General Principles of Taxation (Chapter 1) taxpayer’s personal assessment of the

protection received.
1. Introduction to Taxation
2. Purposes and Scope of Taxation
Taxation is the process or means by which the
sovereign, acting through its lawmaking body, The objectives of taxation are classified as
raises income to defray the necessary expenses follows:
of the government. It is a method of
• Primary Purpose
apportioning the cost of government among
those who, in some measure, are privileged to o To provide funds or property with
enjoy its benefits and must, therefore, bear its which to promote the general
burdens. welfare and protection of its
citizens and to finance
Theory of Taxation (The Necessity Theory)
multifarious activities.
The power of taxation proceeds upon the
• Secondary Purposes (Non-Revenue
theory that the existence of government is a
Objectives)
necessity; it cannot continue without means to
pay its expenses, and for this reason, it has a 1. Strengthening anemic enterprises:
right to compel all its citizens and property within Granting tax exemptions to struggling industries
its limits to contribute. to encourage growth.
The Necessity Theory: The continued existence 2. Protecting local industries: Imposing high
of the government is a responsibility of every customs duties on foreign goods to make local
citizen. Without taxes, the government would products more competitive.
be paralyzed for lack of the motive power to
activate and operate it. Despite the natural 3. Reducing inequalities: Utilizing a
reluctance to surrender part of one's hard- progressive system of taxation to redistribute
earned income to the taxing authorities, every wealth and income.
person who is able to must contribute a share in 4. Economic Stability: Increasing or
the running of the government. decreasing taxes to prevent inflation or ward off
Basis of Taxation (The Benefit-Received depression.
Principle) Scope of Taxation
The basis of taxation is found in the reciprocal In the absence of constitutional restrictions, the
duties of protection and support between the power of taxation is regarded as the strongest
State and its inhabitants. Under this principle, of all powers of the government. It is:
the State receives taxes so that it may be
enabled to carry out its mandates; the citizen 1. Comprehensive: It covers all persons,
pays the portion of taxes demanded so that businesses, and property.
they may be secured in the enjoyment of the 2. Plenary: It is complete; under it, the
benefits of an organized society. legislature may determine the amount,
• Synthesis of Case 1-2 and Case 1-3: the subjects, and the method of
These cases provide a "double-pronged" collection.
defense of the State’s right to tax. In 3. Supreme: It is the highest power of the
Case 1-2, Miss Cory refused to pay taxes State.
simply because she wanted her millions
to remain intact. Her contention was 4. Unlimited: It is not restricted in force or
unjustified because her personal motive extent, provided it stays within
does not override the necessity of the constitutional and inherent limits.
State's existence. Conversely, in Case 1-
Legislative Discretion: The legislature has the
3, Mr. Maco refused to pay on the
absolute discretion to select the subjects or
grounds that he received no protection
objects to be taxed, whether they be persons
from the government. His contention is
(natural or juridical), property, or privileges
also untenable under the Benefit-
(rights or transactions).
Received Principle, as the law presumes
all inhabitants receive benefits (directly 3. Principles of a Sound Tax System
or indirectly) from the existence of an
To ensure a functional and fair framework, a tax
organized government, and the State’s
system should adhere to three "canons":
power to tax is not contingent on a
 Core recognized objects of government (e.g.,
Principle Definition
Requirement roads, calamity aid).

Sources of 2. Non-delegation of Legislative Power:

Revenues must Potestas delegata non delegari potest
revenue should
substantially (What has been delegated cannot be
be sufficient to
Fiscal respond to the delegated).
meet the
Adequacy expanding
demands of o Exception 1 (The President): Under
needs of public
public Art. VI, Sec. 28 (2) of the
service.
expenditures. Constitution, the President may be
authorized to fix tariff rates,
The tax burden
Taxation should import/export quotas, and
must be
Equality or be uniform and tonnage dues.
proportionate
Theoretical equitable
to the o Exception 2 (Local Government):
Justice (Ability-to-Pay
taxpayer’s Under Art. X, Sec. 5, local
Principle).
ability to pay. government units (provinces,
cities, municipalities) have the
The law should
power to create their own sources
Laws must be be simple to
of revenue.
clear, understand
Administrative convenient, and o Exception 3 (Administrative
Feasibility and capable of convenient as Bodies): May exercise "power of
effective to time and subordinate legislation" to
enforcement. place of implement policies, provided
payment. there is a standard.

