INCOME TAXATION

Taxation Defined

• a mandatory payment or charge collected by local, state, and national

governments from individuals or businesses to cover the costs of general
government services, goods, and activities.
• Taxation is a term for when a taxing authority, usually a government, levies or
imposes a financial obligation on its citizens or residents. Paying taxes to
governments or officials has been a mainstay of civilization since ancient times.
• Taxation is the practice of collecting taxes (money) from citizens based on their
earnings and property. The money raised from taxation supports the government
and allows it to fund police and courts, have a military, build and maintain
roads, along with many other services.
History of Taxation

Pre Colonial Period (900 1521)

• Ancient Filipinos practice paying taxes for the protection from
their datu. The collected tax or tribute was called buwis or
handug taxes. Non-payment of taxes was already punishable
during this period.
3 Inherent Powers of the State

• Police Power
• Power of Eminent Domain
• Power of Taxation
Police Power

• The most powerful tool of the state in regulating liberty is police

power. Generally, police power is that inherent and plenary
power in the State which enables it to prohibit all things hurtful
to the comfort, safety and welfare of society
Power of Eminent Domain

• It is one of the fundamental powers of the State. It is

also called as the power of expropriation. This is the use
of the government of its coercive authority, upon just
compensation, to forcibly acquire the needed property
for public purpose
Power of Taxation

The power of taxation is an inherent and plenary

prerogative of the State, its exercise being only limited
by the Bill of Rights enshrined in the 1987 Philippine
Constitution. It is the Legislative Department which
primarily exercises this function.
Similarities among the 3 Inherent Powers of the
State

1.They are inherent in the State.

2.They exist independently of the Constitution.
3.They are legislative in nature and character.
4.They constitute the three methods by which the State
interferes with private rights and property.
5.Each presupposes an equivalent compensation.
Purpose of Taxation

• Aside from the revenue that taxes generate, they also help
promote economic stability and growth. By imposing taxes on
goods and services, the government can discourage unnecessary
consumption and production and ensure that resources are used
more efficiently.
THEORY of TAXATION

• The lifeblood theory in taxation is a doctrine that recognizes the

importance of taxes for the state and its citizens. According to
this theory, taxes are the main source of revenue for the
government, which enables it to perform its duties and provide
public goods and services.
BASIS of TAXATION

The benefits received principle of taxation is the theory that

citizens who have received advantages from the government (in
the form of public goods and services) should pay for them. For
example, those who use a certain road system should pay for
maintaining those roads.
Scope of Power of Taxation

• The power to tax is comprehensive, unlimited, plenary and

supreme.
• It is comprehensive because it covers all persons, activities, businesses,
professions, rights and privileges.
• It is unlimited because the only limitation is the responsibility of the
legislature which imposes tax to the constituents who pay it.
• It is plenary because it is a not incomplete. The government may avail
of valid remedies to make sure that tax is collected.
• It is supreme because whatever subject may be selected to pay the tax.
Essential Elements of Tax

• External contribution. Payment of tax is not voluntary

payment or donation, but an enforced contribution,
exacted pursuant to legislative authority
• Payable in money. It is pecuniary burden payable in
money which must be legal tender
• Proportionate in character. The share of the taxpayer on the
public burden is essentially based on one's ability to pay .
Essential Elements of Tax

• It is levied on persons, property or the exercised of a right or

privilege.
• It is the law-making body of the state. The power of “imposing
tax” being a purely legislative in nature. Congress CANNOT
delegate the power. This doctrine arises from separation of
powers among the tree branches of the government.

• It is levied for public use

Classification of Taxes

• As to scope:
• National Tax. It refers to the tax imposed by the state itself and is
effective within the entire jurisdiction thereof.
• Local Tax. It refers to the tax imposed by a political subdivision of the
state and is effective only within the territorial boundaries thereof.
• As to scope:
• specific – imposed and based on a physical unit of measurement as by head number,
weight, length or volume. Ex. Tax on distilled spirits, fermented liquors, cigars
• Ad Valorem of a fixed proportion of the value of the property with respect to which
the tax is assessed. Ex. Real estate tax, excise tax on cars, non essential goods.
Classification of Taxes

• As to subject matter of object:

• personal, poll or capitation- tax of a fixed amount on individuals
residing within a specified territory, without regard to their property,
occupation or business. Ex. Community tax (basic)
• property- imposed on property, real or personal, in proportion to its
value, or in accordance with some reasonable method or apportionment.
Ex. Real estate Tax
• Excise- imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation, profession or business. Ex.
Income tax, VAT, Estate Tax, Donor’s Tax
Classification of Taxes

