantial part is the receipt of deposits,
➢ sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation, with interest coupons or in registered
form,
➢ any losses resulting from such sale shall not be subject to the above limitations and shall not be included in determining the applicability of such
limitation to other losses (NIRC, Sec. 39 [C]).
b. Net Capital Loss Carry Over (NOLCO)- If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount
not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held
for not more than 12 months (NIRC, Sec. 39 [D]).
Rules with regard to NCLCO

➢ NCLCO is allowed only to individuals, including estates and trusts.
➢ The net loss carry-over shall not exceed the net income for the year sustained and is deductible only for the succeeding year.
➢ The capital assets must not be real property or stocks listed and traded in the stock exchange.
➢ Capital asset must be held for not more than 12 months.
c. Holding period rule (long term capital gain vis-àvis short term capital gain)-Where the taxpayer held the capital asset sold for more than 12 months, the
gain derived therefrom is taxable only to the extent of 50%. Consequently, if the taxpayer held the capital asset sold for a year or less, the whole gain
shall be taxable. The same also applies to capital loss. It is a form of tax avoidance since the taxpayer can exploit it in order to reduce his tax due (NIRC,
Sec. 39 [B]).
Holding period does not find application in the case of disposition of:
➢ Shares of stock; and
➢ Real property considered as capital asset, whether the seller is an individual, trust, estate or a private corporation.
Only individual taxpayers can avail of the holding period rule. It is not allowed to corporations.
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4. Tax-free exchanges- tax free exchanges refer to those instances enumerated in Sec 40 (c) (2) of the National Internal Revenue Code of 1997 that are not
subject to income tax, capital gains tax, documentary stamp tax and/or Value added Tax.In general there are 2 kinds of tax-free exchange (1) transfer to a
controlled corporation, (2) merger or consolidation:
In the first instance no gain or loss shall be recognized if property is transferred to a corporation 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 four persons, gains of said corporations.
In the 2nd instance, no gain or loss shall be recognized if in pursuance of a plan or merger or consolidation; (a) a corporation which is a party to the merger
or consolidation or, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation
also a party to the merger or consolidation or (c) a security holder of a corporation, which is a party to the merger or consolidation exchanges his securities
in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation.
VI. Passive investment income- Passive income refers to income derived from any activity in which the taxpayer has no active participation or involvement.
CLASSIFICATION OF PASSIVE INCOME:

a. Subject to Schedular Rates
b. Subject to Final Taxes.
INCOME SUBJECT TO FINAL TAX- refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of
the income withholds the tax remits it to the government as a final settlement of the income tax due on said income. The recipient is no longer required to include
the item of income subjected to final tax as part of his gross income in his income tax returns.
SOURCES OF INCOME APPLIED TO INDIVIDUALS

1. Interest
➢ On interest on currency bank deposits, yield or other monetary benefits from deposit substitutes, trust, funds and similar arranges
XPN: If the depositor has an employee trust fund or accredited retirement plan such interest income, yield or other monetary benefits is exempt from
final withholding tax.
➢ Interest income under expanded foreign currency deposit system
NOTE: If the loan is granted by a foreign government or an international or regional financing institutions established by government the interest
income of the lender shall not be subject to final withholding tax.
➢ Interest income form long term deposit or investment in the form of savings common or individual trust funds deposit substitute investment
management accounts and other investments evidenced by certificates in such form prescribed by the BSP.
2. Dividend- dividend from DC from a joint stock company, insurance or mutual fund company and regional operating headquarters of a multinational company
or on the share of an individual in the distributable net income tax after tax of partnership (except that of a GPP) of which he is a partner or on the share of
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an individual in the net income after income tax of an association, a joint account or joint venture of consortium taxable as a corporation of which he is a
member of co-venture.
3. Royalty income-Where a person pays royalty to another for the use of its intellectual property, such royalty is generally a passive income of the owner thereof
subject to withholding tax.
4. Rental income-Refers to earnings derived from leasing real estate as well as personal property. Aside from the regular amount of payment for using the
property, it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans, insurance
premiums, etc.) [RR 19-86].
APPLIED TO CORPORATION:
1. Interests from any currency bank deposits, yield or any other monetary benefits from deposit substitutes and from trust fund and similar arrangement/royalties
derived from sources within a Philippines.
2. Interest Income derived under expanded foreign currency deposit system
3. Interest derives from depositary bank under the expanded foreign currency deposit system from foreign currency loans granted to residents other than offshore
banking units.
4. Interest received by NIRC
5. Dividends received from domestic corporation
VII. Annuities and proceeds from life insurance or other types of insurance
ANNUITIES
it refers to the periodic installment’s payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time
whichever is longer, in consideration of capital paid by him. The portion representing return of premium is not taxable while that portion that represents interest is
taxable.
NOTE: The portion of annuity net of premiums is taxable being interest or earnings of the premium and not return of capital.
PROCEEDS OF LIFE INSURANCE

Amounts received under a life insurance endowments or annuity contact whether in a single sum of in installments paid to the beneficiaries upon the death of the
insured are excluded from the gross income of the beneficiary.
XPN:
1. If such amounts, when added to the amounts already received before the taxable year under such contract, exceed the aggregate premiums or
consideration paid, the excess shall be included in the gross income.
NOTE: However, in case of a transfer for a valuable consideration by assignment or otherwise of a life insurance, endowments on annuity contract or any
interest therein, only the actual value of such considerations and the amount of the premiums and other sums subsequently paid by the transferee are
exempt from taxation.
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2. Interest payments thereon if such amounts are held by the insurer under an agreement to pay interest shall be taxable. If paid to a transferee for a
valuable consideration, the proceeds are not exempt.
NOTE: The life insurance proceeds must be paid by reason of death of the insured. Payments for reasons other than death are subject to tax up to the
excess of the premiums paid. Any policy loans or borrowings made on the policy shall be deducted as advances from the life insurance proceeds received
upon death.
RECIPIENTS OF NON-TAXABLE LIFE INSURANCE PROCEED

proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured are exempt. Also, it has also been held that proceeds of life insurance
policies taken by a corporation on the life of an executive to indemnify it against loss in case of his death do not constitute taxable income.
DIFFERENCES BETWEEN THE TAX TREATMENT OF LIFE INSURANCE PROCEEDS UNDER INCOME/ ESTATE TAXATION
In estate taxation, the concept of revocability or irrevocability in the designation of the beneficiary is necessary to determine whether the life insurance proceeds are
included in the gross estate or not. However, if the appointed beneficiary is the estate, executor or administrator, the proceeds shall be included from the gross
estate.
NOTE: Under the Insurance Code, the insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in
said policy. Notwithstanding the foregoing tin the event the insured does not change the beneficiary during the lifetime, the designation shall be deemed irrevocable.
On the other hand, in income taxation, there is no need for the determination or revocability or irrevocability if the beneficiary for the purposes of exclusions of such
proceeds from the gross income. They are non-taxable regardless of who the recipient is.
VIII. Prizes and awards- It refers to amount of money in cash or in kind received by chance or through luck and is generally taxable except if specifically mentioned under
the exclusion from computation of gross income under Sec. 32[B] of NIRC.
Tax treatment for prizes and winnings

1. Generally, prizes exceeding ₱10,000 and other winnings from sources within the Philippines shall be subject to 20% final withholding tax, if received by a
citizen, resident alien or non-resident engaged in trade or business in the Philippines.
2. If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the prizes and other winnings shall be subject to 25% final
withholding tax.
3. If the recipient is a corporation (domestic or foreign), the prizes and other winnings are added to the corporation’s operating income and the net income is
subject to 30% corporate income tax.
Prizes and winning subject to income tax

1. Prizes derived from sources within the Philippines not exceeding ₱10,000 are included in the gross income.
2. Winnings derived from sources within the Philippines is subject to final tax on passive income except PCSO and lotto winnings which are tax exempt.
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3. Prizes and winnings from sources outside the Philippines
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 Philippines or abroad and
sanctioned by their respective national sports association
3. PCSO/Lotto winnings (except NRANETB)
IX. Pension, retirement benefit, or separation pay

➢ It refers to amount of money received in lump sum or on staggered basis in consideration of services rendered given after an individual reaches the age of
retirement.
➢ Pension being part of gross income is taxable to the extent of the amount received except if there is a BIR approved pension plan.
➢ The amounts that do not qualify as exclusions are considered as part of income subject to tax.
X. Income from any source- “Income from whatever source derived “implies that all income not expressly exempted from the class of taxable income under our laws
form part of the taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. The source of the income may be legal
or illegal.
1. Condonation of indebtedness
➢ When cancellation of debt is income. If an individual performs services for a creditor, who in consideration thereof, cancels the debt, it is income to
the extent of the amount realized by the debtor as compensation for his services.
➢ When cancellation of debt is a gift. If a creditor merely desires to benefit a debtor and without any consideration therefore cancels the amount of the
debt, it is a gift from the creditor to the debtor and need not be included in the latter’s income. The creditor is subject to donor’s tax.
➢ When cancellation of debt is a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect
of payment of a dividend.
➢ An insolvent debtor does not realize taxable income from the cancellation or forgiveness.
➢ The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent.
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2. Recovery of accounts previously written off
Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the
year of such recovery to the extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior
year resulted in lesser income and hence tax savings for the company.
“Tax Benefit Rule” or Equitable Doctrine of Tax Benefit

It is a principle that if a taxpayer recovers a loss or expense that was deducted in a previous year, the recovery must be included in the current year's
gross income up to the extent that it was previously deducted.
Two instances where Tax benefit rule applies

a. Recovery of bad debts
b. Receipt of tax refund or credit
Recovery of bad debts

The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in
the year of such recovery to the extent of the income tax benefit of said deduction. If the taxpayer did not benefit from deduction of the bad debt written-off
because it did not result in any reduction of his income tax in the year of such deduction as in the case where the result of the taxpayer’s business operation
was a net loss even without deduction of the bad debts written-off, his subsequent recovery thereof shall be treated as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable income.
3. Receipt of tax refunds or credit

If a taxpayer receives tax credit certificate or refund for erroneously paid tax which was claimed as a deduction from his gross income that resulted in
a lower net taxable income or a higher net operating loss that was carried over to the succeeding taxable year, he realizes taxable income that must be
included in his income tax return in the year of receipt.
XPN: The foregoing principle does not apply to tax credits or refunds of the following taxes since these are not deductible from gross income:
a. Income tax;
b. Estate tax;
c. Donor’s tax; and
d. Special assessments.
d. Exclusions
Exclusions from gross income refer to the flow of wealth to the taxpayers which are not considered part of gross income for purposes of computing the taxpayer’s taxable
income due to the following:
a. It is exempted by the fundamental law or by statute;
b. It does not come within the the definition of income.
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The exclusion of income should not be confused with the reduction of gross income by application of allowable deductions. Exclusions are not taken into account in
determining gross income, however, deductions are subtracted from the gross income.
Construction of exclusions
Exclusions are in the nature of tax exemptions; thus, they must be strictly construed against the taxpayer and liberally in favor of the Government. It behooves upon the
taxpayer to establish them convincingly
I. Rationale. There are exclusions from the gross income either because they:
1. Represent return of capital;
2. Are not income, gain or profit; or
3. Are subject to another kind of internal revenue tax;
4. Are income, gain or profit that is expressly exempt from income tax under the Constitution, Tax treaty, NIRC, or general or a special law.
II. Taxpayers who may avail

All kinds of taxpayers – individuals, estates, trusts and corporations, whether citizens, aliens, whether residents or non-residents may avail of the exclusions.
Rationale: The excluded receipts are not considered as income for tax purposes.
III. Distinguish: exclusions, deductions, and tax credits

EXCLUSIONS DEDUCTIONS TAX CREDIT
Incomes received or earned but are These are included in the gross income It refers to foreign taxes paid
not taxable because of exemption by but are later deducted to arrive at net beforehand but are claimed as credits
virtue of a law or treaty; hence, not income against Philippine income tax to arrive
included in the computation of gross at the tax due and payable
income
IV. Exclusions under the Constitution

➢ Income derived by the Government or its political subdivisions from the exercise of any essential government function
➢ Income derived by the Government or its political subdivision is exempt from gross income, if the source of the income is from any public utility or from the
exercise of any essential governmental functions.
4. Deductions
a. General rule- these refers of amount allowed as deductions, or items authorized by law to be subtracted from pertinent items of gross income to arrive at the taxable
income.
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Nature of Deductions
The items of amounts allowed as deductions represent the expenses (reduction of wealth) of the taxpayer (other than personal expenses and capital expenditures) in
earning the income (increase of wealth) subject to tax as well as reasonable living expenses.
Requisites before deductions are allowed

a. There must be specific provision of law allowing the deductions, since deductions do not exist by implication.
b. The requirements of deductibility must be met. (Refer to discussions on itemized deductions for the requirements of each deduction).
c. There must be proof of entitlement to the deductions. The burden of proof to establish the validity of claimed deduction is on the taxpayer. This is consistent with
the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the State.
d. The deductions must not have been waived. 5. The withholding and payment of tax required must be shown.
General Rules in Claiming Deductions

a. Deductions must be paid or incurred in connection with the taxpayer’s trade, business, or profession.
Matching concept of deductibility
➢ This posits that the deductions must, as a general rule, “match” the income, i.e. helped earn the income.
➢ Ordinary and necessary expenses must have been paid or incurred during the taxable year for it to be deductible from gross income. Further, the
deduction shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred.' Otherwise, the expenses are barred as deductions in
subsequent years.
b. Deductions must be supported by adequate receipts or invoices (XPN: standard deduction).
c. The withholding and payment of tax required must be shown.
Any income payment which is otherwise deductible shall be allowed as a deduction from gross income only if it is shown that the income tax required to be
withheld has been paid to the BIR.
Where the withholding made but still deductible

a. The payee reported the income and the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax, and surcharges,
if applicable, at the time of the original audit and investigation.
b. The recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the
failure towithhold the tax and surcharges, if applicable, at the time of the original audit and investigation; or
c. The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the
interest, incident to such error, and surcharges, if applicable, at the time of the original audit and investigation (Sec. 2.58.5, RR 2-98).
Persons who are not allowed to claim deductions from gross income. Non-Resident Alien-Not Engaged in Trade or Business and Non-Resident Foreign Corporation are subject
to final tax on their gross income derived from sources within the Philippines, hence, no deductions allowed to them.
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NOTE: A Resident Citizen, Non-Resident Citizen, and Resident Alien whose income is purely compensation income are also not entitled to such deductions.
Deductions that can be claimed by an individual

a. With gross compensation income from employer-employee relationship ONLY:
i. Personal and additional exemptions;
ii. Premium payments on health and/or hospitalization insurance
b. With gross income from business or practice of profession:
i. OSD or itemized deductions
ii. Personal and additional exemptions
iii. Premium payments on health and/or hospitalization insurance.
Deductions that can be claimed by a corporation-Domestic Corporations (DC) and Resident Foreign Corporation (RFC) may opt between the OSD OR the Itemized Deductions,
except Non-Resident Foreign Corporation (NRFC) which is subject to final tax on its gross income from sources within the Philippines.
b. Concept of return of capital (Cost of Sales or Services)- The amount representing return of capital should be deducted from the proceeds from the sales of assets and should
not be subject to income tax. Cost of goods purchased for resale, with proper adjustment for opening and closing inventories are deducted from gross sales in computing
gross income. The mere return of capital is allowed as deduction from gross income in order to arrive at income subject to tax. While in general, the nomenclature of “cost
of sales or cost of sold good” is applied, the return of capital have different components depending upon the nature of the business being taxed (Domondon, 2013).
Cost of Goods Sold (CGS)

CGS shall include the purchase price or cost to produce the merchandise and all expenses directly incurred in bringing them to their present location and use. For trading or
merchandising concern, CGS means the invoice cost of goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit. For manufacturing concern, CGS means all costs incurred in the production of the finished goods such as raw materials
used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. The term
may be used interchangeably with "cost of goods manufactured and sold".
Cost of services (COS)

COS means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including:
i. Salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and
ii. Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.
NOTE: COS shall not include interest expense except in the case of banks and other financial institutions (RR 16-08).
c. Distinguish: itemized deductions and optional standard deduction

IN GENERAL, THERE SHALL BE:
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Allowed at the option of the taxpayer, itemized deductions or an Optional Standard Deduction (OSD) at the rate of forty percent (40%). In case of individual
taxpayers, OSD shall be computed at the rate of forty percent (40%) of gross sales/receipts, as the case may be' Corporations may elect standard deduction in an amount
not exceeding forty percent 40%) of its gross income. However. no deductions shall be allowed to individual taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship, and those who Opted to be taxed at 8% income tax rate as opposed to the (graduated scale) on their income
from business/practice of profession.
➢ Unless the taxpayer, who is taxable under the graduated income tax rate, signifies in the income tax return the intention to elect the OSD, it shall be considered as
having availed of the itemized deductions.
➢ Such election of the option, when made in the return, shall be irrevocable for the taxable year for which the return is made. The election to claim either the itemized
deductions or the OSD for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter or the initial quarter
of the taxable year atter the commencement of a new business/practice of profession.
➢ Once the election is made' it must be consistently applied to all the succeeding quarterly returns and in the final income tax return for the taxable year. The OSD
allowed to individual taxpayers, except non-resident aliens, shall be for 40 percent (40%) of gross sales/receipts during tire taxable year.
➢ A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners comprising the Partnership.
➢ APPLICABLE TO BOTH ITEMIZED AND OSD. THE DEDUCTION SHALL NOT BE ALLOWED TO taxpayers earning compensation income arising from personal services
rendered under an employer-employee relationship (PURELY COMPENSATION INCOME) AND WHO OPTED TO BE TAXED AT 8% where no deductions shall be allowed
other than premium payments on health and/or hospitalization insurance, in computing taxable income subject to income tax.
ITEMIZED DEDUCTIONS OPTIONAL STANDARD DEDUCTION
ITEMIZED DEDEUCTIONS SHALL be allowed the OSD is a fixed percentage deduction which is allowed to CERTAIN KIND OF TAXPAYERS
following deductions from gross income in Section 24 without regard to any expenditure. This is in lieu of the itemized deduction. The amount
(a) to (j) and (m) TO ALL KINDS OF TAXPAYERS. The of deduction is an amount not exceeding 40% of the gross sales or gross receipts (qualified
amount of deduction should be computed based on the individual taxpayers) and gross income (qualified corporation or GPP).
amount reflected on the list below.
The persons prohibited from availing OSD are:
THE ITEMS INCLUDE: 1. Non-resident aliens, (NRA) whether or not engaged in trade or business in the
1. Expenses Philippines; and
2. Interest 2. Non- resident foreign corporations (NRFC).
3. Taxes
4. Losses The determination of the deduction of OSD are as follows:
5. Bad Debts 1. Individual- It depends on the accounting method used by the taxpayer in
6. Depreciation recognizing income and deductions:
7. Depletion of Oil Wells and Mines a. Accrual basis – the OSD shall be based on the gross sales during taxable
8. Charitable and other Contributions year.
9. Research and Developments
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10. Contributions to Pension Trust. b. Cash Basis – the OSD shall be based on the gross receipts during the taxable
year.
The determination of the deduction of Itemized NOTE: Costs of sales or costs of services are not allowed to be deducted for
deduction shall be discussed under paragraph (d) purposes of determining the basis of the OSD in case of an individual taxpayer. For
other individual taxpayers allowed by law to report their income and deductions
under a different method of accounting, the gross sales or gross receipts shall be
determined in accordance with the said acceptable method of accounting.
2. Corporation- In case of a corporation, the basis of the OSD is the gross income.
Sales returns, discounts and allowances and cost of goods (or cost of services) are
deducted from the gross receipts to arrive at gross income. The method of
accounting is not taken into consideration unlike in the case of an individual.
3. General Professional Partnership- while GPP is not subject to income tax per se
pursuant to Sec. 26 of the Tax Code, as amended' However, the partners shall be
liable to for income tax on their separate and individual capacities for their
respective distributive share in the net income of the GPP. The GPP is not a taxable
entity for income tax purposes since it is only acting as a "passthrough, entity
where its income is ultimately taxed to the partners comprising it.
a. The distributable net income of the partnership may be determined by

claiming either itemized deductions or OSD. The share in the net income of
the partnership, actually or constructively received, shall be reported as
taxable income of each partner. The partners comprising the GPP can no
longer claiM further deduction from their distributive share in the net income
of the GPP and are not allowed to avail of the 8% income tax rate option
since their distributive share from the GPP is already net of cost and expense
b. For purposes of computing the distributive share of the partners, the net
income of the GPP shall be computed in the same manner as a corporation.
Simply put the GPP’s gross income shall be computed for income tax not for
the purpose of imposing a tax on the GPP itself, but only for the
determination of the distributable income each partner is liable for the said
income. By doing so the GPP may avail either the itemized or OSD the same
as that of an ordinary corporation.
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It must be substantiated by receipt It requires no proof of expenses incurred because the allowable deduction is a percentage
not exceeding 40% of gross sales or receipts or gross income as the case may be.
c. Requirements for deductible items (itemized deduction)

1. Expenses- There shall be allowed as deduction from gross income
1. All the ordinary and necessary expenses
2. Paid or incurred during the taxable year
3. In carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession.
Requisites for deductibility of expenses (in general) Test to determine whether or not an expense is ordinary and
1. Paid or incurred during the taxable year; necessary. If they are directly attributable to the development,
2. The expense must be substantiated by proof; (substantiation management, operation, and or conduct of trade or business of the
rule) taxpayer, or in the exercise of the taxpayer’s profession, including:
3. The expense must be incurred in trade or business carried on 1. Reasonable allowances for salaries, wages and other
by the taxpayer (must be directly attributable to the compensation for personal services actually rendered,
development, management, operation, and or conduct of including gross monetary value of fringe benefits.
trade or business of the taxpayer, or in the exercise of the 2. Travel expenses in pursuit of trade or business.
taxpayer’s profession); 3. Rental and other payments for the continued use or
4. The expense must be reasonable; possession of property, for the purpose of trade, business or
5. The expense must be ordinary and necessary; profession; and
6. If subject to withholding taxes, proof of payment to bir; and 4. Entertainment, amusement and recreation expenses during
7. Expenses must not be against public policy, public moral or the taxable year.
law such as bribes, kickbacks, for immoral purposes.
Ordinary expenses versus capital expenditures
Ordinary expenses - It is any expense that is normal or usual in Ordinary expenses are those which are common to incur in trade or
relation to the taxpayer’s business and the surrounding business. On the other hand, capital expenditures are those incurred
circumstances to improve assets and benefits for more than 1 taxable year.
Necessary expenses - is one which is appropriate and helpful in the Ordinary expenses are usually incurred during a taxable year and
development of taxpayer’s business and is intended to minimize benefits such taxable year.
losses or to increase profits
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Substantiation rules The taxpayer shall substantiate the expense Cohan rule
being deducted with sufficient evidence such as official receipts or Under this principle, taxpayers may use estimates when they can
other adequate records showing: show that there is some factual foundation on which to base a
1. The amount of the expense being deducted; and reasonable approximation of the expense, they can prove that they
2. The direct connection or relation of the expense being had made a deductible expenditure but just cannot prove how much
deducted to the development, management, operation that expenditure was (Cohan v. CIR, 39 F (2d) 540). It is the use of
and/or conduct of the trade, business or profession of the estimates or approximations of the amount of cash and other assets
taxpayer (Sec. 34 (A)(1)(B), NIRC). where the taxpayer lacks adequate records.
2. Interest- Interest shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the
amount paid for the borrower’s use of money during the term of the loan, as well as for his detention of money after the due date for its repayment.
Requirements under the NIRC for interest to be deductible tax is a deductible tax.) However, fines, penalties, and
1. There must be an indebtedness surcharges on account of taxes are not deductible. The
2. The indebtedness must be that of the taxpayer interest on unpaid business tax shall not be subjected to the
3. The interest must be legally due and stipulated in writing limitation on deduction.
4. The interest must be paid or incurred during the taxable year. 2. Paid by a corporation on scrip dividends.
5. The indebtedness must be connected with the taxpayer’s 3. On deposits paid by authorized banks of the BSP to
trade, business, or exercise of profession. depositors, if shown that the tax on such interest was
6. The interest arrangement must not be between related withheld.
taxpayers. 4. Paid by a corporate taxpayer, liable on a mortgage upon real
7. The allowable deduction have been reduced by an amount property of which the said corporation is the legal or equitable
equal to 33% of the interest income subject to tax . owner, even though it is not directly liable for the
indebtedness
The amount of interest
1. paid or incurred. Non-deductible Interest Expense
2. within a taxable year 1. Interest on preferred stock, which in reality is dividend
3. on indebtedness 2. Interest on unpaid salaries and bonuses
4. in connection with the taxpayer's profession, trade or 3. Interest calculated for cost keeping.
business shall be allowed as deduction from gross income 4. Interest paid where parties provide no stipulation in writing
to pay interest
Interest: 5. If the indebtedness is incurred to finance petroleum
1. On taxes, such as those paid for deficiency or delinquency, exploration.
since taxes are considered indebtedness (provided that the 6. Interest paid on indebtedness between related taxpayers.
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7. Interest on indebtedness paid in advance through discount or Arm’s length interest rate- It is the rate of interest which was
otherwise and the taxpayer reports income on cash basis. charged or would have been charged at the time the indebtedness
arose in independent transaction with or between unrelated parties
under similar circumstances.
3. Taxes- Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction.
Examples of taxes which are deductible Non-deductible taxes

1. Import duties Taxes not allowed as deduction from gross income to arrive at
2. Business licenses, excise and stamp taxes taxable income:
3. Local government taxes such as real property taxes, license 1. Income tax provided under the NIRC (Philippine income tax)
taxes, professional taxes, amusement taxes, franchise taxes 2. GR: Income taxes imposed by authority of any foreign
and other similar impositions country
XPN: When the taxpayer does not signify in his return his
Limitation on the deduction desire to avail of the tax credit.
In the case of Non-Resident Alien Engaged in Trade and Business 3. Estate tax and donor’s taxes.
and Resident Foreign Corporation, the deductions for taxes shall be 4. Special assessments - taxes assessed against local benefits
allowed only if and to the extent that they are connected with income of a kind tending to increase the value of property assessed.
from sources within the Philippines. 5. Stock transaction tax - Taxes on sale, barter, exchange of
shares of stock listed and traded through the local stock
Requisites for deductibility of taxes exchange or through initial public offering.
1. Payments must be for taxes. 6. Final taxes.
2. Tax must be imposed by law on, and payable by the 7. Presumed capital gains tax
taxpayer; 8. VAT.
3. Paid or incurred during the taxable year in connection with
taxpayer’s trade, business or profession; and Treatments of surcharges / interests / fines for delinquency. -These
4. Taxes are not specifically excluded by law from being are not considered as taxes; hence they are not allowed as
deducted from the taxpayer’s gross income. deductions. However, interest on delinquent taxes is deductible as
they considered as interest on indebtedness and not as taxes
When to claim deductions for taxes
GR: Taxes may be deducted only on the year it was paid or incurred. Treatment of special assessment. -Special assessments are
XPN: In the case of contingent tax liability, the obligation to deduct deductible as taxes where these are made for the purpose of
arises only when the liability is finally determined maintenance or repair of local benefits, if the payment of such
assessment is ordinary and necessary in the conduct of trade,
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business or profession. Where the assessments are made for the of the property assessed, the payments are in the nature of capital
purpose of constructing local benefits tending to increase the value expenditures that are not deductible
4. Losses
1. Actually, sustained during the taxable year, and
2. Not compensated for by insurance or other forms of indemnity shall be allowed as deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft
or embezzlement
Requisites for deductibility the requisites for deductibility of a loss are: [TAE-TIE-C45]
1. Loss belongs to the taxpayer.
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 a deduction for estate tax purposes in case of individual taxpayers.
6. Must be connected with taxpayer’s trade, business or profession or incurred in any transaction or incurred by an individual in any transaction entered into for
profit though not connected with his trade, business or profession.
7. If it is casualty loss, it is evidenced by a declaration of loss file within 45 days with the BIR.
Types of losses
1. Ordinary losses – incurred in trade, profession or business. These are losses that are incurred by a taxable entity as a result of its day to day operations
conducted for profit or otherwise.
2. Casualty losses – The loss is of property connected with trade, business or profession arising from fire, storm, shipwreck or other casualty, or from robbery,
theft or embezzlement. These are the loss or physical damage suffered by property used in trade, business or the profession that results from unforseen
identifiable events that are sudden, unexpected and unusual in character (Domondon, 2013). A declaration of loss must be filed with the BIR within 45 days
after the date of event.
Measurement of casualty loss
a. Total loss – Actual loss is the book value of the asset.
b. Partial loss – Book value or cost to restore the asset to its normal operating condition, whichever is lower. Actual loss shall be reduced by insurance
recovery or any form of indemnity. Any excess of cost to restore over the book value shall be capitalized.
3. Net Operating Loss Carry-over (NOLCO)- This refers to the excess of allowable deduction over gross income of the business in a taxable year. The net operating
loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction
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from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such
loss; provided that:
a. The taxpayer was not exempt from income tax in the year of such net operating loss; and
b. There has been no substantial change in the ownership of the business or enterprise.
NOTE: NOLCO is on a first-in first-out basis.
“Substantial change in ownership of the business or enterprise”- The 75% equity rule (or ownership or interest rule) shall only apply to transfer or assignment of the
taxpayer’s net operating losses as a result of or arising from the said taxpayer’s merger or consolidation or business combination with another person. The transferee
or assignee shall not be entitled to claim the same as a deduction from gross income except when as a result of the said merger, consolidation or combinat ion, the
shareholders of the transferor/assignor, or the transferor gains control of:
1. At least 75% or more in nominal value of the outstanding issued shares or paid-up capital of the transferee/assignee, if a corporation;
2. At least 75% or more interest in the business of the transferee/assignee, if not a corporation (75% equity rule) (R.R. 14-2001, Sec. 2.4).
Determination of whether or not there is substantial change in ownership- Substantial change in ownership shall be determined on the basis of any change in the
ownership in said business or enterprise arising from or incident to its merger, consolidation, or combination with another person. It shall be determined as of the
end of the taxable year when NOLCO is to be claimed as deduction.
Persons entitled to deduct NOLCO from gross income

1. Individuals engaged in trade or business or in the exercise of his profession.
2. Domestic and Resident foreign corporation subject to the normal income tax or preferential tax rates.
3. Estates and trusts
Effect of NOLCO when the corporate taxpayer is subject to MCIT- The running of the 3-year period for the expiry of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable year during such 3-year period. However, such corporation cannot enjoy the benefit of NOLCO for as long as it is subject
to MCIT in any taxable period. An individual who claims the 40% OSD cannot claim deduction of NOLCO simultaneously. Even if NOLCO was not claimed, the 3-year
period shall continue to run.
Who are not qualified to avail NOLCO?

