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DE LA SALLE

COLLEGE OF SAINT BENILDE


INCOME TAXATION
ATTY. JOSELITO S. MENDOZA
CHAPTER 1
POWER OF TAXATION
1. WHAT IS TAXATION? – IT IS THE INHERENT
POWER BY WHICH THE SOVEREIGN THRU ITS
LAW-MAKING BODY RAISES REVENUE TO
DEFRAY THE NECESSARY EXPENSES OF
GOVERNMENT.

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2. WHAT ARE THE CHARACTERISTICS OF TAXATION?
A. INHERENT POWER OF THE SOVEREIGN STATE
B. EXCLUSIVELY LODGED WITH THE LEGISLATURE
C. SUBJECT TO INHERENT, CONSTITUTIONAL AND
CONTRACTUAL LIMITATIONS.

3. WHAT IS THE NATURE OF TAXATION?


A. PLENARY
B. COMPREHENSIVE
C. AWESOME POWER THAT COULD DESTROY

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4. WHAT IS TAX?
– ENFORCED PROPORTIONAL CONTRIBUTION
FROM THE PERSONS AND PROPERTY LEVIED BY THE
LAW-MAKING BODY OF THE STATE BY VIRTUE OF ITS
SOVEREIGNTY IN SUPPORT OF GOVERNMENT AND
FOR PUBLIC NEEDS.

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5. WHAT ARE THE CHARACTERISTICS OF TAXES?
A. FORCED CHARGES
B. GENERALLY PAYABLE IN MONEY
C. EXCLUSIVELY LEVIED BY THE LEGISLATURE
D. ASSESSED IN ACCORDANCE WITH SOME
REASONABLE RULE OF APPORTIONMENT
E. IMPOSED BY THE STATE WITHIN ITS
JURISDICTION
F. LEVIED FOR A PUBLIC PURPOSE

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6. WHAT ARE THE DIFFERENT PURPOSES AND
OBJECTIVES OF TAXATION?
A. RAISE REVENUE
B. NON REVENUE
a. PROMOTION OF THE GENERAL WELFARE
b. REGULATION
c. REDUCTION OF SOCIAL INEQUALITY
d. ENCOURAGE ECONOMIC GROWTH
e. PROTECTIONISM
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7. WHAT ARE THE THEORIES AND BASES OF
TAXATION?
A. LIFEBLOOD THEORY (IMPORTANCE OF
TAXATION)
B. NECESSITY THEORY (THEORY OF TAXATION)
C. BENEFITS-PROTECTION THEORY (BASIS OF
TAXATION)

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8. WHAT ARE THE TWO ASPECTS OF TAXATION?
A. LEVY OR IMPOSITION OF THE TAX (TAX
LEGISLATION/FUNCTION OF CONGRESS)
B. ENFORCEMENT OR TAX ADMINISTRATION
(TAX COLLECTION/FUNCTION OF EXECUTIVE,
E.G. BIR)

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9. WHAT IS THE SCOPE OF THE LEGISLATIVE
TAXING POWER?
A. AMOUNT OR RATE OF TAX
B. APPORTIONMENT OF THE TAX
C. KIND OF TAX
D. METHOD OF COLLECTION
E. PURPOSE/S OF ITS LEVY, PROVIDED IT IS FOR
PUBLIC PURPOSE
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F. SUBJECT TO BE TAXED, PROVIDED IT IS
WITHIN ITS JURISDICTION
G. SITUS OF TAXATION

10. MAY THE COURT INTERFERE WITH TAX


LEGISLATION?

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11. IS THE POWER TO TAX THE POWER TO
DESTROY?
A. POWER TO TAX IS THE POWER TO
DESTROY
B. POWER TO TAX IS NOT THE POWER TO
DESTROY WHILE THE SUPREME COURT
SITS

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12. WHAT ARE THE BASIC PRINCIPLES OF A SOUND TAX
SYSTEM?
A. FISCAL ADEQUACY – SUFFICIENCY TO MEET GOVERNMENT
EXPENDITURES AND OTHER PUBLIC NEEDS
B. ADMINISTRATIVE FEASIBILITY- CAPABILITY OF BEING
EFFECTIVELY ENFORCED
C. THEORETICAL JUSTICE- BASED ON THE TAXPAYER’S ABILITY
TO PAY; MUST BE PROGRESSIVE
D. CONSISTENCY WITH ECONOMIC GOALS

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13. WHAT ARE THE CLASSIFICATIONS OF TAXES?
A. AS TO SUBJECT MATTER
a. PERSONAL TAX- TAX OF FIXED AMOUNT UPON ALL
PERSONS OF A CERTAIN CLASS WITHIN THE
JURISDICTION WITHOUT REGARD TO PROPERTY,
OCCUPATION OR BUSINESS IN WHICH THEY MAY BE
ENGAGED. E.G. COMMUNITY TAX CERTIFICATE
b. PROPERTY TAX- ASSESSED ON PROPERTY OF A
CERTAIN CLASS. E.G. REAL PROPERTY TAX
c. EXCISE TAX- IMPOSED ON THE EXERCISE OF A
PRIVILEGE. E.G. INCOME TAX, DONOR’S AND ESTATE TAX

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d. CUSTOMS DUTIES- DUTIES CHARGED UPON THE
COMMODITIES ON THEIR BEING IMPORTED INTO OR
EXPORTED FROM A COUNTRY. E.G. TARIFFS

B. AS TO BURDEN

A. DIRECT TAX- BOTH THE INCIDENCE OR THE LIABILITY FOR


THE PAYMENT OF THE TAX AS WELL AS THE IMPACT OR
BURDEN OF THE TAX FALLS ON THE SAME PERSON. E.G.
INCOME TAX
B. INDIRECT TAX- THE INCIDENCE OR LIABILITY FOR THE
PAYMENT OF THE TAX FALLS ON ONE PERSON BUT THE
BURDEN THEROF CAN BE SHIFTED OR PASSED ON TO
ANOTHER E.G. VAT.

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C. AS TO PURPOSE
a. GENERAL TAX- LEVIED FOR THE GENERAL OR
ORDINARY PURPOSE OF THE GOVERNMENT
b. SPECIAL TAX- LEVIED FOR SPECIAL PURPOSES

D. AS TO MEASURE OF APPLICATION
a. SPECIFIC TAX- IMPOSES A SPECIFIC SUM BY THE HEAD
OR NUMBER OR BY SOME STANDARD OF WEIGHT OR
MEASUREMENT.
b. AD VALOREM TAX- TAX UPON THE VALUE OF THE
ARTICLE OR THING SUBJECT TO TAXATION.

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E. AS TO TAXING AUTHORITY
a. NATIONAL TAX- LEVIED BY THE NATIONAL GOVERNMENT
b. LOCAL TAX- LEVIED BY THE LOCAL GOVERNMENT

F. AS TO RATE
a. PROGRESSIVE TAX- RATE OF AMOUNT OF TAX INCREASES
AS THE AMOUNT OF INCOME OR EARNING TO BE TAXED
INCREASES
b. REGRESSIVE TAX- TAX RATE DECREASES AS THE AMOUNT
OF INCOME TO BE TAXED INCREASES
c. PROPORTIONATE TAX- BASED ON A FIXED PROPORTION OF
THE VALUE OF THE PROPERTY ASSESSED.

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CHAPTER 2
LIMITATIONS OF TAXING POWER

1. WHAT ARE THE LIMITATIONS TO THE POWER OF TAXATION?


A. INHERENT- BASED ON THE VERY NATURE OF THE
POWER OF TAXATION
B. CONSTITUTIONAL- EXPRESSLY FOUND IN THE
CONSTITUTION OR IMPLIED FROM ITS PROVISIONS
C. CONTRACTUAL- LIMITATIONS BASED ON CONTRACT
ENTERED BETWEEN THE STATE AND ANOTHER

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2. WHAT IS A TAXPAYER’S SUIT?
A CASE FILED BY A BONA FIDE TAXPAYER IMPUGNING
THE VALIDITY, LEGALITY OR CONSTITUTIONALITY OF A TAX LAW
OR ITS IMPLEMENTATION
3. WHAT ARE THE DIFFERENT INHERENT LIMITATIONS?
A. PUBLIC PURPOSE
B. NON-DELEGABILITY OF THE TAXING POWER
C. TERRITORIALITY OR SITUS OF TAXATION
D. TAX EXEMPTION OF THE GOVERNMENT
E. INTERNATIONAL COMITY

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A. TESTS IN DETERMINING PUBLIC PURPOSE-THE ENDS ARE
PUBLIC BENEFIT AND WELFARE
1. DUTY TEST- WHETHER THE THING TO BE FURTHERED
BY THE APPROPRIATION OF PUBLIC REVENUE IS SOMETHING
WHICH IS THE DUTY OF THE STATE,AS A GOVERNMENT TO
PROVIDE
2. PROMOTION OF GENERAL WELFARE TEST- WHETHER
THE PROCEEDS OF THE TAX WILL DIRECTLY OR INDIRECTLY
PROMOTE THE WELFARE OF THE COMMUNITY IN EQUAL
MEASURE

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B. NON-DELEGABILITY OF THE TAXING POWER
GENERAL RULE: THE POWER OF TAXATION IS
PECULIARLY AND EXCLUSIVELY EXERCISED BY THE LEGISLATURE.
FOR THE POWER EMANATES FROM, THRU AND BY THE PEOPLE.
HENCE, A DELEGATED AUTHORITY COULD NO LONGER BE
FURTHER DELEGATED
EXCEPTIONS TO NON-DELEGABILITY:
1. AUTHORITY OF THE PRESIDENT TO FIX TARIFF RATES,
IMPORT AND EXPORT QUOTAS, TONNAGE AND WHARFAGE
DUES AND OTHER DUTIES OR IMPOSTS (ART. VI, SEC. 28 (2),
1987 CONSTITUTION)

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2. POWER OF LOCAL GOVERNMENT UNITS TO LEVY
TAXES, FEES AND CHARGES (ART. X, SEC. 5, 1987 CONSTI)
3. DELEGATION TO ADMINISTRATIVE AGENCIES FOR
IMPLEMENTATION AND COLLECTION

C. SITUS OF TAXATION – THE POWER TO TAX IS LIMITED ONLY


TO PERSONS, PROPERTY OR BUSINESSES WITHIN THE
JURISDICTION OR TERRITORY OF THE TAXING POWER.

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FACTORS THAT DETERMINE THE SITUS OF TAXATION
1. KIND OR CLASSIFICATION OF THE TAX BEING LEVIED
B. SITUS OF THE THING OR PROPERTY TAXED
C. CITIZENSHIP OF THE TAXPAYER
D. RESIDENCE OF THE TAXPAYER
E. SOURCE OF THE INCOME TAX
F. SITUS OF THE EXCISE, PRIVILEGE, BUSINESS OR
OCCUPATION BEING TAXED

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KIND OF TAX SITUS

PERSONAL OR COMMUNITY TAX RESIDENCE OR DOMICILE OF THE TAXPAYER

REAL PROPERTY TAX LOCATION OF PROPERTY

PERSONAL PROPERTY TAX TANGIBLE-WHERE IT IS PHYSICALLY LOCATED OR


PERMANENTLY KEPT
INTANGIBLE-SUBJECT TO SECTION 104 OF THE NIRC AND THE
PRINCIPLE OF MOBILIA SEQUUNTUR PESONAM
BUSINESS TAX PLACE OF BUSINESS

EXCISE OR PRIVILEGE TAX WHERE THE ACT IS PERFORMED OR WHERE OCCUPATION IS


PURSUED
SALES TAX WHERE THE SALE IS CONSUMMATED

INCOME TAX CONSIDER (1) CITIZENSHIP, (2) RESIDENCE, AND (3) SOURCE
OF INCOME (SEC. 2, 1997, NIRC)
TRANSFER TAX RESIDENCE OR CITIZENSHIP OF THE TAXPAYER OR LOCATION
OF PROPERTY
FRANCHISE TAX STATE WHICH GRANTED THE FRANCHISE

CORPORATE TAX LAW OF INCORPORATION

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D. NON-TAXABILITY OF THE GOVERNMENT
- AS A MATTER OF PUBLIC POLICY , PROPERTY OF THE
STATE AND OF ITS MUNICIPAL SUBDIVISIONS DEVOTED TO
GOVERNMENT USES AND PURPOSES IS DEEMED TO BE EXEMPT
FROM TAXATION ALTHOUGH NO EXPRESS PROVISION IN THE
LAW IS MADE THEREFORE.

GENERAL RULE: THE GOVERNMENT IS TAX EXEMPT


EXCEPTION : IT MAY TAX ITSELF BY ENACTING A LAW

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RULES GOVERNING TAX IMMUNITY OF THE GOVERNMENT
1. ADMINISTRATIVE AGENCIES
A. GOVERNMENT FUNCTION-TAX EXEMPT UNLESS WHEN THE LAW
EXPRESSLY PROVIDES
B. PROPRIETARY FUNCTION- TAXABLE UNLESS EXEMPTED BY LAW

2. GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCC’s)


GENERAL RULE: INCOME IS TAXABLE AT THE RATE IMPOSED UPON
CORPORATIONS OR ASSOCIATIONS ENGAGED IN A SIMILAR BUSINESS,
INDUSTRY, OR ACTIVITY
EXCEPTION: GSIS, SSS, PHIC AND PCSO ARE TAX EXEMPT (SEC 27,
NIRC). HOWEVER, PAGCOR EXEMPTION WAS LIFTED BY R.A. 9337

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3. GOVERNMENT EDUCATIONAL INSTITUTIONS
A. PROPERTY OR REAL ESTATE TAX- PROPERTY
ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR
EDUCATIONAL PURPOSES- EXEMPT-
BUT INCOME OF WHATEVER KIND AND CHARACTER
FROM ANY OF THEIR PROPERTIES, REAL OR PERSONAL,
EGARDLESS OF THE DISPOSITION, IS TAXABLE.
B. INCOMES RECEIVED BY THEM AS SUCH ARE EXEMPT
FROM TAXES. HOWEVER, THEIR INCOME FROM ANY OF THEIR
ACTIVITIES CONDUCTED FOR PROFIT REGARDLESS OF THE
DISPOSITION IS TAXABLE

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E. INTERNATIONAL COMITY
THIS PRINCIPLE LIMITS THE AUTHORITY OF THE
GOVERNMENT TO EFFECTIVELY IMPOSE TAXES ON A
SOVEREIGN STATE AND ITS INSTRUMENTALITIES, AS WELL AS
ON ITS PROPERTY HELD AND ACTIVITIES UNDERTAKEN IN THAT
CAPACITY. INTERNATIONAL LAW DICTATES PEACE AND
HARMONY AMONG STATES, HENCE, NO STATE SHALL ASSERT
SUPERIORITY OVER THE OTHER BY IMPOSING TAXATION.