• As to who bears the burden:

• Direct- the tax is imposed on the person who also bears the
burden thereof
Ex. Income tax, community tax, estate tax

• Indirect – imposed on the taxpayer who shifts the burden of

the tax to another, Ex. VAT, customs duties.
Classification of Taxes

• As to who purpose:
• general, fiscal, or revenue- imposed for the general purpose
of supporting the government. Ex. Income tax, percentage
tax
• special or regulatory- imposed for a special purpose, to
achieve some social or economic objective. Ex. Protective
tariffs or custom duties on imported goods intended to
protect local industries.
Classification of Taxes

• As to who graduation or rate:

• proportional- based on a fixed percentage of the amount of the property,
receipts or on other basis to be taxed ex. Real estate tax, VAT
• progressive and graduated- the rate of the tax increases as the tax
base or bracket increases ex. Income tax, estate tax, donor’s tax
• regressive- the rate of tax decreases as the tax base or bracket
increases.
• degressive- increase of rate is not proportionate to the increase of
tax base.
Classification of Taxes

• As to who taxing authority:

• national- imposed by the national government ex. NIRC,
custom duties
• municipal or local- imposed by municipal corporations
or local governments ex. Real estate tax.
Elements of Sound Tax System

• Fiscal adequacy.
• The sources of tax revenue should coincide with, and
approximate the needs of, government expenditures. The
revenue should be elastic or capable of expanding or
contracting annually in response to variations in public
expenditures.
Elements of Sound Tax System

• Administrative Feasibility
• Tax laws should be capable of convenient, just and effective
administration. Each tax should be capable of uniform
enforcement by government officials, convenient as to the
time, place, and manner of payment, and not unduly
burdensome upon, or discouraging to business activity.
Elements of Sound Tax System

• Theoretical justice or equality

• The tax burden should be in proportion to the taxpayer’s ability
to pay. This is the so-called ability to pay principle. Taxation
should be uniform as well as equitable.
Limitations on the States power to Tax

• Inherent Limitations
1. Taxation must be for a public purpose.
2. Taxation is a power legislative in nature.
3. Taxation is limited to the territory of the State.
4. Taxation respects international comity.
* an association of nations for their mutual benefit.
Limitations on the States power to Tax
Direct Constitutional Limitation
Nonpayment of poll tax must not result in imprisonment.
Taxation must be uniform.
Taxation must be progressive.
Congress may grant the President authority to impose tariff rates.
Religious, charitable entities and educational entities enjoy tax exemptions.
Non-stock, non-profit institutions may enjoy tax exemptions.
Tax exemption requires absolute majority vote.
Taxes levied for a special purpose must be used for such purpose.
The President may exercise its veto and item-veto powers.
Congress cannot expand or impair the jurisdiction of the Supreme Court
without the latter's consent.
Local government units enjoy constitutionally-granted tax and revenue
powers
Tariff rates may be adjusted by the President.
Exemption from real property taxes
There can be no appropriation or use of public money for religious
purposes.
Limitations on the States power to Tax
Indirect Constitutional Limitation
No person shall be deprived of life, liberty or property without due process
of law.
Nor shall any person be denied the equal protection of law.
No law shall be made respecting an establishment of religion, or prohibiting
the free exercise thereof. The free exercise and enjoyment of
religious profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.
No law shall be passed abridging the freedom of speech, of expression, or of
the press, or the right of the people peaceably to assemble and
petition the government for redress of grievances.
No law impairing the obligation of contracts shall be pass
Situs of Taxation

• Situs of taxation literally means place of taxation. The general

rule is that the taxing power cannot go beyond the territorial
limits of the taxing authority.
Factors to consider in determining the Situs of
Taxation

a. Subject matter (person, property or activity)

b. Nature of tax
c. Citizenship
d. Residence of the taxpayer
e. Source of income
f. Place of exercise, business or occupation being taxed
Tax distinguished from other terms

Taxes may be imposed only by the government under its

sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.
Tax distinguished from other terms

A tax is a levy collected for general government services. A fee is

levy collected to provide a service that benefits the group of
people from which the money is collected. A penalty is a levy
collected with the express aim of deterring some kind of
undesirable behavior.
Tax distinguished from other terms

• Tax is imposed on persons, properties and exercise of a right or

privilege; while special assessment is taxed only on land.
•
It is not a tax measure intended to raise revenue for the
government because the proceeds thereof may be
devoted to specific purpose for which the assessment was
authorized
Tax distinguished from other terms