1. OBUs for a foreign banking corporation and FCDU of a domestic banking corporation.
2. Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive.
3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corporations engaged in international shipping or air carriage business in the Philippines
6. Any person, natural or juridical, enjoying exemption from income tax (RR 14-2001)
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4. Capital losses - Losses from sale or exchange of capital assets. It is deductible to the extent of capital gains only It is to ensure that only costs or expenses
incurred in earning the income shall be deductible for income tax purposes consonant with the requirement of the law that only necessary expenses are
allowed as deductions from gross income. The term “necessary expenses” presupposes that in order to be allowed as deduction, the expense must be business
connected, which is not the case insofar as capital losses are concerned. This is also the reason why all nonbusiness connected expenses like personal, living
and family expenses, are not allowed as deduction from gross income (Section 36(A)(1) of the 1997 NIRC).
Securities becoming worthless - If securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered
as a loss from the sale or exchange, on the last day of such taxable year, of capital assets (Section 34 (D), NIRC). Losses from shares of stock, held as capital
asset, which have become worthless during the taxable year shall be treated as capital loss as of the end of the year. However, this loss is not deductible
against the capital gains realized from the sale, barter, exchange or other forms of disposition of shares of stock during the taxable year, but must be claimed
against other capital gains. For the 5% and 10% net capital gains tax to apply, there must be an actual disposition of shares of stock held as capital asset,
and the capital gain and capital loss used as the basis in determining net capital gain, must be derived and incurred respectively, from a sale, barter, exchange
or other disposition of shares of stock (RR No. 06-08).
➢ NOTE: Securities becoming worthless refer to shares when offered for sale or requested for share redemption, no amount can be realized by the owner
of the share (RR No. 06-08).
➢ Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, if these
worthless securities are capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and therefore,
deductible to the extent of capital gains. This deduction, however, is not allowed to a bank or trust company (Sec. 34 [D][4], [E][2], NIRC).
5. Special Losses
a. Wagering losses – deductible only to the extent of gain or winnings deemed to only apply to individuals.
b. Losses on wash sales of stocks
➢ Wash sale - A sale of stock or securities where substantially identical securities are acquired or purchased within 61-day period, beginning 30 days
before the sale and ending 30 days after the sale.
➢ GR: Losses from wash sale are not deductible since these are considered as artificial loss.
➢ XPN: When taxpayer is a dealer in securities, and the transaction from which the loss resulted was made in the ordinary course of business of such
dealer, the loss is deductible in full.
Non-deductible losses.
1. Losses not incurred in trade, profession or business or in any transaction entered into profit.
2. Losses from sales or exchanges of property entered into between related taxpayers (not deductible as provided under Section 36 of the NIRC but the
gains are taxable.
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3. Losses from exchanges of property in a corporate readjustment.
4. Losses from illegal transactions.
5. Loss 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 (Tabag, 2015).
Marcelo doctrine- A loss in one line of business is not permitted as a deduction from gain in another line of business
5. Bad Debts- These are debts due to the taxpayer actually ascertained to be worthless and charged off in the books of the taxpayer within the taxable year except
those:
1. Not connected with trade, business or profession; and
2. Between related taxpayers (Sec 35 (E), NIRC).
Bad debts refer to debts resulting from the worthlessness or 3. Connected with the taxpayer’s trade, business or practice of
uncollectible, in whole or in part, of amount due to the taxpayer by profession.
others, arising from money lent or from uncollectible amounts of 4. Actually, charged off in the books of accounts of the taxpayer as
income from goods sold or services rendered (RR 5-99, Sec. 2). of the end of the taxable year.
5. Actually, ascertained to be worthless and uncollectible as of the
NOTE: A mere recording in the taxpayer’s books of account of end of the taxable year; and
estimated uncollectible accounts does not constitute a write-off of NOTE: In lieu of requisite No. 5, the BSP, thru its Monetary
the said receivable, hence, it shall not be a valid basis for its Board, shall approve the writing off of said indebtedness from
deduction as a bad debt expense. the banks’ books of accounts at the end of the taxable year.
In no case may a receivable from an insurance or surety company
Bad Debt Theory - Absence of creditor is not bad debt. be written off from the taxpayer’s books and claimed as bad debts
deduction unless such company has been declared closed due to
Requisites for deductibility [UST-CAR] insolvency or for any such similar reason by the Insurance
1. The debts are uncollectible despite diligent effort exerted by the Commissioner (RR 5-1999).
taxpayer; To prove that the taxpayer exerted diligent efforts to 6. Must not be sustained in a transaction entered into between
collect the debts. related parties.
a. Sending of statement of accounts.
b. Sending of collection letters. The factors to be considered include, but are not limited to, the
c. Giving the account to a lawyer for collection; and. following:
d. Filing a collection case in court. a. The debtor has no property or visible income.
2. Existing indebtedness subsisting due to the taxpayer which must b. The debtor has been adjudged bankrupt or insolvent.
be valid and legally demandable.
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c. There are numerous debtors with small amounts of debts
and further action on the accounts would entail expenses Effect of recovery of bad debts - That recovery of bad debts previously allowed as
exceeding the amounts sought to be collected. deduction in the preceding years shall be included as part of the gross income in the year
d. The debt can no longer be collected even in the future; of recovery to the extent of the income tax benefit of said deduction (Sec. 34 [E], NIRC).
and This is also known as the tax benefit rule.
e. Collateral shares have become worthless
6. Depreciation- There shall be allowed as a depreciation deduction a:

1. Reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence).
2. Of property used in the trade or business (Sec. 34 [F], NIRC).
Depreciation is the gradual diminution in the useful value of tangible property resulting from exhaustion, wear and tear and obsolescence (Domondon, 2013).
Requisites for deductibility:

1. The property subject to depreciation must be property withlife of more than 1 year.
2. The property depreciated must be used in trade, business, or exercise of a profession.
3. The depreciation must have been charged off during the taxable year.
4. The depreciation method used must be reasonable and consistent.
5. A depreciation schedule should be attached to the income tax return.
Person entitled to claim depreciation expense - The person entitled to claim depreciation expense is the person who sustains an economic loss from the decrease in
property value due to depreciation which is usually the owner. Non-resident aliens and foreign corporations are allowed to deduct only when the property is located
within the Philippines
Depreciable and non-depreciable assets for tax purposes

1. Depreciable assets:
a. Only property that is used for trade, business or exercise of a profession or held for the production of income;
b. All kinds of tangible property (other than land) with life of more than 1 year and do not form part of the stock in trade that are part of the inventory.
c. All kinds of intangible property (other than shares of stock) with life of more than 1 year.
d. Subject to exhaustion within a determinable period of time, that is it has a limited useful life
2. Non-depreciable assets:
a. Land, apart from the improvements of physical development added to it, cannot be depreciated.
b. Inventories or stock in trade.
c. Personal effects or clothing’s, except customs used in theatrical business.
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d. Bodies of minerals subject to depletion.
e. Automobiles and other transportation equipment used solely by the taxpayer for pleasure.
f. Building used solely by the taxpayer as his residence, and the furniture or furnishing used in said building.
g. Intangibles, the use in trade, business or exercise of profession is not of limited duration.
Methods for computing depreciation allowance under NIRC

1. Straight line method – The annual depreciation charge is calculated by allocating the amount to be depreciated equally over the number of years of the estimated
useful life of the tangible. It results in a constant charge over the useful life.
2. Declining balance method – accelerated method of depreciation which writes off a relatively larger amount of the asset’s cost nearer the start of its useful life
than that of the straight line.
3. Sum of the years digit method – accelerated method of depreciation expense in the earlier years and lower charges in the later years.
4. Any other method which may be prescribed by Department of Finance upon recommendation of the CIR.
Determination of depreciation method - The BIR and the taxpayer may agree in writing on the useful life of the property to be depreciated subject to modification if
justified by facts or circumstances. The change shall not be effective before the taxable year on which notice in writing by certified mail or registered mail is served
by the party initiating. However, if there is no agreement and the BIR does not object to the rate and useful life being used by the taxpayer, the same shall be
binding.
7. Depletion of Oil Wells and Mines- Depletion refers to the deduction form gross income arising from the exhaustion of natural resources like mines and oil and gas
wells as a result of production or severance from such mines or wells.
Conditions for deductibility: (COILE)

1. The method allowed under the rules and regulations prescribed by the Secretary of Finance is cost depletion method.
2. Can be availed of by oil and gas wells and mines;
3. The basis of cost depletion is the capital invested in the mine which is the accumulated exploration and development expenses.
4. When the allowance shall equal the capital invested no further allowance shall be granted.
5. In case of RFC, allowance for depletion shall be authorized only in respect to oil and gas wells and mines located in the Philippines.
Persons who may avail deduction for depletion - Annual depletion deductions are allowed only to mining entities which own an economic interest in mineral deposits.
Economic interest- It means interest in minerals in the place of investment therein or secured by operating or contract agreement for which income is derived, and
return of capital expected, from the extraction of mineral.
8. Charitable and other Contributions
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1. Contributions or gifts actually paid or made within the taxable year.
a. To, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to
accredited domestic corporations, or
b. Associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or
for the rehabilitation of veterans, or
c. To social welfare institutions, or to nongovernment organizations
2. In accordance with rules and regulations promulgated by the secretary of finance, upon recommendation of the commissioner.
3. No part of the net income of which inures to the benefit of any private stockholder or individual.
4. In an amount not in excess of
a. 10% in the case of an individual, and
b. 5% in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession (Sec 34 (H), NIRC).
Requisites for deductibility [AW-SEA] 2. Donations to foreign institutions and international

1. The contribution or gift must be actually paid. organizations in compliance with treaties and agreements
2. It must be paid within the taxable year. with the Government.
3. It must be given to the organization specified by law. 3. Donations to accredited NGO’s
4. It must be evidenced by adequate receipts or records; and a. Exclusively for: [C2HES2Y-RC]
5. The amount of charitable contribution of property other than i. Cultural
money shall be based on the acquisition cost of said property. ii. Charitable
iii. Health
Contributions that are deductible in full These are: [GAFA] iv. Educational
1. Donations to the Government of the Philippines, or political v. Scientific
subdivisions including fully-owned government corporation to vi. Social welfare
be used exclusively in undertaking priority activities in: vii. Character building &youth and sports
[CHEESHY] Development
a. Culture viii. Research
b. Health ix. Any combination of the above
c. Economic Development b. Donation must be utilized not later than the 15th day
d. Education of the 3rd month following the close of taxable year.
e. Science c. Administrative expense must not exceed 30% of the
f. Human Settlement total expenses.
g. Youth and Sports development d. Upon dissolution, assets shall be transferred to
another non-profit domestic corporation or to the
State.
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4. Donations of prizes and awards to Athletes (RA 7549, Sec. 3. Donations to the Government of the Philippines or political
1). subdivision exclusive for public purposes
4. Donations to domestic corporations organized exclusively for:
Donations that are deductible in FULL under special laws a. Scientific
1. Gifts and donations to the University of the Philippines shall b. Educational
be exempt from donor’s tax and the same shall be allowable c. Cultural
as a deduction up to 150% of the value of the donation (RA d. Charitable
9500). e. Religious
2. Contributions to the National Book Trust Fund shall likewise f. Rehabilitation of veteran
be exempt from donor’ tax and the same shall be allowable g. Social welfare
as a deduction up to 150% of the value of the donation (RA
9521). Limitations on deductions. Amount deductible shall not exceed:
1. For individuals - 10% of taxable income before
Donations that are subject to limitation contributions.
1. Donations that are not in accordance with the priority plan. 2. For corporations - 5% of taxable income before
2. Donations whose conditions are not complied with contributions (Sec. 34 [H][1], NIRC)
9. Research and Developments

1. Taxpayer may treat research or development expenditures.
2. Which are paid or incurred by him during the taxable year
3. In connection with his trade, business or profession as:
a. Ordinary and necessary expenses, which are not chargeable to capital account, and shall be allowed as deduction during the taxable year when paid
or incurred, or
b. Deferred expenses
i. Paid or incurred by the taxpayer in connection with his trade, business or profession;
ii. Not treated as ordinary expenses; and
iii. Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion (Sec. 34(I), NIRC).
Period for amortizing the deferred research and development expenditures - In computing taxable income.
➢ Such deferred expenses shall be allowed as deduction.
➢ Ratably distributed over a period of not less than 60 months (beginning with the month in which the taxpayer first realizes benefits from such expenditures).
Research and development expenditures that are not deductible - Any expenditure:
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1. For the acquisition or improvement of land or for the improvement of property to be used in connection with research and development subject to
depreciation and depletion; and
2. Paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral including oil or gas.
10. Contributions to Pension Trust

1. An employer establishing or maintaining a pension trust.
2. To provide for the payment of reasonable pensions to his employees
3. Shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year,
allowed as a deduction for ordinary and necessary expenses).
4. A reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions.
5. But only if such amount:
a. Has not theretofore been allowed as a deduction.
b. Is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made
Requisites for deductibility [P-FRANC]

1. The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to his employees
2. It must be funded by the employer.
3. The pension plan is reasonable and actuarially sound.
4. The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made.
5. The payment has not yet been allowed as a deduction.
6. The amount contributed must no longer be subject to the control and disposition of the employer
Deductible payment to pension trusts

1. Employer’s current liability – amount contributed during the taxable year shall be treated as an ordinary and necessary expense
2. Employer’s liability for past services – 1/10 of the reasonable amount paid to cover pension liability applicable to the preceding 10 years
NOTE: When an employer makes a contribution to his employee’s Personal Equity and Retirement Account (PERA), the employer can claim this amount as a deduction
but only to the extent of the employer’s contribution that would complete the maximum allowable PERA contribution of an employee (RR 2011-17, with RA 9505).
Additional requirements for deductibility - Taxpayers who claim deductions for expenses, the amounts of which are subject to withholding tax, must prove that said
deductions were in fact subjected to proper withholding. If no withholding was made, then claimed deductions will not be allowed (Sec. [34][K], NIRC).
No deductions shall be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where
no withholding of tax was made (RR 12-2013).
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d. Items not deductible- In computing net income, no deduction shall in any case be allowed in respect to:
1. Personal, living or family expenses- These are personal expenses 4. Premiums paid on any life insurance policy covering the life of any
and not related to the conduct of trade or business. officer or employee, or of any person financially interested in any
2. Any amount paid out for new buildings of for permanent trade or business carried on by the taxpayer, individual or corporate,
improvements, or betterments made to increase the value of any when the taxpayer is directly or indirectly a beneficiary under such
property or estate – These are capital expenditures added to the cost policy. Note a person is said to be financially interested in the
of the property and the periodic depreciation is the amount that is taxpayer’s business, if he is a stockholder thereof or if he receives
considered as deductible expense. Note it Shall not apply to as compensation his share of the profits of the business.
intangible drilling and development costs incurred in petroleum 5. Interest expense, bad debts, and losses from sales of property
operations which are deductible under Subsection (G)(1) of Sec. 34 between related parties.
of the NIRC. 6. Bribes, kickbacks and other similar payments.
3. Any amount expended in restoring property or in making good the 7. Items where the requisites for deductibility are not met.
exhaustion thereof for which an allowance is or has been made
(Major Repairs).
5. Income tax on individuals

a. Resident citizens, non-resident citizens, and resident aliens
I. Coverage- The general rule is that resident citizens are taxable on income from all sources within and without the Philippines. Whereas, nonresident citizens, overseas
contract workers, seamen who are members of the complement of a vessel engaged exclusively in international trade, resident aliens, and nonresident aliens are
taxable only on income from sources within the Philippines.
1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the Philippines;
3. An individual citizen of the Philippines who is working and deriving income from abroad as an OFW is taxable only on income derived from sources within the
Philippines: Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines (Sec. 23, NIRC).
II. Taxation on compensation income

Compensation income includes all remuneration for services rendered by an employee for his employer unless specifically excluded under the NIRC. The name
by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments, honoraria, allowances, commissions (i.e. transportation,
representation, entertainment and the like); fees including director’s fees, if the director is, at the same time, an employee of the employer/ corporation; taxable
bonuses and fringe benefits except those which are subject to the fringe benefits tax; taxable pensions and retirement pay; and other income of a similar nature
constitute compensation income (R.R. 2-98, Sec. 2.78.1). The test is whether such income is received by virtue of an employer-employee relationship.
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Requisites for taxability of compensation income [SAR]
1. Personal services actually rendered
2. Payment is for such services rendered
3. Payment is reasonable.
Nor Considered as Compensation Income:

• Payment for the services of an independent contractor is not classified as compensation income since there is no employer-employee relationship. The income
of the independent contractor is derived from the conduct of his trade or business, which is considered as business income and not compensation income.
• The share of a partner in a general professional partnership. The general partner rendered services and the payment is in the form of a share in the profits is
not within the meaning of compensation income because it is derived from the exercise of profession classified as professional income.
1. Inclusions
1. Monetary compensation- If compensation is paid in cash, the full amount received is the measure of the income subject to tax.
2. Regular salary/wage
a. Salary – earnings received periodically for a regular work other than manual labor, such as monthly salary of an employee.
b. Wages – all remuneration for service performed by an employee for his employer, including the cash value of all non-cash remuneration. [Sec.
78(A), NIRC]
c. Separation pay/retirement benefit not exempt
d. Retirement pay – a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to
withdraw from work into privacy. The general rule that retirement pay is taxable. The exceptions are:
i. SSS or GSIS retirement pays.
ii. Retirement benefit under R.A. 7641 provided the following requirements are met:
1. Retirement program is approved by the Commissioner;
2. Retirement benefit is pursuant to a reasonable private benefit plan.
3. Retiree employed for 10 years by the employer;
4. Retiree should have been 50 years old or above at the time of retirement; and
5. Retirement benefit availed only once [Sec. 32 (B)(6)(a), NIRC].
e. Separation pay General Rule: Separation pay taxable if voluntarily availed of. Exception: if due to causes such as death, sickness, disability,
reorganization or bankruptcy of the company or for any other cause beyond the control of the said employee.
3. Bonuses, 13th month pay, and other benefits not exempt
a. Tips and Gratuities – those paid directly to the employee (usually by employer’s customer) which are not accounted for by the employee to the
employer. (Taxable income but not subject to withholding tax).
b. 13th month pay – taxable only for the part which exceeds P90,000.
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c. Overtime Pay – premium payment received for working beyond regular hours of work which is included in the computation of gross salary of
employee
4. Directors’ fees, allowances and bonuses
a. General Rule: taxable as compensation income when the recipient director has an employee-employer relationship with the corporation which pays
the same
b. Exception: not taxable as compensation income when recipient director’s duties is confined to attendance and participation only in the meetings of
the Board of Directors, but taxable as income arising from exercise of profession.
5. Non-monetary compensation- measure of income subject to tax is the equivalent value in money.
2. Exclusions
➢ Fringe benefit subject to tax- Fringe benefit is any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to
basic salaries, to an individual employee, except rank-and-file employee, such as but not limited to:
➢ Housing
➢ Expense account
➢ Vehicle of any kind
➢ Household personnel such as maid, driver and others
➢ Interest on loans at less than market rate to the extent of the difference between the market rate and the actual rate granted
➢ Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations
➢ Holiday and vacation expenses
➢ Expenses for foreign travel
➢ Educational assistance to the employee or his dependents
➢ Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows
Tax treatment for fringe benefits If the benefit is not tax-exempt and the recipient is:
1. A rank-and-file employee – the value of such fringe benefit shall be considered as part of the compensation income of such employee subject
to tax payable by the employee.
2. A managerial or supervisory employee – the value shall not be included in the compensation income of such employee subject to tax. The fringe
benefit tax (FBT) is payable by the employer on behalf of the employee (Sec. 33, NIRC).
Nature of a fringe benefit tax (FBT):

FBT is a final withholding tax imposed on the grossed-up monetary value (GMV) of fringe benefit furnished, granted or paid by the employer to the
employee, except rank and file employees (R.R. 3-98, Sec. 2.33 [A]).
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Grossed-up Monetary Value: This represents the whole amount of income realized by the employee, which includes the net amount of money or net
monetary value of property which has been received, plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the
employer for and in behalf of his employee.
Convenience of the employer Rule

If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the
requirement of the employee’s work or position, the value of that privilege need not be included as compensation.
➢ De minimis benefits
Facilities or privileges of relatively small value furnished by an employer to his employees and are as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. These are exempt from both fringe benefit tax and compensation income tax. All other benefits given by
employers, which are not included in the below enumeration shall NOT be considered as de minimis benefits, and hence, shall be subject to income
tax, as well as to withholding tax on compensation income. The benefits provided in the Regulations shall apply to income earned starting the year
2011. The amount of benefits exceeding their respective ceilings shall be considered as part of “other benefits”
Examples of De minimis Benefits:

1. Monetized unused vacation leave credits of employees
➢ Private employees:
i. Vacation leave - exempt up to 10 days
ii. Sick leave – always taxable
➢ Government employees: Vacation and sick leave are always tax exempt regardless of the number of days.
2. Medical cash allowance to dependents of employees.
➢ Not exceeding ₱750 per semester or ₱125 per month
3. Rice subsidy
➢ ₱1,500 or one sack of 50-kg rice per month amounting to not more than P1,500
4. Uniforms and clothing allowances
➢ Not exceeding ₱5,000 per annum (R.R. 8-2012)
5. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check up, maternity
assistance, and routine consultations
➢ Not exceeding ₱10,000 per annum
6. Laundry allowance
➢ Not exceeding ₱300 per month
7. Employee achievement awards under an established written plan which does not discriminate in favor of highly paid employees (e.g. for length
of service or safety achievement)
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➢ In the form of tangible personal property other than cash or gift certificate with an annual monetary value not exceeding ₱10,000
8. Gifts given during Christmas and major anniversary celebrations
➢ Not exceeding ₱5,000 per employee per annum
9. Daily meal allowance for overtime work
➢ Not exceeding 25% of the basic minimum wage on a per region basis
10. Benefits received by virtue of Collective Bargaining Agreement (CBA) and productivity incentive scheme.
➢ Not exceeding ₱10,000 per employee per annum (R.R. 1-2015)
➢ 13th month pay and other benefits and payments specifically excluded from taxable compensation income- Gross benefits received by employees up
to P90,000 (amounts in excess are considered compensation income)
Includes:
1. Thirteenth-month pay equivalent to the mandatory one-month basic salary of officials and employees of the government, (whether national or
local), including government-owned or -controlled corporations, and or private offices received after the 12th-month pay; and
2. Other benefits, such as Christmas bonus, productivity-incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature
actually received by officials and employees of both government and private offices.
3. In no case shall the exemption apply to other compensation received by an employee under an employer employee relationship, such as basic
salary and other allowances.
III. Taxation of business income/income from practice of profession.

All income obtained from doing business or exercising of profession shall be included in the computation of gross income.
GRADUATED INCOME TAX RATES- in general graduated tax rates from 20% to 35% which in January 1 2003 shall be 15%-35% with zero rate for first Php. 250,000
and 5 tiers; basis is from over Php. 250,000 to over Php. 8,000,000 with option under certain cases of qualified individuals to opt for the 8% income tax rates in lieu
of the graduated rates and the percentage tax under Sec 16.
RANGE OF TAXABLE TAX DUE = a (bxc)
INCOME 2018-2022
OVER NOT OVER BASIC ADDITIONAL OF EXCESS
AMOUNT RATE (b) OVER (c)
(a)
- 250,000 - - -
250,000 400,000 - 20% 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 20% 800,000
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2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000
RANGE OF TAXABLE TAX DUE = a(bxc)

INCOME 2022-XXXX
OVER NOT OVER BASIC ADDITIONAL OF EXCESS
AMOUNT INCOME (b) OVER (c)
(a)
- 250,000 - - -
250,000 400,000 - 15% 250,000
400,000 800,000 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,000 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000
1. Individuals Earning Purely Compensation Income-individuals is earning purely compensation income shall be taxed based on the income tax rates prescribed
under subsection (A) here.
1. Taxable income for compensation earners is the gross compensation income less nontaxable income/benefits such as but not limited to the Thirleenth
(13th) month pay and other benefits (subject to limitations, see Section 6(G)(e) of these Regulations), de minimis benefits, and employee's share in
the SSS, GSIS, PHIC, Pag-ibig contributions and union dues.
2. Husband and wife shall compute their individual income tax separately based on their respective taxable income; if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for
the purpose of determining their respective taxable income.
3. Minimum wage earners shall be exempt from the payment of income tax based on their statutory minimum wage rates. The hoiiday pay, overtime
pay, night shift differential pay and hazard pay received by such earner are likewise exempt.
2. Individuals earning purely business or professional income. Individuals earning income purely from self-employment and/or practice of profession, whose
gross sales/receipts and other nonoperating income does not exceed the VAT threshold as provided under Sec. 109 (BB) of the Tax Code, as amended, shall
have the option to avail of:
1. The graduated rates under Sec. 24 (A)(2)(a) of the Tax Code, as amended; OR
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2. An eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of two hundred fifty thousand pesos (P250,000.00) in
lieu of the graduated income tax rates under Sec.24 (A) and the percentage tax under Sec.116 of the NIRC.
Principles:
➢ Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter Percentage and/or income Tax Return, or on the initial
quarter return of the taxable year after the commencement of a new business practice of profession, the taxpayer shall be considered as having
availed of the graduated rates of the Tax Code, as amended. Such election shall be irrevocable and no amendment of option shall be made for the
said taxable year.
➢ The option to be taxed al \oh income tax rate is not available to a VAT-registered taxpayer, regardless of the amount of gross sales receipts, and
to a taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the
same Title. Likewise, partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost
and expenses cannot avail of the 8% income tax rate option.
➢ A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is conclusively qualified for said option at the end of the
taxable year annual gross sales/receipts and other non-operating income did not exceed the VAT threshold (3,000,000.00)1. shall compute the
final annual income tax due based on the actual annual gross sales/receipts and other non-operating income. The said income tax due shall be in
lieu of the graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended.
➢ A taxpayer shall automatically be subject to the graduated rates under Section 2a(A)(2)(a) of the Tax Code, as amended, even if the flat 8%
income tax rate option is initially selected, when taxpayer's gross sales/receipts and other non-operating income exceeded the VAT threshold during
the taxable year. In such case, his income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the
previous quarter/s income tax payment/s under the 8oh income tax rate option.
➢ Taxable income for individuals earning income from self-employment/practice of profession shall be the net income, if taxpayer opted to be taxed
at graduated rates or has failed to signify the chosen option. However, if the option availed is the 8% income tax rate, the taxable base is the gross
sales/receipts and other non-operating income.
3. Individuals earning mixed income for mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under Section 24 (A)(2)(a); AND
2. The income from business or practice of profession shall be subject to the following:
i. If the gross sales/receipts and other nonoperating income do not exceed the VAT threshold, the individual has the option to be taxed at:
1. The aforementioned graduated taxable income rates; OR
2. The aforementioned optional 8% gross income tax.
ii. If the gross sales/receipts and other nonoperating income exceeds the VAT threshold, the individual shall be subject to the graduated income
tax rates.
Principles:
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➢ The provision under Section 24 of the Tax Code, as amended, which allows an option of 8% income tax rates on gross sales/receipts and other
non-operating income in excess of P250,000.00 is available only to purely seif-employed individuals and/or professionals. The P250,000.00
mentioned is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable
to compensation income. Under the said graduated rates' the excess of the P250,000.00 over the actual taxable compensation income is not
deductible against the taxable income from business practice of profession under the 8% income tax rate option.
➢ The total tax due shall be the sum of: (1) tax due from compensation, computed using the graduated income tax rates; and (2) tax due from
self-employment/practice of profession, resulting from the multiplication of the 8% income tax rate with the total of the gross sales/receipts
and other non-operating income
➢ Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice of profession' shall combine
the taxable income from both compensation and business/practice of profession in computing for the total taxable intome and consequently,
the income tax due.
IV. Taxation of partners in a general professional partnership-GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the
partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP. Each partner
shall report as gross income his distributive share in the net income of the GPP, actually or constructively received.
In computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. [Sec. 26, NIRC] If the
partnership sustains a net operating loss, the partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income.
V. Taxation of passive income (Since it was already discussed above, the rates are only discussed here)
1. Interests from any currency bank deposits and yield or any other monetary benefits from deposit substitutes and from trust funds and similar arrangements-
20%
2. Interest income received by an individual taxpayer (except a non-resident individual) from a depositary bank under the expanded foreign currency deposit
system- 15%
3. Proceeds of pre-terminated long-term deposit or investment in the form of savings, common or individual trust funds, deposits substitues management
accounts and other investments evidenced by certificates in such form as prescribed by the BSP-the final tax shall be based on the remaining maturity of the
investment:
➢ 4 years but less than 5 years-5%
➢ 3 years but less than 4 years-12%
➢ Less than 3 years- 20%
4. Royalties (except royalties on books and other literary works and musical compositions)-20%
5. Royalties on Books and other literary works and musical compositions-10%
6. Prizes (except prizes amounting to Php. 10,000 or less)- 20%
7. Winnings (except PCS and Lotto winnings amounting to Php. 10,000 or less)- 20%
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8. Cash and Property Dividedns-10%
9. Capital Gains from Sale of Shares of Stock not traded in the stock exchange-15%
10. Capital Gains from Sale of Real Property located in the Philippines- 6%
VI. Taxation of capital gains

1. Income from sale of shares of stock of a Philippine corporation
➢ Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the similar tax prescribed on citizens and resident aliens- subject to stock transaction tax of ½ of 1% on its gross selling
price
➢ Sale, barter or exchange of Shares of stock in domestic corporation not traded – 15% of net capital gains
2. Income from sale of real property situated in the Philippines
➢ Located in the Philippines
Treatment of sale or disposition of real property located in the Philippines treated as capital asset. Actual gain or loss is immaterial since there is a
conclusive presumption of gain. As regards transactions affected by the 6% capital gain tax, the NIRC speaks of real property with respect to individual
taxpayers, estate and trust but also speaks of land and/or building with respect to domestic corporations. A final tax of 6% shall be imposed based on
the higher amount between:
1. The gross selling price; or
2. Whichever is higher between the current fair market value as determined by:
a. Zonal Value – prescribed zonal value of real properties as determined by the CIR; or
b. Assessed Value – the fair market value as shown in the schedule of values of the Provincial and City assessors
➢ Not Located in the Philippines

➢ Gains realized from the sale, exchange or other disposition of real property not located in the Philippines by resident citizens or domestic
corporations shall be subject to ordinary income taxation but subject to foreign tax credits.
➢ Such income may be exempt in the case of non-resident citizens, alien individuals and foreign corporations
3. Income from sale, exchange, and other disposition of other capital assets
➢ The rules on capital gains and losses apply in the determination of the amount to be included in gross income subject to the graduated rates of 5-32%
for individuals and the normal corporate income tax of 30% for corporations, and not subject to capital gains tax.
b. Non-resident aliens engaged in trade or business

Non-Resident Aliens Engaged in Trade or Business are taxed on their income derived from all sources within the Philippines in the same manner as an individual citizen or
a resident alien individual, subject to the schedule rate and are granted Personal and Additional Exemptions, subject to the rule of reciprocity. A nonresident alien individual
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who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines.
c. Non-resident aliens not engaged in trade or business

There shall be levied, collected, and paid for each taxable year upon the entire income received from all sources within the PH by every NRANETB within the PH as interest,
cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic
or casual gains, profits, and income, and capital gains, a tax equivalent to 25% of such income.
d. Aliens employed by regional headquarters, regional operating headquarters, offshore banking units, and petroleum service contractors
The preferential tax treatment of 15% shall no longer be applicable to employees of regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore
banking units (OBUs) or petroleum service contractors and subcontractors. They are now subject to regular income tax rates.
e. Individual taxpayers exempt from income tax

All individuals and entities claiming exemption from imposition of taxes on income and, consequently, from withholding taxes are required to provide a copy of a valid,
current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment
of the related income. The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption, as well as the corresponding exemption from imposition
of withholding tax. Failure on the part of the taxpayer to present the said tax exemption certificate or ruling as herein required shall subject him to the payment of appropriate
withholding taxes due on the transaction.
I. Senior Citizens-Qualified senior citizens deriving returnable income during the taxable year, whether from compensation or otherwise, are subject to income tax and
are required to file their income tax returns and pay the tax as they file the return.
XPNs:
1. If the returnable income of a senior citizen is in the nature of compensation income but he qualifies as a minimum wage earner under R.A. 9504.
2. If the aggregate amount of gross income earned by the senior citizen during the taxable year does not exceed the amount of his personal exemptions (basic
and additional);
XPNs to the XPN: The exemption of senior citizens from income tax will not extend to all types of income earned during the taxable year. Hence, they can still be
liable for other taxes such as:
1. The 20% final withholding tax on interest income from any currency bank deposit, yield and other monetary benefit from deposit substitutes, trust fund and
similar arrangements; royalties (except on books, as well as other literary works and musical compositions, which shall be imposed a final withholding tax of
10%); prizes (except prizes amounting to P10,000 or less which shall be subject to income tax at the rates prescribed under Sec. 24(A) of the NIRC, and
other winnings (except Philippine Charity Sweepstakes and Lotto winnings) (Sec. 24 [B][1], NIRC).
2. The 7.5% final withholding tax on interest income from a depository bank under the expanded foreign currency deposit system (Sec. 24 [B][1], NIRC).
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3. If the senior citizen will pre-terminate his 5-year long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas before the fifth
year, he shall be subject to the final withholding tax imposed on the entire income, depending on the holding period of the deposit or investment. If held for
a period of:
a. Four years to less than five years — 5%
b. Three years to less than four years — 12%; and
c. Less than three years — 20%
4. The 10% final withholding tax –
a. On cash and/or property dividends actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual
fund company and regional operating headquarters of a multinational company; or
b. On the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a
partner; or
c. On the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation
of which he is a member or a co-venturer (Sec. 24 [B][2], NIRC);
5. Capital gains tax from sales of shares of stock not traded in the stock exchange (Sec. 24 [C], NIRC; and
6. The 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains presumed to have been
realized from the sale or disposition of principal residence (Sec. 24 [D], NIRC).
II. Minimum wage earner.