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4. WHAT ARE THE CONSTITUTIONAL LIMITATIONS?
A. RULE REQUIRING THAT APPROPRIATIONS, REVENUE AND TARIFF
BILLS SHALL ORIGINATE EXCLUSIVELY FROM THE HOUSE OF
REPRESENTATIVES (ARTICLE III, SECTION 1, 1987 CONSTITUTION)
2. UNIFORMITY, EQUITABILITY AND PROGRESSIVITY OF TAXATION
(ARTICLE VI, SEC. 28(1), 1987 CONSTITUTION)

UNIFORMITY- ALL TAXABLE ARTICLES OR KIND OF PROPERTY OF


THE SAME CLASS ARE TAXED AT THE SAME RATE
EQUITABILITY- ALL THE BURDEN FALLS TO THOSE WHO ARE MORE
CAPABLE TO PAY
PROGRESSIVITY- RATE INCREASES AS THE TAX BASE INCREASES

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5. WHAT ARE THE RULES GOVERNING CONTRACTUAL
LIMITATIONS?
A. WHEN THE EXEMPTION IS BILATERALLY AGREED UPON
BETWEEN THE GOVERNMENT AND THE TAXPAYER- IT CANNOT
BE WITHDRAWN WITHOUT VIOLATING THE NON-IMPAIRMENT
CLAUSE
B. WHEN IT IS UNILATERALLY GRANTED BY LAW, AND THE SAME
IS WITHDRAWN BY VIRTUE OF ANOTHER LAW
C. WHEN THE EXEMPTION IS GRANTED UNDER A FRANCHISE-IT
MAYBE WITHDRAWN AT ANY TIME.

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9. WHAT ARE THE DIFFERENT FORMS OF ESCAPING TAXATION?
A. SHIFTING- THE PROCESS BY WHICH THE TAX BURDEN IS
TRANSFERRED FROM THE STATUTORY TAXPAYER (IMPACT OF
TAXATION) TO ANOTHER (INCIDENT OF TAXATION) WITHOUT
VIOLATING THE LAW.
IMPACT OF TAXATION- POINT ON WHICH THE TAX IS
ORIGINALLY IMPOSED
INCIDENT OF TAXATION- POINT ON WHICH THE TAX
BURDEN FINALLY RESTS OR SETTLES DOWN

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B. CAPITALIZATION- A MERE INCREASE IN THE VALUE OF THE
PROPERTY IS NOT INCOME BUT MERELY AN UNREALIZED
INCREASE IN CAPITAL. NO INCOME UNTIL AFTER THE ACTUAL
SALE OR OTHER DISPOSITION OF THE PROPERTY IN EXCESS OF
ITS ORIGINAL COST.

C. TAX AVOIDANCE- THE EXPLOITATION BY THE TAXPAYER OF


LEGALLY PERMISSIBLE ALTERNATIVE TAX RATES OR METHODS
OF ASSESSING TAXABLE PROPERTY OR INCOME, IN ORDER TO
AVOID OR REDUCE TAX LIABILITY.

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D. TRANSFORMATION- THE MANUFACTURER OR PRODUCER 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 AND ENDEAVORS TO
RECOUP HIMPSELF BY IMPROVING HIS PROCESS OF PRODUCTION, HEREBY
TURNING OUT HIS UNITS AT A LOWER COST.

E. TAX EVASION- THE USE BY THE TAXPAYER OF ILLEGAL OR FRAUDULENT


MEANS TO DEFEAT OR LESSEN THE PAYMENT OF THE TAX

F. TAX EXEMPTION- A GRANT OF IMMUNITY TO PARTICULAR PESONS OR


CORPORATIONS FROM THE OBLIGATION TO PAY TAXES.

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10. WHAT ARE THE DIFFERENT KINDS OF TAX EXEMPTION
A. AS TO BASIS
a. CONSTITUTIONAL- IMMUNITIES FROM TAXATION WHICH
ORIGINATE FROM THE CONSTITUTION
b. STATUTORY- THOSE WHICH EMANATE FROM LEGISLATION

B. AS TO FORM
a. EXPRESS- GRANTED BY LAW
b. IMPLIED- WHEN PARTICULAR PERSONS, PROPERTY OR
EXCISES ARE DEEMED EXEMPT AS THEY FALL OUTSIDE THE SCOPE OF
THE TAX PROVISION ITSELF

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C. AS TO EXTENT
a. TOTAL- ABSOLUTE IMMUNITY
b. PARTIAL- ONE WHERE A COLLECTION OF A PART OF
THE TAX IS DISPENSED WITH

D. AS TO OBJECT
a. PERSONAL- GRANTED DIRECTLY IN FAVOR OF CERTAIN
PERSONS
b. IMPERSONAL- GRANTED DIRECTLY IN FAVOR OF A
CERTAIN CLASS OF PROPERTY

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CHAPTER 3
TAX LAWS

1. WHAT IS A TAX LAW?


A LAW THAT PROVIDES MEANS FOR THE STATE TO RAISE REVENUES

2. HOW TO MAKE A TAX LAW?


GENERALLY, ALL REVENUE BILLLS (PROPOSALS) MUST ORIGINATE
FROM THE HOUSE OF REPRESENTATIVES. AFTER PASSING THREE READINGS
BY A MAJORITY VOTE IN TECHNICAL COMMITTEE, DELIBERATION AND
JOURNALS OF CONGRESS, IT SHALL BE ELEVATED TO SENATE, WHICH NEEDS
TO PASS THE SAME THREE READINGS. NORMALLY, THE PRESIDENT SIGNS A
BILL INTO LAW FOR ITS IMPLEMENTATION.

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3. WHAT ARE THE DIFFERENT SOURCES OF TAX LAWS
A. REPUBLIC ACT/STATUTES/TAX CODE (REPUBLIC ACT 8424)
B. PRESIDENTIAL DECREES
C. EXECUTIVE ORDERS
D. COURT DECISIONS
E. REVENUE REGULATIONS (LEAST SOURCE OF TAX LAWS)

4. WHAT IS THE NATURE OF INTERNAL REVENUE LAWS?


INTERNAL REVENUE LAWS ARE NOT POLITICAL IN NATURE. IN
TIMES OF WAR, THEY ARE DEEMED TO BE THE LAWS OF THE
OCCUPIED TERRITORY AND NOT OF THE OCCUPYING ENEMY.
TAX LAWS ARE CIVIL AND NOT PENAL IN NATURE ALTHOUGH
THERE ARE PENALTIES PROVIDED FOR THEIR VIOLATION.

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5. WHAT ARE THE TWO MAJOR CLASSIFICATIONS OF TAX LAWS?
A. TAX IMPOSITION (ONE THAT PROVIDES A BURDEN)
B. TAX EXEMPTION (ONE THAT PROVIDES IMMUNITY)

6. WHAT ARE THE RULES IN CONSTRUCTING TAX IMPOSING LAWS?


A. PUBLIC PURPOSE IS ALWAYS PRESUMED.
B. LEGISLATIVE INTENTION MUST BE CONSIDERED (SPIRIT OF THE
LAW).
C. WHERE THE LANGUAGE IS PLAIN AND THERE IS NO DOUBT, TAX
LAWS MUST BE GIVEN THEIR ORDINARY MEANING.

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D. A STATUTE SHALL NOT BE CONSTRUED AS IMPOSING A TAX
UNLESS IT DOES SO CLEARLY, EXPRESSLY AND UNAMBIGUOUSLY.
E. IN CASE OF DOUBT, IT IS CONSTRUED MOST STRONGLY AGAINST
THE GOVERNMENT AND LIBERALLY IN FAVOR OF THE TAXPAYER.
F. PROVISIONS OF A TAXING ACT ARE NOT TO BE EXTENDED BY
IMPLICATION.
G. TAX LAWS OPERATE PROSPECTIVELY UNLESS THE PURPOSE OF THE
LEGISLATURE TO GIVE RETROACTIVE EFFECT IS EXPRESSLY DECLARED
OR MAY BE IMPLIED FROM THE LANGUAGE USED.
H. TAX LAWS ARE SPECIAL LAWS AND PREVAIL OVER A GENERAL
LAW.

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I. TAX LAWS ARE CIVIL IN NATURE, NOT POLITICAL.
J. TAX LAWS ARE NOT PENAL IN NATURE. HENCE, THE RULE ON
RETROACTIVE EFFECT OF PENAL LAWS FINDS NO APPLICATION IN TAX
CASES.

7. WHAT ARE THE DIFFERENT PRINCIPLES GOVERNING TAX


EXEMPTIONS?
A. EXEMPTIONS FROM TAXATION ARE HIGHLY DISFAVORED IN LAW
AND ARE NOT PRESUMED.
B. HE WHO CLAIMS AN EXEMPTION MUST BE ABLE TO JUSTIFY HIS
CLAIM BY THE CLEAREST GRANT OF THE LAW BY WORDS TOO
PLAIN TO BE MISTAKEN. IF AMBIGUOUS, THERE IS NO
EXEMPTION.

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C. HE WHO CLAIMS AN EXEMPTIONSHOULD PROVE BY
CONVINCING PROOF THAT HE IS EXEMPTED.
D. TAXATION IS THE RULE, TAX EXEMPTION IS THE EXCEPTION.
E. TAX EXEMPTION MUST BE STRICTLY CONSTRUED AGAINST
THE TAXPAYER.
F. TAX EXEMPTIONS ARE NOT PRESUMED.
G. CONSTITUTIONAL GRANTS OF TAX EXEMPTIONS ARE SELF-
EXECUTING.
H. TAX EXEMPTIONS ARE PERSONAL.

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8. WHAT IS A TAX REGULATION?
- AN INTERPRETATION OF AN ADMINISTRATIVE BODY (BIR)
INTENDED TO CLARIFY OR EXPLAIN THE TAX LAWS AND CARRY INTO EFFECT
ITS GENERAL PROVISIONS BY PROVIDING THE DETAILS OF ADMINISTRATION
AND PROCEDURE. IT IS DEEMED NECESSARY TO THE PROPER ENFORCEMENT
AND EXECUTION OF TAX LAWS.

9. WHAT ARE THE REQUISITES OF A TAX REGULATION?


A. IT MUST BE REASONABLE-GERMANE TO THE PURPOSE OF THE LAW.
B. WITHIN THE AUTHORITY CONFERRED
C. NOT CONTRARY TO LAW
D. MUST BE PUBLISHED
E. PROSPECTIVE, UNLESS IT IS BENEFICIAL TO THE TAXPAYER, WHICH MAY
BE GIVEN RETROACTIVE APPLICATION

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10. WHO HAS THE AUTHORITY TO PROMULGATE TAX REGULATIONS?
IT IS PROVIDED THAT THE SECRETARY OF FINANCE, UPON THE
RECOMMENDATION OF THE COMMISSIONER OF INTERNAL REVENUE, SHALL
PROMULGATE ALL NEEDFUL RULES AND REGULATIONS OF THE TAX CODE
(QUASI-LEGISLATIVE FUNCTION)

11. WHAT IS A BIR RULING?


RULING ISSUED BY THE BIR INVOLVING A GENERAL INTERPRETATION
OF TAX LAWS USUALLY UPON THE REQUEST OF A TAXPAYER TO CLARIFY A
PROVISION OF LAW (QUASI-JUDICIAL FUNCTION)

12. DISTINCTIONS BETWEEN ADMINISTRATIVE AND JUDICIAL INTERPRETATION-


INTEPRETATIONS AT ADMINISTRATIVE LEVEL ARE GIVEN GREAT WEIGHT BUT
ARE NOT LAWS, UNLIKE COURT’S DECISIONS WHICH ARE CONSIDERED PART OF
THE LAW OF THE LAND.

