TAXATION

is the inherent power of the

state which imposes a levy, a
burden upon persons,
property and rights for
purpose of raising revenue to
defray the expenses of the
government.
 TWO FOLD NATURE
OF TAXATION

1. Inherent Power
It exists without the necessity of any
specific grant of the power by the
Constitution.

2. Legislative Power
It is exercised by the legislature
through the enactment of statutes.
 PURPOSE OF
TAXATION

The primary purpose of taxation

on the part of the government is
to provide funds or property with
which to promote the general
welfare and protection of its
citizens.
 SITUS OF
TAXATION
The general rule is that the taxing
power cannot go beyond the territorial
limits of the taxing authority. Situs of
taxation is the state or country, which
has jurisdiction to tax the person,
property or interest.

In short, situs of taxation is the place

of taxation.
 THE FOLLOWING SITUS
OF TAXATION APPLY:
1. Persons. Residence of the taxpayer

2. Real property or tangible personal property. Location of the

property

3. Intangible personal property. As a rule, situs is the domicile of the

owner unless he has acquired a situs elsewhere.

4. Income. Taxpayer’s residence or citizenship, or place where the

income was earned.

5. Business, occupation and transaction. Place where business is

being operated, occupation being practices and transaction
completed

6. Gratuitous transfer of property. Taxpayer’s residence or

citizenship, or location of the property.
 Essential
Characteristics of Tax
1. It is an enforced contribution

2. It is generally payable in cash

3. It is proportionate in character
4. It is levied of person or property
5. It is levied by the state

6. It is levied by the lawmaking body

7. It is levied for public purpose

 CLASSIFICATION
OF TAXES
1. As to subject matter or object:
• Personal, poll or capitation
• Property
• Excise

2. As to who bears the burden

• Direct
• Indirect

3. As to determination of amount
• Specific
• Ad valorem
4. As to purpose
• General, fiscal or revenue
• Special or regulatory

5. As to scope (or authority imposing the tax)

• National
• Municipal or local

6. As to nature (graduation or rate)

• Proportional
• Progressive or graduated

• Regressive
 FUNCTIONS OF
INCOME TAX

1. To provide large amounts of revenue;

2. To offset regressive sales and consumption

taxes; and together with estate tax.

3. To mitigate the evils arising from the

inequalities in the distribution of income
and wealth, which are considered
deterrents to social progress, by a
progressive scheme of taxation.
 DEFINITION OF TERMS

Income - refers to all wealth which flows into the taxpayer other than as
mere return on capital.

Capital - refers to the investment made which is the source of income.

Sometimes it refers to a fund or property existing at one
distinct point of time.

Taxes - an enforced proportionate contribution imposed upon persons,

property or interest by the legislature for a public purpose
and generally payable in money.
 DEFINITION OF TERMS

Tax evasion - Is a form of escape from taxation which is accomplished by

breaking the letter of the law. It is the unlawful or illegal
means to defeat or reduce the payment of tax.

Tax avoidance - Is a tax saving device within the means sanctioned by

law or refers to the legal means to lessen, or
minimize or avoid taxes.

Income tax - is a tax on income whether gross, modified gross, or net

depending on the class of the taxpayer or the kind of income. Income
tax is specifically a tax on the privilege to earn an income; thus, it is
an excise rather than a property tax.
 DEFINITION OF TERMS

Gross Income - means all income derived from whatever source. It

includes, but is not limited to, Compensation for services, in whatever
form paid; Gross income derived from the conduct of trade or business
or the exercise of profession; Gains derived from dealings in property;
Interest; Rents; Royalties; Dividends; Annuities; Prizes and winnings;
Pensions; and Partner’s distributive share from the net income of the
general professional partnerships. Exclusions from Gross Income
include Life insurance; Amount received by insured as return of
premium; Gifts, bequests and devise; Compensation for injuries or
sickness; Income exempt under treaty; Retirement benefits, pensions,
gratuities, etc; Miscellaneous item; income derived by foreign
government; income derived by the government or its political
subdivision; prizes and awards in sport competition; prizes and awards
which met the conditions set in the Tax Code; 13th month pay and
other benefits; GSIS, SSS, Medicare and other contributions; gain from
the sale of bonds, debentures or other certificate of indebtedness; and
gain from redemption of shares in mutual fund.
 DEFINITION OF TERMS