1. Rule: they shall be exempt from payment of income tax on their taxable income.
2. Limit: However, if he receives “other benefits” in excess of the allowable statutory amount of P90,000, then he shall be taxable on the exceeds benefits as
well as his salaries, wages, and allowances, just like an employee receiving compensation income beyond the statutory minimum wage.
3. The treatment of bonuses and other benefits that [a minimum wage earner] receives from the employer in excess of the [₱90,000] ceiling cannot but be the
same as the prevailing treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.
4. The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by R.A. 9504.
5. The minimum wage shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night
shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.
6. Compensation income including overtime pay, holiday pay and hazard pay, earned by minimum wage earners who have no other returnable income are NOT
taxable and not subject to withholding tax on wages.
III. Exemptions granted under international agreements

1. Taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments/embassies/diplomatic missions and
international organizations situated in the Philippines.
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2. The Government of the Philippines is a signatory of certain international agreements and a party to different tax treaties which specifically provide for the
exemption of certain persons or entities from taxes imposed by the Philippines.
3. Examples of these tax exemptions are those accorded:
➢ Diplomats or ambassadors of other countries here in the Philippines.
➢ The World Health Organization is also tax exempt upon an international agreement.
➢ Diplomatic agents who are not nationals or permanent residents of the Philippines;
➢ Members of family of the diplomatic agent forming part of his/her household who are not Philippine nationals;
➢ Members of the administrative and technical staff of the mission together with members of their families forming part of their respective households
who are not nationals or permanent residents of the Philippines;
➢ Members of the service staff of the mission who are not nationals or permanent residents of the Philippines; and
➢ Private servants of members of the mission who are not nationals or permanent residents of the Philippines
6. Income tax on corporations

a. Domestic corporations- is a corporation created or organized in the Philippines or under its laws and is liable for its income from sources within and without
Outline of taxes imposed on Domestic Corporation

1. Normal corporate income tax (NCIT) - 30% of taxable income from all sources within and without the Philippines
2. Minimum corporate income tax (MCIT) - 2% of gross income, if MCIT applies.
3. Gross income tax (Optional corporate income tax) - 15% of gross income, if qualified.
4. Improperly Accumulated Earnings Tax - 10% of improperly accumulated earnings.
5. Final tax on passive income.
I. Taxation - in general
1. Regular Corporate Income Tax (RCIT)- An income tax of thirty percent (30%) shall be imposed upon the taxable income derived during the taxable year from
all sources within and without the Philippines for DC while from all sources within the Philippines for RFC.
Cost of Goods Sold:

➢ Cost of Goods Sold (COGs) in general - It includes all business expenses directly incurred to produce the merchandise and bring them to their present
location and use.
➢ Cost of Goods Sold (COGs) for Trading or Merchandising - This shall include the invoice cost of the goods sold, plus import duties and freight in
transporting the goods to the place where they are actually sold, including insurance while the goods are in transit.
➢ Cost of Goods Sold (COGs) for a Manufacturing Concern - This shall include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
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➢ Cost of Goods Sold (COGs) for a Service Concern (Cost of Services) - This shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients, including salaries and employee benefits of personnel, consultants and specialists directly rendering
the service, and cost of facilities directly utilized in providing the service, such as depreciation or rental of equipment used and cost of supplies.
2. Minimum Corporate Income Tax (MCIT)

➢ Purpose.
The imposition of the MCIT is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their
income tax payments. As a tax on gross income, it prevents tax evasion and 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.
➢ Nature.
The MCIT is equal to 2% of the gross income of the corporation at the end of the taxable quarter, except income exempt from income tax and
income subject to final withholding tax. Being a minimum income tax, a corporation should pay the MCIT whenever its normal corporate income tax
(NCIT) is lower than the MCIT, or when the firm reports a net loss in its tax return. Conversely, the NCIT is paid when it is higher than the MCIT.
Therefore, the taxable due for the taxable year will be NCIT (30% of taxable income) or MCIT (2% of gross income), whichever is HIGHER.
➢ The MCIT shall be imposed:
➢ If taxable income is zero;
➢ If taxable income is negative; or
➢ If MCIT is greater than the NCIT due.
➢ Coverage
➢ The MCIT covers domestic and resident foreign corporations which are subject to the 30% (effective Januray 1, 2009) normal corporate income
tax; hence, corporations which are subject to special corporate taxes do not fall within the coverage of the MCIT.
➢ The minimum corporate income tax is a proxy for the normal corporate income tax of 30%, not the special corporate taxes paid by a corporation.
For instance, a proprietary educational institution may be subject to a regular corporate income tax of 10% (depending on its dominant income),
but it is exempt from the imposition of MCIT because the latter is not intended to substitute special tax rates. So is with PEZA enterprises, CDA
enterprises.
➢ Commencement
➢ The MCIT is imposed beginning on the fourth taxable year immediately following the year in which the corporation commenced its business
operations. For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic
corporation registered with the Bureau of Internal Revenue (BIR), regardless of whether the corporation is using the calendar year or fiscal
year.
➢ Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998
➢ Recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, MCIT commences only on the
4th taxable year.
➢ When Reported and Paid?
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➢ The MCIT shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a
yearly basis. The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax.
➢ The MCIT shall likewise apply to the quarterly corporate income tax but the final comparison between the NCIT payable by the corporation and
the MCIT shall be made at the end of the taxable year. The payable or excess payment in the Annual Income Tax Return shall be computed
taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax return, whether this be
MCIT or normal income tax
➢ MCIT cannot be deducted from the gross income since it is an estimate off the normal income tax.
➢ Carry Forward of the Excess of MCIT
➢ The excess of MCIT over the NCIT shall be carried forward on an annual or quarterly basis.
➢ The excess shall be credited against the NCIT due for the three (3) immediately succeeding taxable years.
➢ Any excess not credited in the next three years shall be forfeited.
➢ Carry forward (annually or quarterly) is possible only if MCIT is greater than NCIT.
➢ The maximum amount that can be credited is only up to the amount of the NCIT, there can be no negative NCIT
➢ Suspension of the imposition of MCIT- Since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance,
upon recommendation of the BIR, to suspend the imposition of MCIT if a corporation suffers losses due to any of the following:
➢ Prolonged Labor Dispute – losses arising from a strike staged by the employees which lasted for more than 6 months within a taxable period
and which has caused the temporary shutdown of business operations;
➢ Force Majeure – a cause due to an irresistible force as by ‘Act of God’ like lightning, earthquake, storm, flood and the like, and shall also include
armed conflicts like war or insurgency;
➢ Legitimate Business Reverses – include substantial losses due to fire, theft or embezzlement or for other economic reason, as determined by
the Secretary of Finance
➢ MCIT Limitations
➢ MCIT does not apply on the first 3 years of business operation of a corporation;
➢ MCIT is not applicable to DC or RFC not subject to NCIT;
1. Domestic proprietary educational institutions subject to 10% tax
2. Domestic non-profit hospital subject to 10% tax
3. Domestic depository banks under the expanded foreign currency deposit system otherwise known as FCDUs
4. Resident foreign international carrier subject to tax at 2 ½% of their Gross Philippines Billings;
5. Resident foreign offshore banking units;
6. Resident foreign regional operating headquarters; and
7. Firms enjoying special income tax rate under the PEZA Law (R.A. 7916), Bases Conversion and Development Act of 1992 (R.A. 7227)
and those enjoying income tax holiday incentives (R.R. 9-98, Sec. 2.27 [E][8]) However, the related income from unregistered activities
(or those not covered by the tax incentives) is subject to MCIT.
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➢ For domestic corporation, whose operations are partly covered by NCIT and partly covered under a special income tax system, MCIT shall apply
only on operations covered by NCIT;
➢ For resident foreign corporation, MCIT is applicable only to gross income from sources within the Philippines.
➢ When, by authority of the Secretary of Finance, the imposition of the MCIT is suspended upon submission of proof by the applicant corporation
that the corporation sustained substantial losses
1. on account of a prolonged labor dispute; or
2. because of “force majeure”; or
3. because of legitimate business reverses;
➢ Applicability of MCIT where a corporation is governed party under NCIT and partly under a special income tax system
➢ In the case of a domestic corporation whose operations or activities are partly covered by the normal income tax system (subject to 30% NCIT)
and partly covered under a special income tax system, the MCIT will apply only on operations covered by the regular income tax system. For
example, if a BOI-registered enterprise has a "registered" and an "unregistered" activity, the MCIT shall apply to the unregistered activity
3. Taxation of passive income

Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties
➢ 20% final tax on:
➢ Interest on any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and
➢ Royalties
➢ Domestic Corporations and Resident Foreign Corporations
➢ Collected as Final Withholding Tax
Interest Income derived by a domestic corporation from depository bank under the expanded foreign currency deposit system
1. 15% final income tax
2. same for Domestic Corporations and Resident Foreign Corporations.
3. Collected as Final Withholding Tax
Inter-corporate dividends
1. Dividends received from a domestic corporation by another domestic corporation or resident foreign corporation – Exempt.
2. Dividends received from a domestic corporation by a non-resident foreign corporation (NRFC): 30% of the amount of cash and/or property dividend;
provided that it may be reduced to 15% of the amount of cash and/or property dividend, if the country in which the NRFC is domiciled shall allow a
credit against the tax due from the NRFC deemed to have been paid in the Philippines equivalent to 15%, which represents the difference between the
regular income tax of 30% and the 15% tax sparing rate.
Stock dividends are exempt if there is no change in proportionate interest.
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4. Taxation of capital gains

➢ Capital gain from sale of shares of stock not traded in the stock exchange
➢ Final tax on net capital gains realized by a domestic corporation during the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation not listed and traded through a local stock exchange: 15% of net capital gains
➢ Final tax on net capital gains realized by Resident Foreign Corporations and Nonresident Foreign Corporations during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange:
Capital gains realized from the sale, exchange, or disposition of lands and/or buildings:
➢ On the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital
assets.
➢ On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6%;
➢ If it is a Resident Foreign Corporation., it is subject to the regular corporate income tax rate of 30%.
➢ The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss
on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain.
➢ Applicable to domestic corporations only.
➢ Tax treatment is similar to that of individuals.
5. Improperly accumulated earnings tax - Domestic corporations and closely-held corporations are subject to 10% improperly accumulated earnings tax on their
improperly accumulated earnings. These are the profits of a corporation that are accumulated, instead of distributing them to its shareholders, for the purpose
of avoiding the income tax with respect to its shareholders or the shareholders of another corporation.
➢ Close-held Corporations
➢ These are corporations, at least 50% in value of the outstanding capital stock of which or at least 50% of the total combined voting power of
all classes of stock entitled to vote is owned directly or indirectly by or not more than 20 individuals (R.R. 2-2001, Sec. 4). Corporations outside
the above definition are considered publicly-held corporations.
➢ Touchstone of the Liability
➢ It is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is
due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would
not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has
accumulated income beyond the reasonable needs of the business, IAET shall be imposed.
➢ IAET is imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earning distributed to them by the corporation. If the earnings
and profits were distributed, the shareholders would be liable for tax on dividends
➢ Reasonable Needs
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➢ To determine the “reasonable needs” of the business in order to justify an accumulation of earnings, the Courts of the United States have
invented the so-called “Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate needs of the
business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits,
the accumulation was not for the reasonable needs of the business, and the penalty tax would apply.
➢ In order to determine whether profits are accumulated for the reasonable needs, it must be shown that the controlling intention of the taxpayer
is manifest at the time of accumulation, not subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used
within a reasonable time after the close of the taxable year.
➢ Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years even if not declared as dividend.
Notwithstanding the imposition of the IAET, profits which have been subjected to IAET, when finally declared as dividends shall nevertheless be
subject to tax on dividends imposed under the NIRC, except in those instances where the recipient is not subject thereto.
➢ Constitute accumulation of earnings for the reasonable needs of the business.
➢ Allowance for the increase in accumulation of earnings up to 100% of the paid-up capital. The basis of the 100% threshold of retention
(considered within the reasonable needs of the business) shall be the paid-up capital or the amount contributed to the corporation representing
the par value of the shares of stock. Any excess capital over and above the par (APIC/Premium) shall be excluded (RMC No. 35-2011),
➢ Earnings reserved for definite corporate expansion approved by the Board of Directors or equivalent body
➢ Reserved for building, plant or equipment acquisition as approved by the Board of Directors or equivalent body
➢ Reserved for compliance with any loan covenant or pre-existing obligation
➢ Earnings required by law or applicable regulations to be retained
➢ In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the
Philippines
➢ Instances of accumulation of profits beyond the reasonable needs of a business.
➢ Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities in unrelated business
➢ Investment in bonds and other long-term securities
➢ Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business
➢ Evidence to show purpose of accumulation is tax evasion or tax avoidance the fact that:
➢ Any corporation is a mere:
1. Holding company – one having practically no activities except holding property and collecting income therefrom or investing therein; or
2. Investment (mutual fund) company – when activities of the company further include or consist substantially of buying and selling stocks,
securities, real estate, or other investment properties so that income is derived not only from investment yield but also from profits upon
market fluctuations.
➢ The earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business.
➢ IAET not applicable to the following
➢ Publicly-held corporations (Sec. 29 [B][2], NIRC)
➢ Banks and other non-bank financial intermediaries
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➢ Insurance companies
➢ Publicly-held corporations
➢ Taxable partnerships
➢ General professional partnerships
➢ Non-taxable joint ventures
➢ Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916, and enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared
by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local
II. Proprietary educational institutions and non-profit hospitals - It is any private school maintained and administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. They are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income, except on certain passive incomes which are subject to final tax
1. 10% Preferential Rate
➢ Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals as charitable institutions under Section 30(E)
and (G). The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among institutions covered by Section 30, to the 10% preferential rate under Section
27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
➢ The only qualifications for hospitals are that they must be (1) proprietary; and (2) non-profit. “Proprietary” means private, following the definition of
a “proprietary educational institution” as “any private school maintained and administered by private individuals or groups” with a government permit.
“Non-profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset d evoted to the
institution’s purposes and all its activities conducted not for profit.
2. Predominance Test
➢ If the gross income from unrelated trade/business/other activity exceeds 50% of the total gross income from all sources, the entire taxable income of
the proprietary educational institution shall be subject to the regular corporate tax rate of 30%.
3. Unrelated trade/business/activity of a proprietary educational institutions
➢ The trade, business or other activity of a proprietary educational institution is unrelated when the conduct of which is not substantially related to the
exercise or performance by such educational institution of its primary purpose or function.
➢ Related activities include auxiliary activities such as school-owned canteen, cafeteria, dormitory and bookstore within the school premises
4. Difference in the tax treatment between a proprietary educational institution and a non-stock non-profit educational institution.
➢ Proprietary educational institutions which are non-profit shall pay a tax of 10% on their taxable income, except on certain passive incomes which are
subject to final tax: Provided, that if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived
from all sources, the entire taxable income of the proprietary educational institution shall be subject to the regular corporate tax rate of 30% (Sec. 27
[B], NIRC).
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➢ A non-stock non-profit educational institution is exempt from tax on its revenues and assets actually, directly and exclusively used for educational
purposes.
5. Non-profit hospitals.
A nonstock-nonprofit hospital that is operated for charitable and social welfare purposes is exempt from income tax under Section 30 (E) and (G) of the NIRC.
However, as provided in St. Luke's Medical Center, Inc. vs CIR (2011), the nonstock-nonprofit hospital must satisfy the following requisites in order to be
entitled to the exemption from income tax:
➢ It is a nonstock corporation.
➢ It is operated exclusively for charitable purposes; and
➢ No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
6. Tax on proprietary non-profit educational institutions and non-profit hospitals.
30% 10% Exempt
Private, non-profit hospitals and educational Private, non-profit hospitals and educational Organized and operated exclusively for
institutions whose gross income from institutions whose gross income from charitable purposes and no part of its net
unrelated trade, business or other activity unrelated trade, business or other activity income or asset shall belong to or inure to
exceeds 50% of total gross income from all does not exceed 50% of total gross income the benefit of any member, organizer, officer
sources. from all sources. or any specific person.
Hospitals and educational institutions

claiming to be proprietary non-profit but do
not meet the definition thereof.
III. Government-owned or controlled corporations, agencies, instrumentalities - All corporations owned or controlled by the government are taxed in the same manner
that domestic private corporations are taxed.
XPNs:
➢ Government Service Insurance System (GSIS)
➢ Social Security System (SSS)
➢ Philippine Health Insurance Corporation (PHIC)
➢ Philippine Charity Sweepstakes Office (PCSO)
➢ Local Water District (LWD) (R.A. 10026 amending Section 27 [c] of NIRC)
Under Sec. 32 (B)(7) of the NIRC, even if the GOCC is not one of those enumerated under Sec. 27 (C), it may still be exempt if it is performing governmental
function. Thus, income derived from any public utility or from the exercise of any essential government function accruing to the Government of the Philippines or to
any political subdivision shall be exempt from income tax. PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from the list of
GOCCs that are exempt from the payment of the income tax. PAGCOR’s income from gaming operations is subject only to 5% franchise tax under PD No. 1869,
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while its income from other related services is subject to corporate income tax pursuant to PD No. 1869 in relation to RA No. 9337. SC clarified that RA No. 9337 did
not repeal the tax privilege granted to PAGCOR under PD No. 1869, with respect to its income from gaming operations. What RA No. 9337 withdrew was PAGCOR's
exemption from corporate income tax on its income derived from other related services, previously granted under Section 27(C) of RA No. 8424.
IV. Foreign currency deposit units

Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and
other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks
under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.
b. Resident foreign corporations is a corporation organized, authorized or existing under the laws of any foreign country engaged in trade or business within the Philippines.
The general rule is that RFC shall be liable for a 30% income tax on their income from within the Philippines except for:
1. Resident foreign corporations that are international carriers which shall be taxed at 2 ½% on their Gross Philippine Billings
2. Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with non-residents other offshore banking units. Local
commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be exempt
from all taxes except net income from such transactions as may be specified by the Secretary of Finance upon recommendation of the Monetary Board which
shall be subject to the regular income. Provided, however, that any interest income derived from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units, shall be subject only to a final tax at the rate of 10%
3. Regional or area headquarters shall not be subject to income tax.
4. Regional operating headquarters as defined in Sec 22 (EE) shall pay a tax of 10% of their taxable income.
I. Taxation - in general
1. Regular Corporate Income Tax (RCIT)
An income tax rate of 30% shall be imposed upon the taxable income derived during the taxable year from all sources within the Philippines for RFC.
2. Minimum Corporate Income Tax (MCIT)

2% gross income, Minimum Corporate Income Tax
3. Branch Profits Remittance Tax (BPRT)

Any profit remitted by branch office of a multinational corporation to its head office is subject to 15% final tax based on total profits applied or earmarked for
remittance without deduction for the tax component. A branch is classified as a resident foreign corporation. As such, it is subject to income tax at the rate
of 30% on its net income derived within the Philippines. Such income items include interest, dividends, rents, royalties, including remuneration for technical
services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains
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received during each taxable year from all sources within the Philippines. For purposes of branch profit remittance, income items which are not effectively
connected with the conduct of its trade or business in the Philippines are not considered branch profits. To be ‘effectively connected’, it is not necessary that
the income be derived from the actual operation of the branch’s trade or business. It is sufficient that the income arises from the business activity in which
the branch is engaged. The 15% final tax should exclude profits on activities registered with PEZA
4. Taxation of passive income

20% final tax on Resident Foreign Corporations as Collected as Final Withholding Tax
5. Taxation of capital gains

Final tax on net capital gains realized by Resident Foreign Corporations and Nonresident Foreign Corporations during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange.
II. Resident foreign corporations subject to preferential tax rates

1. International carriers
1. An international carrier refers to foreign airline corporation doing business in the Philippines which has landing rights in any Philippine port to perform
international air transportation services or flight operations anywhere in the world. They shall be taxed at 2.5% on their Gross Philippine Billings (GPB)
unless it is subject to preferential rate or exempt from tax on the basis of applicable tax treaty/international agreement to which the Philippines is a
signatory or on the basis of reciprocity, such that an international carrier, whose home country grants income tax exemption to Philippine carries, shall
likewise be exempt from income tax imposed under the NIRC.
2. Reciprocity may be invoked by an international carrier as basis for GBP Tax exemption when its Home Country grants income tax exemption to
Philippine carriers.
3. The domestic law of the Home Country granting exemption shall cover income taxes and shall not refer to other types of taxes that may be imposed
by the relevant taxing jurisdiction. The fact that the tax laws of the Home Country provide for exemption from business tax, such as gross sales tax,
in respect of the operations of Philippine carriers shall not be considered as valid and sufficient basis for exempting an international carrier from
Philippine income tax on account of reciprocity.
4. Reciprocity requires that Philippine carriers operating in the Home Country of an international carrier are actually enjoying the income tax exemption.
5. Gross Philippine Billings-It refers to the amount of gross revenue realized from carriage of persons, excess baggage, cargo and mail originating from
the Philippines 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
OFFLINE INTERNATIONAL CARRIER IS SUBJECT TO CORPORATE INCOME TAX

1. An off-line airline having a branch office or a sales agent in the Philippines 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 Philippine ports or off-line flights, is not considered
engaged in business as an international air carrier in the Philippines and is, therefore, not subject to Gross Philippine Billings Tax provided for in
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Section 28(A)(3)(a) of the Code nor to the three percent (3%) common carrier's tax under Section 118(A) of the same Code. This provision is
without prejudice to classifying such taxpayer under a different category pursuant to a separate provision of the same Code.
2. The general rule is that resident foreign corporations shall be liable for a 30% income tax on their income from within the Philippines, except for
resident foreign corporations that are international carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating
from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. An international carrier with no flights originating from the
Philippines, does not fall under the exception.
3. To reiterate, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine
Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 30% of such income.
4. An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who has designated or
appointed agents or employees in the Philippines, 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, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such
transportation.
2. Foreign currency deposit units and offshore banking units
Offshore Banking Units
OBU is 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. OBUs are allowed to provide all traditional banking services to non-residents in any currency other than Philippine
national currency. OBUs are forbidden to make any transactions in Philippine Peso. Banking transactions to residents are omitted and restricted (Tabag, 2015).
Income Exempt from Tax: Income derived from

1. Nonresidents
2. Foreign currency transactions with local commercial banks,
3. Foreign currency transactions with branches of foreign banks authorized by the BSP
4. Foreign currency transactions with OBUs in the Philippines
Income subject to 10% Final Tax

Interest income derived from foreign currency loans granted to residents other than OBUs or local commercial banks (Ibid).
Resident Depository Banks (Foreign Currency Deposit Units)

Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks,
including branches of foreign banks that may be authorized by the BangkoSentral ng Pilipinas (BSP) to transact business with foreign currency depository
system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted
by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income.
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3. Regional or area headquarters and regional operating headquarters-Income tax rate of ROHQ is 10% of net income. ROHQ is a branch established in the
Philippines which is engaged in any of the following qualifying services:
1. General administration and planning;
2. Business planning and coordination;
3. Sourcing/procurement of raw materials and components;
4. Corporate finance advisory services;
5. Marketing control and sales promotion;
6. Training and personnel management;
7. Logistics services;
8. Research and development services, and product development;
9. Technical support and maintenance;
10. Data processing and communication; and
11. Business development.
RHQ is a tax-exempt entity. It is a branch established in the Philippines and which headquarters do not earn or derived income from the Philippines and which
act as supervisory, communications and coordinating center for its affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets.
III. Non-resident foreign corporations (NRFC)

1. Taxation of NRFC in general
A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% of the gross income during such taxable year
from all sources within the Philippines except capital gains from sale of shares of stock not traded in the stock exchange.
2. NRFCs subject to preferential tax rates
a. Non-resident Cinematographic Film owner, lessor or distributor – 25% of its gross income from all sources within the Philippines
b. Non-resident owner or lessor of vessels chartered by Philippine nationals – 4.5% of gross rentals, lease, or charter fees
c. Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of gross rentals or fees.
IV. Corporations exempt from income tax - The foregoing exempt corporations have common requisites for exemption:
a. Not organized and operated principally for profit;
b. No part of the net income inures to the benefit of any member or individual.
c. No capital is represented by shares of stock; and
d. Educational or instructive in character.
The moment they invest their income or receive income from their properties, real or personal conducted for profit, such income derived from those properties is
subject to tax. NOTE: If religious, charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit, income
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tax shall be imposed on said items of income irrespective of their disposition (CIR v. YMCA, G.R. No. 124043, October 14, 1998). However, in case of non-stock,
non-profit educational institution, as long as the income is actually, directly and exclusively used for educational purpose, such income is exempt as provided for in
Art. XIV, Sec. 3 of the 1987 Constitution.
Other corporations exempt from income tax under Special Laws

1. Cooperatives under R.A. 6938, the Cooperative Code of the Philippines NOTE: Since interest from any Philippine currency bank deposit and yield or any other
monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings
and time deposits of their members. Moreover, the amendment in Article 61 of R.A. 9520, specifically providing that members of cooperatives are not subject
to final taxes on their deposits, affirms the interpretation of the BIR that Section 24 (B)(1) of the NIRC does not apply to cooperatives and confirms that such
ruling carries out the legislative intent.
2. Foundations created for scientific purposes under Sec. 24 of R.A. 2067, an Act to Integrate, Coordinate, and Intensify Scientific and Technological Research
and Development and to Foster Invention.
The following organizations shall not be taxed in respect to income received by them as such:
1. Labor, agricultural or horticultural organization, not organized principally for profit;
a. Provincial fairs and like associations of a quasi-public character designed to encourage development of better agricultural and horticultural products
through a system of awards, prizes and premiums, and whose income derived from gate receipts, entry fees, donations, etc. is used exclusively to
meet necessary expenses of upkeep and operation are thus exempt.
b. The holding of periodical race meets by associations, the profits from which inure to the benefit of their stockholder are not tax exempt. Similarly,
corporations engaged in growing agricultural or horticultural products or raising livestock or similar products for profits are subject to tax (R.R. 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;
c. It is operated for mutual purposes and without profit
d. NOTE: If the deposits are made compulsory under contract between the bank and the depositors and is operated for speculation rather for savings,
the bank is not qualified as a mutual savings bank.
3. Fraternal Beneficiary Society, Order or Association, provided that:
a. It must be operated under 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 dependents of life, sick, accident or other benefits;
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 their owners;
b. It is not operated for profit.
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5. Religious, Charitable, Scientific, Athletic or Cultural Corporations, provided that:
a. It is organized and operated for one or more specified purposes;
b. No part of the net income inures to the benefit of the any private stockholder or individual
c. St. Luke’s Medical Center, Inc. fails to meet an indispensable requirement under Section 30(E) –operated exclusively for charitable purposes – to be
completely tax exempt from all its income. It admitted paying patients from which profit is derived.
6. Business, Chamber of Commerce, or Board of Trade, provided that:
a. It is an association of persons having some common business interest;
b. Its activities are limited to work for such common interests;
c. Not engaged in a regular business for profit
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 the 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 thereof, and
v. All facts relating to the operation of the organization which affects it right to exemption.
vi. The copy of articles of incorporation, by laws and financial statements should be attached to the sworn affidavit
8. Non-stock, Non-Profit Educational Institutions;
9. Government Educational Institutions;
10. Mutual Fire Insurance Companies and like Organizations; Requisites for exemption:
a. Income is derived solely from assessments, dues and fees collected from members;
b. Fees collected from members are for the sole purpose of meeting its expenses 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.
11. Farmers, Fruit Growers or like Associations; Requisites for exemption:
a. Formed and organized as sales agent for the purpose of marketing the product of its members
b. No net income to the members
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
d. 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.
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V. Tax on other business entities: general partnerships, general professional partnerships, co-ownerships, joint ventures, and consortia.
a. General Partnerships - Partnerships where all or part of their income is derived from the conduct of trade or business;
it is treated as a corporation. The partnership is subject to the same rules and rates as corporations.
Exceptions: A partner’s share in the partnership’s distributable net income is deemed actually or constructively received by the partners in the same taxable
year. Consequently:
1. such share will be subjected to dividend tax (10%) whether actually distributed or not.
2. there can never be an instance of improperly accumulated taxable income; note that RR 2-01 provides that IAET does not apply to taxable partnerships.
Distributable net income of the partnership is its taxable income less the normal corporate income tax (30%). A partner’s contribution to the general
partnership fund is a capital investment and is not taxable income of the partnership.
b. General Professional Partnerships - 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. A GPP as such shall not be subject to the income tax. It is not a taxable entity for income
tax purposes.
GPP is not a taxable entity

➢ The GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism
distribution of such income to the individual partners. But the partnership itself is required to file income tax returns for the purpose of furnishing
information as to the share in the gains or profits which each partner shall include in his individual return [RR 2-98].
➢ The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by
the partner in the same taxable year in which such partnership net income was earned, and shall be taxed to them in their individual capacities,
whether actually distributed or not, at the graduated income tax ranging from 5% to 32%.
➢ Because the principle of constructive receipt is applied to undistributed profits of GPPs, the actual distribution to the partners of such taxpaid profits in
another year should no longer be liable to income tax. [MAMALATEO].
➢ A GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to
corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income.
➢ The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The share in the net income of the
partnership, actually or constructively received, shall be reported as taxable income of each partner. The partners comprising the GPP can no longer
claim further deduction from their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since
their distributive share from the GPP is already net of cost and expenses. [RR No. 08-2018]
c. Co-ownerships - There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. [Art. 484, NCC] It may be created
by succession or donation.
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When Co-ownership is not subject to tax
When the co-ownership’s activities are limited merely to the preservation of the co-owned property and to the collection of the income from the property.
Each co-owner is taxed individually on his distributive share in the income of the co-ownership. [De Leon]
When Co-ownership is subject to tax The following circumstances would render a co-ownership subject to a corporate income tax:
1. When a co-ownership is formed or established voluntarily, or upon agreement of the parties.
2. When the individual co-owner reinvested his share, and
3. When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide to same among the co-heirs, nor
was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership.
Automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used as a
common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.
d. Joint Ventures and Consortia - To constitute a” joint venture,” certain factors are essential. Each party to the venture must make a contribution, not necessarily
of capital, but by way of services, skill, knowledge, material or money; profits must be shared among the parties; there must be a joint proprietary interest
and right of mutual control over the subject matter of the enterprise; and usually, there is single business transaction. An unincorporated joint venture is
taxed like a corporation. The share of the joint venture partners will no longer be taxable to them because they partake in the nature of inter-corporate
dividends.
Exception: an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations pursuant to the
consortium agreement with the Philippine Government is not subject to the corporate income tax. Only the joint venture partners will be taxed on their
respective shares in the income of the joint ventures. [Sec. 22 (B), NIRC]
Two elements necessary to exempt a joint venture or consortium from tax

1. The joint venture must be an unincorporated entity formed by two or more persons.
2. The joint venture was formed for the purpose of undertaking a construction project, or engaging in the petroleum and other energy operations with
operating contract with the government.
7. Filing of returns and payment

Tax Return
Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed form showing an enumeration of taxable amounts and description of taxable transactions,
allowable deductions, amount of tax and tax payable to the government.
Information Return
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Any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the
Commissioner. Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January 31st of the succeeding year, submit
to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary
a. Individual return
I. Who are required to file; exceptions
The following are required to file income tax return:
1. Resident citizen
2. Non-resident citizen, on income from sources within the Philippines
3. Resident alien, on income from sources within the Philippines
4. Non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on income from sources within the Philippines
Exceptions: The following shall not be required to file income tax return:
1. Individuals whose gross income does not exceed P250,000 except citizen and alien individuals engaged in business or practice of profession within the
Philippines who shall file income tax returns regardless of the amount of gross income.
2. Individuals with respect to pure compensation income from sources within the Philippines, the income tax on which has been withheld; except when such
compensation has been derived from more than one employer.
3. Individuals whose sole income has been subjected to final withholding tax.
4. Minimum wage earner.
5. Individuals who are exempt from income tax pursuant to the provisions of the Tax Code and other laws.
Special Provisions
➢ Married individuals (whether citizens, resident or nonresident aliens) who do not derive income purely from compensation, shall file only one consolidated
return to cover the income of both spouses for the taxable year, but where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the BIR for verification.
➢ The income of unmarried minors is a tax liability of the minor but where such income is derived from property received from a living parent, the income shall
be included in the return of the parent except (a) when the donor’s tax has been paid on such property, or (b) when the transfer of such property is exempt
from the donor’s tax [Sec. 51 (E), NIRC].
➢ If the taxpayer is unable to make his return, such as when he suffers from disability, the return may be made by his duly authorized agent or representative
or by the guardian or other person charged with the care of the taxpayer or his property; the principal and his representative or guardian assuming
responsibility for penalties for erroneous, false or fraudulent returns
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II. Substituted filing

Applicable to individual taxpayers:
1. receiving purely compensation income, regardless of amount.
2. from only one employer in the Philippines for the calendar year, and
3. the income tax of which has been withheld correctly by the employer
The certificate of withholding filed by their respective employers, duly stamped ‘received’ by the BIR, shall be tantamount to the substituted filing of income tax
returns by the employee.
III. When and where to file - Income tax return of an individual who is not on a substituted basis shall be filed on or before April 15 of each year covering income of the
preceding taxable year.
Individuals subject to capital gains tax

1. Sale of shares not traded thru a local stock exchange – file a return within 30 days from the transaction, and a final consolidated return on or before April 15
of each year covering all stock transactions of the preceding taxable year.
2. Sale of real property – file a return within 30 days from each sale.
Individuals deriving self-employment income (as sole source of income or mixed)

➢ must file quarterly return of summary declaration of gross income and deductions, and a final or adjustment.
➢ Self-employment income consists of earnings derived by the individual from the practice of profession or conduct of trade or business, as a sole proprietor or
as a member in a general professional partnership.
➢ Filing of these returns shall be in lieu of filing of a declaration of estimated income under Sec. 74, primarily for the reason that the procedure prescribed in
Sec. 74 may not reasonably approximate the correct amount of tax to be paid.
Where to file:
➢ Except in cases where the CIR otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no
legal residence or place of business in the Philippines, with the Office of the Commissioner
PERIOD DUE DATE FOR FILING RETURN

Q1 RETURN MAY 15 OF THE SAME YEAR
Q2 RETURN AUGUST 15 OF THE SAME YEAR
Q3 RETURN NOVEMBER 15 OF THE SAME YEAR
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ANNUAL RETURN APRIL 15 OF THE FOLLOWING YEAR
b. Corporate returns
I. Quarterly income tax - All corporations subject to income tax shall render quarterly income tax returns and a final or adjustment return, except foreign corporations
not engaged in trade or business in the Philippines. The return shall be filed by the President, Vice-President or other principal officer, and shall be sworn to by such
officer and by the treasurer or assistant treasurer.
II. Final adjustment returns - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of
that year, the corporation shall either:
1. Pay the balance of tax still due; or
2. Carry-over the excess credit; or
3. Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. (APRIL
15 OF THE FOLLOWING YEAR)
III. When and where to file.