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CHAPTER 4
TAX ENFORCEMENT AND COLLECTION
1. WHAT ARE THE DIFFERENT AGENCIES INVOLVED IN TAX
ADMINISTRATION?
A. BUREAU OF INTERNAL REVENUE –INTERNAL REVENUE TAXES
(NATIONAL TAXES)
AGENTS OF THE BIR:
a. Commissioner of Customs with respect to taxes on imported
goods
b. head of the appropriate government office with respect to
energy tax
c. banks duly accredited by the Commissioner of Internal Revenue

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B. Bureau of Customs- customs law enforcement (international
taxes)
C. provincial, city and municipal assessors and treasurers- local and
real property taxes (local taxes)

2. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL


REVENUE – BIR SHALL BE UNDER THE SUPERVISION AND
CONTROL OF THE DEPARTMENT OF FINANCE (SECTION 2, NIRC)
UNDER THE OFFICE OF THE PRESIDENT

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3. WHO COMPOSE THE BIR?
A. ONE COMMISSIONER
B. FOUR DEPUTY COMMISSIONERS
C. REGIONAL REVENUE DIRECTORS
D. REVENUE DISTRICT OFFICERS
E. REVENUE OFFICERS

4. WHAT ARE THE POWERS AND DUTIES OF THE BIR?


A. ASSESSMENT AND COLLECTION OF ALL NATIONAL INTERNAL REVENUE
TAXES, FEES AND CHARGES
B. ENFORCEMENT OF ALL FORFEITURES, PENALTIES AND FINES CONNECTED
THEREWITH
C. EXECUTION OF JUDGMENTS IN ALL CASES DECIDED IN ITS FAVOR BY THE
COURT OF TAX APPEALS (CTA) AND THE ORDINARY COURTS
D. GIVE EFFECT TO AND ADMINISTER THE SUPERVISORY AND POLICE POWERS
CONFERRED TO IT BY THE TAX CODE OR OTHER LAWS

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5. WHAT IS AN ASSESSMENT?
SYNONYMOUS TO TAX AUDIT. A FINDING BY THE TAXING AUTHORITY THAT THE TAXPAYER
HAS NOT PAID THE CORRECT TAXES. IT IS ALSO A WRITTEN NOTICE TO A TAXPAYER TO THE
EFFECT THAT THE AMOUNT STATED THEREIN IS DUE AS A TAX AND CONTAINING A
DEMAND FOR THE PAYMENT THEREOF.
6. WHAT ARE THE POWERS AND DUTIES OF THE BIR COMMISSIONER?
A. POWER TO INTERPRET TAX LAW AND DECIDE TAX CASES (QUASI-JUDICIAL FUNCTIONS
1. INTERPRET PROVISIONS OF THE TAX CODE AND OTHER TAX LAWS SUBJECT TO
REVIEW OF THE SECRETARY OF FINANCE
2. DECIDE CASES:
a. DISPUTED ASSESSMENT
b. REFUNDS OF INTERNAL REVENUE TAXES, FEES AND CHARGES
c. PENALTIES IMPOSED IN RELATION THERETO
d. OTHER MATTERS ARISING FROM THE TAX CODE OR OTHER LAWS OR
PORTIONS THEREOF ADMINISTERED BY THE BIR SUBJECT TO THE
EXCLUSIVE APPELLATE JURISDICTION OF THE CTA

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B. POWER TO OBTAIN INFORMATION, SUMMON, EXAMINE
AND TAKE TESTIMONY OF PERSONS
1. THE COMMISSIONER IS AUTHORIZED:
a. TO EXAMINE ANY RELEVANT BOOK, PAPER, RECORD OR
OTHER DATA
b. TO OBTAIN ANY INFORMATION ON A REGULAR BASIS
c. TO SUMMON (SUBPOENA DUCES TECUM AND AD
TESTIFICANDUM)
d. TO TAKE THE TESTIMONY OF THE PERSON CONCERNED,
UNDER OATH AS MAY BE RELEVANT TO THE INQUIRY
e. TO CAUSE REVENUE OFFICERS AND EMPLOYEES TO MAKE
A CANVASS OF ANY REVENUE DISTRICT OR REGION

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C. POWER TO MAKE ASSESSMENTS, PRESCRIBE ADDITIONAL REQUIREMENTS FOR
TAX ADMININISTRATION AND ENFORCEMENT
1. EXAMINATION OF RETURNS AND DETERMINATION OF TAX DUE
2. TERMINATE TAXABLE PERIOD:
A. WHEN THE TAXPAYER IS RETIRING FROM BUSINESS SUBJECT TO TAX
B. WHEN THE TAXPAYER ABSCONDED
C. WHEN THE TAXPAYER REMOVES HIS PROPERTY FROM THE PHILIPPINES
D. WHEN THE TAXPAYER HIDES OR CONCEALS HIS PROPERTY
3. PRESCRIBE REAL PROPERTY VALUE
4. AUTHORITY TO INQUIRE INTO BANK DEPOSIT- NOTWITHSTANDING R.A. 1405
(BANK SECRECY LAW) THE COMMISSIONER IS AUTHORIZED TO INQUIRE INTO
THE BANK DEPOSITS OF:
i. A DECEDENT TO DETERMINE HIS GROSS ESTATE
ii. A TAXPAYER WHO HAS FILED AN APPLICATION TO COMPROMISE
PAYMENT OF TAX LIABILITY BY REASON OF FINANCIAL INCAPACITY

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5. AUTHORITY TO REGISTER TAX AGENTS
6. AUTHORITY TO PRESCRIBE ADDITIONAL REQUIREMENTS
D. AUTHORITY TO DELEGATE POWER
1. THE COMMISSIONER MAY DELEGATE THE POWERS VESTED IN HIM TO
SUBORDINATE OFFICIALS WITH RANK EQUIVALENT TO DIVISION CHIEF OR
HIGHER, SUBJECT TO LIMITATIONS/RESTRICTIONS IMPOSED UNDER THE RULES
AND REGULATIONS
EXCEPT, (THE FOLLOWING POWERS SHOULD NOT BE DELEGATED)
a) POWER TO RECOMMEND THE PROMULGATION OF RULES AND
REGULATIONS BY THE SECRETARY OF FINANCE
b) POWER TO ISSUE RULINGS OF FIRST IMPRESSION OR TO REVERSE,
REVOKE, MODIFY ANY EXISTING RULE OF THE BIR
c) POWER TO COMPROMISE OR ABATE ANY TAX LIABILITY
d) POWER TO ASSIGN OR REASSIGN INTERNAL REVENUE OFFICERS TO
ESTABLISHMENTS WHERE ARTICLES SUBJECT TO EXCISE TAX ARE KEPT

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E. OTHER POWERS
1. DUTY TO ENSURE THE PROVISION AND DISRIBUTION OF FORMS,
RECEIPTS, CERTIFICATES AND APPLIANCES AND THE ACKNOWLEDGMENT
OF PAYMENT OF TAXES
2. AUTHORITY TO ADMINISTER OATHS AND TO TAKE TESTIMONY
3. AUTHORITY TO MAKE ARRESTS AND SEIZURES
4. AUTHORITY TO EMPLOY, ASSIGN OR REASSIGN INTERNAL REVENUE
OFFICERS INVOLVED IN EXCISE TAX FUNCTIONS TO ESTABLISHMENTS
WHERE ARTICLES SUBJECT TO EXCISE TAX ARE PRODUCED OR KEPT
5. AUTHORITY TO ASSIGN OR REASSIGN INTERNAL REVENUE OFFICERS
AND EMPLOYEES OF THE BIR TO OTHER OR SPECIAL DUTIES CONNECTED
WITH THE ENFORCEMENT OR ADMINISTRATION OF THER REVENUE
LAWS.

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7. WHAT ARE THE DIFFERENT SOURCES OF INTERNAL
REVENUE?
THE FOLLOWING TAXES, FEES AND CHARGES ARE COLLECTED
BY BIR:
A. INCOME TAX
B. ESTATE AND DONOR’S TAXES
C. VALUE ADDED TAX
D. OTHER PERCENTAGE TAXES
E. EXCISE TAXES
F. DOCUMENTARY STAMP TAXES

51
BOOK 2
TAXATION
REMEDIES OF THE STATE AND THE TAXPAYER

CHAPTER 1
REMEDIES OF THE STATE

52
1. WHAT ARE REMEDIES?
THE NATIONAL INTERNAL REVENUE CODE OR TAX
CODE PROVIDES SOLUTIONS TO THE PROBLEM OF
THE GOVERNMENT IN ENFORCING TAX LAWS AND
SOLUTIONS TO THE PROBLEMS OF THE TAXPAYER
AGAINST UNLAWFUL ENFORCEMENT OR
COLLECTION OF TAX. THESE SOLUTIONS ARE
TERMED “REMEDIES”, ITS BASIC PURPOSE IS TO
MAINTAIN EQUILIBRIUM BETWEEN THE INTEREST
OF THE STATE AND THE TAXPAYER.
53
2. WHAT ARE THE DIFFERENT REMEDIES AVAILABLE TO THE
STATE AND TAXPAYER?

REMEDIES OF THE STATE COMMON REMEDIES REMEDIES OF THE


AVAILABLE TO BOTH TAXPAYER
I. ADMINISTRATIVE LEVEL (BIR)
ASSESSMENT COMPROMISE PROTEST
COLLECTION ABATEMENT REFUND
II. JUDICIAL LEVEL
CIVIL SUIT / ACTION APPEAL TO CTA
CRIMINAL SUIT / ACTION TRO / INJUNCTION
CRIMINAL SUIT AGAINST
ERRING BIR OFFICIALS
54
3. WHAT ARE THE ADMINISTRATIVE POWERS OF THE BIR?
A. ASSESSMENT AND COLLECTION OF ALL NATIONAL INTERNAL
REVENUE TAXES, FEES AND CHARGES
B. ENFORCEMENT OF ALL FORFEITURES, PENALTIES, AND FINES
CONNECTED THEREWITH
C. EXECUTION OF JUDGEMENTS IN ALL CASES DECIDED IN ITS
FAVOR BY THE COURT OF TAX APPEALS (CTA) AND THE
ORDINARY COURTS
D. GIVE EFFECT TO AND ADMINISTER THE SUPERVISORY AND
POLICE POWERS CONFERRED TO IT BY THE CODE OR OTHER
LAWS.

55
4. WHAT IS AN ASSESSMENT?
A FINDING BY THE TAXING AUTHORITY THAT THE TAXPAYER
HAS NOT PAID THE CORRECT TAXES. IT IS ALSO A WRITTEN
NOTICE TO A TAXPAYER TO THE EFFECT THAT THE AMOUNT
STATED THEREIN IS DUE AS A TAX AND CONTAINING A
DEMAND FOR THE PAYMENT THEREOF.

56
7. WHAT ARE ADMINISTRATIVE COLLECTION REMEDIES OF THE
GOVERNMENT?
A. DISTRAINT (ACTUAL AND CONSTRUCTIVE)
B. LEVY
C. TAX LIEN
D. FORFEITURE OF PROPERTY

57
E. SUSPENSION OF BUSINESS OPERATIONS IN VIOLATION OF VAT
F. ENFORCEMENT OF ADMINISTRATIVE FINE
N.B. THE REMEDIES OF DISTRAINT AND LEVY AS WELL AS
COLLECTION BY CIVIL AND CRIMINAL ACTIONS MAY, IN THE
DISCRETION OF THE COMMISSIONER, BE PURSUED SINGLY
OR INDEPENDENTLY OF EACH OTHER, OR ALL OF THEM
SIMULTANEOUSLY.

58
8. WHAT IS DISTRAINT?
IT IS THE SEIZURE BY THE GOVERNMENT OF PERSONAL
PROPERTY, TANGIBLE OR INTANGIBLE, TO ENFORCE THE
PAYMENT OF TAXES.
9. WHAT IS THE NATURE OF THE WARRANT OF DISTRAINT OR
LEVY?
THE WARRANT IS A SUMMARY PROCEDURE “FORCING” THE
TAXPAYER TO PAY.

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10. WHAT ARE THE TWO TYPES OF DISTRAINT?
A. ACTUAL: THERE IS TAKING OF POSSESSION OF THE PERSONAL
PROPERTY FROM THE TAXPAYER BY THE GOVERNMENT
B. CONSTRUCTIVE: THE OWNER IS MERELY PROHIBITED FROM
DISPOSING OF HIS PROPERTY.
11. WHAT ARE THE DISTINCTIONS BETWEEN ACTUAL AND
CONSTRUCTIVE DISTRAINT?
ACTUAL DISTRAINT CONSTRUCTIVE DISTRAINT
MADE ONLY ON THE PROPERTY OF A MADE ON THE PROPERTY OF ANY
DELIQUENT TAXPAYER TAXPAYER, WHETHER DELIQUENT OR NOT
THERE IS TAKING OF POSSESSION THE TAXPAYER IS MERELY PROHIBITED
FROM DISPOSING OF HIS PROPERTY

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ACTUAL DISTRAINT CONSTRUCTIVE DISTRAINT
EFFECTED BY LEAVING A LIST OF EFFECTED BY REQUIRING THE TAXPAYER
DISTRAINT PROPERTY OR BY SERVICE OF A TO SIGN A RECEIPT OF THE PROPERTY OR
WARRANT OF DISTRAINT OR BY THE REVENUE OFFICER PREPARING
GARNISHMENT AND LEAVING A LIST OF SUCH PROPERTY

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13. WHO SHALL SEIZE AND DISTRAINT PERSONAL PROPERTY
(ACTUAL DISTRAINT)?
A. AMOUNT OF DELINQUENT TAX IS MORE THAN P1,000,000 –
COMMISSIONER OR HIS DUTY AUTHORIZED
REPRESENTATIVES
B. AMOUNT OF DELINQUENT TAX IS P1,000,000 OR LESS –
REVENUE DISTRICT OFFICER.

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17. WHAT IS LEVY?
IT REFERS TO THE ACT OF SEIZURE OF REAL PROPERTY IN
ORDER TO ENFORCE THE PAYMENT OF TAXES

63
19. WHAT ARE THE DISTINCTIONS OF DISTRAINT AND LEVY?
DISTRAINT LEVY
REFERS TO PERSONAL PROPERTY REFERS TO REAL PROPERTY
FORFEITURE BY THE GOVERNMENT IS NOT FORFEITURE IS AUTHORIZED
PROVIDED
THE TAXPAYER IS NOT GIVEN THE RIGHT THE RIGHT OF REDEMPTION IS GRANTED
OF REDEMPTION WITH RESPECT TO IN CASE OF REAL PROPERTY LEVIED UPON
DISTRAINED PERSONAL PROPERTY AND SOLD, OR FORFEITED TO THE
GOVERNMENT.