3. Exemption of Government Entities:

Agencies performing governmental
4. Nature and Characteristics of the State’s functions are exempt to avoid the
Power to Tax "taking from one pocket to put in
1. Inherent in Sovereignty: It is an essential another" scenario.
attribute of a sovereign state and exists 4. International Comity: Based on the
even without a specific constitutional principle of sovereign equality (par in
grant. parem non habet imperium).
2. Legislative in Character: The power to o Case 1-22: The US Embassy is
enact tax laws is vested exclusively in the exempt from customs duties on
legislature. imported goods under the rules of
3. Subject to Limitations: It is constrained by international law.
inherent and constitutional boundaries. 5. Territorial Jurisdiction: A state cannot tax
• Case 1-5 Insight: The President cannot property or persons located outside its
independently grant tax exemptions. As borders.
established in the text, the power to 5.2 Constitutional Limitations
grant exemptions is legislative. The
President (Executive branch) cannot Specific protections found in the Constitution:
enter into executive agreements that
• Due Process: Taxes must not be
waive taxes unless specifically
confiscatory or arbitrary.
empowered by a law enacted by
Congress. • Equal Protection: All persons under similar
circumstances must be treated alike.
5. Limitations on the Power of Taxation
• Uniformity and Equity: Taxation must be
5.1 Inherent Limitations
uniform and the system must be
Restrictions stemming from the very nature of progressive.
the power to tax:
• Non-imprisonment for Debt: No person
1. Public Purpose: Taxation must be used for shall be imprisoned for non-payment of a
the support of the government or poll tax.
 • Non-impairment of Obligations of superior to police power
Contracts: Laws cannot invalidate or all. may be
weaken existing contracts (Case 1-11). unlimited
(Case 1-1).
• Freedom of Religion: No tax on the
exercise of religious worship (e.g., selling • Case 1-24 Synthesis: In the instance of a
Bibles at cost—Case 1-13). smoke tunnel or exhaust fan damaging a
Comparison: Property Tax vs. Income/Customs house, the court applies the "character
Exemptions of the invasion" test. If the character of
the invasion effectively deprives the
Art. VI, Sec 28 Art. XIV, Sec 4 owner of the use of their property for a
Criteria
(Limitation 8) (Limitation 9) public purpose, it is a "taking" (Eminent
Domain) requiring just compensation,
Religious, rather than a mere regulation under
Non-stock, non-
Entities charitable, and Police Power.
profit educational
Exempt educational
institutions. 7. Classification and Aspects of Taxation
institutions.

Property Tax Income Tax, 7.1 Aspects of Taxation

Taxes
(Real Estate Property Tax, and 1. Levy (Legislative): The act of determining
Exempted
Tax) only. Customs Duties. the subjects and rates of tax.
Must be 2. Collection (Administrative): The act of
Assets/revenues
actually, enforcing payment.
must be actually,
directly, and
directly, and 7.2 Classification of Taxes
Usage Test exclusively
exclusively used for
used for the • By Subject Matter: Personal
educational
exempt (Poll/Community Tax), Property, or Excise
purposes.
purpose. (Privilege tax).
• Case 1-15 (Lung Center): Parts of a • By Burden: Direct (e.g., Income Tax) vs.
charitable institution leased to private Indirect (e.g., VAT, where the burden is
entities for profit are subject to property shifted).
tax because they are not used
exclusively for charitable purposes. • By Determination of Amount: Specific (by
head/number, e.g., on spirits) vs. Ad
• Case 1-17 (ACBA): A non-stock, non- Valorem (by value, e.g., Real Property
profit school is exempt from income tax Tax).
on tuition, but rental income from its
property leased to commercial • By Purpose: General (Revenue) vs.
businesses is taxable. Special (e.g., Sugar adjustment tax).

6. The Three Inherent Powers of the Government • By Graduation: Proportional (fixed rate),
Progressive (rate increases with base), or
Eminent Regressive.
Feature Taxation Police Power
Domain
8. Escape from Taxation
Taking for Regulation
To raise Methods that do NOT reduce Government
Purpose public for general Revenue
revenue.
use. welfare.
• Shifting: Transferring the tax burden to
Dictated by No another (e.g., manufacturer to
Limited to
the needs of imposition consumer via VAT).
Amount the cost of
the (Owner is
regulation.* • Capitalization: Reducing the selling price
government. paid).
of a property by the capitalized value of
Superior to Superior to future taxes.
Contract Generally
non- non-
Clause superior. • Transformation: The manufacturer
impairment. impairment.
recovers the tax cost through improved
A tax used as production processes. Crucially, the
Note Taxation is
an manufacturer does not add the tax to
often
instrument of the selling price.
Methods that DO reduce Government Revenue 2. Committee Level: Referred to the House
Committee on Ways and Means.
• Tax Evasion: Illegal, intentional under-
declaration. 3. House Vote: Passed after three readings.

o Case 1-27: In 2021, Mr. Angdaya 4. Senate Transmission: The Senate may
intentionally reported only propose or concur with amendments.
₱1,000,000 when his actual
5. Senate Vote: Senate passes its version of
income was ₱1,500,000. This is
the bill.
illegal tax dodging.
6. Bicameral Conference: Differences are
• Tax Avoidance: The legal exploitation of
reconciled into an "enrolled bill."
the tax system to minimize liability (tax
minimization). 7. Final Approval: Enrolled bill sent to the
President.
• Tax Exemption: Immunity from the
obligation to pay. 8. Presidential Action: The President may
sign it, veto it, or allow it to become law
9. Important Legal Doctrines
through inaction by failing to act on it
• Double Taxation: within thirty (30) days of receipt.

o Direct: Same subject, same 9. Veto Override: Congress may override a

authority, same purpose, same veto with a two-thirds vote of all
period. members of both Houses.