Compensation income
is the
- remuneration received by an employee from
employment or an income earned by an individual as a result of
an employer employee relationship. “Compensation Income
includes among others, salaries, wages, emoluments, honoraria,
bonuses, allowances (transportation, representation,
entertainment, clothing, COLA), fringe benefits (monetary and
non-monetary), fees including director’s fees, taxable pensions
and retirement pay and other income of similar nature”.

Net income - the gross income less the deductions allowed.

Taxable yearthe
- calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed.
Professionan
- economic activity which requires the passing of an
appropriate government boards or bars examination.
Occupation - all economic activities not falling under “profession.

Calendar yearyear
- which starts January 1 and ends December 31 of the
year. Individual taxpayers follow this year.
Withholding Tax-specific proportions of personal income deducted from
employees wage by employers and periodically remitted to the
government.
BIR Form 1700 - if the income of the taxpayer is derived purely from
compensation arising from employer-employee relationship.

BIR Form 1701if the

- whole or part of his/her income and/or that of hi/her
spouse is derived from business and/or the exercise of a profession.

Certificate of Tax Withheld on Compensation.

BIR Form 2316-
 Individuals required to
file income tax return
Under the Tax Code, the following individuals, except as
otherwise provided, are required to file an income tax return
covering all taxable income earned for the preceding year.

1. Every Filipino citizen residing in the Philippines;

2. Every Filipino citizen residing outside the Philippines on his

income from sources within the Philippines;

3. Every alien residing in the Philippines, on income derived
from sources within the Philippines; and

4. Every non-resident alien, engaged in trade or business or in

the exercise of profession in the Philippines.
 INDIVIDUALS EXEMPT
FROM INCOME TAX
A. RESIDENT CITIZEN
 A person whose gross income does not exceed his/her total basic
and additional personal exemptions, unless engaged in business or
profession, is not required to file income tax returns at any amount
of gross income.

 A person whose earnings are purely compensation income, derived

from sources within the Philippines, the income tax on which has
been correctly withheld by the employer for the taxable year and
qualified under substituted filing of income tax returns (Those
individuals with two or more employers for one taxable year,
however, shall file an income tax return for the year art any amount
of gross income);
 A person whose compensation income does not
exceed sixty thousand pesos with one employer only
and the income tax was withheld correctly;

A person who sole income source is subject to

final withholding income tax, such as royalty and
interest income from banks; and

A person who exempt from income taxation

pursuant to the Tax Code and other laws.
 INDIVIDUALS EXEMPT
FROM INCOME TAX
B. Non-resident citizen who is:
 A citizen of the Philippines who establishes to the satisfaction
of the Commissioner the fact of his physical presence abroad
with a definite intention to reside therein.

 A citizen of the Philippines who leaves the Philippines during

the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.

 A citizen of the Philippines 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.
 A citizen who has been previously as a non-resident citizen and
who arrives in the Philippines at any time during the year to
reside permanently in the Philippines will likewise be treated
as a non-resident citizen during 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 in the
Philippines.
B. Overseas Filipino Worker, Including Overseas Seaman
An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas Filipino worker is
taxable only on income from sources within the Philippines. 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
will be treated as an Overseas Filipino Worker.
 Note: that a Filipino employed as Philippine
Embassy/Consulate service personnel of the
Philippine Embassy/Consulate is not to be treated
as a non-resident citizen, hence his income is
taxable.
Filing of Return
 When. – Residents of the Philippines, whether citizens or
aliens, whose income had been derived solely from salaries,
wages, interests, dividends, allowances, commissions, bonuses,
fees, pension, or any combinations thereof shall be filed on or
before the 15th day of April of each year, covering income for
the preceding taxable year.
When the tax due is excess of P 2,000.00, the taxpayer may
elect to pay the tax in two equal installments, the first
installment to be paid at the time the return filed and the second
installment on or before July 15 of the same year.