64
20. MAY A PROPERTY LEVIED BE REDEEMED?
WITHIN 1 YEAR FROM THE DATE OF SALE, THE PROPERTY MAY
BE REDEEMED BY THE DELINQUENT TAXPAYER OR ANYONE
FROM HIM, UPON PAYMENT OF THE TAXES, PENALTIES AND
INTEREST THEREON FROM THE DATE OF DELINQUENCY TO
THE DATE OF SALE, TOGETHER WITH THE INTEREST ON THE
PURCHASE PRICE AT 15% PER ANNUM FROM THE DATE OF
SALE TO THE DATE OF REDEMPTION.

65
21. WHAT IS A TAX LIEN?
IT IS A LEGAL CLAIM OR CHARGE ON PROPERTY, EITHER REAL
OR PERSONAL, ESTABLISHED BY LAW AS A SECURITY IN
DEFAULT OF THE PAYMENT OF TAXES. GENERALLY, IT
ATTACHES TO THE PROPERTY IRRESPECTIVE OF OWNERSHIP
OR TRANSFER THEREOF.
22. WHAT IS THE EXTENT AND NATURE OF LIEN?
THE TAX, TOGETHER WITH INTERESTS, PENALTIES, AND COSTS
THAT MAY ACCRUE IN ADDITION THERETO IS A LIEN UPON ALL
PROPERTY AND RIGHTS TO PROPERTY BELONGING TO THE
TAXPAYER.

66
THE LIEN SHALL NOT BE VALID AGAINST ANY MORTGAGEE,
PURCHASER, OR JUDGEMENT CREDITOR UNTIL NOTICE OF
SUCH LIEN SHALL BE FILED BY THE COMMISSIONER OF
INTERNAL REVENUE IN THE OFFICE OF THE REGISTER OF
DEEDS OF THE PROVINCE OR CITY WHERE THE PROPERTY OF
THE TAXPAYER IS SITUATED OR LOCATED.

LIEN ATTACHES NOT ONLY FROM THE SERVICE OF THE


WARRANT OF DISTRAINT BUT FROM THE TIME TAX BECAME
DUE AND PAYABLE.

67
23. WHAT IS FORFEITURE?
DIVESTITURE OF PROPERTY DISTRAINT OR LEVIED. IF THERE IS
NO BIDDER IN THE PUBLIC SALE OR IF THE AMOUNT OF THE
HIGHEST BID IS INSUFFICIENT TO PAY THE TAXES, PENALTIES
AND COSTS, THE REAL PROPERTY SHALL BE FORFEITED IN
FAVOR OF THE GOVERNMENT. THE EFFECT IS TO TRANSFER
THE TITLE OF A SPECIFIC THING FROM THE OWNER TO THE
GOVERNMENT.
24. WHAT ARE JUDICIAL REMEDIES OF THE STATE?
A. CIVIL ACTIONS
B. CRIMINAL ACTIONS

68
25. WHAT ARE CIVIL ACTIONS?
THERE ARE ACTIONS INSTITUTED BY THE GOVERNMENT TO
COLLECT INTERNAL REVENUE TAXES. IT IS NORMALLY
RESORTED TO:
A. WHEN A TAX IS ASSESSED BUT THE ASSESSMENT BECOMES
FINAL AND UNAPPEALABLE BECAUSE THE TAXPAYER FAILS TO
FILE AN ADMINISTRATIVE PROTEST WITH THE CIR WITHIN
30DAYS FROM RECEIPT; OR

69
B. WHEN A PROTEST AGAINST ASSESSMENT IS FILED AND A
DECISION OF THE CIR WAS RENDERED BUT THE SAID
DECISION BECOMES FINAL, EXECUTORY, AND DEMANDABLE
FOR FAILURE OF THE TAXPAYER TO APPEAL THE DECISION TO
THE CTA WITHIN 30 DAYS FROM RECIEPT OF THE DECISION.

HOWEVER, THE CIR AUTHORIZATION IS ESSENTIAL BEFORE


INSTITUTING A CIVIL OR CRIMINAL ACTION.

70
26. WHO HAS JURISDICTION OVER CIVIL ACTIONS?
A. COURT OF TAX APPEALS – WHERE THE PRINCIPAL AMOUNT
OF TAXES AND FEES, EXCLUSIVE OF CHARGES AND PENALTIES
CLAIMED IS ONE MILLION PESOS AND ABOVE. THE CTA HAS A
TOTAL 9 MAGISTRATE DIVIDED INTO 3 DIVISION COMPOSE
OF 3 JUSTICES PER DIVISION.
B. REGIONAL TRIAL COURT, MUNICIPAL TRIAL COURT,
METROPOLITAN TRIAL COURT – WHERE THE PRINCIPAL
AMOUNT OF TAXES AND FEES, EXCLUSIVE OF CHARGES AND
PENALTIES CLAIMED IS LESS THAN ONE MILLION PESOS.

71
27. WHAT ARE CRIMINAL ACTIONS?
IN CONSONANCE WITH THE CONSTITUTIONAL LIMITATION
“NO PERSON SHALL BE IMPRISONED FOR NON-PAYMENT OF
DEBT OR POLL TAX”. THE CIR MAY INITIATE CRIMINAL SUIT
AGAINST DELINQUENT TAXPAYER AND MAY BE PUNISHED
BEHIND BARS.
28. WHO HAS JURISDICTION OVER CRIMINAL ACTIONS?
A. COURT OF TAX APPEALS – ON CRIMINAL OFFENSES ARISING
FROM VIOLATIONS OF THE NIRC AND OTHER LAWS
ADMINISTERED BY THE BIR, WHERE THE PRINCIPAL AMOUNT
OF TAXES AND FEES, EXCLUSIVE OF CHARGES AND PENALTIES
CLAIMED IS ONE MILLION PESOS AND ABOVE.
72
B. REGIONAL TRIAL COURT, MUNICIPAL TRIAL COURT,
METROPOLITAN TRIAL COURT – ON CRIMINAL OFFENSES
ARISING FROM VIOLATIONS OF THE NIRC AND OTHER LAWS
ADMINISTERED BY THE BIR, WHERE THE PRINCIPAL AMOUNT
OF TAXES AND FEES, EXCLUSIVE OF CHARGES AND PENALTIES
CLAIMED IS LESS THAN ONE MILLION PESOS OR WHERE
THERE IS NO SPECIFIED AMOUNT CLAIMED.

73
29. MAY CRIMINAL ACTION BE FILED DURING THE PENDENCY OF
AN ADMINISTRATIVE PROTEST IN THE BIR?

YES. IT IS NOT A REQUIREMENT FOR THE FILING OF CRIMINAL


COMPLAINT TO HAVE A PRECISE COMPUTATION AND
ASSESSMENT OF THE TAX, SINCE WHAT IS INVOLVED IN THE
CRIMINAL ACTION IS NOT THE COLLECTION OF TAX BUT
CRIMINAL PROSECUTION FOR THE VIOLATION OF THE NIRC.

74
CHAPTER 2
REMEDIES OF THE TAXPAYER
1. WHAT ARE THE REMEDIES OF TAXPAYER?
A. ADMINISTRATIVE – WITHIN THE BIR (a) PROTEST (b) REFUND;
B. JUDICIAL – WITH THE COURTS (a) APPEAL TO CTA (b)
TEMPORARY RESTRAINING ORDER / INJUCTION FROM CTA
AND (c) FILING CRIMINAL SUIT AGAINST ERRING BIR
OFFICIALS.

75
2. WHAT IS A PROTEST?
A CHALLENGE AGAINST AN ASSESSMENT. NORMALLY, A
TAXPAYER SUBJECT OF AN ASSESSMENT WILL CONTRADICT OR
REPEL THE FINAL DEMAND OF THE BIR BY FILING A FORMAL
LETTER ADDRESSED TO THE BIR COMMISSIONER IMPUGNING
THE VALIDITY OF THE ASSESSMENT MADE BY STATING
CLEARLY THE LAWS AND FACTS OF HIS PETITION.

76
3. HOW IS PROTEST FILED?
FILING A PETITION FOR RECONSIDERATION OR
REINVESTIGATION WITHIN 30 DAYS FROM RECEIPT OF
ASSESSMENT WITH THE CIR. AND WITHIN 60 DAYS FROM
FILING OF PROTEST, ALL RELEVANT SUPPORTING DOCUMENTS
SHOULD HAVE BEEN SUBMITTED, OTHERWISE, THE
ASSESSMENT SHALL BECOME FINAL – CANNOT BE DISTURBED.

77
4. WHAT IS A REFUND?
REMEDY OF TAXPAYER IN CASE OF EXCESSIVE OR ERRONEOUS
PAYMENT OF A TAX WITH THE BIR.
A. TAX IS COLLECTED ERRONEOUSLY OR ILLEGALLY.
B. PENALTY IS COLLECTED WITHOUT AUTHORITY.
C. SUM COLLECTED IS EXCESSIVE.

78
5. WHAT ARE THE REQUISITES OF TAX REFUND OR TAX CREDIT?
A. CLAIM MUST BE IN WRITING.
B. IT MUST BE FILED WITH THE CIR WITHIN TWO (2) YEARS
AFTER THE PAYMENT OF THE TAX OR PENALTY.
C. SHOW PROOF OF PAYMENT.

79
6. WHAT ARE THE DIFFERENT JUDICIAL REMEDIES AVAILABLE TO
TAXPAYER?
A. CIVIL ACTION
A. APPEAL TO THE COURT OF TAX APPEALS – WITHIN 30
DAYS FROM RECEIPT OF DECISION ON THE PROTEST OR
FROM THE LAPSE OF 180 DAYS DUE TO INACTION OF THE
COMMISSIONER WHICHEVER COMES FIRST.
B. ACTION FOR DAMAGES AGAINST A REVENUE OFFICER BY
REASON OF ANY ACT DONE IN THE PERFORMANCE OF
OFFICIAL DUTY.

80
B. CRIMINAL ACTION
A. FILING OF CRIMINAL COMPLAINT AGAINST ERRING BIR
OFFICIALS AND EMPLOYEES.
B. INJUCTION – WHEN THE CTA IN ITS OPINION THE
COLLECTION BY THE BIR MAY JEOPARDIZE TAXPAYER.

81
7. WHEN MAY THE CTA ISSUE A TRO / INJUCTION AGAINST A
COLLECTION OF A TAX?
GENERAL RULE: NO ACTION SHALL SUSPEND THE COLLECTION,
PAYMENT, LEVY OR DISTRAINT, AND / OR SALE OF ANY
PROPERTY OF THE TAXPAYER.
EXCEPTION: THE CTA IS EMPOWERED TO SUSPEND THE
COLLECTION OF INTERNAL REVENUE TAXES AND CUSTOMS
DUTIES ONLY WHEN THERE WAS A –
1) SHOWING THAT COLLECTION OF THE TAX MAY JEOPARDIZE
THE INTEREST OF THE GOVERNMENT AND / OR THE
TAXPAYER;

82
2) DEPOSIT OF THE AMOUNT CLAIMED OR FILE A SURETY BOND
FOR NOT MORE THAN DOUBLE THE AMOUNT OF TAX WITH
THE COURT WHEN REQUIRED; AND
3) SHOWING BY TAXPAYER THAT THE APPEAL IS NOT FRIVOLOUS
NOR DILATORY.

83
8. MAY THE GOVERNMENT BE HELD LIABLE FOR INTEREST ON
TAX REFUNDS?
GOVERNMENT CANNOT BE REQUIRED TO PAY INTEREST ON
TAXES REFUNDED TO THE TAXPAYER IN THE ABSENCE OF A
STATUTORY PROVISION CLEARLY OR EXPRESSLY DIRECTING OR
AUTHORIZING SUCH PAYMENT.

84
9. WHAT IS A TAX CREDIT CERTIFICATE?
A. IN LIEU OF CASH PAYMENT, TAX WARRANTS OR CERTIFICATE
MAY BE APPLIED AGAINST ANY INTERNAL REVENUE TAX,
EXCEPT WITHHOLDING TAXES,
B. ORIGINAL COPY IS SURRENDERED TO THE REVENUE OFFICE,
C. MUST BE USED WITHIN A PERIOD OF 5 YEARS.

85
CHAPTER 3
COMMON REMEDIES

1. WHAT IS A COMPROMISE?
MUTUAL CONCESSION BETWEEN THE TAXPAYER AND THE
GOVERNMENT IN SETTLING A TAX DEFICIENCY AMICABLY.

86
2. WHAT ARE THE REQUISITES FOR COMPROMISE?
A. THE TAXPAYER MUST HAVE A TAX LIABILITY.
B. THERE MUST BE AN OFFER (BY THE TAXPAYER OF AN
AMOUNT TO BE PAID BY THE TAXPAYER)
C. THERE MUST BE AN ACCEPTANCE (BY THE COMMISSIONER
OR TAXPAYER AS THE CASE MAY BE) OF THE OFFER IN THE
SETTLEMENT OF THE ORIGINAL CLAIM.

87
3. WHAT CASES MAY BE COMPROMISED?
A. DELINQUENT ACCOUNTS
B. CASES UNDER ADMINISTRATIVE PROTESTS
C. CIVIL TAX CASES BEING DISPUTED BEFORE THE COURTS
D. COLLECTION CASES FILED IN COURTS
E. CRIMINAL VIOLATIONS, OTHER THAN THOSE ALREADY FILED
IN THE COURT OR THOSE INVOLVING CRIMINAL TAX FRAUDS.