➢ WHEN: Domestic corporations and resident foreign corporations shall file quarterly corporate income tax returns within 60 days after the end of the calendar
or fiscal quarter used, and annual corporate income tax return on or before the 15th day of the fourth month following the close of the calendar year or fiscal
year, as the case may be.
➢ WHERE: Except in cases where the CIR otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent
or duly authorized Treasurer of the city or municipality having jurisdiction over the place where the corporation’s principal office is located and where its books
of accounts and other data are kept; otherwise, the returns shall be filed and the tax paid thereon with the Office of the Commissioner of Internal Revenu.
➢ PAYMENT OF INCOME TAX: The total amount of tax imposed by this Title (Tax on Income) shall be paid by the person subject thereto at the time the return
is filed. The exception is that when the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in 2 equal installments:
the first installment paid at the time the return is filed and the second installment, on or before October 15 following the close of the calendar year.
PERIOD DUE DATE FOR FILING RETURN

Q1 RETURN MAY 31 OF THE SAME YEAR
Q2 RETURN AUGUST 31 OF THE SAME YEAR
Q3 RETURN NOVEMBER 30 OF THE SAME YEAR
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ANNUAL RETURN APRIL 15 OF THE FOLLOWING YEAR
IV. Return of corporations contemplating dissolution or reorganization

Within 30 days after the adoption of the plan for dissolution or reorganization (including corporations notified of possible involuntary dissolution by the SEC), render
a correct return to the CIR, verified under oath, setting forth the terms of such plan and such other information required by rules and regulations. Prior to the issuance
by the SEC of the Certificate of Dissolution or Reorganization, the corporation shall secure a certificate of tax clearance from the BIR which shall be submitted to the
SEC.
c. Return on capital gains realized from sale of shares of stock and real estate.
Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange – file a return within 30 days from the transaction, and a final
consolidated return on or before the 15th day of the fourth month following the close of the taxable year
8. Withholding tax
a. Concept
➢ Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income.
➢ In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more
than an agent of the government for the collection of the tax in order to ensure its payment.
➢ Taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations and/or persons for the former to pay the same directly to the
BIR. Hence. The taxes are collected practically at the same time the transaction is made or when the taxable transaction occurs. IT IS A TAXATION AT SOURCE.
➢ To ease the administration and collection of taxes. It is not separate kind of tax as withholding tax is simply a way of collecting tax from the source.
➢ The duty to withhold is different from the duty to pay income tax. The revenue officers generally disallow the expenses claimed as deduction from gross income, if
no withholding of tax as required by law or the regulations was withheld and remitted to the BIR within the prescribed dates
➢ In addition, the withholding tax that should have been withheld and remitted to the BIR as well as the penalties for non-, late or erroneous payment of the withholding
tax such as surcharges and deficiency interest are assessed by the BIR.
b. Final withholding tax

The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability
for payment of the tax rests primarily on the payor as withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income.
c. Creditable withholding tax

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said
income. The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due on the
income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.
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FINAL WITHHOLDING TAX CREDITABLE WITHHOLDING TAX
➢ The amount of tax withheld is full and final. ➢ Taxes withheld on certain incomes payments are intended to equal or at least
➢ The liability for payment of the tax rests approximate the tax due of the payee on said income.
primarily on the withholding agent as payor ➢ Creditable tax must be withheld at source but should still be included in the
➢ In the case he fails to withhold, the tax return of the recipient.
withholding agent will be liable for the ➢ The liability to withhold arises upon the accrual remittance. The purpose of
deficiency the withholding tax is to compel the agent to withhold under all
➢ The payee is not required to file any tax circumstances
return for the particular income
➢ The finality of the withheld tax is limited on
that particular income and will not extend
to the payees other tax liability.
AS TO INCOME SUBJECT OF THE SYSTEM: AS TO INCOME SUBJECT OF THE SYSTEM

1. Compensation 1. Passive incomes
2. Income Professional/talent fees 2. Fringe benefits
3. Rentals
4. Cinematographic film rentals and other AS TO WHETHER OR NOT INCOME SHOULD BE REPORTED AS PART OF THE
payments GROSS INCOME
5. Income payments to certain contractors ➢ The recipient may not report the said income in his gross income because
the tax withheld constitutes final and full settlement of the tax liability.
AS TO WHETHER OR NOT INCOME SHOULD BE
REPORTED AS PART OF THE GROSS INCOME AS TO THE EFFECT OF THE TAX WITHHELD
➢ The income is required to be included in the ➢ The tax withheld cannot be claimed as tax credit
gross income in ITR.
AS TO FILING OF ITR
AS TO THE EFFECT OF THE TAX WITHHELD ➢ If the only source of income is subject to final tax, the earner may no longer
➢ The tax withheld can be claimed as a tax file an ITR. However, with the new income tax forms (R.R. 2-2014),
credit or may be deducted from the tax due taxpayers need to declare those income subjected to final tax in their ITR.
or payable.
AS TO FILING OF ITR
➢ The earner is required to file an ITR.
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I. Expanded withholding tax
A kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax due of the payee for the taxable quarter year
1. Withholding Tax at Source
➢ Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the CIR, the tax imposed or prescribed by the
NIRC on certain specified items of income shall be withheld by Payor corporation and/or person.
➢ N.B. Sec. 57 contains an extensive list of taxes. These items of income include taxes on certain passive incomes (interest, dividends), capital gains tax
(shares not traded, real property), branch profit remittance tax, and certain payments to nonresident aliens /foreign corporations.
2. Withholding of creditable tax at source
➢ The Secretary of Finance may, upon the recommendation of the CIR, require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/ persons as provided for by law, at the rate of not less than 1% but not more than
32%, which shall be credited against the income tax liability of the taxpayer for the taxable year. Provided, That, beginning January 1, 2019, the rate
of withholding shall not be less than one percent (1%) but not more than fifteen percent (15%) of the income payment.
3. Withholding of VAT
➢ The government (political subdivisions, instrumentalities, agencies, GOCCs) shall deduct and withhold final VAT of 5% of gross payment on purchase
of goods and services subject to VAT. If the payment is for lease or use of properties to a nonresident owner, withholding tax shall be 12%.
➢ Note: Beginning January 1, 2021, the VAT withholding system shall shift from final to a creditable system.
II. Withholding tax on compensation

➢ Applies to all employed individuals whether citizens or aliens deriving income from compensation for services rendered in the Philippines.
➢ The employer is considered the withholding agent. Every employer making payments of wages shall deduct from and withhold tax, except for MWEs. Employer
shall be liable if he fails to withhold and remit.
➢ The withholding tax on compensation income of government employees is creditable in nature. Thus, pursuant to Sec. 79 (C)(2) of the NIRC, the amount
deducted and withheld during any calendar year, shall be allowed as a credit to the recipient of such income against the tax imposed under NIRC.
➢ An employer shall furnish to each employee in respect of his employment during the calendar year, on or before January 31 of the succeeding year, or if his
employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming
the wages paid by the employer to such employee during the calendar and the amount of tax deducted and withheld in respect of such wages.
➢ He shall also submit to the Commissioner on or before January 31 of the succeeding year, an annual information return containing a list of employees, the
total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement
referred to in the preceding paragraph, and such other information as may be deemed necessary.
Withholding Tax on Government Money Payments – withheld by government offices and instrumentalities, including government-owned or controlled corporations
and local government units, before making any payments to private individuals, corporations, partnerships and/or associations.
a. Percentage Taxes – taxes withheld by National Government Agencies (NGAs) and instrumentalities, including government- owned and controlled
corporations (GOCCs) and local government units (LGUs), before making any payments to non-VAT-registered taxpayers/suppliers/payees
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b. Value Added Taxes (VAT) – taxes withheld by National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before making any payments to VAT-registered taxpayers/suppliers/payees on account of their
purchases of goods and services.
b. Fringe benefits tax.

➢ It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a final withholding tax placing the legal
obligation to remit the tax on the employer, such that, if the tax is not paid, the legal recourse of the BIR is to go after the employer. Any amount or value received by
the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is legally required to pay (same as statutory incidence
as distinguished from economic incidence) is that person who, in case of non-payment, can be legally demanded to pay the tax.
➢ The FBT is a measure to ensure that an income tax is paid on fringe benefits. If they were given in cash, an income is automatically withheld and collected by the
government. An additional compensation which is given in non-cash form is virtually untaxed. Such a situation has caused inequity in the distribution of the tax burden.
The FBT can enhance the progressiveness and fairness of the tax system
➢ FBT is not an additional tax on the employer. Rather, the employer can claim the fringe benefit and the FBT as a deductible expense from his gross income. The deduction
for the employer is the grossed-up monetary value of the fringe benefit.
➢ Basic salary of managerial or supervisory employee is excluded and not subject to FBT because it is part of his compensation income.
c. Duties of a withholding agent

Withholding Agent
1. A withholding agent is a separate entity acting no more than an agent of the government for the collection of tax in order to ensure its payments.
2. A withholding agent is explicitly made personally liable under Sec. 251 of the NIRC for the payment of the tax required to be withheld, in order to compel the
withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction.
In applications for refund, the withholding agent is considered a taxpayer because if he does not pay, the tax shall be collected from him.
3. The withholding agent is liable for the correct amount of the tax that should be withheld. The withholding agent is, moreover, subject to and liable for deficiency
assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under the
law. Given this responsibility, a withholding agent can validly claim for tax refund.
Persons required to withhold taxes. The withholding taxes shall be withheld by the person having control over the payment and who at the same time claims the expenses.
The following persons are constituted as withholding agents:
1. Juridical person, whether or not engaged in trade or business;
2. Individuals, with respect to payments made in connection with his trade or business;
3. Individual buyers, whether or not engaged in trade or business insofar as taxable sale, exchange or transfer of real property is concerned; and
4. All government offices including GOCCs as well as provincial, city and municipal governments and barangay.
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Duties and Obligations of the withholding agent
1. Register – To 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 – To deduct tax from all money payments subject to withholding tax
3. Remit the tax withheld – To remit tax withheld at the time prescribed by law and regulations
4. File Annual Return – To file the corresponding Annual Information Return at the time prescribed by law and regulations
5. Issue Withholding Tax Certificates – To furnish Withholding Tax Certificates to recipient of income payments subject to withholding
Consequences for Failure to Withhold

1. Liable for surcharges and penalties;
2. Liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted (Sec. 251, NIRC); and
3. Any income payment which is otherwise deductible from the payor’s gross income will not be allowed as a deduction if it is shown that the income tax required to be
withheld is not paid to the BIR (R.R. 18-2013, Sec. 2).
C. ESTATE TAX
1. Basic principles, concept, and definition.
Estate Tax
➢ is a tax on the right of the deceased person to transmit his/her lawful heirs and beneficiaries at the time of death on certain transfers, which are made by law as equivalent
to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon death of the owner. The estate tax is based on
the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.
➢ is an excise tax imposed upon the privilege of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the
disposition of his property to take effect upon death. Estate tax laws rest in their essence upon the principle that death is the generating source from which the taxing power
takes its being, and that it is the power to transmit or the transmission from the dead to the living on which the tax is more immediately based.
➢ Estate tax accrues at the time of death of decedent.
Requisites Characteristics
➢ Death of the decedent a. Transfer Tax
➢ Successor is alive at the time of decedents death b. Ad Valorem Tax
➢ Successor is not disqualified to inherent. c. National TAX
d. General Tax
Rate is 6% e. Direct Tax
f. Excise tax
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Inheritance Tax Estate Planning
➢ Presently, there is no inheritance tax imposed by law. P.D. No. 69 passed ➢ Is the manner by which a person takes step to conserve the property to be
on November 24, 1972, effective January 1, 1973, abolished the inheritance transmitted to his heirs by decreasing the amount of estate taxes to be paid
tax for failure to meet one of the requisites of a sound tax system, which is upon his death.
administrative feasibility. ➢ It is considered as lawful because, “the legal right of a taxpayer to decrease
➢ Is a tax imposed on the legal right or privilege to succeed to, receive or the amount of what otherwise would be his taxes or altogether avoid them
take property by or under a will, intestacy law, or deed, grant or gift by means which the law permits, cannot be doubted.
becoming operative at or after the death.
2. Classification of decedent
Individuals liable to pay estate tax:
a. Resident citizens (RC)
b. Non-resident citizens (NRC)
c. Resident alien (RA)Non-resident alien (NRA)
NOTE: Only natural persons can be held liable for estate tax. Domestic and foreign corporations cannot be liable because they are not capable of death.
Gross Estate
The total value of all property, real or personal, tangible or intangible, the actual and beneficial ownership of which was in the decedent at the time of his death
Net Estate
The value of the gross estate since it is taxed at a flat rate.
Need to Disclose Properties

Whether resident or non-resident. A resident decedent is taxed on properties within or without. On the other hand, while a non-resident decedent is taxed only on properties within
the Philippines, it is a requirement that his estate tax return should disclose the value of his gross estate outside the Philippines in order to avail of the allowable deductions.
GROSS ESTATE BASED ON CITIZENSHIP AND RESIDENCY
DECEDENT GROSS ESTATE
RESIDENT CITIZEN AND RESIDENT ALIEN ➢ All properties, real or personal, wherever situated
➢ Intangible personal property wherever situated
NON-RESIDENT ALIEN ➢ Real property situated in the Philippines
➢ Tangible personal property situated in the Philippines
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➢ Intangible personal property
NON-RESIDENT CITIZEN ➢ All properties, real or personal situated in the

Philippines
➢ Tangible personal property located in the Philippines
➢ Intangible personal property situated in the Philippines
Determination of Gross Estate:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all prop erty, real or personal, tangible or intangible, wherever
situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate
which is situated in the Philippines shall be included in his taxable estate.
Intangible personal property deemed situated in the Philippines

a. Franchise which must be exercised in the Philippines;
b. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; (domestic corporation)
c. Shares, obligations or bonds by any foreign corporation 85% of its business is located in the Philippines;
d. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines;
e. Shares or rights in any partnership, business or industry established in the Philippines (Sec. 104, NIRC).
NOTE: These intangible personal properties are in effect exceptions to the Latin maxim of mobilia sequuntur personam. This enumeration is significant only for non-resident
alien because they are the only set of taxpayers where the situs of the property is considered in determining whether their p roperty shall form part of the gross estate or
not.
Intangible Personal Properties of Non-resident Alien excluded from gross estate

a. 1. Total exemption – If the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign cou ntry which at the time
of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign
country.
b. Partial exemption – If the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar
exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in
that foreign country.
BASIS FOR THE VALUATION OF GROSS ESTATE
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Real property Whichever is higher between the:
a. Fair market value as determined by the
Commissioner (zonal value) or
b. Fair market value as shown in the schedule of
values fixed by the provincial and city
assessors
If there is an improvement, the value of improvement is

the construction cost per building permit or the fair
market value per latest tax declaration
Fair market values - is the price at which any seller will sell and
any buyer will buy both willingly without any force or
intimidation. It is the price which a property will bring when it
is offered by one who desires to buy and one who is not
compelled to sell.
Personal property Whether tangible or intangible, appraised at FMV.
“Sentimental value” is practically disregarded
Shares of stock Unlisted

a. Unlisted common - book value
b. Unlisted preferred - par value
Listed – Closing rate AT THE TIME of death. If none is available,

the FMV is the arithmetic mean between the highest and lowest
quotation at a date nearest the date of death.
In determining the book value of common shares, the following

shall not be considered:
a. Appraisal surplus
b. The value assigned to preferred shares, if there
is any
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Right to usufruct, use or habitation, as well as that of annuity Shall be taken into account the probable life of the
beneficiary in accordance with the latest basic standard
mortality table, to be approved by the Secretary of
Finance, upon recommendation of the Insurance
Commissioner.
3. Composition of gross estate

a. Items to be included in determining gross estate
i. Decedent's interest
➢ This refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or
not in his possession, control or dominion. It also refers to the value of any interest in property owned or possessed by the decedent at the time of his
death.
➢ The decedent’s interest includes any interest including its fruits, having value or capable of being valued, transferred by the decedent at his death. Rental
income from buildings and dividends from investments, interest on bank deposits which have accrued at the time of his death qualify as decedent’s interest
which should be included in the gross estate.
ii. Transfers in contemplation of death

➢ It is a transfer motivated by the thought of an impending death regardless of whether or not death is imminent.
This takes place:

a. When the decedent has, at any time, made a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death; or
b. When decedent has, at any time, made a transfer under which he has retained for his life or for a period not ascertainable without reference to his death or any
period which does not in fact end before his death:
i. Possession, enjoyment or right to income from the property; or
ii. The right, either alone or in conjunction with any other person, to designate the person who will possess or enjoy the property or income therefrom.
Exception: In case of a bona fide sale for an adequate and full consideration in money or money’s worth.
NOTE: The concept of transfer does not constitute any transfers made by a dying person. It is not the mere transfer that constitutes a transfer in contemplation of
death but the retention of some type of control over the property transferred. In effect, there is no full transfer of all interests in the property inter vivos.
Instances Transfer in Contemplation of Death:

a. Secondary Life Estate – Retention by the grantor for life of the right to enjoy the income or the fruits of the property transferred in trust constitute what
is called reservation of a primary life estate. There is no question in this case that the property would be included in the gross estate of the grantor upon
his death.
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b. Interests Analogous to Life Estates – where the decedent had transferred certain shares of stock to his daughter “subject to your giving me the first
dividends on these P15,000,” and part of the P15,000 was still unpaid when the decedent died, it was held that the entire value of the securities was
properly included in the decedent’s gross estate since he had retained the income for a period which did not in fact end before his death.
c. Discharging Legal obligation to transferor – a transfer with the right retained to have the income used to discharge a legal obligation of the transferor or
otherwise for his pecuniary benefit is equivalent to a reservation of the right to the income. Thus, where a man created a trust with the provision that the
income should be paid to his life for her “support and maintenance”, remainder to their children, it was held that the property was includible in his gross
estate. But there is no inclusion required if the grantor’s dependent is free to use the income for any purpose without restriction, the reason being that
inclusion is required only where the transfer relieves the grantor of his duty to support.
d. Right Retained Alone or with another to designate who shall enjoy property or income therefrom – The situation contemplated here usually occurs when
the settlor or grantor designates himself as trustee or co-trustee with another.
e. Retention of Power to distribute or accumulate trust income – where the grantor, either alone as trustee or as co-trustee with others, reserved the power
to accumulate or distribute income and exercised such power by accumulating and adding income to principal and this power he held until the moment of
his death with respect to both the original principal as well as the accumulated income, this requires the inclusion in the decedent settlor’s gross estate.
Circumstances to consider in determining that the transfer is in contemplation of death:

1. Age of the decedent at the time the transfers were made
2. Decedent’s health, as he knew it at or before the time of the transfers
3. The interval between the transfers and the decedent’s death
4. The amount of property transferred in proportion to the amount of property retained
5. The nature and disposition of the decedent
6. The existence of a general testamentary scheme of which the transfers were a part
7. The relationship of the donee(s) to the decedent
8. The existence of a desire on the part of the decedent to escape the burden of managing property by transferring the property to others
9. The existence of a long-established gift-making policy on the part of the decedent
10. The existence of a desire on the part of the decedent to vicariously enjoy the enjoyment of the donees for the property transferred
11. The existence of the desire by the decedent of avoiding estate taxes by means of making inter vivos transfers of property.
12. Concurrent making of will or making a will within a short time after the transfer.
Motives which negate transfer in contemplation of death:

1. To relieve the donor from the burden of management
2. To save income taxes or property taxes
3. To settle family litigated and unlitigated disputes
4. To provide independent income for dependents
5. To see the children enjoy the property while while the donor is alive
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6. To protect family from hazards of business operations
7. To reward services rendered.
iii. Revocable transfer

It is a transfer by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power to alter or
amend or revoke or terminate such transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend,
revoke or terminate; or
3. Where any such power is relinquished in contemplation of the decedent’s death other than a bone fide sale for an adequate and full consideration in money
or money’s worth
Power to alter, amend or revoke considered to exist on the date of decedent’s death even though:
1. The exercise of the power is subject to a precedent giving of notice; or
2. The alteration, amendment or revocation takes effect only on the expiration of a stated period for the exercise of the power, whether or not on or before the
date of the decedent’s death
a. Notice has been given
b. The power has been exercised.
In such cases, proper adjustment shall be made representing the interest which would have been excluded from the power if the decedent had lived, and for such
purpose if notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or
the power exercised on the date of his death (Sec. 85(C)(2), NIRC).
NOTE: Revocable transfer is part of the gross estate of the decedent because the transferor can revoke the transfer any time, such person wields tremendous amount
of power such that he can revoke the transfer as if none was actually made.
IT IS NOT NECESSARY THAT THE DECEDENT EXERCISE SUCH RIGHT.

No. It is sufficient that the decedent has the power to revoke, though he did not exercise such power. The EXCEPTION IS THAT In case of a bona fide sale for an
adequate and full consideration in money and money’s worth.
Transfer not revocable, thereby not subject to estate tax when:

1. The decedent’s power could only be exercised with the consent of all parties having an interest in the transferred property and if the power adds nothing to
the rights the parties possess under local law (Lober v. United States, 346 US 335).
2. When the decedent has been completely divested of the power at the time of his death (ibid.)
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3. Where the exercise of the power by the decedent was subject to a contingency beyond the decedent’s control which did not occu r before his death (Hurd v.
Commissioner 160F(2)610).
4. The mere right to name trustees. Neither is the grantor’s limited power to appoint himself as trustee under conditions which did not exist at his death.
iv. Property passing under a general power of appointment

➢ It is the right to designate by will or deed, without restrictions, the persons who shall succeed to the property of the prior decedent. The appointment could
be in favor of anybody, including himself, his estate, his creditors, or the creditors of his estate.
General Power of Appointment vs Special Power of Appointment
GENERAL POWER OF SPECIAL POWER OF

APPOINTMENT APPOINTMENT
AS TO NATURE Donee has the power to appoint Donee appoints successor to the
any person he chooses or enjoy property within a limited group or
the property without restriction class of persons according to the
will of the donor
AS TO TAX Makes appointed property, for all Not includible in the gross estate
IMPLICATION intents, the property of the donee; of the donee when he dies
thus, forms part of the gross
estate
EFFECTS Donee holds the appointed Donee holds the appointed
property with all the attributes of property in trust or under the
ownership under the concept of an concept of a trustee
owner
Properties passing under a GPA forms part of decedent’s estate through:

1. Will
2. Deed executed in contemplation of death, or intended to take effect in possession or enjoyment at, or after his death
3. Deed under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact
end before his death:
a. The possession, enjoyment or right to income from the property; or
b. The right to designate the person who will possess or enjoy the property or income therefrom.
v. Proceeds of life insurance
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Proceeds of life insurance forms part of the gross estate when the beneficiary is:
1. The estate of the decedent, his executor or administrator taken out by the decedent upon his own life regardless of whether the designation is revocable or
irrevocable; or
2. A third person, other than the decedent’s estate, executor, or administrator provided that the designation is not irrevocable
NOTE: Under the Insurance Code, in the absence of an express designation, the presumption is that the beneficiary is revocably designated. Notwithstanding the
foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.
Not part of the gross estate when:

1. Proceeds from a life insurance policy is receivable by a 3rd person (NOT the decedent’s estate, executor or administrator) AND that the said beneficiary is
designated as irrevocable;
2. Where the life insurance was not taken by the decedent upon his own life even though the beneficiary is the decedent’s estate, executor, or administrator;
3. Accident insurance proceeds. NIRC specifically mentions only life insurance policies;
4. Proceeds of a group insurance policy taken out by a company for its employees;
5. Proceeds of insurance policies issued by the GSIS to government officials and employees are exempt from all taxes;
6. Benefits accruing from SSS law;
7. Proceeds of life insurance payable to heirs of deceased members of military personnel.
To determine the conjugal or separate character of proceeds, the following factors are considered:
1. Policy taken before marriage – Source of funds determines ownership of the proceeds of life insurance
2. Policy taken during marriage
a. Beneficiary is estate of the insured – Proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable.
b. Beneficiary is third person – Proceeds are payable to beneficiary even in premiums were paid out of the conjugal.
vi. Prior interests - Prior Interest are all transfers, trusts, estates, interests, rights, powers and relinquishment of powers made, created, arising existing, exercised or
relinquished before or after the effectivity of the NIRC (Sec. 85, NIRC).
Coverage of prior interest

1. Transfers in contemplation of death.
2. Revocable transfers.
3. Life insurance proceeds to the extent of the amount receivable by the estate of the deceased, executor or administrator under policies taken out by the
decedent upon his own life or to the extent of the amount receivable by any beneficiary not expressly designated as irrevocable.
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vii. Transfers for insufficient consideration - When a transfer is for insufficient consideration, only the excess of the fair market value of the property at the time of the
decedent’s death over the consideration received shall be included in the gross estate.
This is applicable to:

1. Transfers in contemplation of death.
2. Revocable transfers
3. Transfers under GPA
NOTE: The above transfers should be made for a consideration in money/money’s worth but is not abona fide sale for an adequate and full consideration in money
and money’s worth.
It is also subject to donor’s tax if there is no reference to:

1. Revocable transfer
2. Contemplation of death
3. General power of appointment.
NOTE: It is subject to estate tax if the 3 instances mentioned are present (Sec. 100 in rel. to Sec 85[B], NIRC).
NOTE: Items included in the gross estate No. 2 (Transfers in Contemplation of Death),3 (Revocable Transfer) ,4 (Property passing under the General Power of
Appointment) and 7 (Transfer for insufficient Consideration) are properties not physically in the estate (these have already been transferred during the lifetime of
the decedent but are still subject to payment of estate tax. Although these properties are inter vivos in form, they are treated as mortis causa, in substance. Note
that transfers made for a bona fide consideration shall not be included in the gross estate.
Share of the Surviving Spouse

➢ The capital or paraphernal property of the surviving spouse is not included in the computation of the gross estate; it is actually a deduction from the decedent’s
gross estate in order to arrive at the net estate.
➢ Under Section 85 (H) of the NIRC capital pertains to the property of the spouses brought into the marriage. Under the Civil Law capital means property
brought by the husband to the marriage while the properties brought into the marriage by the wife is called paraphernal property.
b. Allowable deductions from gross estate - deductions are categorized as ordinary, special citizen and residential alien to non-resident alien, and if deaths occurred in January
1, 2018. Train law or January 1, 1998 to December 21,2017 NIRC of 1997.
TRAIN LAW ALLOWABLE DEDUCTIONS

GENERAL DEDUCTIONS
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1. STANDARD DEDUCTIONS - in the amount of Five Million Pesos (P5, 000, 000.00).
2. CLAIMS AGAISNT THE ESTATE - Claims against the estate which mean debts or demands of a pecuniary nature which could have been enforced against the deceased
in his lifetime and could have been reduced to simple money judgments.
Sources of claims:
a. Contract
b. Tort
c. Operation of law

1. It must be a personal obligation of the deceased existing at the time of his death except those incurred incident to his death such as unpaid funeral expenses
and unpaid medical expenses.
2. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth
3. Debt or claim must be valid and enforceable in court.
4. Indebtedness not condoned by the creditor or the action to collect from the decedent must not have prescribed (R.R. 2-2003)
5. It must be duly substantiated
NOTE: Unpaid taxes such as income and real estate taxes that have accrued after the death of the decedent are not deductible from gross estate as they are properly
chargeable to the income of the estate.
3. CLAIMS AGAINST INSOLVENT PERSONS UNDER FRIA - Claims of the deceased against insolvent persons, where the value of the decedent’s interest therein is
included in the value of the gross estate.

1. The full amount of the receivables be included first in the gross estate
2. The incapacity of the debtors to pay their obligation is proven not merely alleged
NOTE: Judicial declaration of insolvency is not necessary. It is enough that the debtor’s liabilities exceeded his assets
4. UNPAID MORTGAGE, TAXES AND CASUALTY LOSSES.
UNPAID MORTGAGE
1. The value of the property to the extent of the decedent’s interest therein, undiminished by such mortgage or indebtedness is included in the gross estate
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2. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or money’s worth.
Principles:
➢ In case unpaid mortgage payable is being claimed by the estate, and the loan is found to be merely an accommodation loan where the loan proceeds went to
another person, the value of the unpaid loan, to the extent of the decedent’s interest therein must be included as a receivable of the estate.
➢ If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction
from the gross estate.
➢ Where the decedent owned only one-half of the property mortgaged so that only one-half of its value was included in his estate, only one-half of the mortgage
debt was deductible, even though the executor paid the entire debt, the liability of the decedent being solidary, inasmuch as the executor would be subrogated
to the rights of the mortgagee as against the co-owner and co-mortagagor.
➢ Unpaid mortgages upon, or any indebtedness with respect to property are deductible from the gross estate only if the value of the decedent’s interest in said
property, undiminished by such mortgage or indebtedness, is included in the gross estate.
TAXES
1. Taxes which have accrued as of or before the death of the decedent
2. Unpaid as of the time of his death
Taxes NOT deductible:

1. Income tax on income received after death
2. Property tax not accrued before death
3. Estate tax due from the transmission of his estate
CASUALTY LOSSES
➢ Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or estate tax purposes
➢ Allowed deductions include those incurred up to the last day prescribed by law or any extension thereof for the payment of estate tax.
➢ 6 months extendible to:
o 2 years (extrajudicial settlement)
o 5 years (judicial settlement).