Tax is a compulsory payment that is made by citizens to the

government with no direct repayment. In this sense, tax can be
seen as a form of revenue. On the other hand, revenue is obtained
from the sale of a product or service and does not include taxes
when considered as such.
Tax distinguished from other terms

Taxes are a charge the government imposes on individuals' and

firms' income and revenue. At the same time, subsidies are grants
or tax breaks given to individuals and firms to incentivize them to
pursue a social objective that the government that issues the
subsidy wishes to promote.
Tax distinguished from other terms

The purpose of tax is to raise revenue while the purpose of a

license fee is for regulation only. The objects of taxation are
persons, property and exercise of a right or privilege; while the
object of a license fee is the right to exercise a privilege.
Tax distinguished from other terms

Customs duties are taxes imposed on goods exported from

or imported to a country.
Double Taxation

Double taxation is a tax principle referring to income taxes paid twice on the
same source of income. It can occur when income is taxed at both the
corporate level and personal level. Double taxation also occurs in
international trade or investment when the same income is taxed in two
different countries.

Direct double taxation occurs when the same property is taxed twice for the
same purpose, during the same taxing period, by the same taxing authority,
of the same kind or character, and on the same subject matter within the
same jurisdiction.
Shifting: What does this mean?

“Shifting of the burden of the tax" happens when the taxpayer

transfers to another person the burden of the tax. The taxpayer
remains the taxpayer; he still pays it but the economic burden is
transferred to another person.
Shifting: What does this mean?

There are three (3) ways of shifting tax burden: [1]

forwarding; [2] backwarding; and [3] onwarding.

When the burden of the tax is transferred to the end user, ultimate
purchaser or ultimate consumer, there is forward shifting.

When the burden of tax is taken away from the end user by adjusting
production or distribution variables, there is backward shifting.

When the tax burden is shifted two or more times either forward or
backward, there is onward shifting.
Transformation: What does this mean?

Tax transformation is a form of digital transformation that

integrates processes, people, technology, and data to understand
tax liabilities and forecast how decisions will impact them.
Evasion: What does this mean?

Tax evasion is the use by the taxpayer of illegal or fraudulently

means to defeat or lessen the payment of tax. It is also called “tax
dodging”. It connotes fraud though the use of pretense or
forbidden devises to lessen or defeat tax
Avoidance: What does this mean?

Unlike tax evasion, tax avoidance is a legal way of decreasing the

amount of taxes that a taxpayer has to pay. Nevertheless,
excessive tax avoidance can cause problems for the government,
especially for developing countries like the Philippines, which
would need those tax revenues the most.
Exemption: What does this mean?

Tax-exempt refers to income or transactions that are free from tax at the
federal, state, or local level.
to release or exclude from some liability (as in taxation), obligation, or duty
to which others are subject.
It is the grant of immunity to a particular persons or corporations or to
a persons or corporation in a particular class from a tax which
persons or corporations generally within the same state of taxing
district are obliged to pay. It is an immunity or privilege.
Grounds for granting tax exemptions

a. Maybe based on contract. In such a case, the public which is

represented by the government is supposed to receive a full
equivalent thereof e.g. charter corporation
b. Maybe be based on some ground of policy. , e.g. to encourage
new industries or to foster charitable institutions. Here, the
government need not to receive any consideration in return to for
the tax exemptions.
c. Maybe be based on some ground of reciprocity or to lessen the
rigors of international double or multiple taxation
Nature of power to grant tax exemption

a. National government The power to grant tax exemptions is an

attribute of sovereignty for the power to prescribe who or what
persons or property shall be taxed implies the power to
prescribe who or what persons or property shall not be taxed.
It is inherent in the exercise in the power to tax that the
sovereign state be free to select the subjects of taxation and
grant the exemptions therefrom.
Nature of power to grant tax exemption

a. Local governments. Municipal corporations are clothed with

no inherent power to tax or to grant exemptions. But the the
power to impose a particular tax is granted, they also have the
power to grant therefrom unless forbidden by some provisions
in the Constitution or law. The legislature may delegate this
power to grant tax exemptions to the same extent that it may
exercise the power to exempt.
Kinds of exemptions

As to basis:
1. Constitutional. Immunities from taxation which originates from the
constitution
2. Statutory. Immunities from taxation which emanates from
legislation

As to from:
1. Express. Exemptions expressly granted by statue.
2. Implied. When particular persons, property or rights are deemed
exempt as they fall outside the scope of taxing provisions itself
Kinds of exemptions

As to extent:
1. Total. Connotes absolute immunity
2. Partial. One where a collection of a part of a tax is
dispense with
Amnesty: What does this mean?