88
4. WHAT ARE THE GROUNDS FOR COMPROMISE?
A. A REASONABLE DOUBT AS TO THE VALIDITY OF THE CLAIM
AGAINST THE TAXPAYER EXISTS; OR
B. THE FINANCIAL POSITION OF THE TAXPAYER DEMONSTRATES
A CLEAR INABILITY TO PAY THE ASSESSED TAX.

89
5. WHAT ARE THE MINIMUM COMPROMISE RATES?
A. IN CASE OF FINANCIAL INCAPACITY
MINIMUM COMPROMISE RATE = 10% OF THE BASIC
ASSESSED TAX
B. OTHER CASES:
MCR = 40% OF THE BASIC ASSESSED TAX

90
6. WHAT ARE THE REMEDIES IN CASE THE TAXPAYER REFUSES OR
FAILS TO ABIDE BY THE TAX COMPROMISE?
A. ENFORCE THE COMPROMISE BY COURT ACTION;
B. IF IT IS JUDICIAL COMPROMISE, IT CAN BE ENFORCED BY
MERE EXECUTION. A JUDICIAL COMPROMISE IS ONE WHERE
A DECISION BASED ON THE COMPROMISE AGREEMENT IS
RENDERED BY THE COURT ON REQUEST OF THE PARTIES.

91
7. WHAT IS A COMPROMISE PENALTY?
IT IS AN AMOUNT OF MONEY WHICH THE TAXPAYER PAYS TO
COMPROMISE A TAX VIOLATION. THIS IS PAID IN LIEU OF
CRIMINAL PROSECUTION.

8. WHAT IS ABATEMENT?
A TAX MAY BE CANCELLED OR OBLITERATED UPON THE
AUTHORITY OF THE BIR UNDER CERTAIN CIRCUMSTANCES.

92
9. WHAT ARE THE GROUNDS FOR ABATEMENT?
A. THE TAX OR ANY PORTION THEREOF APPEARS TO BE
UNJUSTLY OR EXCESSIVELY ASSESSED;
B. THE ADMINISTRATION AND COLLECTION COSTS INVOLVED DO
NOT JUSTIFY THE COLLECTION OF THE AMOUNT DUE.

93
C. THE COMMISSIONER MAY ALSO, EVEN WITHOUT CLAIM
THEREFORE, REFUND OR CREDIT ANY TAX WHERE ON THE
FACE OF THE RETURN UPON WHICH PAYMENT WAS MADE
SUCH PAYMENT APPEARS CLEARLY TO HAVE BEEN
ERRONEOUSLY PAID.

94
CHAPTER 4
LIMITATIONS TO REMEDIES
1. WHAT ARE THE LIMITATIONS TO THE ASSESSMENT POWER OF
THE STATE?
PRESCRIPTION. THROUGH LAPSE OF TIME A RIGHT MAY
EITHER BE EXTINGUISHED OR ACQUIRED. THE POWER OF THE
STATE TO ASSESS (INVESTIGATE / AUDIT) TAXPAYER SHALL
PRESCRIBE AFTER THREE (3) YEARS FROM THE DATE THE
RETURN IS DUE (REQUIRED BY LAW) OR FILED, WHICHEVER IS
LATER.

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EXCEPTIONS:
1) FAILURE TO FILE A RETURN: TEN (10) YEARS FROM THE DATE
OF THE DISCOVERY OF THE OMISSION TO FILE THE RETURN;
2) FALSE OR FRADULENT RETURN WITH INTENTION TO EVADE
THE TAX : TEN (10) YEARS FROM THE DATE OF THE
DISCOVERY OF THE FALSITY OR FRAUD;

96
2. WHEN WILL THE PRESCRIPTIVE PERIOD COMMENCE IN CASE
OF AN AMENDED RETURN?
IF THE AMENDED RETURN IS SUBSTANTIALLY DIFFERENT
FROM THE ORIGINAL RETURN , THE PRESCRIPTIVE PERIOD
SHALL BE COUNTED FROM THE FILING OF THE AMENDED
RETURN. BUT THE SAID PERIOD SHALL RUN FROM THE FILING
OF THE ORIGINAL RETURN IF THE SAME IS SUFFICIENTLY
COMPLETE TO ENABLE THE COMMISSIONER TO MAKE A
PROPER ASSESSMENT.

97
WHEN SUBSTANTIAL: SUBSTANTIAL UNDER-DECLARATION
(EXCEEDING 30% OF THAT DECLARED) OF TAXABLE SALES,
RECEIPTS OR INCOME, OR A SUBSTANTIAL OVERSTATEMENT
(EXCEEDING 30% OF ACTUAL DEDUCTIONS) OF DEDUCTIONS.
3. WHAT IS THE LIMITATION TO THE COLLECTION POWER OF THE
STATE?
THE STATE’S POWER TO COLLECT TAX SHALL PRESCRIBE WITHIN:
5 YEARS – FROM ASSESSMENT OR WITHIN PERIOD FOR
COLLECTION AGREED UPON IN WRITING BEFORE EXPIRATION
OF THE 5 – YEAR PERIOD.

98
10 YEARS – WITHOUT ASSESSMENT IN CASE OF FALSE OR
FRAUDULENT RETURN WITH INTENT TO EVADE OR FAILURE
TO FILE RETURN.

99
5. WHAT ARE THE PRESCRIPTIVE PERIODS FOR THE VIOLATION
OF ANY PROVISION OF THE TAX CODE?
SHOULD BE FILED WITHIN FIVE (5) YEARS FROM THE (1) DAY OF
THE COMMISSION OF THE VIOLATION OF THE LAW, AND IF
THE SAME BE NOT KNOWN, FROM THE (2) DISCOVERY
THEREOF AND THE INSTITUTION OF THE JUDICIAL
PROCEEDINGS FOR ITS INVESTIGATION AND PUNISHMENT.

100
6. WHAT ARE THE DIFFRERENT PRESCRIPTIVE PERIODS FOR
PROTEST?
A. A PROTEST MUST BE FILED WITHIN 30 DAYS FROM RECEIPT
OF ASSESSMENT
B. SUBMIT SUPPORTING DOCUMENTS WITHIN 60 DAYS FROM
DATE OF THE FILINF OF THE PROTEST.
C. IF THE PROTEST IS DENIED; APPEAL THE MATTER TO THE
DIVISION OF THE COURT OF TAX APPEALS (CTA) WITHIN 30
DAYS FROM RECEIPT OF FINAL DECISION OF CIR OR IF THE
CIR FAILS TO ACT ON THE PROTEST WITHIN 180 DAYS FROM
THE DATE OF SUBMISSION OF THE EVIDENTIARY
DOCUMENTS BY TAXPAYER, WHICHEVER COMES FIRST.
101
D. APPEAL WITHIN 15 DAYS TO THE CTA EN BANC FROM RECEIPT
OF DIVISION OF THE CTA DENIAL DECISION.
E. APPEAL TO THE SUPREME COURT WITHIN 15 DAYS FROM
RECEIPT OF THE CTA EN BANC DENIAL DECISION.

102
7. WHAT ARE THE PRESCRIPTIVE PERIODS FOR REFUND?
A. CLAIM FOR REFUND MUST BE MADE WITHIN 2 YEARS FROM
THE DATE OF PAYMENT.
B. IN CASE OF THE CIR’S DENIAL OF THE CLAIM FOR REFUND,
30-DAY PERIOD TO APPEAL WITH THE CTA MUST BE WITHIN
THE 2-YEAR PREEMPTORY PERIOD FOR INSTITUTING
JUDICIAL ACTION.

103
BOOK 3

TAXATION

INCOME TAX

104
CHAPTER 1
1. WHAT ARE THE DIFFERENT CLASSIFICATIONS OF TAXPAYERS/INCOME EARNERS?
A. INDIVIDUALS
1) CITIZENS
1.1 RESIDENT CITIZENS (RC)
1.2 NON-RESIDENT CITIZENS (NRC)
2) ALIENS
2.1 RESIDENT ALIENS (RA)
2.2 NON-RESIDENT ALINES (NRA)
2.2.1 ENGAGED IN TRADE OR BUSINESS IN THE
PHILIPPINES(NRAETB)
2.2.2 NOT ENGAGED IN TRADE OR BUSINESS WITHIN THE
PHILIPPINES (NRANETB)

105
B. CORPORATIONS
1) DOMESTIC (DC)
2) FOREIGN
2.1 RESIDENT FOREIGN CORPORATION (RFC)
2.2 NON-RESIDENT FOREIGN CORPORATION (NRFC)
C. ESTATES
D. TRUSTS
E. PARTNERSHIPS
1) ORDINARY PARTNERSHIP
2) GENERAL PROFESSIONAL PARTNERSHIP

106
2. WHAT ARE THE DIFFERENT CLASSIFICATIONS OF TAXABLE
INDIVIDUALS?
A. RESIDENT CITIZEN
B. NON-RESIDENT CITIZEN- A FILIPINO CITIZEN WHO:
A. ESTABLISHES TO THE SATISFACTION OF THE CIR THE FACT
OF HIS PHYSICAL PRESENCE ABROAD WITH A DEFINITE
INTENTION TO RESIDE THEREIN;
B. LEAVES THE PHILIPPINES DURING THE TAXABLE YEAR TO
RESIDE ABROAD, EITHER AS AN IMMIGRANT OR FOR
EMPLOYMENT ON A PERMANENT BASIS;
C. WORKS AND DERIVES INCOME FROM ABROAD AND

107
WHOSE EMPLOYMENT THEREAT REQUIRES HIM TO BE
PHYSICALLY PRESENT MOST OF THE TIME DURING THE
TAXABLE YEAR;
D. IS PREVIOUSLY CONSIDERED AS A NON-RESIDENT AND
WHO ARRIVES IN THE PHILIPPINES AT ANYTIME DURING THE
TAXABLE YEAR TO RESIDE THEREAT PERMANENTLY SHALL BE
CONSIDERED NON-RESIDENT FOR THE TAXABLE YEAR IN
WHICH HE ARRIVES IN THE PHILIPPINES WITH RESPECT TO HIS
INCOME DERIVED FROM SOURCES ABROAD UNTIL THE DATE
OF HIS ARRIVAL
E. WHO STAYS OUTSIDE THE PHILIPPINES MORE THAN 183
DAYS.
108
C. RESIDENT ALIEN- INDIVIDUAL WHOSE RESIDENCE IS WITHIN
THE PHILIPPINES AND WHO IS NOT A CITIZEN THEREOF.

D. NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS


WITHIN THE PHILIPPINES
NON-RESIDENT ALIEN- INDIVIDUAL WHOSE RESIDENCE IS NOT
WITHIN THE PHILIPPINES AND WHO IS NOT A CITIZEN
THEREOF.

TRADE OR BUSINESS- INCLUDES THE PERFORMANCE OF THE


FUNCTIONS OF A PUBLIC OFFICE.

109
THE TERM TRADE, BUSINESS, OR PROFESSION SHALL NOT INCLUDE
PERFORMANCE OF SERVICES BY THE TAXPAYER AS AN EMPLOYEE.
A NON-RESIDENT ALIEN WHO SHALL COME IN THE PHILIPPINES AND STAY
THEREIN FOR AN AGGREGATE PERIOD OF MORE THAN 180 DAYS DURING
ANY CALENDAR YEAR SHALL BE DEEMED A NON-RESIDENT ALIEN DOING
BUSINESS IN THE PHILIPPINES.
E. NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS WITHIN THE
PHILIPPINES
F. SPECIAL ALIENS- EMPLOYED BY MULI-NATIONAL COMPANIES, REGIONAL
AREA HEADQUARTERS, OFFSHORE BANKING UNITS AND PETROLEUM
CONTRACTORS OR SUB-CONTRACTORS

110
3. WHAT ARE THE GENERAL PRINCIPLES OF INDIVIDUAL TAX SITUS?
ONLY RESIDENT CITIZENS ARE TAXABLE FOR INCOME DERIVED FROM SOURCES
WITHIN AND WITHOUT THE PHILIPPINES. ALL OTHER INDIVIDUAL INCOME
TAXPAYERS ARE TAXABLE ONLY FOR INCOME DERIVED FROM SOURCES WITHIN THE
PHILIPPINES.
NOTES:
A. AN OVERSEAS CONTRACT WORKER (OCW) IS TAXABLE ONLY ON INCOME
DRIVED FROM SOURCES WITHIN THE PHILIPPINES.
B. A SEAMAN IS CONSIDERED AN OCW PROVIDED THE FOLLOWING
REQUIREMENTS ARE MET:
1. RECEIVES COMPENSATION FOR SERVICES RENDERED ABROAD AS A MEMBER OF
THE COMPLEMENT OF A VESSEL; AND
2. SUCH VESSEL IS ENGAGED EXCLUSIVELY IN INTERNATIONAL TRADE.

111
4. WHAT ARE THE DIFFERENT TAXABLE CORPORATIONS?
A. DOMESTIC CORPORATION- CREATED OR ORGANIZED IN THE
PHILIPPINES OR UNDER ITS LAW
B. RESIDENT FOREIGN CORPORATION- CREATED OR
ORGANIZED OTHER THAN THE PHILIPPINE LAWS; ENGAGED IN
TRADE OR BUSINESS WITHIN THE PHILIPPINES
C. NON-RESIDENT FOREIGN CORPORATION –CREATED OR
ORGANIZED OTHER THAN PHILIPPINE LAWS; NOT ENGAGED
IN TRADE OR BUSINESS WITHIN THE PHILIPPINES
D. SPECIAL CORPORATION

112
5. WHAT IS A CORPORATION?
- IT INCLUDES THE FOLLOWING BUT NOT LIMITED TO:
A. PARTNERSHIPS, NO MATTER HOW CREATED OR ORGANIZED;
B. JOINT STOCK COMPANIES;
C. JOINT ACCOUNTS
D. ASSOCIATIONS; OR
E. INSURANCE COMPANIES
- IT EXCLUDES:
A. GENERAL PROFESSIONAL PARTNERSHIPS;
B. JOINT VENTURE OR CONSORTIUM FORMED FOR THE PURPOSE OF
UNDERTAKING CONSTRUCTION PROJECTS OR ENGAGING IN PETROLEUM, COAL,
GEOTHERMAL AND OTHER ENERGY OPERATIONS PURSUANT TO AN OPERATING OR
CONSORTIUM AGREEMENT UNDER A SERVICE CONTRACT WITH THE
GOVERNMENT.