o Indirect: Case 1-26 (Buhi). A local

occupation tax on fishponds and
Chapter 5 — Items and Concept of Income
a national income tax represent
indirect double taxation, which is 1. Fundamental Principles of Income Taxation
generally not prohibited.
The Power to Tax Income Taxation is the process
• Situs of Taxation: The place of taxation. or means by which the sovereign, through its
Real property is taxed where located; law-making body, raises income to defray the
income is taxed where earned or based necessary expenses of the government. In the
on citizenship. hierarchy of state powers, the power to tax is
considered the strongest, as the legislature is
• Rule on Set-off or Compensation: Taxes
free to select the subjects or objects to be
are not subject to set-off.
taxed.
o Case 1-28 (Francia vs.
Theoretical Basis The legal justification for
Government): A taxpayer cannot
imposing income tax is synthesized through two
set off his tax liability against a
foundational theories:
debt the government owes him
(e.g., from an expropriated land). • Lifeblood Theory: This theory posits that
The core legal distinction is that a the existence of the government is a
tax is not a debt. Taxes are necessity; it cannot continue without the
enforced contributions, whereas means to pay its expenses.
debts are based on contract. Consequently, the State has the right to
compel all its citizens and property within
• Tax Amnesty: A general pardon from civil
its limits to contribute.
and criminal liability for past periods. It is
retroactive. • Benefit-Received Principle: This principle
establishes the reciprocal duties of
• Interpretation of Tax Laws: Laws are
protection and support between the
interpreted in favor of the taxpayer when
State and its inhabitants. The
there is doubt about coverage, but
government receives taxes to carry out
strictly against the taxpayer when
its functions, while the taxpayer
regarding an exemption.
contributes a portion of their income to
10. The Legislative Process of Tax Laws be secured in the enjoyment of the
benefits of an organized society. While
1. Initiation: The tax bill must originate
not every taxpayer receives a direct or
exclusively in the House of
equal benefit, they are presumed to
Representatives.
benefit from the existence of the State.
Principles of a Sound Tax System A sound tax 4. Employee Allowances and Benefits
system must satisfy three criteria:
Statutory Allowances and Taxability The
1. Fiscal Adequacy: Revenue sources following allowances are recognized in the
should be sufficient to meet the context of government revenue and personnel
demands of public expenditures. administration. However, the specific statutory
thresholds and taxability status for these items
2. Equality or Theoretical Justice (Ability-to-
are governed by "Exclusions from Gross Income"
Pay Principle): The tax burden should be
(Chapter 7) and are not contained within the
proportionate to the taxpayer's ability to
General Principles (Pages 1–55).
pay. This is the technical basis for the
Progressive Tax system, where tax rates Allowance Taxability
Definition/Acronym
increase as the income bracket Type Status
increases.
Representation and Subject to
3. Administrative Feasibility: Tax laws must RATA Transportation Chapter 7
be clear, plain to the taxpayer, and Allowance Exclusions
capable of convenient and effective
administration by government officials. Subject to
Personnel Economic
PERA Chapter 7
2. Definition and Classification of Income Relief Allowance
Exclusions
Legal Concept of Income - Income represents
Additional Subject to
the tax base upon which the levy is imposed. It
ACA Compensation Chapter 7
must be distinguished from the broader
Allowance Exclusions
concept of Revenue, which refers to all funds or
income derived by the government. Revenue
includes grants, loans, and administrative
collections such as fines or penalties. 5. Gains from Forgiveness of Indebtedness and
Remuneratory Donations
Income vs. Capital Under Philippine jurisdiction,
income tax is classified as an Excise Tax (or Forgiveness of Indebtedness The tax treatment
privilege tax). Unlike a property tax, which is of debt cancellation is determined by the
imposed on the property itself, an excise tax is nature of the transaction:
imposed upon the performance of an act, the • Gratuitous Transfer: If a debt is cancelled
enjoyment of a privilege, or the engaging in an without consideration, it is treated as a
occupation—in this case, the privilege of "Gratuitous transfer of property" (a gift).
earning income. Under the general principles, these are
Classification of Income Tax distinct from income earned through
business or occupation.
1. General/Revenue Tax: Imposed solely to
raise funds for government expenditures. • Onerous Transfer: If debt is forgiven in
exchange for services, it loses its
2. Excise Tax: Imposed on the privilege of gratuitous character and is treated as
earning income rather than on property. taxable compensation.
3. Progressive Tax: Calculated based on Remuneratory Donations A remuneratory
the Ability-to-Pay Principle, where the donation is given for services rendered.
rate increases as the base increases. Because it is not a purely "Gratuitous transfer"
3. Compensation for Services and Income in (which implies no consideration), it is treated as
Kind taxable income. The law distinguishes between
the "support" received by a citizen and the
Compensation Income Compensation refers to "protection" provided by the State; where
all remuneration derived from an employer- money is received as a result of labor or service,
employee relationship. While the specific it is a taxable item of income.
technical valuation rules (such as Fair Market
Value assessments for commodities or services) 6. Recovery of Bad Debts and Leasehold
are detailed in the latter chapters of the Improvements
textbook (starting Page 123), the general Technical Reporting Methods The General
principle dictates that any economic benefit Principles of Taxation (Pages 1–55) do not
received for services rendered constitutes a provide the specific calculation logic for the Tax
taxable gain. Benefit Rule, the Outright Method, or the
Spread-out Method for leasehold Conceptual Nature
improvements. These items are technically
The taxation of fringe benefits is grounded in the
classified under "Deductions from Gross Income"
Benefit-Received Principle (Page 5), which
(Chapter 14) and "Items and Concept of
posits that the exercise of the State's taxing
Income" (Chapter 5), which are found in later
power is a reciprocal duty: the State provides
portions of the text not covered in this synthesis.
protection and an organized society, and in
7. Taxation of Dividends return, taxpayers contribute a portion of their
income. Fringe benefits represent a flow of
General Criteria Dividends represent a
wealth or economic advantage to the
distribution of corporate earnings. While the
employee, thus falling under the sovereign's
general principles discuss the "Exemption of
power to tax all items of income to defray the
religious, charitable, or educational entities"
necessary expenses of the government (Page
from taxes on dividends used for educational
3).
purposes, the specific taxability of Cash,
Property, or Stock dividends for regular Taxable Compensation vs. Fringe Benefits Tax
taxpayers is a technical matter addressed in (FBT)
Chapter 9 (Taxation of Corporations).
A critical distinction exists in the tax treatment of
8. Situs and Jurisdiction of Income these benefits based on the employee's rank:

Rules of Situs The "Situs of Taxation" refers to the • Taxable Compensation Income: For
place of taxation. For income, the situs is certain employees, the value of the
defined as: benefit is added to their basic salary and
subjected to the graduated income tax
• The place where the income is earned;
rates.
or
• Fringe Benefits Tax (FBT): For others, the
• The citizenship or domicile of the owner.
benefit is subjected to a final withholding
Territorial Jurisdiction A state’s power to tax is tax (FBT) imposed on the Grossed-Up
limited to its territorial jurisdiction. A state may Monetary Value (GUMV) of the benefit.
not tax property or income lying outside its
This classification is a matter of Administrative
borders unless there is a privity of relationship
Feasibility (Page 6), ensuring that the tax system
between the state and the taxpayer.
remains capable of convenient and effective
• Privity of Relationship: This exists through administration.
citizenship or residence (domicile). If a
citizen earns income abroad, the state
may still exercise jurisdiction due to this 2. Categorization of Employees and Tax
personal relationship. Imposition

• International Comity: Under the rule of The application of FBT follows the Rule of
"par in parem non habet imperium," a Uniformity (Page 9) and the Equal Protection
state is precluded from exercising Clause (Page 8), ensuring that all taxable
jurisdiction over the property of another persons within the same class are treated alike.
sovereign state. This limits the situs of
taxation for certain foreign entities and Employee Jurisprudential
Tax Treatment
diplomatic property. Category Logic

Based on
Administrative
Chapter 6 – Fringe Benefits and Fringe Benefits Managerial Subject to Feasibility (Page
Tax (FBT) and Fringe Benefits 6). Taxing at the
1. Fundamentals and Conceptual Framework of Supervisory Tax (FBT) as a source as a final
Fringe Benefits Employees Final Tax. tax is more
efficient for high-
In the Philippine tax jurisdiction, "fringe benefits" value benefits.
are defined as any good, service, or other
benefit furnished or granted in money or in kind Based on the
Rank-and- Benefits are Ability-to-Pay
by an employer to an individual employee.
File included in Principle (Page
Legally, these are considered supplements to
Employees Gross 6). These benefits
the basic salary or compensation, provided in
consideration of the services rendered. are taxed via the
 Compensation progressive The Logic of "Grossing-Up"
Income. system to ensure
The GUMV represents the total amount of
theoretical
income that would have been required to pay
justice.
the tax and leave the employee with the net
Exemptions from Imposition value of the benefit. This mechanism utilizes the
principle of Shifting (Page 29), where the
A fringe benefit may be exempt from tax statutory taxpayer (the employer) bears the
altogether if it meets the following criteria: burden of the tax on behalf of the employee. By
• Convenience of the Employer: If the grossing up the value, the government ensures
benefit is required by the nature of or it collects the full tax due as if the benefit were
necessary to the trade, business, or received in cash.
profession of the employer. This aligns Mathematical Formula
with the "actually, directly, and
exclusively" rule (Page 13). To determine the tax liability, the following
formulas are applied:
• Legal Authorization: Benefits specifically
granted tax exemption under the 1. Grossed-Up Monetary Value (GUMV):
Constitution or statues (Page 10).

3. De Minimis Benefits and Tax-Exempt

Thresholds
2. Fringe Benefits Tax (FBT):
De Minimis benefits are facilities or privileges of
relatively small value offered by an employer as
a means of promoting the health, goodwill,
contentment, or efficiency of employees. These
are exempt from both income tax and FBT
because they are deemed not to be taxable
Note: The divisor factor and tax rate are
compensation.
determined by the prevailing National Internal
The following ceilings are established under Revenue Code (NIRC) schedules.
current Revenue Regulations to ensure the tax
5. Specific Valuation Rules for Non-Cash Benefits
burden remains proportionate, satisfying the
requirement of Theoretical Justice (Page 6): Valuation of benefits is typically Ad Valorem
(Page 22), where the tax is a fixed proportion of
• Rice Subsidy: [Per Current Revenue
the value of the property/benefit.
Regulations]
Housing Privilege
• Uniform and Clothing Allowance: [Per
Current Revenue Regulations] • Leased Property: If the employer leases
residential property for the employee,
• Medical Cash Allowance to Dependents:
the value is the amount of rental paid.
[Per Current Revenue Regulations]
• Employer-Owned: If the property is
• Laundry Allowance: [Per Current
owned by the employer, the value is
Revenue Regulations]
typically based on the higher of the fair
• Employee Achievement Awards: [Per market value (FMV) as determined by
Current Revenue Regulations] the Commissioner or the Zonal Value.