1. Allowed as deductions from the gross estate of RC, NRC and RA decedent provided that they:
a. Were incurred during the settlement of the estate
b. Arise from fire, storm, shipwreck, or other casualties, or from robbery, theft or embezzlement
c. Not compensable (no insurance)
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d. Not claimed as a deduction from income tax
e. Incurred not later than the last day or any extension thereof for payment of the estate tax
2. Allowed as deductions from the gross estate of NON RESIDENT ALIEN decedent: The same items herein shall be allowed as deduction but only the proportion
of such deductions which the value of his gross estate in the Philippines bears to the value of his entire gross estate, wherever situated shall be deducted.
5. VANISHING DEDUCTIONS – property previously taxed

➢ Vanishing deduction is the deduction allowed on the property left behind by the decedent which was previously subject to donor’s or estate taxes.
➢ In property previously taxed, there are two (2) transfers of property. Within a period of 5 years, the same property has been transferred from the first to the
second decedent or from a donor to the decedent. In such case, the first transfer has been subject to a transfer tax. The second transfer would now be subject
to a vanishing deduction.
Requisites for Deductibility:

1. Present decedent died within 5 years from receipt of property from a prior decedent or donor
2. The property formed part of the gross estate situated in the Philippines of the prior decedent or was a taxable gift of the donor
3. The estate tax on the prior succession or donor’s tax must have been paid
4. The property must be identified as the one received or acquired
5. No vanishing deduction was allowed on the same property on the prior decedent’s estate.
Rate of deduction - This depends on the period reckoned from date of transfer to death of the decedent enumerated below:
PERIOD DEDUCTION
1 DAY TO 1 YEAR 100%
1 YEAR AND 1 DAY TO 2 YEARS 80%
2 YEARS AND 1 DAY TO 3 YEARS 60%
MORE THAN 5 YEARS NO DEDUCTION ALLOWED
Rules in vanishing deductions:

1. The deduction allowed is only in the amount finally determined as value of property in determining the value of the gift, or the gross estate of prior decedent
2. Only to the extent that the value of such property is included in decedent’s gross estate.
3. Only if in determining the value of the estate of the prior decedent, no deduction was allowed for property previously taxed in respect of the property of
properties given in exchange therefore.
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4. Where a deduction was allowed of any mortgage or lien in determining the gift tax, or the estate tax of the prior decedent, which were paid in whole or in
part prior to the decedent’s death, then the deduction allowable for property previously taxed shall be reduced by the amount so paid.
5. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowable as deductions for expenses, losses,
indebtedness, taxes and transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the decedent’s estate.
6. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.
6. TRANSFER FOR PUBLIC USE - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or
any political subdivision thereof, for exclusively public purposes.

1. The disposition is in a last will and testament
2. To take effect after death
3. In favor of the government of the Philippines or any political subdivision thereof
4. For exclusive public purposes
5. The value of the property given is included in the gross estate
NOTE: In case of a NRA decedent, the property transferred must be located within the Philippines and included in the gross estate.
DISTINCTIONS:
GOVERNMENT OF THE PHILIPPINES NATIONAL GOVERNMENT

Refers to the corporate governmental entity through which the Refers to the entire machinery of the central government, as
functions of government are exercised throughout the distinguished from the different forms of local governments. The
Philippines, including, save as the contrary appears from the National Government then is composed of the three great
context, the various arms through which political authority is departments: the executive, legislative and judicial
made effective in the Philippines, whether pertaining to the
autonomous regions, the provincial, city, municipal, or barangay
subdivisions, or other forms of local government.
SEC 86 (A) (3) SEC 87 (D)
It contemplates transfers by a citizen or resident of the It contemplates transfers to social welfare, cultural and charitable
Philippines in favor of the Government of the Philippines or any institutions which are exempted from estate tax.
political subdivision thereof, for public purpose which are
deducted from the gross estate
7. FAMILY HOME Family Home
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1. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the
locality where the family home is situated.
2. The total value of the family home must be included as part of the gross estate
3. Allowable deduction must be in the amount equivalent to:
a. The current FMV of the family home as declared or included in the gross estate, or
b. The extent of the decedent’s interest (whether conjugal/community or exclusive property), whichever is lower
4. The deduction does not exceed P10,000,000.
8. AMOUNTS RECEIVED UNDER RA 4917 - Amount Received by Heirs as a Consequence of an Employer-Employee Relationship.
➢ Any amount received by heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with RA No. 4917 (An
Act Providing That Retirement Benefits Of Employees Of Private Firms Shall Not Be Subject To Attachment, Levy, Execution, Or Any Tax Whatsoever)shall be
allowed as a deduction from the gross estate.

1. Amounts received by heirs from decedent’s employer;
2. Received as a consequence of death of the decedent-employee; and
3. Amount is included in the gross estate of the decedent
9. NET SHARE IN THE SURIVIVING SPOUSE Share in the Surviving Spouse - The net share of the surviving spouse in the conjugal partnership property as diminished
by the obligations properly chargeable to such property shall be deducted from the net estate of the decedent.
NON-RESIDENT ALIEN IN THE PHILIPPINES

1. STANDARD DEDUCTION - Standard deduction in the amount of Five Hundred Thousand Pesos (P500, 000.00);
2. LOSSES AND INDEBTEDNESS; (a) Claims Against the Estate, (b) Claims against Insolvent Persons (c) Unpaid Mortgages, Taxes and Casualty Losses -The proportion
of the total losses and indebtedness which the value of such part bears to the value of his entire gross estate wherever situated (Proportion of gross estate in the
Philippines over the worldwide gross estate)
3. PROPERTY PREVIOUSLY TAXED – same rules apply as that of the Resident Citizen hence fully deductible
4. TRANSFERS FOR PUBLIC USE - same rules apply as that of the Resident Citizen hence fully deductible
5. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL PROPERTY OR COMMUNITY PROPERTY - same rules apply as that of the Resident Citizen hence fully
deductible
ADDITIONAL RULES FOR TRAIN LAWS AND NIRC (NON-RESIDENT ALIEN)
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1. Non-Resident Alien cannot avail of the special deductions SPECFICALLY FAMILY HOME (Foreigners cannot own land in the Philippines) AND AMOUNT RECEIVED
UNDER EE-ER RELATIONHIP (Special law only for Filipinos).
2. No deductions shall be allowed in the case of a non-resident decedent not a citizen of the Philippines, unless the executor administrator or anyone of the heirs as the
case may be includes in the return required to be filed under Sec 90. Of the Code, the value at the time of the decedent’s death of that part of his gross estate not
situated in the Philippines.
3. No deduction shall be allowed in the case of a non-resident decedent not a citizen in the Philippines, unless the executor, administrator or anyone of the heirs as the
case be included in the return required to be filed in the Sec. 90 of the Code the value at the time of the decedents death of that part of his gross estate not situated
in the Philippines.
GENERALLY SPECIAL DEDUCTION ARE:

1. Family Home
2. Standard Deduction
3. Amount received by heir under RA 4917
OLD NIRC ALLOWABLE DEDUCTIONS DELETED UNDER THE TRAIN LAW

1. Medical Expenses - Medical expenses as of the last illness will not form part of funeral expense but should be claimed as Medical expenses.
2. Funeral Expenses
a. Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used in the occasion of the burial;
b. Expenses of the wake preceding the burial including food and drinks;
c. Publication charges for death notices;
d. Telecommunication expenses in informing relatives of the deceased;
e. Cost of burial plot, tombstone monument or mausoleum but not their upkeep. In case deceased owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible;
f. Interment and/or cremation fees and charges;
Expenses incurred after the interment are not deductible. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are
not deductible. Actual expenses shall mean those which are actually incurred in connection with the intermittent or burial of the deceased. The expenses must be duly
supported by official receipts or invoices or other evidences to show that they were actually incurred.
3. Judicial Expenses – expenses allowed as deduction under this category are those incurred in the inventory taking assets compromising the gross estate, their
administration the payment of debts of the estate, as well as the distribution of the estate among the heirs. In short, these deductibles are expenses incurred during the
settlement of the estate but not beyond the last day prescribed by law or the extension thereof for the filing of the estate tax return. Judicial expenses may include:
i. Fees of executor or administrator
ii. Attorney’s fees
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iii. Court fees
iv. Accountant Fees
v. Appraiser Fees
vi. Clerk Hire
vii. Costs of preserving and distributing the estate
viii. Costs of storing or maintaining property of the estate.
ix. Brokerage fees for selling property of the estate.
Any unpaid amount for the aforementioned cost and expenses claimed under Judicial expenses should be supported by a sworn statement of account issued and
signed by the creditor.
c. Exclusions from gross estate and exemptions of certain acquisitions and transmissions
Exclusions from Gross Estate - Excluded from gross estate are those provided for under NIRC (Sections 85, 86 and 87) and under special laws.
Exclusions under Sec. 85 and 86 NIRC:

1. Exclusive property (capital/paraphernal) of surviving spouse (Sec. 85 [H], NIRC).
2. Property outside Philippines of NRA decedent.
3. Intangible personal property in the Philippines of NRA decedent provided there is reciprocity.
Exclusions under Sec. 87 NIRC:

1. The merger of the usufruct in the owner of the naked title.
2. The transmission or the delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary.
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor.
4. All the bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided no part of the net income of which inures to the benefit
of any individual and that not more than 30% of the value given is used for administrative purposes.
Exclusions from estate under special laws:

1. Benefits received by members from the Government Service Insurance System (PD 1146) and the Social Security System (RA 1161, as amended) by reason of death
2. Amounts received from the Philippine and United States governments for damages suffered during the last war (RA 227).
3. Benefits received by beneficiaries residing in the Philippines under laws administered by the U.S. Veterans Administration (RA 360).
4. Grants and donations to the Intramuros Administration (PD 1616) (Mamalateo, 2014).
Exemptions of Certain Acquisitions and Transmissions

Transmissions exempted from payment of estate tax:
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1. The merger of usufruct in the owner of the naked title - E.g. Y died leaving a condominium unit, the naked title belongs to W and usufruct to F for a period of 5 years,
then F died after two years. Upon the death of F, the usufruct will merge into the owner of the naked title W who shall becom e the absolute owner of the said
condominium unit. The transfer from F to W is exempt from estate tax.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary - E.g. X dies and leaves in his will a lot to his brother,
Y, who is entrusted with the obligation to transfer the lot to Z, a son of X, when Z reaches legal age. Y is the fiduciary heir and Z is the fideicommissary. The transfer
from X to Y is subject to estate tax. But the transmission or delivery to Z upon reaching legal age shall be exempt from estate tax.
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that no part of the net income of which inures to the benefit
of any individual and not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used for administration purposes (Sec. 87,
NIRC).
NOTE: Bequests, devises, legacies or transfers made to educational institutions are not included.
d. Tax credit for estate taxes paid to a foreign country - The estate tax imposed by the NIRC shall be credited with the amounts of any estate tax imposed by the authority a
foreign country. Estate tax credit is a remedy against international double taxation to minimize the onerous effect of taxing the same property twice.
Who may avail: Only the estate of a citizen or a resident alien at the time of death can claim tax credit for any estate taxes paid in a foreign country.
Limitations in estate tax credit:

1. Per country basis: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is
taken, which the decedent’s net estate situated within such country taxable under the NIRC bears to his entire net estate; and
2. Overall basis: The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate
situated outside the Philippines taxable under the NIRC bears to his entire net estate.
e. Filing of estate tax returns and payment of estate tax

When estate tax return is filed: It is filed within 1 year from the decedent’s death. Extension to file an estate tax return is allowed in meritorious cases but not to exceed 30
days (Sec. 90, NIRC).
Who files estate tax return:

1. Executor
2. Administrator
3. Any legal heir
Where estate tax return is filed:
1. If resident decedent – To an authorized agent bank, RDO, Collection Officer, or duly authorized Treasurer in the city or municipality where the decedent was domiciled
at the time of his death, or to the Office of the CIR.
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2. If non-resident decedent – To the RDO or to the Office of the CIR (Sec. 90[D], NIRC).
Requisites for granting extension to pay estate tax:

1. The request for extension must be filed before the expiration of the original period to pay which is within 6 months from death
2. There must be a finding that the payment on the due date of the estate tax would impose undue hardship upon the estate or any of the heirs
3. The extension must be for a period not exceeding 5 years if the estate is settled judicially or 2 years if settled extra-judicially
4. The Commissioner may require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment thereof
Effects for granting extension to pay estate taxes:

1. The amount shall be paid on or before expiration of the extension and running of the statute of limitations for assessment shall be suspended for the period of any
of such extension.
2. The CIR may require a bond not exceeding double the amount of the tax and with such sureties as the CIR deems necessary when the extension of payment is
granted.
3. Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge (Sec. 91[B]).
Instances where request for extension of time to pay estate tax should be denied:
1. Negligence
2. Intentional disregard of rules and regulations
3. Fraud
Who shall pay the estate tax:

1. The executor or administrator, before delivery to any beneficiary of his distributive share.
2. The beneficiary, to the extent of his distributive share in the estate, shall be subsidiarily liable for the payment of such portion of the estate tax as his distributive share
bears to the value of the total net estate.
D. DONOR'S TAX
1. Basic principles, concept, and definition
Donor’s tax is an excise tax imposed on the privilege of transferring property by way of a gift inter vivos based on pure act of liberality without any or less than adequate
consideration and without any legal compulsion to give. A donor’s tax is levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the
property by gift. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is
real or personal, tangible or intangible. [Sec. 98(B), NIRC]
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It is a tax on donations. Thus, it is a tax on:
1. An act of the donor disposing gratuitously of a thing/right in favor of a donee; and
2. Sales, exchanges or other transfers of properties, other than real property (defined in Sec. 24(D)) classified as capital asset within the Philippines, for less than an
adequate and full consideration in money or money’s worth.
Nature of donor’s tax

1. Donor’s tax is not a property tax, but a tax imposed on the transfer of property by way of gift inter vivos (i.e., an excise tax).
2. It is a direct tax imposed on the donor.
3. It applies to both natural and juridical persons. [AMPONGAN, 2014]
Object
To prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually members of a family, or into many trusts, with the donor
thereby escaping the effect of the progressive rates of income tax.
Time and Transfer of Properties

Donor’s tax shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the
donee; it is completed by delivery, either actually or constructively, of the donated property, to the donee. Thus, the law in force at the time of the perfection/completion of the
donation shall govern the imposition of the donor’s tax.
2. Requisites of a valid donation

a. Donative intent of the donor Donative intent must be present in a direct gift. It is not, however, required in transfers of property for less than adequate and full consideration.
b. Capacity of the donor.
c. Delivery of the donated property.
d. Acceptance of the done.
e. Donation must be in the proper form
i. Movable: orally or in writing if value is equal to or less than P5,000. Otherwise, it shall be in writing.
ii. Immovable: must be made in a public document.
Re: Acceptance
1. For movables exceeding P5,000 – Acceptance shall be in writing [Art. 748, Civil Code]
2. For immovable [Art. 749, Civil Code] –
a. Must be in the same deed of donation.
b. In a separate public document – the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments
Note: Acceptance shall not take effect unless it is done during the lifetime of the donor and of the donee [Art. 746, Civil Code.
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3. Transfers which may be considered as donation
a. Sale, exchange, or transfer of property for less than adequate and full consideration; exception
Where property, other than real property referred to in Sec. 24(D), is transferred for less than an adequate and full consideration, then the amount by which the FMV of the
property exceeded the value of the consideration shall be deemed a gift.
Exception: A transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be
considered as made for an adequate and full consideration in money or money’s worth. [Sec. 100, NIRC]
Requisites: The excess of FMV over the value of the consideration will be considered a donation and subject to donor’s tax when:
1. The transfer was for less than adequate and full consideration.
2. Such transfer was effective during his lifetime (inter vivos); and
3. It involves property other than real property classified as capital asset within the Philippines as defined in Sec. 24(D)
Principles:
1. Real property considered as capital assets under the Tax Code are exempted from this rule because the taxable value taken into account in the computation of tax
is the higher of either the gross selling price or the FMV; not gain.
2. The absence of donative intent does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that the amount by
which the fair market value of the property exceeded the value of the consideration shall be deemed a gift.
b. Condonation or remission of debt

Condonation or remission of debt is defined as an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be
gratuitous.
c. Renunciation of inheritance; exception

Renunciation in favor of other heirs is subject to donor’s tax. [Sec 12, RR 12-2018]
1. Renunciation by the surviving spouse of his/her share in the ACP/CPG after the dissolution of the marriage in favor of heirs of the deceased spouse or any other
person/s.
2. Renunciation by an heir, specifically and categorically in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate
However, general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is NOT subject to donor’s tax.
4. Classification of donor
Donor’s tax applies to individuals and corporations.
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Classifications:
1. Residents (RC/RA/DC/RFC)
2. Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining the deductions from the gross gift of the donor, and in filing the return.
If donor is:
i. RC/NRC/RA/DC/RFC = liable for donor’s tax REGARDLESS of where the gift was made or where property is located
ii. NRA/NRFC = liable for donor’s tax only if the property donated is within the Philippines.
Situs of Intangible Personal Properties

➢ General Rule: Mobilia Sequuntur Personam (principle that taxation of intangible personal property generally follows the residence or domicile of the owner thereo)
➢ Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of owner
thereof. Situs is the domicile or residence of the owner.
➢ Exceptions: When it is inconsistent with express provisions of law
➢ Rule of Reciprocity: Same as in Estate Tax, supra
5. Determination of gross gift

a. Composition of gross gift
i. Resident Citizen, Non-resident Citizen, Resident Alien, Domestic Corporation, Resident Foreign Corporation
➢ All properties, real or personal, tangible or intangible, wherever situated.
ii. Non-Resident Alien and Non-resident Foreign Corporation

➢ Only properties situated in the Philippines, provided that the inclusion of intangible personal property is subject to the rule of reciprocity
➢ Note: If there is reciprocity, intangible assets are excluded from gross gifts [Sec. 104, NIRC]
b. Valuation of gifts made in property

TAXABLE BASE: Net gifts - the net economic benefit from the transfer that accrues to the donee AT THE TIME OF DONATION
1. If gift is personal property = FMV at the time of donation [Sec. 102, NIRC].
2. If gift is real property = whichever is HIGHER
a. FMV as determined by the CIR (Zonal Value) or
b. FMV in the latest schedule of values fixed by the provincial and city assessor (MV per Tax Declaration)
3. If there is an improvement = construction cost per building permit or the FMV based on the latest tax declaration.
4. If unlisted stocks = Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus
the adjusted liability value is the indicated value of the equity. [RR 6-2013]
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Note: Where the consideration is fictitious, the entire value of the property shall be subject to donor’s tax.
c. Exemption of certain gifts

It is more appropriate to consider these “exemptions” as “deductions” as they are subtracted from the gross value of the property donated to arrive at the value of the net
gift, which is the tax base for donor’s tax.
1. Contributions to a candidate or political party for campaign purposes duly reported to COMELEC.
2. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision
of the said Government.
3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or
philanthropic organization or research institution or organization: Provided not more than 30% of said gifts will be used by such donee for administration purposes.
4. Encumbrances on the property donated if assumed by the donee in the deed of donation.
5. Donations made to entities exempted under special laws.
i. Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines
ii. Development Academy of the Philippines.
iii. Integrated Bar of the Philippines.
iv. International Rice Research Institute
v. National Museum.
vi. National Library
vii. National Social Action Council
viii. Ramon Magsaysay Foundation
ix. Philippine Inventor’s Commission
x. Philippine American Cultural Foundation.
xi. Task Force on Human Settlement on the donation of equipment, materials and services.
6. Tax credit for donor's taxes paid to a foreign country

The donor’s tax imposed by the NIRC upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor’s taxes of any character
and description imposed by the authority of a foreign country.
Who may avail:

Only donors who are citizens or residents at the time of the donation are entitled to claim tax credit.
Limitations in estate tax credit:

1. Per country basis: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken,
which the decedent’s net estate situated within such country taxable under the NIRC bears to his entire net estate; and
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2. Overall basis: The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated
outside the Philippines taxable under the NIRC bears to his entire net estate.
Formula in computing the donor’s tax credit:

Lower of actual tax paid and the amounts derived by computing the tax limits as follows:
Limitation A (per country):

Net gifts (foreign country) X Phil. Donor’s tax
Net gifts (world)
Limitation B (by total):

Net gifts (outside Philippines) X Phil. Donor’s tax
Net gifts (world)
NOTE: If there’s only one foreign country, the tax credit shall be the lower between actual tax paid and Limitation A. If there are donations in more than one country, the tax credit
shall be the lower between (a) actual tax paid and (b) lower between Limitation A and Limitation B.
7. Filing of return and payment

Time for filing
➢ FILED: within thirty (30) days after the gift (donation) is made.
➢ PAID: upon filing of return
NOTE:
➢ If the gift involves conjugal/community property, each spouse shall file separate return with regard to his/her respective share in the property.
➢ A separate return is filed for each gift made on different dates during the year reflecting therein any previous net gifts made in the same calendar year.
Who should file?

Any person, natural or juridical, resident or nonresident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect
and whether the property is real or personal, tangible or intangible.
E.VALUE-ADDED TAX
I. WHAT IS VALUE ADDED TAX?
Definition
It is a business tax imposed and collected on every:
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a) Sale, Barter or Exchange of Good or Properties
i. Real Properties.
ii. Personal Properties
b) Lease of Good or Properties
i. Real Properties
ii. Personal Properties
c) Rendition of Services, all in the Course of Trade or Business.
d) Importation of Goods
i. In the Course of trade or business.
ii. Not in the Course of Trade or Business
Nature
The VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the good, properties or services.
Advantage of VAT
1. Economic Growth
2. Simplified Tax Administration
3. Promote Honesty
4. Higher Governmental Revenues
Characteristics
1. Value Added- a tax on the value added of a taxpayer arising from the sales of goods or properties or services during the taxable quarter
2. Invoice Method- input taxes shifted by the seller to the buyer will be use as a tax credit b the buyer against his output taxes.
3. Sales Tax- there is tax when there is sale, barter exchange of goods or properties for a consideration.
4. Broad Based Tax on Consumption in the Philippines- the manufacturing, producing and distribution is subject to VAT as long as they are consumed in the Philippines.
5. Destination Principle- the goods and services are taxed only in the country where they are consumed.
6. Cross- Border Doctrine- mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing
authority. Hence experts are zero rated while importers are taxed.
7. Indirect Tax- tax burden may be shifted by the statutorily taxable person to another person such as the purchaser.
8. Ad Valorem Tax- taxis based on the gross selling price, gross value of money or the gross receipts on the VAT transactions
9. Not a Cascading Tax- an item is tax more than once; it is not so since the additional amount to paid is not a tax but as a part of the purchase price
10. National Tax
11. Revenue Tax
12. Regressive Tax- all persons are tax at the same rate.
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II. WHO ARE THE VATABLE PERSONS?

Who is liable to the pay the Value-Added Tax?
Any person who in the course of trade or business, sells, barter, exchange, leases goods or properties, renders services and any person who imports goods shall be subject to the
VAT.
IF: The sale or transaction is not in the ordinary course of business or not in the pursuit of a commercial or economic activity but a governmental function mandated by law then
such is not subject to VAT. (PSALM CASE)
Simply Put: The seller is the one statutorily liable (incidence) for the payment of tax but the amount of tax (burden) may be shifted or passed on the buyer, transferee or lessee
of goods or properties or services. XPN: In case of importer, the importer is the one liable for tax.
In the Course of Trade or Business

RULE OF REGULARITY
The regular conduct or pursuit of a
➢ Commercial
➢ Or an Economic Activity
➢ Including transactions Incidental thereto
By any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization or government entity.
Elements
1. Commercial or Economic Activity – conducted for profit
2. Regularity and Habitually in the Action- means more than one isolated transaction. It requires repetition and continuity of action.
3. Incidental- means something necessary, appertaining to or depending upon another which is termed the principal something incident to the main purpose.
Exception to the Rule:

➢ IF Services is rendered in the Philippines by a NON-RESIDENT FOREGN PERSONS it shall be considered as in the course of trade or business for the purpose of VAT even
though it isn’t.
➢ Importation is subject to VAT whether in the Course of Trade or business
➢ Business where the gross sales or receipts do not exceed Php. 100,00 during the 12-month period shall be considered principally for subsistence or livelihood and not in the
course of trade or business. (Needs more research on this)
Mindanao II Geothermal Doctrine:

A sale of a fully depreciated vehicle that has been used on business is subject to VAT as an incidental transaction although such sale may be considered isolated.
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Who are required to register as a VAT Taxpayer?

1. Gross sales or receipts for the past twelve months other than those that are exempt under the NIRC have exceeded the 3 million thresholds (Past)
2. Reasonable grounds to believe that his gross sales re receipts for the next twelve months, except transactions that are exempt under NIRC, WILL exceed 3 million
thresholds. (Future)
Note: Previous Threshold is Php. 1,919,500
Failure to Register by a VATABLE person but did not register as a VAT Tax Payer
He shall be liable to pay the VAT as if he is a VAT registered person but he cannot avail of the input tax credit for the period that he has not properly registered.
PERSONS NOT LIABLE TO VAT

1. A NON-VAT registered person whose annual gross sales did not exceed the VAT threshold but they are liable to percentage tax
2. A Marginal Income Earner not deriving compensation as an employee defining gross sales or receipts not exceeding 100,000 in any 12-month period.
3. Transaction subject to VAT but not become subject to VAT because they did not exceed the VAT threshold
4. In VAT exemption under Sec. 109
III. WHAT ARE THE TRANSACTIONS AND THEIR OBJECT THAT ARE SUBJECT TO VAT AND THEIR CORRESPONGING RULES?
General Elements of Vatable Transactions
1. It must be done in the ordinary course of trade or business
2. There must be a sale, barter or exchange. Lease of properties or rendering services in the Philippines
3. It is not a VAT exempt or zero rated.
Note: The imposition of VAT may refer to any of the following transactions and such transactions may be categorized as to the object of such transaction:
1. Sale of Goods or Properties
2. Sale of Service
3. Lease of Properties
4. Transactions Deemed Sale
5. Importation of Goods
1. Sale of Goods or Properties

a. Definition of Goods or Properties
Shall mean all tangible and intangible objects which are capable of pecuniary estimation.
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b. Goods or Properties subject to VAT:
i. Real Properties held primarily for sale to customers or held for lease in the ordinary course of business.
ii. Privilege to use Patent, Copyright, design Secret Formula or Process, Trademark or other property rights
iii. Right to use in the Philippines of an industrial commercial or scientific equipment.
iv. Privilege to use Motion Pictures, Films, Tapes.
v. Radio, TV, satellite transmission and Cable TV Time.
c. Specific Elements for Sale of Goods or Properties (SILN)

OTHER THAN REAL PROPERTY
i. Sale, barter or exchange of goods or properties for a valuable consideration.
ii. In the Course of Trade or Business or exercise of profession in the Philippines.
iii. Located in the Philippines are the goods or properties and are dor use or consumption therein.
iv. Not exempt from VAT under NIRC
REAL PROPERTY
1. Seller executes a deed of Sale, including dacion en pago, barter or exchange, conveyance, or a contract to sell
2. Real property located in the Philippines
3. Engaged in real estate business either as a dealer, developer or lessor
4. Held Primarily for Sale or for Lease in the Ordinary Couse of his Trade or business
5. Not exempt form VAT.
Note: Absence of any requisites exempts them from VAT but percentage tax of 3 percent may apply
Profit Element: Not required for VAT to be imposed. VAT is a tax on transaction, there is no need for a taxable gain unlike in income tax. It is not required either by law
or jurisprudence.
d. Tax Base of VAT on Sale of Goods Or Properties (12% of the Gross Selling Price)
i. Real Property- as stated in the sale document either the fair market value as assessed by the city or provincial assessors or zonal value as assessed by the BIR assessors.
ii. Other than real Property- the total amount of money or its equivalent which the purchaser pays or is obligated to pay in consideration of the transaction, excluding VAT.
The tax shall form part of the gross selling price.
e. Deductions
i. Discounts determined and granted at the time of the sale indicated in the invoice
ii. Sale returns and allowances for which proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales.
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f. Sale on Installments, Deferred and Initial Payments
i. Sale on Installment Plan
➢ Payment: Initial Payment for the sale or real property in the year of sale does not exceed 25 percent of its gross selling price.
➢ Effect: The seller shall be subject to VAT on installment basis plus interest and penalties
➢ Effect; The buyer can claim the input tax as the same period the seller recognized the output tax
ii. Sale on Deferred Payment Basis
➢ Initial payment for the sale of real property in the year of sale does 25 percent of its gross selling price.
➢ It shall be treated as cahs sale meaning the VAT shall be imposed on the entire selling price at the month the sale was made
➢ Same as that of a taxable sale of real property and that the subsequent payments after the initial payment made shall no longer be computed as output tax
because it was already deemed paid.
iii. Initial Payments
➢ Payments received which the seller receives before or upon execution of instrument of the sale during the year the sale or disposition of the property was made.
➢ Initial payments do not include the amount of mortgage on the real property except the when it exceed the cost of the property, the excess shall be considered
initial payments.
➢ Effect on Tax if the transmission of property is held in trust it is not VAT However if by transmission the transferor divest completely himself of the control of such
property then it will be subject to VAT.
iv. Sale of Scrap Metals
➢ Empty drums
➢ Plastic bags
➢ Cartons
➢ Crates
➢ Obsolete Inventories
➢ Fully depreciated fixed assets sold at a minimal price lower than the purchase price shall be subject to VAT.
2. Sale of Service
a. Definition of Service
It means the performance of all kinds of services in the Philippines for others fro a fee, remuneration or consideration whether in kind or in cash.
Service has been defined as the art of doing something useful for a person or company fro a fee or useful labor or work rendered or to be rendered to another for a fee
b. Service Subject to VAT
i. Construction and Service Contractors
ii. Transmission of electricity by Electric Cooperatives.
iii. Lessors of property whether personal or real
iv. Stock, real commercial, customs, immigration brokers
v. Proprietors or operators of restaurants
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vi. Engaged in warehousing services
vii. Distributors of Cinematographic Films
viii. Processing, repacking manufacturing goods for others
ix. Sales of electricity by generation, transmission and or distributive companies. XPN: regarding renewable energy ( zero rated VAT)
x. Franchise Grantees of electric utilities, telegraph telephone , radio ,or TV broadcasting. XPN; Those having gross receipts not exceeding Php. 10,000,000, they shall
have the option to be registered as VAT taxpayer.
ACCORDING TO RR 16-2005
1. The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right.
2. The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment;
3. The supply of scientific, technical, industrial or commercial knowledge or information.
4. The supply of any assistance that is ancillary and subsidiary to and is furnished as means of enabling the application or enjoyment of any such property as mentioned
number 2 or any such knowledge or information as is mentioned in number 3
5. The supply of services by a non-resident person or his employee in connection with the use of property or right belonging to or the installation or operation of any
brand, machinery or other apparatus purchased from such non-resident person
6. The supply of technical advice, assistance or services rendered in connection with the technical management of administration of an scientific, industrial or commercial
undertaking venture project or scheme
7. The lease of motion picture film tapes and discs
8. Lease or the use of or the right to use radio, television satellite transmission and cable television time.
c. Specific Elements for Sale of Service

i. Sale or exchange of service or lease or use of property enumerated in the law or other similar services
ii. Services to be performed in the Philippines
iii. The service is in the course of the taxpayer’s trade or business or profession
iv. Service is for valuable Consideration
v. Service is not exempt under the Tax Code, Special law or International Agreement.
d. Tax Base of VAT on Sale of Services (12% of the Gross Receipts)

Gross Receipts - It pertains to the total amount of money or its equivalent representing the
➢ contract price,
➢ compensation,
➢ service fee,
➢ rental
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➢ royalty
➢ including the amount charged for materials supplied with the services and deposits and advanced payments.
(1) Actually or (2) constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT.
e. Exclusions from Gross Receipts

Excluded from Computation of Gross receipts:
Except those amounts earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another which do not redound
to the benefit of the payor (service provider)
➢ A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person. Such obligation should be evidenced by the sales
invoice/ official receipt issued by the said third party to the customer/client of the service provider.
➢ An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said customer/client
which obligation is evidenced by a sales invoice/official receipt issued by the creditor (3rd party) to the customer/client (the aforementioned another party) for the
sale of goods or services by the former to the latter.
➢ For this purpose, ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent, subsidiary and other related companies), relatives by
consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement
to the contrary (Sec. 11, R.R. 04-2007).
Constructive receipt
It occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor.
Examples of constructive receipts:

1. Deposit in banks which are made available to the seller without restrictions.
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered.
3. Transfer of the amounts retained by the payor to the account of the contractor.
3. Lease of Properties
a. Definition of Lease
Grant by one person to another the used and possession of goods or properties for a limited time.
b. Lease of Properties Subject to VAT

The lease of properties shall be subject to VAT irrespective of the place where the contract of lease or licensing agreement was EXECUTED, provided that the property is
leased or used in the Philippines.
Examples:
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1. Lessors of property whether real or personal subject to exemption of the 15k Monthly rental and 3 Million threshold rule.
2. Lease of Motion picture, films, films tapes and discs
3. Lease of the use of or the right to use radio television, satellite transmission and cable television time.
4. Those included under RR. 16-2005
Additional Rules Lease on Non-resident lessor owners
Definition:
Refers to any natural or juridical, an alien or a citizen who establishes to the satisfaction of the Commissioner of Internal revenue the fact of his physical presence abroad
with a definite intention to reside therein and who owns or lease a property located in the Philippines
Effect on VAT rentals:

The VAT amount shall be based on the contract price agreed upon by the licensor and the licensee The lessee shall be responsible for the payment of the VAT on such
rental’s ad or royalties in behalf of the non-resident foreign corps.
c. Specific Elements of Lease of Properties

i. There is a lease or use of properties enumerated in the law or other similar services
ii. Lease property leased or used must be located in the Philippines.
iii. In the course of the taxpayers’ trade or business or profession
iv. Valuable consideration actually or constructively received
v. Not exempt under the Tax Code, special law international agreement
Note: Absence of any elements of those above-mentioned transactions may be exempt from VAT but may be subject to other percentage tax.
d. Tax Base of VAT on Lease of Properties

Same as n VAT on Sale of Service which is 12% of the gross receipts arising from the use or lease of properties. Controlled by the same rules
e. Advance Payments Made by the Lessee

Depends upon the what is the intention of making the advance payments. If;
1. Is actually a Loan, Option Money or a Security Deposit- not subject to VAT.
2. If it is a Prepaid Rental- subject to VAT.
4. Transaction Deemed Sale

a. Definition
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A certain transaction which are not actually sales because of the absence of actual exchanges between the buyer and the seller are considered or included in the term sale
for VAT purposes
Rationale: IN a transaction deemed sale the input VAT was already used by the seller as a credit against output VAT. However, since there was no actual sale no output
VAT is actually charged against the customers
Consequently, the state will be derived of its right to collect the output of a VAT To avoid the situation where a VAT registered taxpayer avail of input Vat without being
liable for output certain transactions shall be considered sales even in the absence of actual sale.
b. Transactions Deemed Sales Subject to VAT (TDCR)

i. Transfer use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business. (Kumipit yung VAT
registered person goods na dapat for business for personal use nalang)
ii. Distribution or transfer to:
➢ Shareholders or investors as share in the profits of the VAT-registered person
➢ Creditors in payment of debt and obligation
iii. Consignment of goods if actual sale is not made within 60 days from the date of such consignment
iv. Retirement form or cessation of business with respect to inventories on hand
➢ Change of ownership of a business
➢ Dissolution of partnership and creation of a new partnership which takes over the business.
c. Specific Elements of Transaction subject to VAT

1. There is a transaction deemed sale
2. Such Sale was done in the ordinary course of trade or business
3. It is one of those circumstances enumerated under NIRC Sec 106.
d. Tax Base of VAT on transactions deemed Sale.