113
6. WHAT CORPORATION IS EXEMPT FROM INCOME TAXATION?
A. THOSE ENUMERATED UNDER SECTION 30 OF THE NIRC.
B. WITH RESPECT TO GOCC’S, GENERAL RULE IS THAT THESE
CORPORATIONS ARE TAXABLE AS ANY OTHER CORPORATION, EXCEPT:
1. GSIS
2. SSS
3. PHIC
4. PCSO
C. REGIONAL OR AREA HEADQUARTERS- NOT SUBJECT TO INCOME TAX
(LIMITED TO SUPERVISION/COMMUNICATION ACTIVITIES
NOTE: REGIONAL OPERATING HEADQUARTERS SHALL PAY A TAX OF 10%
OF THEIR TAXABLE INCOME

114
7. WHAT ARE THE GENERAL PRINCIPLES OF CORPORATE TAX SITUS?
ONLY DOMESTIC CORPORATIONS ARE TAXABLE FOR INCOME DERIVED FROM
SOURCES WITHIN AND WITHOUT THE PHILIPPINES. ALL OTHER CORPORATE
INCOME TAXPAYERS ARE TAXABLE ONLY FOR INCOME DERIVED FROM SOURCES
WITHIN THE PHILIPPINES.
8. WHAT ARE ESTATES AND TRUSTS?
ESTATE- MASS OF PROPERTIES LEFT BY A DECEASED PERSON.
TRUST- A RIGHT TO THE PROPERTY, WHETHER REAL OR PERSONAL, HELD BY ONE
PERSON FOR THE BENEFIT OF ANOTHER. IT IS A STIPULATION IN FAVOR OF THIRD
PERSONS.
UNDER ARTICLE 1440 OF THE CIVIL CODE, A PERSON WHO ESTABLISHES A
TRUST IS CALLED A TRUSTOR; ONE IN WHOM CONFIDENCE IS REPOSED AS
REGARDS PROPERTY FOR THE BENEFIT OF ANOTHER PERSON IS KNOWN AS THE
TRUSTEE; AND THE PERSON FOR WHOSE BENEFIT THE TRUST HAS BEEN CREATED
IS REFERRD TO AS THE BENEFICIARY.

115
9. WHAT ARE THE DIFFERENT KINDS OF PARTNERSHIPS?
A. GENERAL PROFESSIONAL PARTNERSHIPS(GPP)-FORMED BY
PERSONS FOR:
1. THE SOLE PURPOSE OF EXERCISING A COMMON
PROFESSION; AND
2. NO PART OF THE INCOME OF WHICH IS DERIVED FROM
ENGAGING IN ANY TRADE OR BUSINESS.
B. TAXABLE OR BUSINESS PARTNERSHIP (GENERAL CO-
PARTNERSHIP)- ALL OTHER PARTNERSHIPS, EXCEPT GENERAL
PROFESSIONAL PARTNERSHIPS NO MATTER, HOW CREATED
OR ORGANIZED.

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CHAPTER 2
INDIVIDUAL INCOME TAX

1. WHAT ARE THE DIFFERENT INDIVIDUAL INCOME TAXES?


A. NET INCOME TAX (NORMAL OR BASIC TAX IS 5% TO 32%
PROGRESSIVE TAX RATES)
B. FINAL TAX ON PASSIVE INCOMES (PROPORTIONAL TAX
RATES)
C. CAPITAL GAINS TAX ON CAPITAL GAINS

117
2. HOW TO COMPUTE NET INCOME TAX FOR INDIVIDUALS?
NET INCOME TAX FORMULA:

GROSS INCOME (EXCLUDING PASSIVE INCOME AND CAPITAL GAINS) XX


LESS: EXCLUSIONS
LESS: ALLOWABLE DEDUCTIONS (XX)
__________________________
NET TAXABLE INCOME XX
APPLY TAX RATES
__________________________
NET INCOME TAX DUE XX
LESS: TAX CREDIT, IF ANY (XX)
__________________________
TAX STILL DUE, IF ANY. XX

118
THE PROGRESSIVE TAX RATES ARE AS FOLLOWS:

OVER BUT NOT OVER THE TAX SHALL BE PLUS OF EXCESS OVER
- P10,000 5% - -
P10,000 30,000 P 500 10% P10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000

119
3. WHAT IS GROSS INCOME- ALL INCOME DERIVED FROM WHATSOEVER SOURCE,
INCLUDING BUT NOT LIMITED TO THE FOLLOWING:
A. COMPENSATION
B. GROSS INCOME FROM PROFESSION, TRADE OR BUSINESS
C. GAINS FROM DEALINGS IN PROPERTY
D. INTERESTS
E. RENTS
F. ROYALTIES
G. DIVIDENDS
H. ANNUITIES
I. PRIZES AND WINNINGS
J. PENSIONS
K. PARTNER’S SHARE IN THE NET INCOME OF THE GENERAL PROFESSIONAL
PARTNERSHIP

120
EXCLUSIONS FROM GROSS INCOME:
1.GSIS, SS, MEDICARE AND OTHER
CONTRIBUTIONS
2.BENEFITS RECEIVED FROM THE SSS
AND THE GSIS
3.13TH MONTH PAY AND OTHER
BENEFITS NOT EXECEEDING
P82,000.00

121
4. WHAT ARE ALLOWABLE DEDUCTIONS FOR INDIVIDUALS?
A. WITH GROSS COMPENSATION INCOME FROM EMPLOYER-EMPLOYEE
RELATIONSHIP ONLY
(1) PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
(2) BASIC AND ADDITIONAL PERSONAL EXEMPTIONS

B. GROSS INCOME FROM BUSINESS OR PRACTICE OF PROFESSION


(1) ITEMIZED DEDUCTIONS OR OPTIONAL STANDARD DEDUCTION (OSD)
(2) PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
(3) BASIC AND ADDITIONAL PERSONAL EXEMPTIONS

122
5. WHO CANNOT AVAIL OF DEDUCTIONS FROM GROSS INCOME?
NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS IN
THE PHILIPPINES

6. WHAT IS A PREMIUM PAYMENT ON HEALTH AND/OR


HOSPITALIZATION INSURANCE?
- IT IS AN AMOUNT OF PREMIUM ON HEALTH AND/OR
HOSPITALIZATION PAID BY AN INDIVIDUAL TAXPAYER (HEAD
OF THE FAMILY OR MARRIED), FOR HIMSELF AND MEMBERS
OF HIS FAMILY DURING THE TAXABLE YEAR.

123
7. WHAT ARE THE REQUISITES FOR PREMIUM PAYMENTS TO BE
DEDUCTIBLE?
A. INSURANCE MUST HAVE BEEN ACTUALLY TAKEN;
B. THE AMOUNT OF PREMIUM DEDUCTIBLE DOES NOT
EXCEED P2,400 PER FAMILY OR P200 PER MONTH DURING
THE TAXABLE YEAR;
C. THAT SAID FAMILY HAS A GROSS INCOME OF NOT MORE
THAN P250,000 FOR THE TAXABLE YEAR;
D. IN CASE OF MARRIED INDIVIDUAL, ONLY THE SPOUSE
CLAIMING ADDITIONAL EXEMPTION SHALL BE ENTITLED TO
THIS DEDUCTION

124
8. WHO MAY AVAIL OF THE PREMIUM PAYMENTS?
A. INDIVIDUAL TAXPAYERS EARNING PURELY COMPENSATION
INCOME DURING THE YEAR.
B. INDIVIDUAL TAXPAYER EARNING BUSINESS INCOME OR
PRACTICE OF HIS PROFESSION WHETHER AVAILING OF
ITEMIZED OR OPTIONAL STANDARD DEDUCTIONS DURING
THE YEAR.
C. INDIVIDUAL TAXPAYER EARNING BOTH COMPENSATION,
AND THE BUSINESS OR PRACTICE OF PROFESSION DURING
THE YEAR.

125
9. WHO MAY AVAIL OF THE BASIC AND ADDITIONAL PERSONAL EXEMPTIONS?
-AVAILABLE ONLY TO INDIVIDUAL TAXPAYERS:RESIDENT CITIZEN, NON-RESIDENT
CITIZEN AND RESIDENT ALIEN (WHETHER BUSINESS OR COMPENSATION INCOME
EARNERS).
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS MAY BE ENTITLED TO
PERSONAL EXEMPTIONS SUBJECT TO RECIPROCITY, I.E.,
A. THE COUNTRY OF WHICH HE IS A SUBJECT OR A CITIZEN HAS AN INCOME TAX
LAW; AND
B. THE INCOME TAX LAW OF HIS COUNTRY ALLOWS PERSONAL EXEMPTION TO
CITIZENS OF THE PHILIPPINES NOT RESIDING THEREIN, BUT DERIVING INCOME
THEREFROM AND NOT TO EXCEED THE AMOUNT ALLOWED IN THE NIRC.
NOTE: THE PERSONAL EXEMPTION SHALL BE EQUAL TO THAT ALLOWED BY THE
INCOME TAX LAW OF HIS COUNTRY TO A CITIZEN OF THE PHILIPPINES NOT
RESIDING THEREIN, OR THE AMOUNT PROVIDED IN THE NIRC, WHICHEVER IS
LOWER.

126
10. WHAT ARE BASIC AND ADDITIONAL PERSONAL EXEMPTIONS
A. BASIC PERSONAL EXEMPTION:
THE BASIC PERSONAL EXEMPTION IS P50,000 EXEMPT INCOME OF AN INDIVIDUAL, WHETHER
SINGLE, HEAD OF THE FAMILY OR MARRIED(EACH MARRIED INDIVIDUAL)
HEAD OF THE FAMILY:
1. UNMARRIED OR LEGALLY SEPARATED PERSON WITH-
A) ONE OR BOTH PARENTS, OR
B) ONE OR MORE BROTHERS OR SISTERS, OR
C) ONE OR MORE LEGITIMATE, RECOGNIZED NATURAL OR LEGALLY ADOPTED CHILDREN,
LIVING WITH AND DEPENDENT UPON THE TAXPAYER FOR THEIR CHIEF SUPPORT, AND
2) WHERE SUCH BROTHER, SISTER, OR CHILDREN ARE-
A) NOT MORE THAN 21 YEARS OF AGE
B) UNMARRIED AND
C) NOT GAINFULLY EMPLOYED, OR WHERE SUCH DEPENDENTS REGARDLESS OF AGE, ARE
INCAPABLE OF SELF-SUPPORT BECAUSE OF MENTAL OR PHYSICAL DEFECT.

CHIEF SUPPORT- MORE THAN ONE-HALF OF THE REQUIREMENTS FOR THE SUPPORT.

127
B. ADDITIONAL PERSONAL EXEMPTION:
- THE ADDITIONAL PERSONAL EXEMPTION IS P25,000 EXEMPT INCOME OF AN INDIVIDUAL
FOR EACH OF THE
1)QUALIFIED DEPENDENT CHILDREN, OR
2) SENIOR CITIZEN, NOT EXCEEDING FOUR(4) IN NUMBER.

THE PROPER CLAIMANT OF THE ADDITIONAL EXEMPTION IN CASE OF MARRIED INDIVIDUAL


IS THE HUSBAND BEING THE HEAD OF THE FAMILY, EXCEPT UNDER THE FOLLOWING CASES:
1. HUSBAND IS UNEMPLOYED
2. HUSBAND IS WORKING ABROAD LIKE AN OCW OR A SEAMAN
3. HUSBAND EXPLICITLY WAIVED HIS RIGHT OF THE EXEMPTION IN FAVOR OF HIS WIFE IN
THE WITHHOLDING EXEMPTION CERTIFICATE
4. HUSBAND IS THE GUILTY SPOUSE IN A LEGAL SEPARATION (THE INNOCENT SPOUSE MAY BE
CATEGORIZED AS THE HEAD OF THE FAMILY PLUS ADDITIONAL PERSONAL EXEMPTION IF
COURT AWARDS CUSTODY)
5. HUSBAND IS PURELY IN BUSINESS WHILE WIFE IS PURELY RECEIVING COMPENSATION.