A tax amnesty can be defined as a limited-time offer by the

government to a specified group of taxpayers to pay a defined
amount, in exchange for forgiveness of a tax liability (including
interest and penalties), relating to a previous tax period (s), as
well as freedom from legal prosecution
Capitalization: What does this mean?

Tax capitalization occurs if the burden of the tax is incorporated

in the value of long-term assets—e.g., a decline in the price of
land that offsets an increase in property taxes. Capitalization can
result where there is forward shifting, backward shifting, or no
shifting.
Taxpayers suit

A taxpayer's suit is an action filed by a taxpayer to challenge an

unlawful disbursement of funds raised by taxation.
CHAPTER 2 – Income
Taxes for Individuals
Definition – Individual Taxpayers

• Individual taxpayers are natural with income derived

from within the territorial jurisdiction of a taxing
authority. Under the Tax Code individual taxpayers are
classified as follows;

• Resident citizen (RC)

• Nonresident citizens (NRC)
• Resident aliens (RA)
• Nonresident aliens (NRA)
Resident citizen of the Philippines

• A Filipino citizen taxpayer not classified as nonresident

taxpayer considered as resident citizen for tax purposes.
Nonresident Citizen of the Philippines

• This describes nonresident citizen;

• To the satisfaction of the CIR, the fact of his physical
presence with the desire to intention permanently reside there
in.
• Is one who stays in the Philippines for an aggregate period of
more than 180/183 days during any calendar year .
Alien in the Philippines

• An alien is a foreign-born person who is not qualified to acquire

Philippine citizenship by birth or after birth
Nonresident aliens of the Philippines

an individual whose residence is not within the Philippines and

who is not a citizen thereof

Aliens who stayed in the Philippines for an aggregate period of

more than 180 days during the taxable year and/or aliens who
have business income in the Philippines are considered as non-
resident aliens engaged in trade or business
Nonresident alien NOT engaged in trade or
business (NRANETB)

• A NRANETB is subject to 25% income tax based on gross income from

all sources within the Philippines
What is Taxable year?

• The calendar year, or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed under this Title.
Income Tax rate
Applicable taxes and rates

Application of taxes individuals depend on some ares but not limited to;

1. Classification of taxes
2. Source of income
3. Type of income
Classification of taxes

It is important to prepoerly classify individual taxpayer becuase resident citizen are taxable
on their income derived from sources within and without in the Philippines while other
taxppayer are within only. Moreover, individual which is classified as NRANETB are
taxable on their ‘gross income” while others on the net income.
Source of income

It is important to know sporce of income, because as resident citizan are taxable in theie
worldwide income, while others are taxable on their income derived only in the Phlippine,
example

Taxpayer Tax Base Sources

RC Net Income Within and Without
NRC, RA, NRAETNB Net Income Within
NRANETB Gross Income Within
Types of Income

There are three types of income subject to income tax

1. Ordeinary or regular income

2. Passive income derived form the Philppines
3. Capital gains subject to capital gains tax (will discuss this further)
Ordinary or regular income

includes any gain from the sale or exchange of property which is not a capital asset or
property described in Section 39(A)(1). Any gain from the sale or exchange of property
which is treated or considered, under other provisions of this Title, as 'ordinary income'
shall be treated as gain from the sale or exchange of property which is not a capital asset as
defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or
exchange of property which is not a capital asset. Any loss from the sale or exchange of
property which is treated or considered, under other provisions of this Title, as 'ordinary
loss' shall be treated as loss from the sale or exchange of property which is not a capital
asset.
Passive Income

Subject to final withholding taxes are certain passive income from sources within the
Philippines as enumerated in Section 24(B), this includes but not limited to;

(1) Interests, Royalties, Prizes, and Other Winnings

(2) Cash and/or Property Dividends
Self-Employed and Professionals (SEP)
Purely SEP
The taxpayer is considered purely SEP if s/he is not earning income from
employment. The applicable rate are as follows;

GS/GR Income Tax Business Tax

NOT more than 3M Graduated tax rate 3% Percentage tax
OR
At the option of the SEP 8% of GR/GS and other non
operating income in excess of 250k
More than 3M Graduated tax rate VAT (12%)
8% Preferential tax

In order to avail an 8% preferrential rate, the following shall be satisfied, namely;

1. The GS/GR shall not exceed 3M

2. The SEP shall not be VAT-registered
3. The GR/GS shall not received or derived from a VAT transactions
4. The SEP shall be subject to OPT
5. The SEP shall signify the intention to elect a 8% income tax
Final Withholding Tax

Under the final withholding tax system, payee received the

income NET of tax. Meaning, the FWT was dedcucted in
advance prior the payee received the income.
The payor is required to issue the withholding tax certificate
to the payee (will discuss this further)
 Sale of Principal Residence

Principal residence means the family home of the individual

taxpayer. It refers to the dwelling house, including the land on
which is situated wherein an individual including his family resides
as a permanent drawing or whenever absent, wherein the said
individuals returned. It should be considered by the Barangay
Chairman over the place or the building administrator.