• Gifts Given During Christmas and Major • Note: Only 50% of the value is usually
Anniversaries: [Per Current Revenue taxable if it is for the employee's use.
Regulations]
Motor Vehicles
• Daily Meal Allowance for Overtime
• Purchase/Ownership: If the employer
Work/Night Shift: [Per Current Revenue
purchases the vehicle in the name of the
Regulations]
employee, the value is the entire
acquisition cost.

4. Quantification: The Grossed-Up Monetary • Lease/Maintenance: If the vehicle is part

Value (GUMV) of a fleet, the value is depreciated over
 a specific period (e.g., 5 years). Usage for Tax Return (ITR) unless required for information
the employer's business is generally non- purposes.
taxable.
Exclusions vs. Deductions
Interest on Loans
As a Senior Technical Auditor, one must never
If the employer grants a loan to the employee confuse these two concepts. They differ
at a rate lower than the benchmark rate fundamentally in their role within the tax
prescribed by law, the difference between the equation:
market rate and the actual interest paid is
considered a taxable fringe benefit. This follows Feature Exclusions Deductions
the principle that any economic gain Income
constitutes taxable income (Page 3). Amounts
received but
subtracted from
6. Summary of Exclusions and Exemptions not
Definition gross income to
considered
The following is a compliance checklist for arrive at taxable
part of gross
identifying benefits not subject to Fringe Benefits income.
income.
Tax:
Not taken into
• [ ] Benefits Authorised and Exempted by Subtracted only
account for
Law: Items specifically excluded by the Computational after the "Gross
the "Gross
NIRC or special laws (Page 10). Role Income" bucket
Income"
is determined.
• [ ] Convenience of the Employer: Benefits bucket.
necessary for the employer's business or
Represents a Represents
for the employee to perform their duties
return of allowable
properly (Page 12).
Legal Nature capital or a business
• [ ] De Minimis Benefits: Benefits within the non-taxable expenses or
prescribed monetary thresholds. flow of wealth. statutory losses.

• [] Retirement and Insurance: Audit Note: Exclusions vs. Exemptions While

Contributions by the employer for the often used interchangeably, Exclusions refer to
benefit of the employee to retirement, receipts that never enter the gross income
hospitalization, and health plans. computation (they are outside the bucket).
Exemptions refer to income that is technically
• [] Actually, Directly, and Exclusively
"gross income" but is subsequently removed or
Used: Benefits provided by specific
shielded by law.
institutions (e.g., non-stock, non-profit
educational entities) that are integral to Statutory Listing of Exclusions
their primary purpose (Page 13, 15).
The following are expressly excluded from gross
• [] Rank-and-File Benefits: Benefits income under the Tax Code:
provided to rank-and-file employees
(subject instead to standard withholding 1. Proceeds of life insurance.
tax on compensation). 2. Return of premiums paid.

3. Gifts, bequests, and devises.

Chapter 7: Exclusions from Gross Income 4. Compensation for injuries or sickness.
1. Fundamental Concepts of Exclusions 5. Income exempt under treaty.
Definition and Statutory Basis 6. Retirement benefits, pensions, and
In Philippine income taxation, Exclusions gratuities.
represent a flow of wealth to the taxpayer that 7. Miscellaneous items (e.g., prizes, awards,
is not treated as part of "Gross Income." Under SSS/GSIS benefits).
the Ampongan methodology and the National
Internal Revenue Code (NIRC), these items are 2. Life Insurance and Return of Premiums
excluded because they are exempted by the Life Insurance Proceeds
Constitution, specific statutes (e.g., TRAIN Law),
or international treaty obligations. Because they Proceeds paid to heirs or beneficiaries upon the
fall outside the definition of taxable income, death of the insured are excluded from gross
they are generally not reported in the Income income.
 • Indemnity Theory: The rationale is that would follow the standard life insurance
human life has no pecuniary value; the exclusion.
proceeds are a mere indemnity for the
3. Gifts, Bequests, and Devises
loss of an asset (the life), not a gain.
Core Definitions
• Condition: The exclusion is predicated
upon the death of the insured. If the • Gift: A voluntary transfer of property
insured outlives the policy (e.g., an without consideration, motivated by
endowment), the gain is taxable. pure liberality.
• Interest Rule: If the proceeds are held by • Bequest: Personal property gifted via a
the insurer under an agreement to pay will.
interest, the interest portion is taxable.
• Devise: Real property gifted via a will.
Jurisprudence: The Installment Election (Queen
Case) The Liberality Rule