128
A QUALIFIED DEPENDENT IS:
A. CHILD OR CHILDREN
B. LEGITIMATE, ILLEGITIMATE, LEGALLY ADOPTED
C. LIVING WITH THE TAXPAYER AND DEPENDENT UPON THE TAXPAYER FOR CHIEF SUPPORT
D. NOT EXCEEDING 21 YEARS OLD, UNLESS INCAPABLE OF SELF SUPPORT DUE TO MENTAL OR
PHYSICAL DEFECT
E. UNMARRIED AND NOT GAINFULLY EMPLOYED

A SENIOR CITIZEN IS:


A. ANY RESIDENT CITIZEN OF THE PHILIPPINES
B. AT LEAST SIXTY (60) YEARS OLD, INCLUDING THOSE WHO HAVE RETIRED FROM BOTH
GOVERNMENT OFFICES AND PRIVATE ENTERPRISES, AND
C. HAS AN INCOME OF NOT MORE THAN P60,000.00 THOUSAND PESOS PER ANNUM
SUBJECT TO THE REVIEW OF THE NATIONAL ECONOMIC DEVELOPMENT AUTHORITY(NEDA)
EVERY THREE YEARS

129
11. WHAT ARE THE RULES FOR A CHANGE OF STATUS?
A. IF THE TAXPAYER SHOULD MARRY OR SHOULD HAVE ADDITIONAL DEPENDENTS DURING
THE TAXABLE YEAR, HE MAY CLAIM THE CORRESPONDING EXEMPTION IN FULL FOR SUCH
YEAR.
B. IF THE TAXPAYER SHOULD DIE DURING THE TAXABLE YEAR, HIS ESTATE MAY CLAIM HIS
CORRESPONDING EXEMPTIONS AS IF HE DIED AT THE CLOSE OF SUCH YEAR.
C. IF THE SPOUSE OR ANY DEPENDENT SHOULD MARRY OR BECOME 21 YEARS OLD DURING
THE YEAR, OR SHOULD BECOME GAINFULLY EMPLOYED, THE TAXPAYER MAY CLAIM THE
EXEMPTION AS IF THE SPOUSE OR DEPENDENT DIED OR AS IF SUCH DEPENDENT MARRIED,
BECAME 21 YEARS OLD OR BECAME GAINFULLY EMPLOYED AT THE CLOSE OF SUCH YEAR.
D. FOR ANY OTHER EVENT AND FOR WHICH THERE ARE NO SPECIFIC RULES APPLICALBE FOR
THE ABOVEMENTIONED, THE STATUS OF THE TAXPAYER AT THE END OF THE YEAR SHALL
DETERMINE HIS EXEMPTIONS. (STRICTLY CONSTRUED AGAINST THE TAXPAYER)

130
12. WHAT ARE ITEMIZED DEDUCTIONS? (BLEDD-CRIPT-P)
A. ORDINARY AND NECESSARY EXPENSES
B. INTERESTS
C. TAXES
D. LOSSES
E. BAD DEBTS
F.DEPRECIATION OF PROPERTY
G. DEPLETION OF OIL AND GAS WELLS AND MINES
H. CHARITABLE AND OTHER CONTRIBUTIONS
I. RESEARCH AND DEVELOPMENT
J. PENSION TRUST CONTRIBUTIONS OF EMPLOYEES, AND
K. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
13. WHAT ARE OPTIONAL STANDARD DEDUCTIONS?- IN CASE OF INDIVIDUALS, OSD IS A
DEDUCTION EQUIVALENT TO 40% OF THE GROSS RECEIPTS IN LIEU OF COST OF SALES AND
ITEMIZED DEDUCTIONS.

131
14. WHAT IS FINAL TAX?
A TAX IMPOSED ON PASSIVE INCOME, ALSO KNOWN AS FINAL INCOME TAX.
A. IT IS CONSTITUTED AS A FULL AND FINAL PAYMENT OF THE INCOME TAX DUE FROM THE
PAYEE ON A PARTICULAR TYPE OF INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT). THE
FINALITY OF THE WITHHOLDING TAX IS LIMITED ONLY TO THE PAYEE’S INCOME TAX LIABILITY
AND DOES NOT EXTEND TO OTHER TAXES THAT MAYBE IMPOSED ON SAID INCOME.
B. THE INCOME SUBJECTED TO FINAL INCOME TAX IS NO LONGER SUBJECT TO THE NET
INCOME TAX; OTHERWISE, THERE WOULD BE A VIOLATION OF PROHIBITED DOUBLE
TAXATION.
C. THE LIABILITY FOR THE PAYMENT OF THE TAX RESTS PRIMARILY ON THE PAYOR AS THE
WITHHOLDING AGENT
D. THE PAYEE IS NOT REQUIRED TO FILE AN INCOME TAX RETURN FOR THE PARTICULAR
INCOME SUBJECTED TO FWT.
E. THE RATE OF THE FINAL TAX IS MULTIPLIED TO THE GROSS INCOME. THUS, DDUCTIONS
AND/OR PERSONAL AND ADDITIONAL EXEMPTIONS ARE NOT ALLOWED.

132
15. WHAT ARE PASSIVE INCOMES?
INCOME DERIVED FROM SOURCES WITHIN THE PHILIPPINES SUCH AS:
A. INTEREST UNDER THE EXPANDED FOREIGN CURRENCY DEPOSITS
SYSTEM
B. INTERESTS, YIELDS, OR OTHER MONETARY BENEFITS FROM DEPOSITS,
DEPOSIT SUBSTITUTES, TRUST FUNDS OR SIMILAR ARRANGEMENT
C. ROYALTIES FROM INTELLECTUAL CREATION (E.G. COMPOSITION,
AUTHORSHIP, LITERARY WORKS)
D. PRIZES AND WINNINGS
E. DIVIDENDS FROM DOMESTIC CORPORATION OR SHARE OF A PARTNER
IN THE DISTRIBUTABLE INCOME OF AN ORDINARY PARTNERSHIP

133
16. WHAT IS A CAPITAL GAINS TAX?
A TAX IMPOSED ON SALE OF SHARES OF STOCK OF A DOMESTIC CORPORATION NOT LISTED
AND TRADED THRU A LOCAL STOCK EXCHANGE, HELD AS CAPITAL ASSET AND SALE OF REAL
PROPERTY IN THE PHILIPPINES HELD AS A CAPITAL ASSET.

17. HOW TO COMPUTE CAPITAL GAINS TAX OF INDIVIDUALS?

A. ON SALE OF SHARES OF STOCK OF DOMESTIC CORPORATION NOT LISTED AND TRADED


THRU A LOCAL STOCK EXCHANGE, HELD AS CAPITAL ASSET:
ON THE NET CAPITAL GAIN-
NOT OVER P100,000 -CGT OF 5%
AMOUNT IN EXCESS OF P100,000 - CGT OF 10%

B. ON SALE OF REAL PROPERTY IN THE PHILIPPINES HELD AS CAPITAL ASSET;


-ON THE GROSS SELLING PRICE, OR THE CURRENT FAIR MARKET VALUE AT THE TIME
OF SALE, WHICHEVER IS HIGHER- CGT OF 6%

134
18. WHO ARE MINIMUM WAGE EARNERS?
BOTH THOSE WHO ARE WORKING IN THE PRIVATE AND PUBLIC
SECTORS BEING PAID THE STATUTORY MINIMUM WAGE AS
DETERMINED BY THE TRIPARTITE MINIMUM WAGE BOARD
COVERING THEIR BASIC, HOLIDAY, OVERTIME, NIGHT DIFFERENTIAL
AND HAZARD PAY SHALL BE EXEMPT FROM INCOME TAX AND IS
NOT REQUIRED TO FILE INCOME TAX RETURN.
19. WHAT INCOMES OF A MINIMUM WAGE EARNER ARE TAXABLE?
-COMMISSIONS AND HONORARIUMS AMONG OTHER THINGS.

135
Juan-single, pure compensation earner
Salaries for the year - P200,000
Allowances - 30,000
Premiums for health - 2,000

136
GROSS INCOME
SALARY - 200,000
ALLOWANCES - 30,000
________
230,000
LESS:
ALLOWABLE DEDUCTIONS
PERSONAL EXEMPTION (50,000)
PREMIUMS ( 2,000)
_________
(52,000)
________________________________________________________________________
NET TAXABLE INCOME 178,000
APPLY TAX RATES
UP TO P140,000 22,500
EXCESS(178,000-140,000=38,000
X .25 9,500
________
INCOME TAX DUE 32,000

137
JUAN- PURE COMPENSATION EARNER, UNMARRIED, WITH A 9
YEAR OLD DAUGHTER.

SALARIES - 200,000
ALLOWANCES - 30,000
PREMIUMS ON HEALTH INSURANCE 2,000

138
GROSS INCOME
SALARY 200,000
ALLOWANCES 30,000
_______
230,000
LESS:
ALLOWABLE DEDUCTIONS
PERSONAL EXEMPTION (50,000)
ADDITIONAL EXEMPTION (25,000)
PREMIUMS ( 2,000)
_______
(77,000)
_____________________________________________________________________
NET TAXABLE INCOME 153,000
APPLY TAX RATE
UP TO P140,000 22,500
EXCESS(153,000-140,000=13,000
X .25 3,250
______
25,750

139
CHAPTER 3
CORPORATE INCOME TAX
1. WHAT ARE THE DIFFERENT CORPORATE INCOME TAXES?
A. NET INCOM TAXE (BASIC/NORMAL/PROPORTIONAL)
B. OPTIONAL CORPORATE INCOME TAX OR GROSS INCOME TAX
(GIT)
C. MINIMUM CORPORATE INCOME TAX (MCIT)
D. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
E. FINAL TAX
F. CAPITAL GAINS TAX
G. PROFIT REMITTANCE TAX
140
2. HOW TO COMPUTE NET INCOME TAX?
NET INCOME TAX FORMULA:
GROSS INCOME(EXCLUDING PASSIVE INCOME AND CAPITAL GAINS) XX
LESS: ALLOWABLE DEDUCTIONS (XX)
NET TAXABLE INCOME XX
APPLY TAX RATES (30%)
NET INCOME TAX DUE XX
LESS: TAX CREDIT, IF ANY
TAX STILL DUE, IF ANY

141
3. WHAT IS GROSS INCOME?
MEANS ALL INCOME DERIVED FROM WHATEVER SOURCE,
INCLUDING BUT NOT LIMITED TO THE FOLLOWING;
A. GROSS INCOME FROM TRADE OR BUSINESS
B. GAINS FROM DEALINGS IN PROPERTY
C. INTERESTS
D. RENTS
E. ROYALTIES
F. DIVIDENDS
G. ANNUITIES
H. PRIZES AND WINNINGS
142
4. WHAT ARE ALLOWABLE DEDUCTIONS FOR CORPORATION?
THE ONLY ALLOWABLE DEDUCTIONS FOR CORPORATION ARE
ITEMIZED DEDUCTIONS OR OPTIONAL STANDARD
DEDUCTIONS.
ITEMIZED DEDUCTIONS ARE:
A. ORDINARY AND NECESSARY EXPENSES
B. INTERESTS
C. TAXES
D. LOSSES
E. BAD DEBTS
F. DEPRECIATION OF PROPERTY
143
G. DEPLETION OF PROPERTY
H. CHARITABLE AND OTHER CONTRIBUTIONS
I. RESEARCH AND DEVELOPMENT
J. PENSION TRUST CONTRIBUTIONS OF EMPLOYEES

IN CASE OF CORPORATION, OSD IS A DEDUCTIONS EEQUIVALENT


TO 40% GROSS INCOME IN LIEU OF ITEMIZED DEDUCTIONS.

144
5. WHAT IS OPTIONAL CORPORATE INCOME TAX?
IS AN OPTIONAL INCOME TAX GIVEN TO CORPORATE EARNERS
EQUIVALENT TO 15% OF ITS GROSS INCOME INSTEAD OF THE
30% NET INCOME TAX ALSO KNOWN AS GROSS INCOME TAX
6. WHAT CORPORATIONS MAY AVAIL SUCH OPTIONAL TAX
SCHEME?
A. DOMESTIC CORPORATION
B. RESIDENT FOREIGN CORPORATIONS

145
7. WHAT ARE THE PARAMETERS FOR THE AVAILMENT OF THE
OPTION?
A. A TAX RATIO OF 20% OF GROSS NATIONAL PRODUCTS
B. A RATIO OF 40% INCOME TAX COLLECTION OF TOTAL TAX
REVENUES
C. A VAT TAX EFFORT OF 4% OF GNP
D. A 0.9% RATION OF CONSOLIDATED PUBLIC SECTOR
FINANCIAL POSITION TO GNP

146
OTHER CONDITIONS ARE:
A. AVAILABLE ONLY TO FIRMS WHOSE RATIO OF:
COST OF SALES___________________________ = 55%
GROSS SALES OR RECEIPTS FROM ALL SOURCES
B. THE ELECTION SHALL BE IRREVOCABLE FOR THREE (3)
CONSECUTIVE YEARS
C. RECOMMENDATION FROM THE SECRETARY OF FINANCE
D. APPROVAL OF THE OFFICE OF PRESIDENT

147
8. WHAT IS THE TAX BASE OF THE OPTIONAL CORPORATE
INCOME TAX?
GROSS INCOME WHICH MEANS:
GROSS SALES
LESS/SUBTRACT: SALES RETURN;
DISCOUNT AND ALLOWANCES;
COST OF GOODS SOLD – MEANS ALL
BUSINESS EXPENSES DIRECTLY INCURRED
TO PRODUCE THE MERCHANDISE TO
BRING THEM TO THEIR PRESENT
LOCATION AND USE.

148
9. WHAT IS MINIMUM CORPORATE INCOME TAX (MCIT)?
A MINIMUM TAX IMPOSED ON CORPORATE EARNERS.
10. WHAT CORPORATIONS ARE COVERED?
MCIT IS IMPOSED ON DOMESTIC AND RESIDENT FOREIGN
CORPORATIONS
A. WHENEVER SUCH CORPORATION HAS ZERO OR NEGATIVE
TAXABLE INCOME; OR
B. WHENEVER THE AMOUNT OF MCIT IS GREATER THAN THE
NORMAL INCOME TAX DUE FROM SUCH CORPORATION.