The seller/transferor compliance with preliminary conditions for exemptions

from the 6% CGT
 Requisites for Tax Exemptions

As a rule, sale of principal residence if 6% CGT, but with certain exemptions.

This are the following;

1. The proceeds is FULLY utilized in acquiring or constructing a NEW principal

residence with 18 months calendar months from the date of disposition.
2. The historical cost or adjusted basis of the real property disposed shall be
CARRIED over the NEW principal residence
3. The BIR shall be notified by the taxpayer within 30 days from the time of
the disposal of the “old” residence and shall be notify to avail of the tax
exemption
4. The tax exemption can be avail once in every 10 years
Quarterly Tax Returns

Income tax returns for income derived from business and practice of
profession are required to filed on a quarterly;

1st Quarter May 15

2nd Quarter Aug 15
3rd Quarter Nov 15
Annual Return April 15 (succeeding year)
Quarterly Tax Returns
Income Tax due to Married Taxpayers

Unless impracticable, a husband and wife must file one consolidated

income tax return, but the tax is computed separately. Income that
cannot be definitely attributed or identified as exclusive income of
either spouse is divided equally between them. Generally, this results
in lower combined tax liability than when the tax is jointly computed
(RA 10963)
 Income Tax due to Married Taxpayers
Kristof Anna
Gross income P800,000
Income from compensation P400,000
Dividend income from domestic corp 5,000 5,000
Dividend income from resident corp (12,000/2) 6,000 6,000

Miscellaneous Income (60,000/2) 30,000 30,000

Royalty Income (30,000/2) 15,000 15,000

Capital gain from Sale of Stocks 50,000

Total P906,000 P456,000

 Minimum Wage Earners (MWE)

According to the International Labour Organization, minimum wages are “the

minimum amount of remuneration that an employer is required to pay wage earners for
the work performed during a given period, which cannot be reduced by collective
agreement or an individual contract.”

That minimum wage earners as defined in Section 22 (HH) of this Code 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. (RA 9504)
 MWE with additional compensation
RA 10963 or the TRAIN law on January 2018. The amendment stipulates
that the 13th month pay and other equivalent benefits shall not be subject to tax
for a maximum of P90,000. This new amount is a relative increase from the
previous tax exclusion rate of P82,000.
 Senior Citizens and PWD
Generally, Senior Citizens and PWD are subject to income tax in the
same manner as an individual taxpayer. However, if the SC and PWD
are MWE, per RA 9504 he shall be exempt from tax.
 Filling of Income Tax
For PURELY compensation
Once a year
On or before April 15 of the following year

For BUSINESS OWNERS (included income from practice of profession)

1st Quarter May 15
2nd Quarter Aug 15
3rd Quarter Nov 15
Annual Return April 15 (succeeding year)
 How to Pay Tax Dues?

• There are there (3) ways to pay Income tax using manual or online payment methods:

• eFPS Online Banking for those who are registered

• Accredited agent bank (AAB)
• Other payment partners like GCash, Paymaya, Landbank, and Union Bank.
 Gain on sale of Capital Assets are classified
as capital gains (continuation)

Capital Gains may be:

1. Subject to CAPITAL GAINS TAX if it pertains to sale of:
a. Shares of stock of a domestic corporation SOLD directly to a BUYER
(shares of a CLOSELY-HELD or NON-LISYED domestic corporations)
b. Sale of a real properties LOCATED in the Philippines.
Capital Gains Tax on sale of shares of a
domestic corporation
Capital Gains Tax on sale of shares of a
domestic corporation (how to compute?)

• Computation of CGT

• Selling Price (Fair Market Value) xxx

• Cost (historical cost) (xxx)
• Capital Gain xxx
• SP > Cost Capital Gain
• SP < Cast Capita Lost
• Note it shall be computed SEPARATELY
• Income from business
• CGT
Capital Gains Tax on sale of real properties

• Computation of CGT

CGT = 6% higher between Gross Selling Price and FMV

Note: FMV is between 1. the fair market value as
Determined by Commissioner 2. the fair market value as shown in the
Provincial and city assessor (real property tax declaration)
Final Withholding Tax (continuation)
Final Withholding Tax (continuation)
End of the session