If a beneficiary elects to receive the proceeds Exclusion is only granted if the transfer is made
in installments rather than a lump sum, the tax out of Pure Liberality. Transfers made in
treatment changes: consideration of services (e.g., a "gift" for 20
years of employment) are treated as taxable
• Principal: The portion representing the compensation.
face value of the policy remains Exempt.
Note: While the value of the gifted property is
• Excess/Interest: The portion exceeding exempt from income tax (it is subject to Transfer
the face value is Taxable Interest. Taxes), the income derived from such property
(e.g., rental income from an inherited
• Example: Queen is a beneficiary of a
apartment) is fully taxable.
₱500,000 policy. She elects to receive
₱120,000/year for 5 years. 4. Compensation for Injuries or Sickness
o Annual Principal (₱500k / 5): Rationale: Bodily Integrity
₱100,000 (Exempt)
Payments for physical or mental health injuries
o Annual Interest (₱120k - ₱100k): are intended to restore the taxpayer's "Bodily
₱20,000 (Taxable) Integrity." As this has no pecuniary value, its
replacement through insurance or damages is
Return of Premium
not considered profit.
Amounts received as a return of premium
Taxable vs. Non-Taxable Damages (Illustration
(under life insurance, endowment, or annuity
7-5)
contracts) are excluded as a Return of Capital.

• Taxable Excess: If the proceeds exceed Non-Taxable (Return of Taxable (Substitution

the aggregate premiums paid, the Capital/Exempt) of Income)
excess is taxable income. Hospital bills and Recovery of lost
• Scenario (Mutya Case): Mutya received medicine reimbursements income/wages
₱1,500,000 at maturity. She paid
Moral damages (mental Recovery of lost
₱1,000,000 in total premiums.
anguish/libel) business profits
o Taxable Gain: ₱500,000.
Attorney's fees
Keyman Insurance (compensatory)
Proceeds from insurance taken by a Loss of personal property
corporation on the life of a key executive are (e.g., DVD player)
not taxable if the corporation is the beneficiary.
The proceeds are a replacement of a lost
corporate asset (the Keyman).
5. Retirement Benefits and Pensions
• Professor's Tip: If the heirs were the
Private Sector Retirement (RA 7641)
beneficiaries, the premiums paid by the
corporation would be considered Benefits are exempt only if four cumulative
taxable compensation or fringe benefits requirements are met:
to the employee, and the proceeds
 1. A BIR-approved Reasonable Private 7. Prizes, Awards, and Athlete Benefits
Benefit Plan.
Recognition Prizes
2. Minimum 10 years of service with the
Exempt if:
same employer.
1. Selected without any action to enter the
3. Minimum 50 years of age at retirement.
contest.
4. The privilege is availed of only once.
2. Not required to render substantial future
Government Retirement services.

Benefits from SSS and GSIS are tax-exempt. Sports Awards

Terminal leave pay (money value of
Exempt if the competition is sanctioned by a
accumulated leave credits) is also exempt as it
National Sports Association.
is considered a retirement gratuity.
Talent/Royalty Fees (Don Naiti Case)
Case Analysis: Application of Retirement Rules
(Alma Case) While a championship trophy or prize is exempt,
ancillary income like modelling fees or royalties
Private
Years Audit from a film portrayal of the athlete's life are fully
Case Benefit Age Status
Service Finding taxable.
Plan?
8. De Minimis Benefits (Updated per RR 29-2025)
Fails Age
1 No 12 40 Taxable These are privileges of small value intended to
and Plan
promote goodwill and health.
Fails
2 Yes 9 60 Taxable Comprehensive Threshold Table (Effective
Tenure
January 6, 2026)
3 No 15 65 Taxable Fails Plan
Updated
Benefit Item Frequency
All criteria Ceiling
4 Yes 10 55 Exempt
met
Monetized Unused
Vacation Leave Up to 12 days Per Annum
(Private)
6. Separation Pay and Involuntary Severance
Medical Cash
The 'Control' Test ₱2,000 (Total Per
Allowance
₱4,000) Semester
Separation pay is exempt if the severance is (Dependents)
due to causes beyond the control of the
employee. Rice Subsidy ₱2,500 Per Month

• Exempt Causes: Death, sickness, physical Uniform and Clothing

₱8,000 Per Annum
disability, redundancy, retrenchment, Allowance
closure of business, or installation of
Actual Medical
labor-saving devices. ₱12,000 Per Annum
Assistance
• Taxable Causes: Resignation,
inefficiency, and serious misconduct (as Laundry Allowance ₱400 Per Month
these are within the employee's control).
Employee
Jurisprudence: Watanabe vs. Abe Achievement ₱12,000 Per Annum
Awards (Tangible)
In this case, the corporation suffered losses.
Watanabe resigned voluntarily; Abe refused Gifts (Christmas and
₱6,000 Per Annum
and was retrenched. Anniversary)
• Watanabe's Pay: Taxable (Resignation is 30% of Basic
within his control). Overtime Meal Per
Minimum
Allowance Incident
• Abe's Pay: Exempt (Retrenchment is Wage
beyond his control). CBA and Productivity
₱12,000 Per Annum
Incentive Schemes
9. 13th Month Pay and Statutory Contributions Chapter 8 – Taxation of Individuals