149
11. WHEN DOES A CORPORATION BECOME LIABLE UNDER THE
MCIT?
MCIT IS IMPOSED BEGINNING ON THE FOURTH TAXABLE YEAR
IMMEDIATELY FOLLOWING THE YEAR IN WHICH SUCH
CORPORATIONS COMMENCED ITS BUSINESS.
12. WHAT ARE RELIEFS FROM MCIT?
THE SECRETARY OF FINANCE IS AUTHORIZED TO SUSPEND THE
IMPOSITION OF THE MCIT ON ANY CORPORATION WHICH
SUFFERS LOSSES BECAUSE OF:
A. PROLONGED LABOR DISPUTE
B. FORCE MAJEURE; OR
C. LEGITIMATE BUSINESS REVERSES.
150
“SUBSTATIAL LLOSSES FROM A PROLONGED LABOR DISPUTE”
MEANS LOSSES ARISING FROM A STRIKE STAGED BY THE
EMPLOYEES WHICH LASTED FOR MORE THAN SIX (6) MONTHS
WITHIN A TAXABLE PERIOD AND WHICH HAS CAUSED THE
TEMPORARY SHUTDOWN OF BUSINESS OPERATIONS.
“FORCE MAJEURE” MEANS A CAUSE DUE TO AN IRRESISTIBLE
FORCE AS BY “ACT OF GOD” LIKE LIGHTNING, EARTHQUAKE,
STORM, FLOOD AND THE LIKE. THIS TERM SHALL ALSO
INCLUDE ARMED CONFLICTS LIKE WAR AND INSURGENCY.

151
“LEGITIMATE BUSINESS REVERSES” SHALL INCLUDE SUBSTANTIAL
LOSSES SUSTAINED DUE TO FIRE, ROBBERY, THEFT, OR
EMBEZZLEMENT, OR FOR OTHER ECONOMIC REASON AS
DETERMINED BY THE SECRETARY OF FINANCE.

13. WHAT IS THE TAX RATE OF MCIT?


2% OF GROSS INCOME OR TAXABLE BASE PERTINENT TO A
TRADING/ MERCHANDISING CONCERN OR A SERVICE ENTITY.

152
14. WHAT IS THE TAX BASE FOR MCIT?
GROSS INCOME MEANS:
GROSS SALES
LESS/SUBTRACT:
1. SALES RETURN
2. DISCOUNT AND ALLOWANCES
3. COST OF SOLD GOODS – MEANS ALL BUSINESS EXPENSES
DIRECTLY INCURRED TO PRODUCE THE MERCHANDISING TO
BRING THEM TO THEIR PRESENT LOCATION AND USE.

153
A. MERCHANDISING CONCERN COST OF SALES =
GROSS INCOME = GROSS SALES/ 1. INVOICE COST OF THE GOODS SOLD;
RECIEPTS LESS SALES RETURNS, 2. IMPORT DUTIES
DISCOUNTS AND ALLOWANCES AND 3. FREIGHT IN TRANSPORTING THE
COST OF GOODS SOLD GOODS TO THE PLACE WHERE THE
GOODS ARE ACTUALLY SOLD;
4. INSURANCE WHILE THE GOODS ARE
IN TRANSIT.
B. MANUFACTURING COST OF SALES = ALL COST OF
GROSS INCOME (SAME) PRODUCTION OF FINISHED GOODS, SUCH
AS
1. RAW MATERIAL USED;
2. DIRECT LABOR
3. MANUFACTURING OVERHEAD
4. FREIGHT COST
5. INSURANCE PREMIUMS
6. OTHER COST INCCURED TO BRING THE
RAW MATERIALS TO THE FACTORY OR
WAREHOUSE 154
C. SERVICES COST OF SERVICES = ALL DIRECT COSTS
GROSS INCOME = GROSS RECIEPTS LESS AND EXPENSES NECESSARILY INCURRED
SALES RETURNS, ALLOWANCES, TO PROVIDE THE SERVICES REQUIRED BY
DISCOUNTS AND COST OF SERVICES THE CUSTOMERS AND CLIENTS
INCLUDING:
A. SALARIES AND EMPLOYEE BENEFITS
OF PERSONNEL, CONSULTANTS AND
SPECIALISTS DIRECTLY RENDERING
THE SERVICE;
B. COST OF FACILITIES DIRECTLY
UTILIZED IN PROVIDING THE SERVICE.
IT SHALL NOT INCLUDE INTEREST
EXPENSE EXCEPT FOR BANKS AND
OTHER FINANCIAL INSTITUTIONS.

155
15. WHAT IS THE NATURE OF THE EXCESS MINIMUM TAX OVER
THE NORMAL TAX?
A DEFERRED ASSET. THEREFORE, THE FOLLOWING RULES MUST
BE APPLIED:
ANY EXCESS OF MCIT OVER THE NORMAL INCOME TAX CAN BE CARRIED
FORWARD ON A QUARTERLY OR ANNUAL BASIS AS THE CASE MAY BE.
THE EXCESS CAN BE CREDITED AGAINST THE NORMAL INCOME TAX DUE IN
THE NEXT 3 IMMEDIATELY SUCCEEDING TAXABLE YEARS.
ANY AMOUNT OF THE EXCESS MCIT WHICH CANNOT BE CREDITED AGAINST
THE NORMAL INCOME TAX DUE IN THE NEXT 3-YEAR PERIOD SHALL BE
FORFIETED AND CHARGED TO RETAINED EARNINGS.

156
16. WHAT IS IMPROPERLY ACCUMULATED EARNINGS (IAET) TAX?
A TAX IMPOSED ON IMPROPER ACCUMULATION OF EARNINGS.
“IMPROPERLY ACCUMULATED EARNINGS (IAE)” ARE THE PROFITS
OF A CORPORATION THAT ARE PERMITTED TO ACCUMULATE
INSTEAD OF BEING DISTRIBUTED BY A CORPORATION TO ITS
SHAREHOLDERS FOR THE PURPOSE OF AVOIDING THE
INCOME TAX WITH RESPECT TO ITS SHAREHOLDERS OR THE
SHAREHOLDERS OF ANOTHER CORPORATION.

157
17. WHAT IS THE TAX RATE OF IAET?
THE RATE IS 10% OF THE IMPROPERLY ACCUMULATED TAXABLE
INCOME (IN ADDITION TO OTHER TAXES).
18 WHAT IS THE TAX BASE OF IAET?
THE FORMULA TO DETERMINE “IMPROPERLY ACCUMULATED
TAXABLE INCOME”
TAXABLE INCOME FOR THE YEAR
ADD:
INCOME EXEMPT FROM TAX
INCOME EXCLUDED FROM GROSS INCOME
INCOME SUBJECT TO FINAL TAX
NET OPERATING LOSS CARRY-OVER (NOLCO)
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TOTAL
LESS:
INCOME TAX PAID/PAYABLE FOR THE TAXABLE YEAR
DIVIDENDS ACTUALLY OR CONSTRUCTIVELY PAID/ISSUED FROM THE
APPLICABLE YEAR’S TAXABLE INCOME
AMOUNT RESERVED FOR THE REASONABLE NEEDS OF THE BUSINESS AS
DEFINED IN THE REGULATIONS
TAX BASE OF IMPROPERLY ACCUMULATED EARNINGS TAX

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19.WHAT CORPORATIONS ARE COVERED BY IAET?
GENERAL RULE: THE IAET TAX SHALL APPLY TO EVERY
CORPORATION FORMED OR AVAILED FOR THE PURPOSE OF
AVOIDING THE INCOME TAX WITH RESPECT TO ITS
SHAREHOLDERS OR THE SHAREHOLDERS OF ANY OTHER
CORPORATION, BY PERMITTING EARNINGS AND PROFITS TO
ACCUMULATE INSTEAD OF BEING DIVIDED OR DISTRIBUTED.
THESE ARE:
A. DOMESTIC CORPORATIONS AS DEFINED UNDER TAX CODE

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B. CORPORATIONS WHICH ARE CLASSIFIED AS CLOSELY-HELD
CORPORATIONS.
1. THOSE CORPORATIONS AT LEAST FIFTY PERCENT (50%) IN
VALUE OF THE OUTSTANDING CAPITAL STOCK OR AT LEAST
FIFTY PERCENT OF THE TOTAL COMBINED VOTING POWER OF
ALL CLASSES OF STOCK ENTITLED TO VOTE IS OWNED
DIRECTLY OR INDIRECTLY BY OR FOR NOT MORE THAN
TWENTY (20) INDIVIDUALS.
2. DOMESTIC CORPORATIONS NOT FALLING UNDER THE
AFORESAID DEFINITION ARE, THEREFORE, PUBLICLY-HELD
CORPORATIONS.

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3. THE FACT THAT ANY CORPORATION IS A MERE HOLDING
COMPANY OR INVESTMENT COMPANY SHALL BE PRIMA FACIE
EVIDENCE OF A PURPOSE TO AVOID THE TAX UPON ITS
SHAREHOLDERS OR MEMBERS.
4. THE FACT THAT THE EARNINGS OR PROFITS OF A
CORPORATION ARE PERMITTED TO ACCUMULATE BEYOND
THE REASONABLE NEEDS OF THE BUSINESS SHALL BE
DETERMINATIVE OF THE PURPOSE TO AVOID THE TAX UPON
ITS SHAREHOLDERS OR MEMBERS UNLESS THE
CORPORATION, BY THE CLEAR PREPONDERANCE OF
EVIDENCE, SHALL PROVE THE CONTRARY.

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EXCEPTION: THE SAID TAX SHALL NOT APPLY TO:
A. PUBLICLY HELD CORPORATIONS
B. BANKS AND OTHER NON-BANKS FINANCIAL INTERMEDIARIES
C. INSURANCE COMPANIES
D. TAXABLE PARTNERSHIPS (DEEMED TO HAVE ACTUALLY OR
CONSTRUCTIVELY RECEIVED THE TAXABLE INCOME UNDER
SEC. 73D)
E. GENERAL PROFESSIONAL PARTNERSHIPS (EXEMPT; TAXABLE
AGAINST THE PARTNERS)
F. NON-TAXABLE JOINT VENTURES AND

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G. ENTERPRISES DULY REGISTERED WITH THE PHILIPPINE
ECONOMIC ZONE AUTHORITY (PEZA) UNDER A.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.

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20. WHEN WILL IAET BECOME DUE?
DIVIDENDS MUST BE DECLARED AND PAID OR ISSUED NOT LATER
THAN ONE YEAR FOLLOWING THE CLOSE OF THE TAXABLE
YEAR, OTHERWISE, THE IAET, IF ANY, SHOULD BE PAID WITHIN
FIFTEEN (15) DAYS THEREAFTER.

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21. WHAT IS FINAL TAX?
A TAX IMPOSES ON PASSIVE INCOME. ALSO KNOWN AS FINAL
INCOME TAX.
A. IT IS CONSTITUTED AS A FULL AND FINAL PAYMENT OF THE
INCOME TAX DUE FROM THE PAYEE ON A PARTICULAR TYPE
OF INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT)
B. THE INCOME SUBJECTED TO FINAL INCOME TAX IS NO
LONGER SUBJECT TO THE NET INCOME TAX; OTHERWISE,
THERE WOULD BE A VIOLATION OF PROHIBITED DOUBLE
TAXATION.

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C. THE LIABILITY FOR THE PAYMENT OF THE TAX RESTS
PRIMARILY ON THE PAYOR AS WITHHOLDING AGENT.
D. THE PAYEE IS NOT REQUIRED TO FILE AN INCOME TAX RETURN
FOR THE PARTICULAR INCOME SUBJECTED TO FWT.
E. THE RATE OF THE FINAL TAX IS MUTLIPLIED TO THE GROSS
INCOME.

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22. WHAT ARE PASSIVE INCOMES OF CORPORATE EARNERS?
INCOME DERIVED FROM SOURCES WITHIN THE PHILIPPINES
SUCH AS
A. INTEREST UNDER EXPANDED FOREIGN CURRENCY DEPOSITS
SYSTEM;
B. INTEREST, YIELDS, OR THE OTHER MONETARY BENEFITS
FROM DEPOSITS, DEPOSIT SUBSTITUTES, TRUST FUNDS OR
SIMILAR ARRANGEMENT;
C. ROYALTIES;

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23. WHAT IS A CAPITAL GAINS TAX?
A TAX IMPOSE ON SALE OF SHARES OF STOCK OF A DOMESTIC
CORPORATION NOT LISTED AND TRADED THRU A LOCAL
STOCK EXCHANGE, HELD AS CAPITAL ASSET AND SALE OF REAL
PROPERTY IN THE PHILIPPINES HELD AS A CAPITAL ASSET.

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24. HOW TO COMPUTE CAPITAL GAINS TAX OF CORPORATE
EARNERS?
A. ON SALE OF SHARES OF STOCK OF A DOMESTIC
CORPORATION NOT LISTED AND TRADED THRU A LOCAL
STOCK EXCHANGE, HELD AS CAPITAL ASSET
ON THE NET CAPITAL GAIN –
NOT OVER P100,000 - CGT OF 5%
AMOUNT IN EXCESS OF P100,000 - CGT OF 10%

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B. ON SALE OF REAL PROPERTY IN THE PHILIPPINES HELD AS A
CAPITAL ASSET
ON THE GROSS SELLING PRICE, OR THE CURRENT FAIR MARKET
VALUE AT THE TIME OF SALE, WHICHEVER IS HIGHER – CGT OF
6%

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25. WHAT IS PROFIT REMITTANCE TAX?
ANY PROFIT REMITTED BY A BRANCH TO ITS HEAD OFFICE SHALL
BE SUBJECT TO A FINAL TAX AT FIFTEEN (15%) WHICH SHALL
BE BASED ON THE TOTAL PROFIT APPLIED OR EARMARKED
FOR REMITTANCE, WITHOUT ANY DEDUCTION FOR THE TAX
COMPONENT THEREOF, EXCEPT THOSE ACTIVITIES WHICH
ARE REGISTERED WITH THE PEZA. EVERY RESIDENT
CORPORATIONSHALL BE HELD LIABLE TO A 15% OF THE TOTAL
EARMARKED PROFIT REMITTANCES TO A FOREIGN COUNTRY.

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