When the date falls on a Saturday, Sunday or holiday, the due

date falls on the next business day.
 How and Where to File
 File in triplicate, two (2) copies for the Authorized
Agent Bank (AAB) of the Revenue District Office/BIR Office
and one (1) copy for the taxpayer) with the accredited
bank in the city or municipality where the taxpayer’s legal
residence or principal place of business is located. In
place(s) where there are no accredited banks, the return
shall be filed directly with the Collection Officer or
authorized Municipal Treasurer where the taxpayer’s
residence or principal place of business is located. If at the
time of filing the taxpayer has no longer residence in the
Philippines, the return shall be filed with the Office of the
Commissioner of Internal Revenue.
 Persons under disability
If the taxpayer is unable to make his own
return, the return may be maid by his duly
authorized agent or representative or by the
guardian or other person charges with the
care of his person or property. The principal
and his representative or guardian assuming
the responsibility of making the return and
incurring penalties provided for erroneous,
false, or fraudulent return.
 Penalties
There shall be imposed and collected as part of the tax:
1. A surcharge of twenty five percent (25%) for each of the following
violations:
 Failure to file any return and pay the amount of tax or installments due on
or before the due date;
 Unless otherwise authorizes by the Commissioner, filing a return with a
person or office other than those with whom it is required to be files;

 Failure to pay the full or part of the amount of tax shown on the return, or the
full amount of tax due for which no return is required to be filed on or before
the due date;

 Failure to pay the deficiency tax within the time prescribed for its payment in
the notice of assignment.
2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax,
in case any payment has been made on the basis of such return
before the discovery of the falsity or fraud, for each of the following
violations:
 Willful neglect to file the return within the period prescribed by the Code or
by rules and regulations; or

 In case a false or fraudulent return is willfully made.

3. Interest at the rate of twenty percent (20%) per annum, or such

higher rate as may be prescribed by rules, and regulations, on any
unpaid amount of tax, from the date prescribed for payment until the
amount if fully paid.

4. Compromise penalty.
 Substituted Filing of An
Individual’s Income Tax
Return
“Substituted filing” is when the
employer’s annual return (BIR Form 1604C)
may be considered as the “substituted”
Income Tax Return (ITR) of an employee,
inasmuch as the information provided in
his income tax return (BIR Form 1700)
would exactly be the same information
contained in the employer’s annual return
(BIR Form 1604-CF).
 DEFINITION OF
INDIVIDUAL TAXPAYERS
Individual taxpayers are natural persons who generally
derive income subject to tax within the jurisdiction of a
taxing authority. These individual taxpayers are further
classified into two major general classifications as citizens
and aliens.
Under the Philippine Constitution, a person acquires
Philippine citizenship when he:
 is born (by birth) with father and/or mother as Filipino citizens;

 born before January 17, 1973 of Filipino mother who elects

Philippine citizenship upon reaching the age of majority; or

 acquired Philippine citizenship after birth (naturalized) in

accordance
 An Alien is a foreign-born person who
is not qualified to acquire Philippine
citizenship by birth or after birth.

CLASSIFICATIONS OF CITIZENS
Citizens are classified into two categories as Resident
Citizen and Non-Resident Citizen.

 Resident Citizen (RC) is a Filipino citizen who stayed

permanently in the Philippines or stayed outside the
Philippines for less 183 than days during the taxable
year.
A citizen of the Philippines residing therein is taxable for all
income derived from sources within and without the Philippines
 Non-resident Citizen is a Filipino citizen who stayed outside
the Philippines for 180 days or more during the taxable year
and has established proof to the BIR Commissioner of his
definite intention to reside outside the Philippines on a
permanent basis as an immigrant or employee.