The ₱90,000 Ceiling 1. Classification of Individual Taxpayers

The 13th month pay and "Other Benefits" Tax liability in the Philippines is determined by
(bonuses, loyalty awards) are exempt up to a citizenship, residency, and the duration of stay
combined total of ₱90,000. Amounts in excess within the country.
are taxable.
Taxpaye Description/Criteri Specific Exclusions /
Mandatory Contributions r Class a Notes
Contributions for SSS, GSIS, PhilHealth, Pag-Ibig, Taxable on income
and Union Dues are excluded. Resident A Filipino citizen
from all sources
Citizen residing in the
• The Mandated Rule: Only the maximum (Within and
(RC) Philippines.
amount mandated by law is exempt. Without).
Voluntary excess contributions requested
A Filipino citizen
by the employee are Taxable
who: (1)
Compensation.
establishes the
10. Minimum Wage Earner (MWE) Provisions intent to reside
abroad as an
Core Exemptions Non- immigrant or for
Includes "Seafarers"
MWEs are exempt from tax on: Statutory Resident permanent
(see Situs rules
Minimum Wage (SMW), Holiday Pay, Overtime Citizen employment; or
below).
Pay, Night Shift Differential, and Hazard Pay. (NRC) (2) works and
derives income
Mixed Income Rule abroad requiring
If an MWE earns income from a separate trade physical presence
or profession, the MWE compensation remains for at least 183
exempt, but the business/professional income is days.
taxable. An individual who
Professor's Tip: The Promotion Rule is not a Filipino
Taxable only on
Resident citizen but resides
If an MWE is promoted mid-year and their salary income derived
Alien in the Philippines
begins to exceed the SMW: from sources within
(RA) (not a mere
the Philippines.
• Non-Retroactivity: The employee is only transient or
taxable on income earned from the sojourner).
point of promotion onward. The income
Non-
earned while they were still an MWE
resident An alien individual
remains exempt.
Alien who stays in the Treated similarly to
11. Miscellaneous Exclusions Engage Philippines for an RAs for income tax
d in aggregate period on
• Financial Instruments: Gains from bonds Trade or of more than 180 business/profession
or debentures with a maturity of more Business days during any al income.
than 5 years and redemption of shares in (NRA- calendar year.
mutual funds are exempt. ETB)
• Foreign Entities: Income derived by
Non-
foreign governments from investments in
resident
the Philippines is exempt.
Alien
• Professor's Tip: The Tax Benefit Rule If a Not An alien individual Subject to a 25%
taxpayer recovers an item previously Engage who stays in the final tax on gross
claimed as a deduction (e.g., a tax d in Philippines for 180 income from within
refund for a tax paid in a prior year), that Trade or days or less. the Philippines.
recovery is taxable only if the original Business
deduction provided a tax benefit (i.e., it (NRA-
reduced the tax liability in the year it was NETB)
claimed).
2. Income Situs and Taxability Rules Compensation. Includes moral damages
and mental anguish.
The "situs" or place of taxation depends on
where the income is earned and the • Retirement Benefits: Excluded if: (1)
classification of the individual. Reached 50 years old; (2) 10 years of
service with the same employer
Income from Income from (requisites must be concurrent); (3)
Taxpayer
Within Without Private benefit plan is BIR-
Classification
(Philippines) (Foreign) qualified/approved; and (4) Availed only
Resident Citizen Taxable Taxable once.

• Statutory Contributions: Employee’s

Non-Resident
Taxable Non-Taxable share of SSS, GSIS, Philhealth, and Pag-
Citizen
IBIG contributions (up to the maximum
Resident Alien Taxable Non-Taxable amount mandated by law), and union
dues.
Non-Resident
Taxable Non-Taxable Sub-section: De Minimis Benefits (Updated per
Alien (ETB/NETB)
RR 29-2025)
[!WARNING] WORLDWIDE TAXATION RULE
Effective January 6, 2026, the updated non-
Resident Citizens (RC) are the ONLY individual
taxable thresholds for de minimis benefits are:
taxpayers subject to Philippine income tax on
their worldwide income. All other individual Benefit Item 2026 Threshold/Limit
taxpayers are taxable only on income derived
from sources within the Philippines. ₱2,500 per month
Rice Subsidy
(or one 50kg sack)
Technical Note for Seafarers: Seafarers are
classified as NRCs. Consequently, only their Uniform and Clothing
₱8,000 per annum
income from Philippine sources is taxable. Allowance
Compensation for services rendered on a vessel
exclusively in foreign waters is considered Medical Cash Allowance ₱2,000 per semester
income from "Without" and is thus exempt. (Dependents) (₱333/month)

3. Gross Compensation Income and Exclusions Actual Medical Assistance ₱12,000 per annum

Gross compensation income includes all Laundry Allowance ₱400 per month
remuneration for services performed by an
employee for an employer, including salaries, Employee Achievement ₱12,000 per annum
tips, and honorariums. Awards (must be in kind)