General Rule: The output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of such transactions enumerated.
➢ Xpn: Transactions to the government it is the actual selling price.
➢ Xpn of the First Xpn: where the selling price is unreasonable lower than the actual market value (30% more lower). The commissioner shall determine the tax base.
➢ Xpn:In case of retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties.
Note: Retirement and Cessation of business shall be further discussed in circumstances that affect the VAT rate.
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5. Importation of Goods
a. Definition
Importation- is an act of bringing goods and merchandise into a country from a foreign country. It is imposed whether or not such importation whether or not it is
used for business.
Importer- refers to any person who brings into the Philippines whether or not made in the course of trade or business. It includes non-exempt persons or entities
who acquire tax-free imported goods from exempt persons, entities or agencies.
b. Who shall pay?

The VAT on importation shall be paid by the importer prior to the release of such goods from customs duty.
c. Specific Elements of Importation of Goods

i. Importation begins when the carrying vessel or aircraft enters the Philippine with the intention to unload therein.
ii. It is deemed terminated when the duties taxes and other charges due upon the goods have been paid and secured to be paid at the port of entry
iii. In the case the goods are deemed free of duties taxes, and other charges when the goods have legally left the jurisdiction of the bureau.
d. Tax Base on VAT on Importation of Goods

i. The tax base shall be based on the TOTAL VALUE used by the BOC in determining tariffs, custom, duties and excise tax if any and other charges.
ii. If the computation is based on volume or quantity of the imported goods, THE LANDED COST shall be the basis for computing VAT.
e. Rules of Transfer of Goods by Tax-Exempt Persons to a Non-Exempt Person

The non-exempt person shall be considered as an importer. NIRC provides that the purchaser or transferee shall be considered as an importer and shall be held liable for
VAT and other internal revenue tax due on such importation.
IV. WHAT ARE THE TRANSACTIONS AND CIRCUMSTANCES THAT AFFECTS THE RATE OF VAT AND AVAILING TAX CREDIT?
The transactions that affect the rate of VAT which either imposes an exemption of paying VAT entirely, or VAT is imposed but the rate is zero, or circumstances either the cessation
of the VATABLE persons business or registration that may or may not exempt the payment of VAT is as follows is as follows:
1. VAT EXEMPTIONS
a. Persons
b. Transactions
2. ZERO RATED
a. Sales of Goods or Properties
i. Export Sales
ii. Foreign Currency Denominated Sales
iii. Effectively Zero Rated Sales
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b. Sales of Service or lease of properties
3. Newly VAT registered Persons
4. Change or Cessation of Status as a VAT registered Person.
5. Retirement or Cessation Business
Note: It is important to differentiate VAT exemptions, Zero Rated and Effectively Zero Rate Sales.
Note: OUR VAT SYSTEM FALLS ON PPART IN THE FOLLOWING THREE CLASSFICATIONS TRANSACATIONS:
• 12% VAT RATE
• ZERO RATE
• VAT EXEMPTIONS
1. VAT EXEMPTIONS
i. Definitions
It refers to the sale of goods or properties and/or services and the use or lease of properties that is not subject to output tax and the seller is not allowed any tax
credit of input tax on purchases.
ii. Classifications
Exempt Person – a person or entity granted VAT exemption under the NIRC special law or international agreement to which the Philippines is a signatory and by
virtue of which its taxable transactions become VAT exempt from the VAT
Effect: Such party is not subject to VAT, but may be allowed a tax refund or credit of input tax paid depending on the registration as a VAT taxpayer
Exempt Transactions- Involves goods or services which by their nature are specifically listed in and expressly exempted from the VAT under the NIRC without
regard of the tax status of the parties in the transaction.
Effect: Transaction is not subject to VAT but the seller is not allowed ay tax refund or credit fr any input taxes paid.
iii. Features
i. Seller is not allowed to credit input tax passed to him on his purchases of taxable good, properties or services because he has no output tax to deduct from
(Xpn: Exempt Persons).
ii. VAT exempt transactions shall not be liable for VAT or the 3-percentage tax.
iii. VAT exempt transactions shall not be included in determining the general threshold prescribed by law the amount of which is Php. 3 million.
iv. What Persons or Transactions are Exempt from VAT.

Persons
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➢ Asian Development Bank
➢ World Health Organization
Transactions
1. Sale or importation of agricultural and marine food in their original state and livestock and poultry (they shall be considered as in their original state even if
they have undergone the simple process of preparation).
2. Importation of fertilizer seeds, seedlings fish prawn livestock and poultry feeds.
3. Importation of personal and house hold effects belonging to the residents returning to the Philippines and nonresident citizens coming to settle in the Philippines
provided that they are also exempted in the Code of Commerce.
4. Importation of professional instruments and implements, tools of trade, domestic animals, and personal and household effects belonging to persons coming
to settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred
to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and
not for barter or sale accompanying such persons, or arriving within a reasonable time:
a. Provided, That the Bureau of Customs may, upon the production of satisfactory evidence that such persons are actually coming to settle in the
Philippines and that the goods are brought from their former place of abode, exempt such goods from payment of duties and taxes:
b. Provided, further, That vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall within this classification
and shall therefore be subject to duties, taxes and other charges;
5. Services subject to percentage tax under Title V;
6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar.
7. Medical, dental, hospital and veterinary services except those rendered by professionals.
8. Educational services rendered by private educational institutions, duly accredited.
9. Services rendered by individuals pursuant to an employer-employee relationship
10. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines.
11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those
under Presidential Decree No. 529.
12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members.
13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;.
14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the
share capital contribution of each member does not exceed Fifteen thousand pesos (₱15,000) and regardless of the aggregate capital and net surplus ratably
distributed among the members.
15. Export sales by persons who are not VAT-registered.
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16. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-
cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related
laws, residential lot valued at One million five hundred thousand pesos (₱1,500,000) and below, house and lot, and other residential dwellings valued at Two
million five hundred thousand pesos (₱2,500,000) and below:
a. Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279,
sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (₱2,000,000):
b. Provided, further, That every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price
Index, as published by the Philippine Statistics Authority (PSA).
17. Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos (₱15,000) (subject to New Rules).
18. Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed
prices or subscription and sale and which is not devoted principally to the publication of paid advertisements;
19. Transport of passengers by international carriers.
20. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international
transport operations.
21. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations: Provided, That the fuel, goods,
and supplies shall be used for international shipping or air transport operations.
22. Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries.
23. Sale or lease of goods and services to senior citizens and persons with disability.
24. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended
a. Exchange of Property by a corporation subject of a merger or consolidation
b. Shareholder stock to corporation
c. Security holder of the Corporation
25. Association dues, membership fees, and other assessments and charges collected by homeowners’ associations and condominium
corporations
26. Sale of gold to the Bangko Sentral ng Pilipinas (BSP).
27. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019.
28. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales
and/or receipts do not exceed the amount of Three million pesos (₱3,000,000).
v. Rules of residential Units

General Rule: They are exempt from VAT if the monthly rental does not exceed 15k
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If: It the monthly rental exceeds 15k but the annual aggregate gross receipts from said unit does not exceed the 3 Million threshold then it will be subjected to 3
percentage tax.
Provided: That the annual aggregate gross receipts of commercial and residential units are to be computed separately for thee purpose of determining their respective
taxable liabilities.
2. Zero Rated
i. Definition
The VAT that will be impose will be 0% for every sale of good, properties or service or lease of such properties. There is an input tax, but the output tax is zero rated.
Hence the input tax is credit as refund.
Zero Rated Sales of Goods and Properties

Zero rated sale by a VAT registered person is a taxable transaction for VAT purposes but the sale does not result in an output tax. However the input tax on the
purchases of goods, properties or services related to such zero-rates shall be available as tax credit or refund.
Zero Rates Sales of Service

The NIRC provides services performed in the Philippines shall be subject to zero percent rate.
ii. Types of Zero-Rated Transactions

i. Automatically Zero Rated (Sale to a Freeport enterprise)
1. Refers to export sale of goods, properties and supply of services to a Freeport Zone registered enterprise by a VAT registered person.
2. To be enjoyed by the seller who is directly liable for VAT by making the input VAT that are attributable to the export sale
3. Does not need the approval the BIR
4. The presence of the word ZERO-RATED on the face of the VAT invoice or receipt is not necessary
ii. Effectively Zero-Rated Sale (Sale to a Tax Exempt Person)

1. Refers to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted dircet and indirect ta exemption
under special laws or international agreement. (Sale to a tax exempt Entity).
2. Benefit the purchaser since they will not be burden to the amount of the value added.
3. BIR approval is necessary.
4. ZERO rate must be stamped in the invoice.
iii. Zero Rated Sale of Goods and Properties

i. Export Sales
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1. Sale of Actual Shipment of Goods from the Philippines to a foreign country:
a. Irrespective of any shipping arrangement.
b. Paid for in acceptable foreign currency or its equivalent in goods or services accounted in accordance with the RR of BSP.
2. Sale of Raw Materials or packaging materials by a VAT registered person entity to a Non-resident buyer
a. For delivery to a resident local export-oriented enterprise
b. Used in the manufacturing processing and repacking in the Philippines of the said buyers’ goods.
c. Paid for in Acceptable foreign currency and accounted in accordance with the rules and regulations of the BSP.
3. Sale of raw Materials or Packing Materials to an export-oriented enterprise whose export sales exceeds 70 percent of the total production.
4. Transactions considered as export Sales under Omnibus Investment Code. The following shall be considered as constructively exported for purposes
of these provisions
a. Sales to bonded manufacturing warehouses of export-oriented manufacturers
b. Sales to exports processing zones.
c. Sales to registered export traders’ operation bonded trading warehouses supplying raw materials in the manufacture of export producers under
the guidelines set BY the BIR and BOC.
d. Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities of locally manufactured assembled or repacked
producers’ products whether paid for in foreign currency or not
5. The sale of goods supplies equipment and fuel to persons engaged in international shipping or international air transport operations. Provided that the
goods supplies equipment and fuel shall be used exclusively for international shipping or air transport operations.
Under the OLD LAW

➢ Registered enterprises within a separate customs territory as provided by special laws, ECOZONE and PEZA registered.
➢ Registered enterprises within tourism enterprise zones as approved by TIEZA
➢ International shipping or international air transport operations Provided that:
o Goods supplies and equipment’s and fuel shall be used
o International shipping or Air transport operations.
PROVIDED THAT 2,3 AND 4 shall be subject to 12 Percent Rate upon the Implementation of the Enhanced VAT refund system.
Characteristics:
a. Successful establishment of VAT refund system which grants refunds of credit input tax within90 days upon application.
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b. Pending VAT claims as of December 31,2017 shall be fully paid.
c. Establishment of VAT refund center.
ii. Foreign Currency Denominated Sales

1. Buyer Must be a Non-resident.
2. Goods sold must be assembled or manufactured here in the Philippines.
3. Goods are to be sold and delivered to a resident of the Philippines.
4. Paid For in Acceptable Foreign Currency and accounted for in accordance with the rules and regulations of the BSP
iii. Effectively Zero-Rated Sales.

1. Local Sale of Goods and Properties by a VAT registered person
2. To a person or entity who was granted indirect tax exemption under special laws or international agreement.
iv. Zero-Rated Sale of Service

i. Processing and Manufacturing or repacking of goods for other persons doing business OUTSIDE THE PHILIPPINES which goods are subsequent exported
and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.
ii. Service other than those mentioned above
1. Rendered to a person engaged in business conduced outside the Philippines
2. Non-resident person not engaged in business outside the Philippines
3. Service must be performed within the Philippines
4. Payment for services must be in acceptable foreign currency.
iii. Services rendered to a person or entity whose exemptions under special law or international agreement to which the Philippines is a signatory effectively
subject the supply of such services to zero percent rate
iv. Services engaged to persons engaged exclusively in international shipping or air transport operations including leases of property for use thereof. Provided
that these services shall be exclusively for international shipping or air transport operations
v. Services performed by subcontractors and or contractors in processing converting and manufacturing goods for an enterprise whose exports sales exceed 70
percent of the total annual production.
vi. Transport of passengers and cargo by domestic air or sea vessel from the Philippines to a foreign Country.
vii. Sale of power of fuel generated through renewable sources of energy. Provided that the sale of power or fuel is the one being subject to 0 percent and not
the sale of services related to the maintenance or operations of the plants generating said power.
v. Newly VAT registered Person

Transitional Input VAT
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During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit
mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a
stage when the person is yet unable to credit input VAT payments.
Who Can AVAIL? These can be availed by taxpayers who become VAT registered persons upon:
i. Exceeding the minimum turnover of P3 Million in any 12-month period,
ii. Who voluntarily register even if they do not reach the threshold, except for franchise grantees of radio and TV broadcasting whose threshold is P10,000,000)
The said taxpayers shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration on the following:
1. Goods purchased for resale in the present condition;
2. Raw materials - Materials purchased for further processing but which have not yet undergone processing;
3. Manufactured goods
4. Goods in process for sale; or
5. Goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person (Sec. 4. 110-1(a.), R.R 16-2005).
The allowed input tax shall be whichever is higher between: 1. 2% of the value of the taxpayer’s beginning inventory of goods, materials and supplies; or 2. The
actual value-added tax paid on such goods (Sec.111[A], NIRC). NOTE: Transitional input tax credit may only be availed once. It may be carried over to the next
taxing period, until fully utilized.
vi. Change or Cessation as a VAT Registered Person

The following change in or cessation of status of a VAT registered person are subject to VAT:
1. Change of business activity from VAT taxable status to VAT-exempt status.
2. Approval of a request for cancellation of registration due to reversion to exempt status.
3. Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of 3 consecutive years from the time of
registration by a person who voluntarily registered despite being exempt under Sec 109 (2) of the NIRC.
4. Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipt exceeding P1,919,500
but who failed to exceed this amount during the first 12 months of operations.
The following change in or cessation of status of a VAT registered person are NOT subject to Output Tax
1. Change of control in the corporation of as corporation by the acquisition of controlling interest of the corporation by another stockholder or group of
stockholders. The goods or properties used in the business or those comprising the stock-in-trade of the corporation will not be considered sold, bartered
or exchanged despite the change in the ownership interest. However, the exchange of real estate properties held for sale or for lease, for shares of stocks,
whether resulting to corporate control or not, is subject to VAT, subject to exceptions provided under Section 4.106-3 (Sale of real properties) hereof. On
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the other hand, if the transferee of the transferred real property by a real estate dealer is another real estate dealer, in an exchange where the transferor
gains control of the transferee-corporation, no output VAT is imposable on the said transfer (Sec. 8, R.R. 4-2007).
2. Change in the trade or corporate name of the business.
3. Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by
the surviving or new corporation.
vii. Retirement and Cessation Of Business

They are deemed transactions deemed sale subject to VAT Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-
in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor (Sec. 106 (B)
NIRC).
Transactions that are considered retirement or cessation of business.

1. Change of ownership of the business. There is change in the ownership of the business when a single proprietorship incorporates; or the proprietor of a
single proprietorship sells his entire business.
2. Dissolution of a partnership and creation of a new partnership which takes over the business
Before considering whether the transaction is “deemed sale”, it must first be determined whether the sale was in the ordinary course of trade or business or not.
Even if the transaction was “deemed sale” if it was not done in the ordinary course of trade or business or was not originally intended for sale in the ordinary course
of business, the transaction is not subject to VAT.
V. WHAT ARE INPUT TAX CREDIT?

1. Output Tax and Input Tax
Output Tax
It means the value-added tax due on the sale or lease of taxable goods or properties or services by
a. any person registered
b. required to register under NIRC
Output tax is what the taxpayer-seller passes on to the purchases. Note that what is output tax for the seller is input tax to the purchase.
SOURCES:
➢ Actual sale
➢ Transaction deemed sales
Input Tax
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It means the value-added tax due on or paid by a VAT-registered person on importation of goods or local purchase of goods, properties or services, including lease or use
of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptive input tax determined in accordance with Section 111
of the NIRC.
Input tax is what is passed on to the purchaser/taxpayer by the seller. If the purchaser is VAT-registered person, then he can use the input tax as credit to the output taxes
that he is liable to remit to the BIR.
It includes input taxes which can be

1. directly attributed to transactions subject to the VAT, plus
2. a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity
SOURCES:
1. Purchase or importation of goods:
1. For sale; or
2. For conversion into or intended to form part of a finished product for sale including packaging materials; or
3. For use as supplies in the course of business; or
4. For use as materials supplied in the sale of service; or
5. For use in trade or business for which deduction for depreciation or amortization is allowed under NIRC, except automobiles, aircraft and yachts. (Capital
Goods)
2. Purchases of real properties for which a VAT has actually been paid;
3. Purchases of services in which a VAT has actually been paid (Sec. 110, NIRC);
4. Transactions “deemed sales”;
5. Presumptive input tax;
6. Transitional input tax credits allowed under the transitory and other provisions
2. Presumptive Income Tax
It is an input tax credit allowed to persons or firms engaged in the: [SMM-RCN]
1. processing of:
a. sardines
b. mackerel
c. milk
2. manufacturing of:
a. refined sugar
b. cooking oil
c. packed noodle based instant meals
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The allowed input tax shall be equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to
their production (Sec. 111 [B], NIRC).
They are given this 4% presumptive input tax because the goods used in the said enumeration are VAT-exempt
3. Transitional Input Tax

Transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of
goods, materials, and supplies.
The allowed input tax shall be whichever is higher between:

a. 2% of the value of the taxpayer’s beginning inventory of goods, materials and supplies; or
b. The actual value-added tax paid on such goods.
4. Input Tax on Depreciable Goods

Where a VAT registered person purchases or imports capital goods, which are DEPRECIABLE ASSETS for income tax purposes in a CALENDAR MONTH exceeds 1 Million
regardless of the acquisition cost of each CAPITAL GOOD it shall be claimed as creditable Income Tax
How?
a. Estimated Useful Life of the Capital Good is 5 Years or more
➢ Claim for Income Tax: It shall be spread evenly over a period of 60 months starting from the calendar month when the capital is acquired.
➢ Distribution: The total input taxes on purchases will divided within the 60-month period.
b. Estimated Useful Life of the Capital Good is less than 5 Years.

➢ Claim for Income Tax: It will be spread in a monthly basis starting from the month of acquisition
➢ Distribution: Dividing the input tax by the actual number of months of the estimated useful life of the capital goods.
Where the aggregate amount does not exceed One Million Pesos the result is that the total input taxes will be allowable as credit against output tax in the month of
acquisition.
Capital goods or Properties- refers to goods or properties with an estimated useful life greater than one year and which are treated as depreciable assets used directly
or indirectly in the production or sale of taxable goods or services
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Input Tax Credit in Construction in Progress
➢ Is the cost of construction work which is not yet completed
➢ It is not considered as depreciated assets subject to such rules until the asset is placed in service
➢ Upon Completion it becomes a capitalized and depreciated subject to the rules stated above.
Then what will it be considered of if it is still a work in progress for purpose of input tax It will be considered as a purchase of service subject to input credit based on the
progressive billings. Same rules concerning the supply of labor
However, once you claim an input credit while the construction is in progress you cannot impose no additional input tax upon its completion and
reclassification. Amortization of the input VAT shall be only allowed until Dec 31, 2021 after which unutilized input VAT on Capital goods purchased or imported shall be
allowed to apply the same as scheduled until full realized.
VI. PROCEDURE OF TAX CREDIT OR REFUND AND REQUIREMENTS

Requirements to claim for VAT refund
a. The taxpayer is VAT-registered
b. The taxpayer is engaged in zero-rated or effectively zero-rated sales;
c. The input taxes are due or paid;
d. The input taxes are not transitional input taxes as it cannot be claimed as a refund or credit;
e. The input taxes have not been applied against output taxes during and in the succeeding quarters;
f. The input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
g. For zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for
in accordance with the rules and regulations of the BSP;
h. Where there are both zero-rated or effectively zero- rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these
sales, the input taxes shall be proportionately allocated on the basis of sales volume; and
i. The claim is filed within two years after the close of the taxable quarter when such sales were made. (Luzon Hydro Corporation v CIR G.R. No. 188260 November 13,2013,
penned by Justice Bersamin)
The taxpayer must prove the following for a tax refund to prosper:
➢ That it is a VAT-registered entity;
➢ It must substantiate the input VAT paid by purchase invoices or official receipts
SUMMARY OF PROCEDURE
A. Two-Year Prescriptive Period
1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi)
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2. The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. (San Roque)
3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008. Atlas states that the two-year prescriptive period for filing a claim
for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. (San Roque)
B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways:
i. file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or
ii. file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period.
2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.
3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and San Roque)
4. As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was
still in force. (San Roque)
5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force. (San Roque)
F. PERCENTAGE TAXES: CONCEPT AND NATURE

Concept TAX RATE
A percentage tax is a national tax measured by a certain percentage of the gross Any person whose sales or receipts are exempt from the payment of VAT and who
selling price or gross value in money of goods sold, bartered or imported; or of the is not a VAT-registered person shall pay a tax equivalent to 3% of his gross
gross receipts or earnings derived by any person engaged in the sale of services. quarterly sales or receipts. Note: Cooperatives shall be exempt from the 3% gross
[CIR v. Solidbank Corp., G.R. No. 148191 (2003)] Percentage tax is a business tax receipts tax.
imposed on persons, entities, or transactions specified under Sections 116 to 127
of the NIRC.
Nature
It is a privilege tax. Like VAT, it is imposed on the privilege to sell commodities or
services. [DE LEON]
TAX BASE: Gross Receipts

By its nature, a gross receipts tax applies to the entire receipts without any
deduction, exemption or exclusion, unless the law clearly provides otherwise.
[China Banking Corp. v. CA, G.R. No. 146749 (2003)]
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PERSONS OR TRANSACTIONS SUBJECT TO PERCENTAGE TAX 6. Banks and Non-bank Financial Intermediaries (Sec 121)
1. Persons Exempt from VAT (Sec 116, NIRC) 7. Other Non-bank Financial Intermediaries (Sec 122)
2. Domestic Carriers; Keepers of Garages (Sec 117) 8. Life insurance Premiums (Sec 123)
3. International Carriers (Sec. 118) 9. Agents of Foreign Insurance Companies (Sec 124)
4. Franchises (Sec 119) 10. Proprietors, Lessee or Operator of Amusement Places (Sec. 125)
a. Radio and/or television broadcasting companies with annual gross 11. Winnings (Sec 126)
receipts not exceeding P10M 12. Sale, Barter or Exchange of Shares of Stock Listed and Traded through the
b. Gas and water utilities Local Stock Exchange or through Initial Public Offerings.
5. Overseas Dispatch, Message or Conversation Originating in the Philippines
(Sec 120)
G. EXCISE TAX: CONCEPT AND NATURE

Concept Nature
Excise taxes are taxes imposed on certain specified goods manufactured or ➢ Excise taxes, whether under the specific or the ad valorem tax system, is
produced in the Philippines for domestic sale or consumption or for any other basically an indirect tax imposed on certain types or classes of goods,
disposition and to things imported as well as services performed in the Philippines. whether locally manufactured or imported. While the tax is directly levied
[Sec. 129, par. 1, NIRC] upon the manufacturer/importer upon removal of the taxable goods from
its place of production or from the customs custody, the tax, in reality, is
Kinds of Excise Taxes [Sec. 129, par. 2, NIRC] actually passed on to the end consumer as part of the transfer value or
1. Specific tax – tax due is computed based on: selling price of the goods, sold, bartered or exchanged.
a. Weight ➢ In the refund of indirect taxes, the proper party to question or seek a refund
b. volume capacity of the tax is the statutory taxpayer, the person on whom the tax is imposed
c. any other physical unit of measurement. by law and who paid the same even when he shifts the burden thereof to
2. Ad valorem tax – tax due is computed based on: another.
a. selling price ➢ The tax liability remains with the manufacturer/producer/importer that is
b. other specified value of the good or service performed primarily, directly, and legally liable for the payment of excise taxes. [Ibid.]
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Purpose SPECIFIC GOODS AND SERVICES THAT ARE SUBJECT TO EXCISE TAX:
1. To curtail consumption of certain commodities, the excessive or 1. Distilled Spirits (Sec 141)
indiscriminate use of which is considered harmful to the individual or 2. Wines (Sec 142)
community (e.g., alcoholic beverages and tobacco products); 3. Fermented Liquors (Sec 143)
2. To protect a domestic industry, the products of which face competition from 4. Tobacco Products (Sec 144)
similar imported articles; 5. Cigars and Cigarettes (Sec 145)
3. To distribute the tax burden in proportion to the benefit derived from a 6. Manufactured Oils and Other Fuels (Sec. 148)
particular government service (e.g., excise taxes on gasoline, lubricating 7. Automobiles (Sec 149)
oils and denatured alcohol for motive power); and 8. Non-essential Goods (Sec. 150)
4. To raise revenue [DE LEON] 9. Non-essential Services (Sec 150-A)
10. Sweetened Beverages (Sec 150-B)
11. Mineral Products (Sec 151)
H. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE

Concept Person liable
Documentary stamp tax (DST) is a tax on documents, instruments, loan It is paid by the person making, signing, issuing, accepting or transferring the
agreements and papers evidencing the acceptance assignment, sale or transfer of documents. However, when one party to the taxable document enjoys the
an obligation, right, or property incident thereto. [Sec. 173, NIRC] exemption from the tax, the other party thereto who is not exempt shall be the
one directly liable for the tax. [TABAG, p. 429 (2019)]
Nature
➢ A DST is actually an excise tax because it is imposed on the transaction Purpose
rather than on the document. It is levied on the exercise by persons of The purpose of the law in imposing stamp taxes is to raise revenue and not to
certain privileges conferred by law for the creation, revision, or termination invalidate contracts or inflict penalties, and courts should
of specific legal relationships through the execution of specific instruments. give it a liberal construction. [33 C.J.S. 315- 316]
Hence, in imposing the DST, the Court considers not only the document but
also the nature and character of the transaction is considered. [Phil. Banking Filing and Payment
Corp. v. CIR, G.R. No. 170574 (2009)] The tax return shall be filed and the tax due shall be paid at the same time within
➢ Being an excise tax, it is paid only once. Since DST is not a tax on income, 10 days after the close of the month when the taxable document was signed,
an exemption from income tax does not include DST. [BIR Ruling No. DA- issued, accepted or transferred. [Sec. 200(B), NIRC]
106-08, August 4, 2008]
➢ The tax base is the document itself, not the transaction or the property
described in the document. Thus, the validity or invalidity of the transaction,
or the extent of the right to the property is not affected by payment or
nonpayment of the DST. [VITUG and ACOSTA]
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Effect of Failure to Pay DST
a. Failure to stamp a taxable document shall not invalidate the same.
However, it shall not be recorded or admitted or used as evidence in
any court until the requisite stamp is affixed.
b. No notary or other officer authorized to administer oaths shall add his
jurat or acknowledgment to the document unless the proper
documentary stamp is affixed thereto or cancelled. [Sec. 201, NIRC
SPECIFIC DOCUMENTS THAT ARE SUBJECT DOCUMENTARY STAMP TAX:

1. Documents, Loan Agreements, Instruments and Papers (Sec 173) 13. Fidelity Bonds and Other Insurance Policies (Sec 185)
2. Original Issue of Shares of Stock (Sec 174) 14. Policies of Annuities and Pre-Need Plans (Sec 186)
3. Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of 15. Indemnity Bonds (Sec 187)
Due-Bills Certificates of Obligations, or Shares of Certificates of Stock (Sec 16. Certificates (Sec 188)
175) 17. Warehouse Receipts (Sec 189)
4. Bonds, Debentures, Certificates of Stock or Indebtedness Issued in Foreign 18. Jai-alai, Horse Race Tickets, Lotto or Other Authorized Number Games (Sec
Countries (Sec 176). 190)
5. Certificates of Profits or Interest in Property or Accumulations (Sec 177) 19. Bills of Lading or Receipts (Sec 191)
6. Bank Checks, Drafts, Certificates of Deposit not Bearing Interest and Other 20. Proxies (Sec 192)
Instruments (Sec 178) 21. Power of Attorney (Sec 193)
7. All Debt Instruments (Sec 179) 22. Leases and Other Hiring Agreements (Sec 194)
8. All Bills of Exchange or Drafts (Sec 180) 23. Mortgages, Pledges and Deeds of Trusts (Sec 195)
9. Acceptance of Bills of Exchange and Others (Sec 181) 24. Deeds of Sale, Conveyances and Donations of Real Property (Sec 196)
10. Foreign Bills of Exchange and Letters of Credit (Sec 182) 25. Charter Parties and Similar Instruments (Sec 197)
11. Life Insurance Policies (Sec 183) 26. Assignments and Renewals of Certain Instruments (Sec 198).
12. Policies of Insurance Upon Property (Sec 184)
I. TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE

1. Assessment of internal revenue taxes
The assessment process starts with the self-assessment by the taxpayer of his tax liability, the filing to the tax return, and the payment of the entire tax due shown in his tax
return in accordance with the methods and within the dates prescribed in the law and regulations. Upon discovery of the BIR that the self-assessment was either deficient or
when no return was made by the taxpayer, the BIR issues deficiency assessment
a. Procedural due process in tax assessments
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1. Letter of authority and tax audit
Letter of Authority
➢ It is an official document that authorizes a revenue officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order
to determine the taxpayer’s correct internal revenue tax liabilities.
➢ There must be a grant of authority before any revenue officer can conduct an examination or assessment and
➢ The revenue officer must not go beyond authority. Otherwise, the assessment or examination is a nullity.
➢ A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing LAs covering audit of “unverified prior years”
is therefore prohibited.
➢ It must be served to the taxpayer within 30 days from its date of issuance; otherwise, it shall become null and void. The taxpayer shall then have the
right to refuse the service of this LA, unless the LA is revalidated.
➢ Revalidated through the issuance of a new LA. It can be revalidated:
o only once, if issued by the Regional Director;
o twice, if issued by the CIR.
➢ The suspended LA(s) must be attached to the new issued LA
Tax Audit
This includes the examination of books of accounts and other accounting records of the taxpayers by revenue officers to determine the correct tax liability.
Period of Audit: Only once per taxable year
XPN
i. When the CIR determines that Fraud, irregularities, or mistakes were committed by the taxpayer
ii. When the taxpayer himself requests for the Re-investigation or re-examination of his books of accounts and it was granted by the commissioner
iii. When there is a need to verify the taxpayer’s Compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum
Order issued by the Commissioner
iv. When the taxpayer’s Capital gains tax liabilities must be verified
v. When the Commissioner chooses to exercise his power to obtain information relative to the examination of other taxpayer
2. Informal conference
The Revenue Officer who audited the taxpayer’s records shall state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable
for deficiency taxes. If the taxpayer is not amenable, based on the said Officer’s submitted report of investigation, the taxpayer shall be informed, in writing, of
the discrepancies in the taxpayer’s payment of his internal revenue taxes for the purpose of “informal Conference,” in order to afford the taxpayer with an
opportunity to present his side of the case.
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The Informal Conference shall in no case extend beyond 30 days from receipt of the notice for informal conference. If it is found that the taxpayer is still liable
for deficiency tax or taxes after presenting his side, and the taxpayer is not amenable, the case shall be endorsed within 7 days from the conclusion of the
Informal Conference for the issuance of a deficiency tax assessment.
3. Preliminary assessment notice

A PAN shall be issued if it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax. It shall show in detail the facts and the
law on which the proposed assessment is based. The sending of PAN to taxpayer to inform him of the assessment made is but part of the “due process requirement
in the issuance of a deficiency tax assessment,” the absence of which renders nugatory any assessment made by the tax authorities. Therefore, for its failure to
send the PAN stating the facts and the law on which the assessment was made as required by the law, the assessment made by CIR is void
Requirements of a valid PAN

i. In writing; and
ii. Should inform the taxpayer of the law and the facts on which the assessment is made
Exception:
1. Mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or
2. Excise tax due on excisable articles has not been paid; or
3. Discrepancy has been between the tax withheld and the amount actually remitted
4. When an article locally purchased or imported by an Exempt person, has been sold, traded or transferred to non-exempt persons
5. Carry Over or automatic application of excess of CWT against estimated tax liabilities for the taxable quarter or quarters of the succeeding year
Period for the taxpayer to respond to PAN via “Reply”

The taxpayer has 15 days from receipt of PAN to file a written reply contesting the proposed assessment.
Effect of taxpayer’s failure to respond to PAN

The taxpayer shall be considered in default, in which case, a FLD/FAN shall be issued calling for payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties
4. Formal letter of demand and final assessment notice

An FLD/FAN is a declaration of deficiency taxes issued to a taxpayer who:
1. fails to respond to a PAN within the prescribed period of time.
2. whose reply to the PAN was found to be without merit
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The FLD/FAN calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based; otherwise, the assessment shall be void.
The FAN and FLD should always go together. The law requires that the factual and/or legal bases of the assessment must be stated, and this requirement is not
satisfied by the issuance of FAN alone, a letter of demand fills up the void and explains to the taxpayer how the deficiency assessment was arrived at, including
the reasons and legal bases for the assessment. It shall be issued by the Commissioner or his duly authorized representative.
5. Disputed assessment
The taxpayer may protest the assessment within 30 days from receipt. Otherwise, the assessment. becomes final, executory, demandable and not appealable to
the CTA. The protest comes in the form of either a written request for reconsideration or reinvestigation. After the request is filed and received by the BIR, the
assessment becomes a disputed assessment
6. Administrative decision on a disputed assessment
i. Direct grant or denial of protest
Final Decision on a Disputed Assessment (FDDA) The decision of the Commissioner or his duly authorized representative shall state:
a. the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, and
b. That the same is his final decision.
ii. Indirect denial of protest

a. Formal and final letter of demand from the BIR to the taxpayer
b. Civil collection can also be considered as denial of protest of assessment (BIR v. Union Shipping Corp., G.R. No. 66160, May 21, 1990)
c. Preliminary collection letter may serve as assessment notice (United International Pictures v. CIR, G.R. No. 110318, August 28, 1996).
d. Filing of criminal action against the taxpayer
e. Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is outright denial of the request for reconsideration.
iii. Inaction of the CIR or his duly authorized representative

a. On Reconsideration-lapse of 180 days of the period for the CIR to make a decision.
b. On Reinvestigation-lapse of 180 days of the period for the CIR to make a decision on whose period starts from the date the submission of the
taxpayer of necessary documents to prove her/his claim and within a period of 60 days starting from the date the protest were made.
FDDA that does not inform the taxpayer in writing of the facts and law on which it is based renders the decision void. The written notice requirement
for both the FLD and the FAN is in observance of due process — to afford the taxpayer adequate opportunity to file a protest on the assessment and
thereafter file an appeal in case of an adverse decision.
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However, a void FDDA does not ipso facto render the assessment void. The assessment remains valid notwithstanding the nullity of the FDDA because
the assessment itself differs from a decision on the disputed assessment. An FDDA that does not inform the taxpayer in writing of the facts and law on
which it is based renders the decision void. Therefore, it is as if there was no decision rendered by the CIR. It is tantamount to a denial by inaction by
the CIR, which may still be appealed before the CTA and the assessment evaluated on the basis of the available evidence and documents
7. Appeal from an administrative decision on disputed assessment
Remedies of taxpayer in case of denial or inaction
Authorized representative
1. If the protest is denied, in whole or in part, the taxpayer may either:
a. appeal to the CTA within 30 days from date of receipt of the said decision; or
b. elevate his protest through request for reconsideration to the CIR within 30 days from date of receipt of the said decision.
No request for reinvestigation shall be allowed in administrative appeal and only issues raised in the decision of the CIR’s duly authorized representative
shall be entertained by the CIR.
2. If the protest is not acted upon, the taxpayer may either:

a. appeal to the CTA within 30 days after the expiration of the 180-day period; or
b. await the final decision of the CI R’s duly authorized representative on the disputed assessment.
NOTE: Items 1&2 are mutually exclusive. The exercise of one option bars the other.
By the CIR
1. If the protest or administrative appeal, as the case may be, is denied, in whole or in part, the taxpayer may appeal to the CTA within 30 days from date
of receipt of the said decision. Otherwise, the assessment shall become final, executory and demandable.
A motion for reconsideration of the CIR’s denial of the protest or administrative appeal, as the case may be, shall not toll the 30-day period to appeal to
the CTA.
2. If the protest or administrative appeal is not acted upon, the taxpayer may either:
a. appeal to the CTA within 30 days from after the expiration of the 180-day period; or
b. await the final decision of the CIR on the disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy
of such decision.
NOTE: Items 1&2 are mutually exclusive. The exercise of one option bars the other.
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b. Requisites of a valid assessment

1. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment notice shall be rendered null and
void.
2. assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period.
3. Assessment must be served on and received by the taxpayer.
c. Tax delinquency and tax deficiency

Tax Delinquency
When:
1. Self-assessed tax per return filed by the taxpayer on the prescribed date was not paid at all or only partially paid; or
2. Deficiency tax assessed by the BIR becomes final and executory and the taxpayer has not paid it within the period given in the notice of assessment.
Collection
Can immediately be collected through:
1. administratively action - the issuance of a warrant of distraint and levy
2. judicial
Civil Action
The filing of a civil action for the collection of the delinquent tax in the ordinary court is a proper remedy.
Penalties
Subject to administrative penalties such as 25% surcharge, interest, and compromise penalty.
Tax Deficiency
When
a. The amount by which the tax imposed by law as determined by the CIR or his authorized representative exceeds the amount of tax in the taxpayer’s return; or
b. If there is no amount of tax in his return, then the amount by which the tax as determined by the CIR or his authorized representative exceeds the amounts
previously assessed or collected without assessment as deficiency.
Collection
Cannot be collected immediately as the taxpayer may file the protest assessment & there should be a denial of such protest by the BIR
Civil Action
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The filing of a civil action at the ordinary court for collection during the pendency of protest may be the subject of a motion to dismiss. In addition to a motion to dismiss,
the taxpayer must file a petition for review with the CTA to toll the running of the prescriptive period.
Penalties
Not subject to the 25% surcharge, although subject to interest and compromise penalty.
d. Prescriptive period for assessment

i. General rule
Within 3 years after the last day prescribed by law for the filing of the return or from the date of actual filing, whichever comes later; provided, that a return filed
before the last day prescribed by law for filing shall be considered as filed on such last day.
Exception: Within 10 years after the discovery of the falsity, fraud or omission in case of: (FFF)
i. False return
ii. Fraudulent return with intent to evade tax;
iii. Failure to file a return.
ii. Distinguish: false returns, fraudulent returns, and non-filing of returns

False Return
➢ Contains wrong information due to mistake, carelessness or ignorance
➢ Deviation may or may not be intentional
➢ Not subject to 50% surcharge, except if done willfully
Fraudulent Return
➢ Made with intent to evade taxes due
➢ Intentional or deceitful entry with intent
➢ Subject to 50% surcharge
Non-Filing of Returns
➢ Omission to file a return within the time prescribed by law Omission may or may not be intentional
➢ Not subject to 50% surcharge, except if omission is willful
iii. Suspension of statute of limitations
a) When the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for 60 days thereafter;
b) When the taxpayer requests for a reinvestigation which is granted by the CIR;
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c) When the taxpayer cannot be located in the address given by him in the return filed, BUT if the taxpayer informs the CIR of any change in address, the
running of the statute of limitations shall not be suspended;
d) When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion,
and no property is located; and
e) When the taxpayer is out of the Philippines.
Valid Waiver of Statute of Limitations

a) It must be in writing, but not necessarily in the form prescribed by Revenue Memorandum Order for as long as the following are complied with.
1. It is executed before the expiration of the prescriptive period. The date of execution shall be indicated.
2. It is signed by the taxpayer himself or his authorized representative. In a corporation, it must be signed by its responsible officials
3. The expiry date of the period agreed upon to assess/collect the tax after the regular 3-year period of prescription should be indicated.
b) Except for waiver of collection of taxes which shall indicate the particular taxes assessed, the waiver need not specify the particular taxes to be assessed nor
the amount thereof, and it may simply state “all internal revenue taxes”.
c) It may or may not be notarized.
d) CIR or designated officials or the concerned revenue district officer or group supervisor must indicate acceptance by signing the same before the expiration
of the period to assess or collect taxes, or before the lapse of the period agreed upon in a prior agreement.
e) The taxpayer has the duty to retain a copy of the accepted waiver.
Two (2) material dates required on the waiver:

1. The date of execution of the waiver by the taxpayer or its authorized representative;
2. The expiry date of the period the taxpayer waives the statute of limitations
Effect of noncompliance with the requisites

When a waiver does not comply with the requisites for its validity, it is invalid and ineffective to extend the prescriptive period to assess taxes.
Exception: When both the BIR and the taxpayer are in pari delicto or “in equal fault”, it would be more equitable if the BIR’s lapses were allowed to pass and
consequently uphold the validity of the waivers in order to support the principle that taxes are the lifeblood of the governm ent. [CIR v. Next Mobile, Inc., G.R. No.
212825 (2015)].
2. Taxpayer's remedies
a. Protesting an assessment
Administrative protest is the act by the taxpayer of questioning the validity of the imposition of the corresponding delinquency increments for internal revenue taxes as
shown in the notice of assessment and letter of demand.
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i. Period to file protest
The taxpayer or its authorized representative or tax agent may protest administratively against the aforesaid FLD/FAN within thirty (30) days from date of receipt
thereof
ii. Kinds of protest - request for reconsideration or reinvestigation

➢ Reconsideration
Refers to a plea of re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of
fact or of law or both.
➢ Reinvestigation
Refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the
reinvestigation. It may also involve a question of fact or of law or both.
iii. Submission of supporting documents

For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents in support of his protest within sixty (60) days from date of filing of
his letter of protest. Otherwise, the assessment shall become final.
“Relevant supporting documents”

➢ These refer to those documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer.
➢ These are documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted,
otherwise, the taxpayer would always be at the mercy of the BIR which may require production of such documents which taxpayer could not produce
(Standard Chartered Bank v. CIR, CTA case No. 5696, August 16, 2001).
➢ The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted.
Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit (CIR vs. First Express
Pawnshop Co., Inc., G.R. Nos. 172045-46, June 16, 2009, 607).
iv. Effect of failure to file protest

If the taxpayer fails to file a valid protest against the FLD/FAN within thirty (30) days from date of receipt thereof, the assessment shall become final, executory
and demandable. No request for reconsideration or reinvestigation shall be granted on tax assessments that have already become final, executory and demandable
The failure of the taxpayer who requested for a reinvestigation to submit all relevant supporting documents within the 60-day period shall render the FLD/FAN
“final” by operation of law. He/it shall be barred from disputing the correctness of the FLD/FAN by the introduction of newly discovered or additional evidence
because he/it is deemed to have lost his/its chance to present evidence. The BIR shall then deny the request for reinvestigation through the issuance of an FDDA.
v. Action of the Commissioner on the protest filed
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i. Period to act upon or decide on protest filed
By the duly authorized representative
1. Request for investigation – within 180 days from submission of relevant documents
2. Request for reconsideration - within 180 days from filing of protest
By CIR
1. In case of protest – within 180 days from filing of protest
2. In case of administrative appeal - within 180 days from the filing of administrative appeal
Administrative appeal – request for reconsideration filed with the CIR to elevate the denial made by his duly authorized representative
ii. Remedies of the taxpayer in case of denial or inaction of the Commissioner

a. file a petition for review with the CTA within 30 days after the expiration of the 180-day period; or
b. await the final decision of the Commissioner or his duly authorized representative on the disputed assessment and appeal such final decision to the
CTA within 30 days after the receipt of a copy of such decision.
These options are mutually exclusive and the resort to one bar the application of the other.
iii.Effect of failure to appeal

➢ The decision or assessment becomes final and executory. The assessment is considered correct which may be enforced by summary or judicial
remedies. The assessment which has become final and executory cannot be superseded by a new assessment.
➢ In an action for the collection of the tax by the government, the taxpayer is barred from re-opening the question already decided.
➢ In a proceeding for collection of tax by judicial action, the taxpayer’s defenses are similar to those of the defendant in a case for the enforcement
of a judgment by judicial action.
b. Recovery of tax erroneously or illegally collected
1. Grounds, requisites, and periods for filing a claim for refund or issuance of a tax credit certificate
i. Tax is erroneously or illegally assessed or collected;
ii. Penalty is imposed without authority; and
iii. Sum collected is excessive or in any manner wrongfully collected.
2. Proper party to file claim for refund or tax credit

GR: The “taxpayer” is the person entitled to claim a tax refund. He is the “party adversely affected” who is given the right to appeal the decision or ruling of the
Commissioner.
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XPN:
1. Theater goers can claim the illegally exacted taxes not the theater owners
2. Where the payer is the withholding agent. The withholding agent
3. Withholding agent may file a claim for refund for taxes which was withheld and paid on behalf of a non-resident foreign corporation
4. In case the taxpayer does not file a claim for refund, the withholding agent has the right to file the claim, even when it is unrelated to, or is not a wholly
owned subsidiary of, the principal taxpayer
5. Where the donor’s tax was assumed by the done. Donee is the proper party to claim the refund of the donor’s tax
3. Distinguish from input value-added tax refund

Distinction Between Refund of Unutilized Input VAT (Sec. 112, NIRC) and Refund of Erroneously or Illegally Collected Tax (Sec. 229, NIRC)
Unutilized Input VAT

➢ Refers to a refund or tax credit of excess or unutilized input VAT attributable to zero-rated sales
➢ The 2-year period shall be reckoned from the close of the taxable quarter when the sales were made.
➢ Only the administrative claim is required to be filed within the 2-year period.
➢ Sec. 112(C) of the NIRC provides a 90- day waiting period for the CIR to decide on the application for tax refund or credit. Compliance with the 90-day
waiting period is mandatory and jurisdictional.
➢ Thus, the taxpayer may elevate his claim to the CTA (a) within 30 days from the full or partial denial of the claim, or (b) within 30 days after the lapse of
the 90-day waiting period, in case of inaction by the CIR.
Refund of Erroneously or Illegally Collected Tax

➢ Refers to a refund or credit of
a) tax erroneously or illegally assessed or collected,
b) penalty collected without authority,
c) any sum excessively or wrongfully collected
➢ The 2-year period shall be reckoned from the date of payment of the tax or penalty. Both the administrative claim with the CIR and the appeal to the CTA
must be made within the 2-year period.
➢ If the 2-year period is about to lapse and the CIR has not acted on the claim, the taxpayer may already appeal to the CTA without waiting for the decision
of the CIR.
1. Illegally Collected Tax - There is a violation of certain provisions of tax law or statute. The tax was paid by him under duress. The tax was collected in
patent disregard of the law.
2. Erroneously Collected Tax - No violation of the law but there is a mistake in collection. The payment was made under a mistake of fact. The collection
was made based on a misapplication of the law.
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c. Power of Commissioner of Internal Revenue to compromise
The CIR has the authority to compromise or abate any tax liability.
Exception: The power to compromise may be delegated to:
1. the Regional Evaluation Board (REB), in case of:
a. assessments issued by regional offices involving basic taxes of P500,000 or less;
b. minor criminal violations discovered by regional and district officials [Sec. 7(C), NIRC]
2. the National Evaluation Board (NEB), when:
a. the basic tax exceeds P1,000,000,
b. the settlement offered is less than the prescribed minimum rates [Sec. 204(A), NIRC]
Grounds for a compromise.

The CIR may compromise the payment of any internal revenue tax in the following cases:
1. Doubtful validity of the assessment – when there exists reasonable doubt as to the validity of the claim against the taxpayer (e.g., one arising from a jeopardy
assessment, arbitrary assessment).
2. Financial incapacity – when the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. [Sec. 204(A), NIRC; Sec. 3, RR 30-2002]
Limits of the CIR’s power to compromise

➢ Financial incapacity-10% of the basic assessed tax
➢ Other cases-40% of the basic assessed tax
Payment of compromise upon filing of application

The compromise offer shall be paid by the taxpayer upon filing of the application for compromise settlement. No application for compromise settlement shall be processed
without the full settlement of the offered amount. In case of disapproval of the application for compromise settlement, the amount paid upon filing of the aforesaid
application shall be deducted from the total outstanding tax liabilities.
Requisites of a tax compromise

➢ The taxpayer must have a tax liability;
➢ There must be an offer by the taxpayer or the Commissioner of an amount to be paid by the taxpayer
➢ There must be an acceptance by the Commissioner or taxpayer as the case may be, of the offer in settlement of the original claim.
Note: A compromise is consensual in nature. Hence, it may not be imposed on the taxpayer without his consent. The BIR may only suggest settlement of the taxpayer’s
liability through a compromise.
Cases which may be compromised:

a) Delinquent accounts
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b) Cases under administrative protest after issuance of the FAN to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal
Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office
c) Civil tax cases being disputed before the courts
d) Collection cases filed in courts
e) Criminal violations, except
a. those already filed in court
b. those involving criminal tax fraud
Cases which cannot be compromised:

1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold
2. Criminal tax fraud cases confirmed as such by the CIR or his duly authorized representative
3. Criminal violations already filed in court
4. Delinquent accounts with duly approved schedule of installment payments
5. Cases where final reports of reinvestigation or reconsideration have been issued resulting in reduction in the original assessment and the taxpayer is agreeable
to such decision by signing the required agreement form for the purpose.
6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment
7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.
d. Non-retroactivity of rulings
Rulings do not have retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer.
Exceptions:
1. Taxpayer’s deliberate misstatement or omission of facts
2. BIR’s gathered facts is materially different from the facts from which the ruling was based on
3. Taxpayer acted in bad faith
The rule on non-retroactivity of rulings may be applied only if the parties in the ruling involve the taxpayer himself/itself. The taxpayer cannot invoke the rulings granted
in favor of the other taxpayers
3. Government remedies for collection of delinquent taxes

a. Requisites
1. The government can initiate collection administratively or judicially once the assessment becomes final and executory.
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2. Collection must be made within 5 years following the assessment of the tax.
The government has two ways to collect:

a. Summary or administrative remedies
1. Distraint on personal property
2. Levy on real property
b. Judicial remedies (civil or criminal)
The remedies of distraint and levy shall not be availed of where the amount of tax involved is not more than P100.
b. Prescriptive periods; suspension of running of statute of limitations

The taxes due must be collected within 5 years following the assessment of the tax.
Exception:
1. In case of:
i. false or fraudulent return with intent to evade tax or of
ii. failure to file a return, a proceeding in court for the collection of such tax without assessment may be made within 10 years from discovery of falsity, fraud
or omission.
2. When a waiver of the statute of limitation is executed within the 5-year period, collection may be made within the period agreed upon. [Sec. 222(d), NIRC]
Court proceeding for collection of tax

No proceeding in court without assessment for the collection of taxes may be made after the 3-year period for making an assessment.
Exception:
A proceeding in court for the collection of such tax may be filed without assessment in the case of
(i) false or fraudulent return with intent to evade tax
(ii) failure to file a return
Waiver of prescriptive period

If tax was assessed within the period agreed upon by the CIR and the taxpayer, such tax may be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the 5-yr period.
Suspension of Running of Statute of Limitations
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1. When taxpayer cannot be Located in the address given by him in the return. XPN: He informs the CIR of any change in his address thru a written notice to the
BIR;
2. When the taxpayer is Out of the Philippines;
3. When the Warrant of distraint and levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion
and no property is located; Only period to collect is suspended.
4. Where the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court for 60 days thereafter, such as where there is
a Pending petition for review in the CTA from the decision on the protested assessment.
5. Where CIR and the taxpayer Agreed in writing for the extension of the assessment, the tax may be assessed within the period so agreed upon
6. When the taxpayer Requests for reinvestigation which is granted by the Commissioner; Only the period to collect is suspended because assessment has been
done at this point. The request must be granted by the CIR. A request for reconsideration alone does not suspend the period to collect.
7. When there is an Answer filed by the BIR to the petition for review in the where the court justified this by saying that in the answer filed by the BIR, it prayed
for the collection of taxes.
c. Administrative remedies
1. Tax lien
➢ It is a legal claim or charge on property, personal or real, established by law as a sort of security for the payment of tax obligations Tax in itself is not a
lien even upon the property against which it is assessed, unless expressly made so by statute.
➢ When a taxpayer neglects or refuses to pay his tax liability after demand, the amount shall be a lien in favor of the Governm ent from the time when the
assessment was made by the CIR until paid, with interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property
belonging to the taxpayer. Provided, that this lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien shall
be filed by the CIR in the Register of Deeds of the province or city where the property is situated or located (Sec. 219, NIRC).
➢ The claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax claim must be given
preference over any other claim of any other creditor, in respect of any and all properties of the insolvent
2. Distraint and levy

Distraint
It is a summary remedy whereby the collection of tax is enforced on the goods, chattels or effects of the taxpayer (including other personal property of whatever
character as well as stocks and other securities, debts, credits, bank accounts and interest in or rights to personal property.) The property may be offered in a
public sale, if taxes are not voluntarily paid.
Requisites for the exercise of distraint and levy (DeF –DeP)

1. Taxpayer is delinquent in payment of tax;
2. There must be subsequent demand to pay;
3. Taxpayer failed to pay delinquent tax on time; and
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4. Period within which to assess and collect the tax due has not yet prescribed
Levy
It is the seizure of real property and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer.
When levy on real property may be made:

➢ It may be made before, simultaneously or after the distraint of personal property of the same taxpayer.
➢ It may be affected by serving upon the taxpayer a written notice of levy in the form of a duly authenticated certificate prepared by Revenue District Officer
containing:
1. Description of the property upon which levy is made;
2. Name of the taxpayer;
3. Amount of tax and penalty due.
3. Forfeiture of real property

BIR is allowed to forfeit the property subject to levy only if:
1. There is no bidder.
2. The bid amount is insufficient to pay the taxes, penalties and costs (Sec 215, NIRC).
Forfeiture
It is the divestiture of property without compensation, in consequence of a default or offense. It transfers the title to the specific thing from the owner to the
government. Also, there would no longer be any further levy for such would be for the total satisfaction of the tax due.
NOTE: The erring taxpayer may still be criminally prosecuted even if the property has already been forfeited
Redemption of forfeited property

The Register of Deeds shall transfer the title of forfeited property to the Government without necessity of a court order. Within 1 year from the date of forfeiture,
the taxpayer, or any one for him may redeem said property by paying to the CIR or Revenue Collection Officer the full amount of the taxes and penalties, together
with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute
4. Suspension of business operation

The CIR or his authorized representative is empowered to suspend the business operations and temporarily close the business establishment of any person for
any of the following violations:
i. 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; or
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c. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipts for the taxable quarter.
ii. Failure of any person to Register as required under Sec. 236: The temporary closure of the establishment shall be for the duration of not less than 5 days
and shall be lifted only upon compliance with whatever requirements prescribed by the CIR in the closure order (Sec. 115 NIRC).
5. Judicial remedies
Civil Action Two ways by which civil liability is enforced:
1. By filing a civil case for the collection of sum of money with the proper regular court.
2. By filing an answer to the petition for review filed by the taxpayer with the CTA
Criminal Action Any person convicted of a crime under the NIRC shall:
1. be liable for the payment of the tax,
2. be subject to the penalties imposed under the NIRC.
d. No injunction rule; exceptions

No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the NIRC. [Sec. 218,
NIRC]
Exception
When in the opinion of the CTA, the collection of tax may jeopardize the interest of the government and/or the taxpayer, the CTA may suspend said collection and
require the taxpayer to deposit the amount claimed or file a surety bond.
Reason
The Lifeblood doctrine requires that the collection of taxes cannot be enjoined, without taxation, a government can neither exist nor endure.
4. Civil penalties
a. Delinquency interest and deficiency interest
Deficiency Interest – Interest at the rate of 12% per annum on any deficiency tax due, which interest shall be assessed and collected from the date prescribed for its
payment until:
1. full payment thereof;
2. upon issuance of a notice and demand by the CIR or his authorized representative, whichever comes first
Delinquency interest – Interest at the rate of 12% per annum on the unpaid amount in case of failure to pay:
a. the amount of the tax due on any return required to be filed;
b. the amount of the tax due for which no return is required;
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c. a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the CIR or his authorized representative until
the amount is fully paid, which interest shall form part of the tax.
b. Surcharge
This is a civil penalty imposed in addition to the tax required to be paid [Sec. 248, NIRC] Rates of Surcharge (25% or 50%)
1. 25% of the amount due in the following cases:
i. Failure to file any return and pay the tax due on the prescribed date; or
ii. Filing a return with an internal revenue officer other than those with whom the return is required to be filed, unless the CIR authorizes otherwise; or
iii. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or d. Failure to pay the full or part of the amount
of tax due on or before the date prescribed for its payment [Sec. 248(A), NIRC]
2. 50% of the tax or of the deficiency tax in case any payment has been made, in the following cases:
i. Willful neglect to file the return within the prescribed period; or
ii. A false or fraudulent return is willfully made [Sec. 248(B), NIRC]
Prima facie evidence of a false or fraudulent return

1. Substantial under declaration of sales, receipts or income – failure to report sales, receipts or income in an amount exceeding 30% of that declared per return
2. Substantial overstatement of deductions – a claim of deductions in an amount exceeding 30% of actual deductions [Sec. 248(B), NIRC]
c. Compromise penalty
A compromise penalty is an amount of money paid by a taxpayer to compromise a tax violation that he has committed, instead of the BIR instituting a criminal action
against the taxpayer. A compromise is consensual in character, hence, may not be imposed on the taxpayer without his consent. All criminal violations may be
compromised except:
a. those already filed in court.
b. those involving fraud
d. Fraud penalty
Fifty percent (50%) of the tax or of the deficiency tax xxx Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per
return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial under-declaration of sales, receipts
or income or for overstatement of deductions, as mentioned herein.
TITLE III. LOCAL TAXATION
LOCAL GOVERNMENT TAXATION
1. Fundamental principles
a. Taxation shall be Uniform in each LGU;
b. Taxes, fees, charges and other impositions shall
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1. be equitable and based as much as possible on the taxpayer's ability to pay;
2. be levied and collected only for public purposes;
3. shall not be unjust, excessive, oppressive, or confiscatory;
c. The collection of local taxes, fees, charges and other impositions shall in no case be Let to any private person;
d. The revenues collected pursuant to the provisions of the LGC shall Inure solely to the benefit of, and be subject to the disp osition by, the LGU levying the tax, fee, charge
or other imposition unless otherwise specifically provided herein; and
e. Each LGU shall, as far as practicable, evolve a Progressive system of taxation.
2. Nature and source of taxing power

a. Grant of local taxing power under the Local Government Code
Sec. 129 of the Local Government Code (LGC) - “Each LGU shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges consistent with
the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the LGUs.
b. Authority to prescribe penalties for tax violations

1. The Sanggunian of an LGU is authorized to prescribe fines or other penalties for violation of tax ordinances.
a) In no case shall such fines be less than P1,000 nor more than P5,000.
b) nor shall imprisonment be less than 1 month nor more than 6 months.
2. Such fine or other penalty, or both, shall be imposed at the discretion of the court.
3. The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than P1,000.
c. Authority to grant local tax exemptions

➢ LGUs may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary (Sec. 192,
LGC).
➢ The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU.
d. Withdrawal of exemptions
General rule:
Unless otherwise provided, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or judicial, including government owned or
controlled corporations are withdrawn upon the effectivity of the LGC
Exceptions Tax exemptions not withdrawn
1. Local water districts
2. Cooperatives duly registered under Cooperative Code of the Philippines
3. Non-stock and non-profit hospitals and educational institutions
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Note
The LGC took effect on January 1, 1992. Sec. 193 is an express and general repeal of all statutes granting exemptions from local taxes. It withdrew the sweeping tax
privileges previously enjoyed by private and public corporations.
e. Authority to adjust local tax rates