A nonresident citizen is taxable for all income derived from

sources within the Philippines

A citizen of the Philippines who works and derives income

from abroad and whose employment requires him to be
physically present abroad most of the time during the taxable
year is to be classified as nonresident citizen.
An individual citizen of the Philippines who is working and
deriving income form abroad as Overseas Filipino Worker is
taxable only one income from sources within the Philippines.

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 Filipino Worker.

A Filipino Citizen who was previously a non-resident citizen and

who arrives and resides permanently in the Philippines at any
time during the taxable year shall likewise be treated as a non-
resident citizen for the same taxable year with respect to his
income derived from sources abroad until the date of his arrival
in the Philippines.
 CLASSIFICATIONS
OF ALIENS
As a rule, an alien individual, whether resident or
not of the Philippines, taxable only for income
derived from sources within the Philippines.

 Resident Aliens (RA) are persons

who are not citizens of the
Philippines but are residing within
the Philippines including foreign
individuals who have stayed in the
Philippines for more than one year
 Nonresident Aliens (RA) are foreign
individuals whose residence are not within
the Philippines.
 Those engaged in trade or business within the
Philippines (NRAETB)
Those who have stayed within the Philippines for more
than 180 days during the taxable year shall be deemed
a non-resident alien doing business in the Philippines.
A non-resident alien who is engaged in trade or
business and has business income in the Philippines,
also belong in this group. (Sec.25A (1), NIRC.)
 Those not engaged in trade or
business within the Philippines.
NRANETB)
They are non-resident foreign
individuals who have stayed within the
Philippines for only 180 days or less,
and have no business income derived
within the Philippines. (Sec.25B, NIRC.)
 NOTES REGARDING
RESIDENCY
1. The intention with regard to the length
and nature of stay of an alien determines
whether he is a resident or non-resident.
2.If one comes to the Philippines with a
definite purpose that can be promptly
accomplished, he may be considered as
non-resident.
3. A person who comes to the
Philippines with a definite
transaction that can be accomplished
with an extended period becomes a
resident if such transaction results in
making his home temporarily in the
Philippines regardless of his intention
to return to his residence abroad.
 SPECIAL TAXPAYERS
Special Taxpayers are those who are taxed with a fifteen
percent (15%) tax rate. This applies to compensation income
derived within by aliens or Filipino citizen (not engaged in
trade of business in the Philippines) with special employment
contracts with:
1. Regional or area headquarters of
multi­national corporations.
2.Petroleum service contractors and
subcontractors.

3.Offshore banking units.

4. A foreigner who shall live in the
Philippines with no definite intention as
to his stay is a resident.

5. A foreigner who has acquired residency

in the Philippines shall only become a non­
resident when he actually departs with
the intention of abandoning his residency
in the Philippines.
 QUIZ 1
Classify the individual taxpayer by indicating the appropriate letter in the space
provided:
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident alien in business in the Philippines
 
1. Alyza P., a citizen stayed in Japan for more than one hundred eighty days.
 
2. Marissa R., an alien, stayed in the Philippines for more than one year
3. Victoria G., citizen, maintained her residence in Australia
4. Alicia A., a citizen, departed from the Philippines to work as a physical
therapist in the U. S.
5. Ruben R., a Filipino overseas contract worker, on vacation in the
Philippines for one month.
6. Lorna T., non-resident citizen, after two years work as entertainer
under contract in Japan, returns during the year to reside in the
Philippines
 
7. Richard P., a Filipino singer, visited Canada for three days to sing for
her cousin’s wedding.
 8. Steve W., a non-resident alien, finding the beauty of the Philippines,
stayed therein for more than one hundred eighty days.
9. Christopher C., a non-resident alien, stayed in the Philippines as
manager of domestic airline from January to September.

10. Arnold Z, a British, left Manila for Europe for a vacation. He has a
re-entry permit.