Sub-section: Exclusions and Exemptions Gifts

₱6,000 per annum
(Christmas/Anniversary)
The following items are excluded from gross
income: Vacation Leave
12 days
Monetization (Private)
• Life Insurance: Proceeds paid to heirs
upon the death of the insured. 30% of applicable
Overtime/Night Shift Meal
The "Outliving" Trap: If the insured basic minimum
o Allowance
outlives the policy (e.g., wage
endowment maturity), the CBA & Productivity
proceeds in excess of premiums ₱12,000 per annum
Incentive Schemes
paid are taxable.
Sub-section: The ₱90,000 Ceiling
• Return of Premium: Amounts received as
a return of premiums paid under life The 13th-month pay and "Other Benefits"
insurance, endowment, or annuity (Christmas bonuses, productivity bonuses, etc.)
contracts are excluded (return of are exempt from tax up to a combined total of
capital). ₱90,000. Amounts in excess are added to
taxable gross compensation.
• Compensation for Injury/Sickness:
Amounts received through
accident/health insurance or Workmen's
4. Graduated Income Tax Schedule (Effective Graduated Rates Option
2023 Onwards)
• SEPs may choose the graduated rates in
Pursuant to RR 8-2018, the following rates apply Section 4. This becomes mandatory if the
to the taxable income of individuals: ₱3,000,000 threshold is breached.

Taxable Taxable Additional

Basic Tax
Income Income Rate on
Amount 6. Taxation of Mixed Income Earners
(Over) (Not Over) Excess
Mixed-income earners receive both
₱0 ₱250,000 ₱0 0% compensation and business/professional
income.
15% of
₱250,000 ₱400,000 ₱0 excess over Calculation Logic:
₱250k
1. Compensation Income: Always taxed
20% of using Graduated Rates.
₱400,000 ₱800,000 ₱22,500 excess over
2. Business/Professional Income:
₱400k
o If total sales are ₱3,000,000 or
25% of
below: Taxpayer may choose
₱800,000 ₱2,000,000 ₱102,500 excess over
Graduated Rates OR 8% Flat Tax.
₱800k
o Crucial Rule: If the 8% option is
30% of chosen, the ₱250,000 deduction is
₱2,000,000 ₱8,000,000 ₱402,500 excess over NOT allowed against business
₱2M income, as the first ₱250,000 (0%
rate) is already applied to the
35% of
compensation income.
₱8,000,000 - ₱2,202,500 excess over
₱8M 3. Restriction: If business income exceeds
₱3,000,000, graduated rates are
mandatory for the entire taxable
5. Taxation of Self-Employed and Professionals income.
(SEP)
7. Allowable Deductions: Itemized vs. OSD
SEPs whose gross sales/receipts do not exceed
SEPs and GPP partners taxed under graduated
the ₱3,000,000 VAT threshold have two options:
rates may choose their deduction method.
The 8% Flat Tax Option
Itemized Deductions
• Rate: 8% on gross sales/receipts and
The 10 allowable items under RR 8-2018 include:
other non-operating income in excess of
Expenses, Interest, Taxes, Losses, Bad Debts,
₱250,000.
Depreciation, Depletion, Charitable
• In-Lieu Of: Replaces both the graduated Contributions, R&D, and Pension Trusts.
income tax and the 3% percentage tax
Optional Standard Deduction (OSD)
(Sec. 116).
• Basis Distinction:
• Disqualifications: This option is NOT
available to: o For Individuals: 40% of Gross Sales
or Gross Receipts.
1. VAT-registered taxpayers
(regardless of gross sales). o For Corporations/GPPs: 40% of
Gross Income.
2. Taxpayers subject to Other
Percentage Taxes under Title V • Irrevocability: Choice must be made in
(except Sec. 116). the 1st Quarter Return and is irrevocable
for the rest of the taxable year.
3. Partners of a General Professional
Partnership (GPP).
8. Passive Income Subject to Final Tax
(Residents/Citizens)

• Interest: 20% general rate; 15% for interest

from Expanded Foreign Currency
Deposit System (EFCDS).

• Pre-termination of Long-term Deposits:

o Less than 3 years: 20%

o 3 years to less than 4 years: 12%

o 4 years to less than 5 years: 5%

• Royalties: 20% general rate; 10% on

Books, Literary Works, and Musical
Compositions (Bolded for exam focus).

• Prizes/Winnings: 20% (if exceeding

₱10,000).

• Dividends: 10% (from domestic

corporations).

• Capital Gains (Shares): 15% on net

capital gain (shares not traded in stock
exchange).

• Capital Gains (Real Property): 6% of the

higher of Gross Selling Price or FMV.

9. Filing and Administrative Requirements

Filing Deadlines

• Quarterly ITR: May 15, August 15, and

November 15.

• Annual ITR: April 15 of the following year.

Substituted Filing

Individual employees are not required to file an

annual ITR if they meet all the following:

• Receiving purely compensation income.

• Working for only one employer within the

taxable year.

• Tax has been correctly withheld (Tax Due

= Tax Withheld).

• The "No-File" Rule: An individual earning

purely compensation income not
exceeding ₱250,000 is not required to file
an ITR.

Installment Payment

If the tax due is in excess of ₱2,000, it may be

paid in two equal installments:

1. First Installment: At the time of filing (April

15).

2. Second Installment: On or before

October 15.