LGUs shall have the authority to adjust the tax rates not oftener than once every 5 years, but in no case shall the adjustment exceed 10% of the rates fixed by the LGC.
f. Residual taxing power of local governments

LGUs may exercise the power to levy taxes, fees, or charges on ANY base or subject not otherwise specifically enumerated in the LGC or taxed under the NIRC or other
applicable laws upon Congress when it provides guidelines and limitations on the LGUs power of taxation:
The Congress shall ensure that:

1. The taxpayers will not be overburdened or saddled with multiple and unreasonable impositions;
2. Each LGU will have its fair share of available resources;
3. The resources of national government will not be unduly disturbed; and
4. Local taxation will be fair, uniform and just.
Principle of preemption or exclusionary doctrine

Preemption in the matter of taxation simply refers to an instance where the national government elects to tax a particular area, impliedly withholding from the local
government the delegated power to tax the same field. This doctrine primarily rests upon the intention of Congress. Conversely, should Congress allow municipal corporations
to cover field of taxation it already occupies, then the doctrine of preemption will not apply.
3. Scope of taxing power

a. Each LGU shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges, consistent with the basic policy of local autonomy. Such taxes,
fees, and charges shall exclusively accrue to it (Sec. 129, LGC).
b. All LGUs are granted general powers to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the
NIRC or other applicable laws. The levy must not be unjust, excessive, oppressive, confiscatory or contrary to a declared national economic policy (Sec. 186, LGC).
c. No such taxes, fees or charges shall be imposed without a public hearing having been held prior to the enactment of the ordinance (Sec. 187, LGC).
d. Copies of the provincial, city, and municipal tax ordinances or revenue measures shall be published in full for three consecutive days in a newspaper of local circulation or
posted in at least two conspicuous and publicly accessible places.
4. Specific taxing power of local government units

Province/City
Except as otherwise provided in the LGC, a province may levy only the following taxes, fees, and charges: [Sec. 134, LGC]
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1. Tax on transfer of real property ownership (Sec. 135, LGC);
2. Tax on business of printing and publication (Sec. 136, LGC);
3. Franchise Tax (Sec. 137, LGC);
4. Tax on sand, gravel and other quarry resources (Sec. 138, LGC);
5. Professional tax (Sec. 139, LGC);
6. Amusement tax (Sec. 140, LGC);
7. Annual fixed tax for every delivery truck or van of manufacturers or producers, wholesalers of, dealers, or retailer in certain products (Sec. 141, LGC);
8. Annual ad valorem tax on real property such as land, building, machinery, and other improvement not specifically exempted at the rate not exceeding 1% of the
assessed value of the real property (Sec. 232, LGC)
9. Special levies on real property
10. Toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge, ferry, or telecommunication system funded and constructed by the provincial
government (Sec. 155, LGC);
11. Reasonable fees and charges for services rendered (Sec. 153, LGC);
12. Charges for the operation of public utilities owned, operated, and maintained by the provincial government (Sec. 154, LGC);
13. Slaughter fees, corral fees, market fees, charges for holding benefits;
14. Tuition fees from the operation of the provincial high school, except in the public elementary grades
Municipality
May levy taxes, fees and charges not otherwise levied by provinces [Sec. 142, LGC]
1. Tax on Various Types of Businesses Manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits,
and wines or manufacturers of any article of commerce of whatever kind or nature
2. Wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature
3. Exporters and manufacturers, millers, producers, wholesalers, distributor, dealers or retailers of essential commodities enumerated below: [Sec. 143(c), LGC
4. Retailers
5. Contractors and other independent Contractors
6. Banks and other financial institutions.
7. Peddlers engaged in the sale of any merchandise or article of commerce
8. Any other business which the Sanggunian concerned may deem proper to tax
City
May levy taxes, fees and charges which the province or municipality may impose [Sec. 151, LGC]
Barangay
May levy only:
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1. Taxes on stores or retailers
2. Service fees or charges
3. Barangay clearance
4. Other fees and charges
5. Common revenue raising powers

a. Fees, service or user charges – LGUs may impose and collect such reasonable fees and charges for services rendered (Sec. 153, LGC).
b. Public utility charges – LGUs may fix the rates for the operation of public utilities owned, operated, and maintained by them within their jurisdiction (Sec. 154, LGC).
c. Toll fees or charges – The sanggunian concerned may prescribe the terms and conditions and fix the rates for the imposition of toll fees or charges for the use of any public
road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU concerned (Sec. 155, LGC).
Persons exempted from payment of tolls, fees, or other charges [HOP]

1. Officers and enlisted men of the Armed Forces of the Philippines and members of PNP on mission
2. Post office personnel delivering mail
3. Physically Handicapped and disabled citizens who are 65 years or older.
The sanggunian concerned may discontinue the collection of the tolls when public safety and welfare so requires. Thereafter, the said facility shall be free and open for public
use (Sec. 155, LGC)
6. Community tax
The community tax is a poll or capitation tax imposed upon residents of a city or municipality. It replaced the former residence tax. It may be levied by a city or municipality
but not a province
Individuals
Every inhabitant of the Philippines 18 years of age or over:
1. who has been regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year;
2. who is engaged in business or occupation;
3. who owns real property with an aggregate assessed value of P1,000.00 or more.
4. who is required by law to file an income tax return.
Amount
Basic: P5.00
Additional tax of P1.00 for every P1,000.00 of income regardless of whether from business, exercise of profession or from property which in no case shall exceed P5,000.00
In case of husband and wife, the additional tax shall be based on the total property, gross receipts or earnings owned or derived by them.
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Juridical Persons
Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines.
Amount
Additional tax, which, in no case, shall exceed P10,000.00 in accordance with the following schedule:
1. For every P5,000.00 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax
under existing laws, found in the assessment rolls of the city or municipality where the real property is situated - Two pesos (P2.00); and
2. For every P5,000.00 of gross receipts or earnings derived by it from its business in the Philippines during the preceding year - Two pesos (P2.00) (Sec. 157 & 158, LGC).
Venue of Payment
Residence of the individual, or in the place where the principal office of the juridical entity is located (Sec. 160, LGC).
Payment of community tax, when required:

Accrues on the 1st day of January of each year which shall be paid not later than the last day of February of each year (Sec. 161, LGC).
Penalty for delinquency:

An interest of 24% per annum from the due date until it is paid shall be added to the amount due (Sec. 161, LGC)
Exemptions from Community Tax

1. Diplomatic and consular representatives
2. Transient visitors when their stay in the Philippines does not exceed three (3) months (Sec. 159, LGC)
7. Common limitations on the taxing powers of local government units

The exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:
1. Income tax, except when levied on banks and other financial institutions;
2. Documentary stamp tax;
3. Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided under the LGC; XPN: Tax on transfer of real property
4. Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on
wharves constructed and maintained by the LGU concerned;
5. Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of LGUs in the guise of charges
for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;
6. Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;
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7. Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the
date of registration;
NOTE: However, the grant of the Income Tax Holiday for registered enterprises under EO 226 is subject to the following rules:
a) For six (6) years from COMMERCIAL OPERATION for pioneer firms and for four (4) years for non-pioneer firms – fully exempt; and
b) For a period of three (3) years from COMMERCIAL OPERATION, registered expanding firms shall be entitled to exemption from income tax levied by the
National Government proportionate to their expansion under such terms and conditions as the Board may determine (EO 226, Title III, Article 39).
8. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees, or charges on petroleum products;
NOTE: LGUs may impose tax on a petroleum business. A tax on business is distinct from a tax on the article itself (Phil. Petroleum Corporation vs. Municipality of
Pililia Rizal, G.R. No. 90776, June 3, 1991).
9. Percentage or VAT on sales, barters, or exchanges or similar transactions on goods or services except as otherwise provided herein;
10. Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air,
land, or water, except as provided in this Code;
11. Taxes on premiums paid by way or reinsurance or retrocession;
12. Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;
13. Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided in the LGC (i.e. Sec. 143(c), LGC- municipalities may impose
taxes on exporters);
14. Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and R.A. No. 6938 or the
"Cooperative Code of the Philippines" respectively;
15. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and LGUs (Sec. 133, LGC).
NOTE: An examination of the above enumeration reveals that those taxes, charges, and fees already imposed and collected by the National Government such as income taxes,
estate taxes, donor’s taxes, documentary stamps taxes. Simply stated, the LGUs cannot exercise taxing powers reserved to the National Government. Thus, it is also called the
“reservation rule” or the “exclusionary rule”.
8. Requirements for a valid tax ordinance

The power to impose a tax, fee, or charge or to generate revenue under the LGC shall be exercised by the Sanggunian concerned through an appropriate ordinance
Procedure for Approval and Effectivity of Tax Ordinances

1. The procedure applicable to local government ordinances in general should be observed (Sec. 187, LGC).
2. The following procedural details must be complied with:
Page 161 of 174

a. Necessity of a quorum;
b. Submission for approval by the local chief executive;
c. The matter of veto and overriding the same;
d. Publication and effectivity (Secs. 54, 55, and 59, LGC).
3. Public hearings are required before any local tax ordinance is enacted (Sec. 187, LGC).
4. Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In the absence of such newspaper in the province,
city or municipality, then the ordinance may be posted in at least two conspicuous and publicly accessible places (Sec. 188 & 189, LGC).
NOTE: The requirement of publication in full for 3 consecutive days is mandatory for a tax ordinance to be valid. The tax ordinance will be null and void if it fails to comply with
such publication requirement
When an ordinance takes effect

In case the effectivity of any tax ordinance or revenue measure falls on any date other than the beginning of the quarter, the same shall be considered as falling at the beginning
of the next ensuing quarter, and the taxes, fees, or charges due shall begin to accrue therefrom.
Test in determining the validity of an ordinance

1. It must not contravene the Constitution or a statute
2. It must not prohibit but may regulate trade
3. It must not be discriminatory, unfair, unjust, confiscatory, unreasonable, and oppressive
4. It must be general and consistent with the national or public policy of the government
a. Protest
Protest of Assessment
1. Protest: The taxpayer may file a written protest with the local treasurer within 60 days from receipt of the notice of assessment; otherwise it shall become final
and executory.
2. Decision: The local treasurer shall decide the protest within 60 days from the time of its filing.
a) If found to be wholly or partly meritorious, a notice cancelling wholly or partially the assessment will be issued.
b) If denied or when the 60-day period already lapsed, the taxpayer shall have 30 days thereafter to appeal with the court of competent jurisdiction; otherwise,
the assessment becomes conclusive and unappealable.
Court of competent jurisdiction

1. Depending on the amount involved, the taxpayer may appeal the decision of the local treasurer to the MTC, MeTC, MCTC or the R TC in the exercise of its original
jurisdiction.
Page 162 of 174

2. Local tax cases decided by the MTC, MeTC and MCTC may be appealed to the RTC in the exercise of its appellate jurisdiction.
3. Said cases decided by the RTC in its original or appellate jurisdiction may be elevated to the CTA.
b. Refund
Requisites:
1. A written claim for refund or credit must be filed with the local treasurer; and
2. The case or proceeding must be filed in court within 2 years from the payment of tax or from the date the taxpayer became entitled to refund or credit. [Sec. 196, LGC]
c. Action before the Secretary of Justice

Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal to the Secretary of Justice. [Sec. 187, LGC]
Procedure:
1. Appeal must be made to the Secretary of Justice within 30 days from effectivity of the ordinance.
2. The Secretary must render a decision within 60 days from receipt of the appeal.
Note: The appeal shall not suspend the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein.
3. Within 30 days after receipt of the decision or the lapse of the 60-day period without any action from the Secretary of Justice, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction. [Sec. 187, LGC]
Note: The Secretary of Justice can only review the constitutionality or legality of the tax ordinance, and, if warranted, to revoke it on either or both of these grounds.
There is no need for a written protest when disputing an ordinance. [Ingles]
The periods stated in Section 187 of the Local Government Code are mandatory. (30-60-30 period)
1. Assail the tax ordinance within 30 days of its effectivity with the SOJ;
2. The SOJ is given 60 days to decide;
3. After the lapse of 60 days, appeal before a competent court within 30 days.
10. Assessment and collection of local taxes

a. Remedies of local government units
1. Local government lien
Local taxes, fees, charges, and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate
administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation,
Page 163 of 174

practice of profession or calling, or exercise of privilege with respect to which the lien is imposed (Sec. 173, LGC). The lien may only be extinguished upon full
payment of the delinquent local taxes fees and charges including related surcharges and interest.
2. Civil remedies (Secs. 173 & 174, LGC)

a) Distraint of personal property
b) Levy of real property
c) Judicial action
Levy of real property may be simultaneously issued with the warrant of distraint
The levy of a real property may be made before or simultaneous with distraint. In case the levy on real property is not issued before or simultaneously with the warrant of
distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the case
may be, shall within 30 days after execution of the distraint, proceed with the levy on taxpayer’s real property (Sec. 176, LGC).
LGU has right to purchase real property advertised for sale, when:
a) No bidder for the real property
b) If the highest bid is for an amount insufficient to pay the taxes, fees, or charges, related surcharges, interests, penalties and costs.
Local government may repeat the remedies of distraint and levy

The remedies by distraint and levy may be repeated, if necessary, until the full amount due, including all expenses, is collected (Sec. 184, LGC).
Penalty of the local treasurer for failure to issue and execute the warrant:
Automatically dismissed from service after notice and hearing, if found guilty of abusing the exercise thereof by competent authority, without prejudice to criminal prosecution
under the RPC and other applicable laws (Sec. 177, LGC).
b. Prescriptive period
General Rule:
Local taxes, fees, or charges shall be assessed within 5 years from the date they became due. No action for the collection of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted after the expiration of such period.
Exception
In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within 10 years from discovery of the fraud or intent to evade payment
(Sec. 184 [a] and [b], LGC).
Period of collection of local taxes.

Local taxes, fees, or charges may be collected within 5 years from the date of assessment by administrative or judicial action (Sec. 194 (c), LGC).
Page 164 of 174

REAL PROPERTY TAXATION

1. Fundamental principles
a. Real property shall be appraised at its Current and fair market value.
b. Real property shall be classified for assessment purposes on the basis of its Actual use. (Doctrine of Usage)
Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession of the property.
c. Real property shall be assessed on the basis of a Uniform classification within each LGU
d. The appraisal, assessment, levy and collection of real property tax shall not be Let to any private person.
e. The appraisal and assessment of real property shall be Equitable
Real Property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it and whoever uses it.
Doctrine of Essentiality
Properties considered as personal under the Civil Code may nonetheless be considered as real property for tax purposes where said property is essential to the conduct of business.
The property to be considered as immobilized for RPT must be “essential and a principal element” of an industry without which such industry would be unable to carry on the
principal industrial purpose for which it was established
2. Nature
a. Direct tax whose burden could not be shifted by the one who pays to other persons
b. Ad valorem tax based on the assessed value of the property
c. Local tax
d. Imposed on use and not ownership
e. Progressive in character pending to a certain extent on the use and value of the property
f. Indivisible single obligation
LGUs responsible for the administration of real property tax

1. Provinces
2. Cities
3. Municipalities in Metro Manila Area
3. Imposition
a. Power to levy
Provinces, cities, and municipalities do not only have the power to levy real estate taxes, but they may also fix real estate tax rates. Sec. 233 of the LGC provides that they
shall fix a uniform rate of basic real property tax applicable to their respective localities.
Page 165 of 174

A province or city or a municipality within Metro Manila may:

1. levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted;
2. fix a uniform rate of basic real property tax applicable to their respective localities.
Note: A special levy on lands benefited by public works may be imposed by municipalities outside Metro Manila.
b. Exemption from real property tax

1. Real property owned by the Republic of the Philippines or any of its political subdivisions Exception: when beneficial use is granted for a consideration or to a taxable
person.
2. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and
improvements actually, directly and exclusively used for religious, charitable, or educational purposes
3. Machinery and equipment actually, directly and exclusively used by local water districts and GOCCs engaged in the supply and distribution of water and/or generation
and transmission of electric power.
4. Real property owned by duly registered cooperatives as provided for under RA 6938 [Cooperative Code of the Philippines]
5. Machinery and equipment used for pollution control and environmental protection [Sec. 234, LGC]
A claim for exemption under Sec. 234(e) of the LGC should be supported by evidence that the property sought to be exempted is actually, directly and exclusively used for
pollution control and environmental protection.
4. Appraisal and assessment

a. Classes of real property
Appraisal is the act or process of determining the value of property as of a specified date for a specific purpose. [Sec. 199(e), LGC] Assessment is the act or process of
determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. [Sec. 199(f), LGC]
Classes of Real Property

For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special. [Sec. 215, LGC]
1. Residential land – land principally devoted to habitation [Sec. 199(u), LGC]
2. Agricultural land – land devoted principally to the planting of trees, raising of crops, livestock and poultry, dairying, salt making, inland fishing and similar
aquaculture activities and other agricultural activities and is not classified as mineral, timber, residential, commercial or industrial land
3. Commercial land – land devoted principally for the object of profit and is not classified as agricultural, industrial, mineral, timber or residential land
4. Industrial land – land devoted principally to industrial activity as capital investment and is not classified as agricultural, commercial, timber, mineral or residential
land.
5. Mineral land – land in which minerals exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such minerals .
Page 166 of 174

6. Timberland – land identified as forest or reserved area by the government, which may or may not be granted to a concessionaire, licensee, lessee or permitee .
7. Special:
a. all lands, buildings and other improvements actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and
b. those owned and used by local water districts, and GOCCs rendering essential public services in the supply and distribution of water and/or generation
and transmission of electric power
b. Assessment based on actual use

Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof
NOTE:
➢ Unpaid realty taxes attach to the property and are chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not
he is the owner. The basis of taxing real property is actual use, even if the user is not the owner.
➢ Real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it (Sec. 217,
LGC).
5. Collection
a. Date of accrual
Real property tax for any year shall accrue on the first day of January. From that date it shall constitute a lien on the property superior to any other lien, mortgage, or
encumbrance of any kind whatsoever extinguished only upon the payment of the delinquent tax (Sec. 246, LGC).
b. Periods to collect
Both the Local Tax Code (LTC) and the Real Property Tax Code (RPTC) do not have any provision on prescription of the assessment and collection of government taxes and
other revenues. However, the LTC does not prohibit the local government from providing for prescription in its tax ordinances, and under Sec. 25 of RPTC, real properties
declared for the first cannot be assessed for back taxes for more than 10 years.
Period of collection of real property tax under local government code

➢ Within 5 years from the date taxes become due.
➢ XPN: In case of fraud or intent to evade payment - within 10 years from discovery of fraud or intent
c. Remedies of local government units

Remedies of the LGUs for the collection of real property tax
1. Administrative action
a. Exercise of lien on the property subject to tax Superior to all liens, charges or encumbrances and is enforceable by administrative or judicial action. It is
extinguished only upon payment of tax and other expenses (Sec. 257, LGC).
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b. Levy on the real property subject of the tax
c. Distraint of personal property
2. Judicial action
Issuance of delinquency notice for real property tax payment

When real property tax or other tax imposed becomes delinquent, the local treasurer shall immediately cause a notice of the delinquency to be posted at the main hall and
in a publicly accessible and conspicuous place in each barangay of the LGU concerned. Notice of delinquency shall also be published once a week for two (2) consecutive
weeks, in a newspaper of general circulation in the province, city, or municipality.
LGU’s lien
Guidelines in the exercise of local government lien
1. A legal claim on the property subject on the real property tax as security for the payment of tax obligation.
2. It is constituted on the property subject to the tax from the date the RPT accrued, i.e., January 1 (Sec. 246, LGC).
3. It is superior to any lien, mortgage, or encumbrance of any kind whatsoever (Sec. 246, LGC) in favor of any person, irrespective of the owner or possessor
thereof (Sec. 257, LGC).
4. It is enforceable by administrative or judicial action (Sec. 257, LGC).
5. It may be extinguished only upon payment of the tax and related interests and expenses (Sec. 246 and 257, LGC).
a. Contesting an assessment
Any owner or person having legal interest in the property not satisfied with the action of the assessor in the assessment of his property may within 60 days from the date
of receipt of the written notice of assessment appeal to the Board of Assessment Appeals of the provincial or city by filing a petition under oath in the form prescribed for
the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal (Sec. 226, LGC).
The LBAA shall decide the appeal within 120 days from the date of receipt of such appeal. The Board, after hearing, shall render its decision based on substantial evidence
or such relevant evidence on record as a reasonable mind might accept as adequate to support the conclusion (Sec 229[a], LGC).
The owner of the property or the person having legal interest therein or the assessor who is not satisfied with the decision of the LBAA, may, within 30 days after receipt of
the decision of said LBAA, appeal to the CBAA.
Period to decide and finality of decision

The CBAA shall decide cases on appeal within 12 months from the date of receipt thereof, which shall become final and executory 15 days after receipt thereof by the
appellant or appellee, as the case may be. [Sec. 9, Rule 3, Chapter VII, Manual of Real Property Appraisal and Assessment Operations]
Page 168 of 174

Effect of appeal on the payment of tax
Appeal on assessments of real property shall not suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city
assessor without prejudice to subsequent readjustment depending upon the final outcome of the
Appeal
b. Contesting a valuation of real property

Same Procedure for protest of an assessment
c. Compromising real property tax assessment

Condonation or reduction of RPT
1. The Sanggunian:, in case of general failure of crops or substantial decrease in the price of agricultural or agri-based products or calamity, may, by ordinance, condone
or reduce taxes and interest for the succeeding year/s in the city or municipality affected by the calamity. [Sec. 276, LGC]
2. The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or
municipality within Metro Manila. [Sec. 277, LGC]
Compromise by authority of the President

The CTA allowed the compromise agreement between Batangas City, represented by its Mayor, and the taxpayer since it was entered into in line with an executive order
issued by the President to address the real property tax issues of independent power producers through the reduction of their tax liabilities and the condonation of fines,
penalties and interest on deficiency taxes.
TITLE IV. JUDICIAL REMEDIES

JURISDICTION OF THE COURT OF TAX APPEALS
1. Exclusive original and appellate jurisdiction over civil cases
CTA in Divisions
1. Tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges
and penalties, claimed is P1 million pesos or more.
2. Decisions of the CIR in cases involving, Disputed assessments; Refunds of internal revenue taxes, fees or other charges and penalties imposed thereto Other matters arising
under NIRC or other laws administered by the BIR.
CTA En Banc
1. Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: [ALT]
a. Cases arising from administrative agencies – BIR, BOC, DoF, DTI, and DA;
b. Local tax cases decided by the RTC in the exercise of their original jurisdiction; and
Page 169 of 174

c. Tax collection cases decided by the RTC in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and penalties claimed is less than P1 million pesos;
2. Decisions, resolutions or orders of the RTC in cases decided or resolved by them in the exercise of their appellate jurisdiction over:
a. Local tax cases
b. Tax collection cases;
3. Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over tax collection
cases; and
4. Decisions of the CBAA in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or
city board of assessment appeals (Sec. 2, Rule 4, RRCTA).
2. Exclusive original and appellate jurisdiction over criminal cases

CTA in Divisions
Exclusive appellate jurisdiction over:
1. Appeals from the Judgments, Resolutions or Orders of the RTC in their original jurisdiction in criminal offenses arising from violations of the NIRC or TCCP and other laws
administered by the BIR or BOC, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than P1 million or where there is no
specified amount claimed; and
2. Criminal offenses over Petitions for Review of the Judgments, Resolutions or Orders of the RTC in the exercise of their appellate jurisdiction on cases originally decided by
the MeTC, MTC and MCTC.
CTA en banc
Exclusive appellate jurisdiction to review by appeal the following:
1. Decisions, Resolutions or Orders on Motions for Reconsideration or New Trial of the Court in division in the exercise of its exclusive original jurisdiction over criminal offenses
arising from violations of the NIRC or TCCP and other laws administered by the BIR or BOC where the principal amount of taxes and fees, exclusive of charges and penalties
is P1 million or more;
2. Decisions, Resolutions or Orders on Motions for Reconsideration or New Trial of the Court in division in the exercise of its exclusive appellate jurisdiction over criminal
offenses arising from violations of the NIRC or TCCP and other laws administered by the BIR or BOC; and
3. Decisions, Resolutions or Orders of the RTC decided or resolved by them in the exercise of their appellate jurisdiction over criminal offenses arising from violations of the
NIRC or TCCP and other laws administered by the BIR or BOC where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than P1
million.
4.
PROCEDURE
a. Filing of an action for collection of taxes
i. Internal revenue taxes
Page 170 of 174

The remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency can be through the institution of a
civil or criminal action. [Sec. 205, NIRC]
When this remedy is resorted to: The tax assessment becomes final and executory because of the failure to appeal. Even pending decision of the administrative
protest.
ii. Local taxes

The LGU concerned may enforce the collection of delinquent taxes, fees, charges or other revenues by civil action in any court of competent jurisdiction. The civil
action shall be filed by the local treasurer. [Sec. 183, LGC] MTC/RTC depending on jurisdictional threshold amount.
b. Civil cases
i. Who may appeal, mode of appeal, and effect of appeal
Appeal to CTA Division
1. A party aggrieved or adversely affected by the decision or ruling or inaction of
a. CIR;
b. Commissioner of Customs;
c. Secretary of Finance;
d. Secretary of Trade and Industry;
e. Secretary of Agriculture; or
f. RTC exercising original jurisdiction
2. May appeal within 30 days from the receipt of the copy of the decision or ruling, or the expiration of the period fixed by law for the Commissioner to decide,
to the Court of Tax Appeals Division.
Mode of Appeal: Rule 42

Aggrieved party may file a motion for reconsideration or new trial within 15 days from receipt of the copy of the decision.
Appeal to CTA en Banc

A party adversely affected by a decision or resolution of a Division of the Court on a motion for reconsideration or new trial may appeal within 15 days from receipt
of the copy of the decision.
Mode of Appeal: Rule 43

A party adversely affected by a decision or ruling of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction
may appeal within 30 days from the receipt of the copy of the decision.
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ii. Suspension of collection of taxes
General rule
No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any property of the taxpayer for the satisfaction of his tax liability as provided
under existing laws.
Exception
Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of any property of the taxpayer,
or by whatever means, as provided under existing laws, may jeopardize the interest of the Government or the taxpayer, an interested party may file a motion for
the suspension of the collection of the tax liability [Sec. 11, RA 1125, as amended]
iii. Injunction not available to restrain collection

No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code. [Sec. 217,
NIRC]
Exception: Sec. 11, R.A. 1125.

The CTA has ample authority to dispense with the deposit of the amount claimed or the filing of the required bond, whenever the method employed by the BIR in
the collection of tax jeopardizes the interest of the taxpayer for being patently in violation of law.
c. Criminal cases
i. Institution and prosecution of criminal action
➢ Institution of criminal action Instituted by the filing an information in the name of the People of the Philippines
➢ Those involving violations of the NIRC and other laws enforced by the BIR: Must be approved by the CIR
➢ Those involving violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs: Must be approved by the Commissioner of
Customs
➢ Institution shall interrupt the running of the period of prescription.
Prosecution of criminal action

Conducted and prosecuted under the direction and control of the public prosecutor Those involving violations of the NIRC and other laws enforced by the BIR or
violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs – The prosecution may be conducted by their respective duly deputized
legal officers.
ii. Institution of civil action in criminal action
Page 172 of 174

In cases within the jurisdiction of the Court, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall be
deemed jointly instituted in the same proceeding. The filing of the criminal action shall necessarily carry with it the filing of the civil action. No right to reserve the
filing of such civil action separately from the criminal action shall be allowed or recognized.
iii. Period to appeal

Regional Trial Court in the exercise of its original jurisdiction [to CTA Division]
➢ 15 days from receipt of decision
➢ Appeal pursuant to Sec. 3[a] and 6, Rule 122 of the Rules of Court
CTA Division [to CTA En Banc]

➢ May be extended for good cause for not more than 15 days
➢ Petition for review as provided in Rule 43 of the Rules of Court
➢ The Court En Banc shall act on the appeal
Regional Trial Courts in the exercise of their appellate jurisdiction [To CTA division]
➢ Petition for review as provided in Rule 43 of the Rules of Court
d. Appeal to the Court of Tax Appeals en banc

➢ No civil proceeding involving matters arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be
maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this
Act.
➢ A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc.
[Sec. 18, RA No. 1125 as amended]
➢ The CTA En Banc cannot annul a final and executory judgment of a division of the court The laws creating the CTA and expanding its jurisdiction, and the CTA’s own
rules of procedure do not provide for a scenario where the CTA sitting en banc is asked to annul a decision of one of its divisions. Annulment by a collegial court,
sitting En Banc is tantamount to allowing a court to annul its own judgment and acknowledging that a hierarchy exists within such court. A proper remedy would
have been an original action for Certiorari under Rule 65.
e. Petition for review on certiorari to the Supreme Court
A party adversely affected by a decision or ruling of the Court en banc may appeal by filing with the Supreme Court a verified petition for review on certiorari within fifteen
days from receipt of a copy of the decision or resolution, as provided in Rule 45 of the Rules of Court. The motion for reconsideration or for new trial filed before the Court
shall be deemed abandoned if, during its pendency, the movant shall appeal to the Supreme Court.
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-3nd-
Page 174 of 174

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BALA SA BAR SA TAX TR3Z NOTES SERIES

TITLE I. GENERAL PRINCIPLES AND LIMITATIONS OF TAXATION

3. Distinguish: tax and other forms of exactions

4. Tax distinguished from License or Permit

5. Tax distinguished from Tariffs and Customs Duties

6. Tax distinguished from Debt

Eminent Domain Police Power

DISTINCTION BETWEEN THE THREE

C. THEORY AND BASIS OF TAXATION

D. JURISDICTION OVER SUBJECT AND OBJECTS

E. PRINCIPLES OF A SOUND TAX SYSTEM

F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

G. STAGES OR ASPECTS OF TAXATION

Tax Administration- The process by which the power of tax is exercised.

H. REQUISITES OF A VALID TAX

Factors that Determine Situs:

SITUS OF EXCISE TAX

5. Escape from taxation

b. Distinguish: tax avoidance and tax evasion

This may include:

K. CONSTRUCTION AND NTERPRETATION OF TAX LAWS, RULES AND REGULATIONS

TITLE II. NATIONAL TAXATION

2. Rule-making authority of the Secretary of Finance

Nature and Purpose:

a. Income tax systems

II. Juridical Persons

2. Foreign corporations: A corporation which is not domestic. [Sec. 22 (D), NIRC]

8. Joint venture and consortium: Essential factors of a joint venture or consortium:

Nature and Purpose

Security Advances/ Security Deposits paid by a lessee to a lessor.

Increase in the Net Worht of the Taxpayer:

Examples of Constructive Receipt

c. Tests in determining whether income is earned for tax purposes

2. Deferred Payment Sales

Income from sources without the Philippines.

BASIS GROSS INCOME NET INCOME

AS TO DEDUCTIONS ALLOWS NO DEDUCTIONS ALLOWS DEDUCTIONS

AS TO TAX BASE GROSS INCOME NET INCOME

ADVANTAGES/DISADVANTAGES SIMPLIFIES THE INCOME TAX CONFUSES/COMPLEX FILING OF

c. Sources of income subject to tax

V. Income from dealings in property

Examples of Ordinary assets:

These rules do not apply to:

ACTUAL GAIN VIS-À-VIS PRESUMED GAIN

Wherethe capital loss limitation rule will not apply:

Rules with regard to NCLCO

CLASSIFICATION OF PASSIVE INCOME:

SOURCES OF INCOME APPLIED TO INDIVIDUALS

PROCEEDS OF LIFE INSURANCE

RECIPIENTS OF NON-TAXABLE LIFE INSURANCE PROCEED

Tax treatment for prizes and winnings

Prizes and winning subject to income tax

Exempt from tax

IX. Pension, retirement benefit, or separation pay

“Tax Benefit Rule” or Equitable Doctrine of Tax Benefit

Two instances where Tax benefit rule applies

Recovery of bad debts

3. Receipt of tax refunds or credit

II. Taxpayers who may avail

III. Distinguish: exclusions, deductions, and tax credits

IV. Exclusions under the Constitution

Requisites before deductions are allowed

General Rules in Claiming Deductions