GENERAL PRINCIPLES OF TAX

Taxation – process by which the sovereign, through its lawmaking body, raises income to defray the
necessary expenses of the government
Primary Purpose:
To provide funds or property to promote the general welfare of tis citizen and finance its activities or
projects
Characteristics
 Enforced contribution
 Generally payable in money
 Proportionate in character
 it is levied on persons and property within the jurisdiction of the state
 it is levied pursuant to legislative authority, the power to tax can only be exercised by the lawmaking
body or congress
 it is levied for public purpose
 it is commonly required to be paid a regular interval
Theory and Basis of Taxation
Theory
 The existence of government is a necessity
 The government cannot continue without a means to pay its expenses
 The government has the rights to compel its citizens and property within its limits to contribute.
Basis
 Taxation is based on the reciprocal duties of protection and support between the government and its
people.
 Government receives taxes from the people which is used to perform functions of government and other
benefits.
 Benefit-received theory.
Basic principles of sound tax system
 Fiscal adequacy
- The source of government revenue should be efficient to demand the needs of public expenditure.
- Creating new taxes or new tax machinery or by merely changing the rates applicable to existing
taxes.
 Equality or theoretical justice
- The tax burden should be proportionate to the taxpayer’s ability to pay.
- Ability-to-pay principle
 Administrative feasibility
- The tax laws should be capable of convenient, just and effective administration.
- Each tax should be: – Clear and plain to the taxpayer. – Capable of uniform enforcement –
Convenient as to time, place and manner of payment. – Not unduly burdensome upon or
discouraging to business activity
Nature of taxation
 It is inherent in sovereignty.
 Legislative in character.
 Subject to constitutional and inherent limitations.
Limitations of taxation
 Inherent limitations – restrictions on the power exists from the very nature of the power of taxation
itself.
- Requirement that levy must be for a public purpose.
- Non-delegation of the legislative power to tax, except: – Delegation to the President – Delegation
to local governments – Delegation to administrative bodies
- Exemption from taxation of government entities.
- International comity
- Territorial jurisdiction

 Constitutional limitations – restrictions in the exercise of the power of taxation as expressly provided
in the Philippine Constitution.
- Due process.
- Equal protection of the laws.
- Rule of uniformity and equity in taxation.
- Non-imprisonment for non-payment of poll tax.
- Non-impairment of the obligations and contracts.
- Non-infringement of religious freedom.
- No appropriation for religious purposes.
- Exemption of religious, charitable or educational entities, non-profit cemeteries, and churches from
taxation.
- Exemption of revenues and assets of non-stock, non-profit educational institutions and donations
for educational purposes from taxation.
- Concurrence by a majority of all members of the Congress for the passage of a law granting any
tax exemption.
- Power of the President to veto any particular item or items in a revenue or tariff bill. • Non-
impairment of the jurisdiction of the Supreme Court in tax cases.
Aspects of taxation
 Levy – deals with the provisions of law which determines:
- The person or property to be taxed
- The sum or sums to be raised
- The rate of the tax
- The time and manner of levying, receiving and collection the tax.
 Collections – constituted of the provisions of law which prescribe the manner of enforcing the
obligation on the part of those taxes to pay the demand thus created.
Tax Avoidance/ Minimization/ Planning – legal act
Tax Evasion/ Dodging – illegal act
Direct Double Taxation – not unconstitutional
- Same subject
- Same purpose
- Same jurisdiction
- Same taxable year
- Same kind
Sources of Tax Law – basis of enforcement
- Constitution
- Statutory Enactments
- Revenue Regulations
- BIR Rulings
- Judicial Decisions
- Others
Statutes – tax laws
Against Government; in favor to Taxpayer
Exemption
In favor of Government; against to Taxpayer
 National Internal Revenue Code (NIRC)
INDIVIDUAL INCOME TAX
1. Person Subject to Individual Income Tax
a. Citizen
i) Resident Citizen – citizen of Philippines, has a permanent place in Philippines
ii) Nonresident Citizen – citizen of Philippines, establishes physical presence abroad
Immigrant – reside abroad as immigrant
Permanent Employee – OFW
Contract Worker – 180 days or more on abroad
b. Alien
i) Resident Alien – not a citizen of Philippines but residence of within the Philippines
ii) Nonresident Alien – not a citizen of Philippines and residence is not within the Philippines
Engaged in trade or business (NRAETB) – stayed in the Philippines for more than 180 days
Not engaged in trade or business (NRANETB) – stayed in the Philippines 180 days or less

2. Income Subject to Tax

a. Compensation Income – arising from employer-employee relationship (salaries, wages,
emoluments and honoraria, commissions, taxable bonuses, fringe benefits, taxable allowances,
non-monetary compensation, director’s fee, and amounts drawn as salaries by partners of a
partnership)
b. Business Income and Profession Income – business/trade income, fees from profession, gains from
sale or exchange of assets, commissions, rental income, and other income not covered by
compensation
c. Passive income or Other Sources of Income – did not work for but has income

3. Determination of Taxable Income

a. On Compensation Income
Gross Compensation xxx
Less: Deductions (xxx)
Exemptions (Basic and Additional) (xxx)
TAXABLE INCOME xxx
b. On Business Income and Profession Income
Gross Sales or Receipts xxx
Less: Cost of Sales or Services (xxx)
Gross Income xxx
Less: OPEX – itemized or OSD (40% of gross sales/receipts) (xxx)
Net Income xxx
Less: Exemptions – Basic and Additional (for Profession) (xxx)
TAXABLE INCOME xxx
c. On Passive Income
On gross amount
Sources of Citizen Alien
Income Resident Nonresident Resident NRAETB NRANETB
Subject to w/in w/o w/in w/o w/in w/o w/in w/o w/in w/o
Tax Phil Phil Phil Phil Phil Phil Phil Phil Phil Phil
Compensation YES YES YES NO YES NO YES NO YES NO
Income
Business/ YES YES YES NO YES NO YES NO YES NO
Profession
Income

*NRANETB – Gross Income = Taxable Income

**RAH, ROH, OBU, PETROLEUM OPERATIONS – Filipino (has option 15% or graduated tax); Alien
(Gross Income = Taxable Income)
4. Exclusions from Gross Income
NOT INCLUDED in the computation of gross income
a. Proceeds of Life Insurance but not the interest paid to the heirs or beneficiaries
b. Amount received as return of premium
c. Value of Property acquires through gratuitous but not the income from the property
d. Compensation for injuries/ sickness
e. Income exempts under treaty
f. Retirement benefit, Pensions, Gratuities
g. Income from foreign government, financing from foreign governments, investments in loans,
stocks, bonds, and interest on the deposits in the bank of Philippines
h. Income derived from public utility or from government function
i. Prizes and Awards in religious, charitable, scientific, educational, the recipient was selected
without any action to enter and the award does not render services as a condition
j. Prizes and Awards granted to athletes
k. 13th month pay, incentives, Christmas bonus – 82,000
l. GSIS, SSS, Pag-ibig, Philhealth, Medicare and union dues
m. Gains from sale or exchange or retirement of bonds, debentures and other indebtedness certificate,
with a maturity of more than 5 years
n. Gains realized from redemption of shares of stocks

5. Deduction from Gross Income

1) Resident Citizen/ Nonresident Citizen/ Resident Alien
a. On Compensation Income – premium payments on health and hospitalization (2400 per year or 200
per month and has a family income not more than 250,000 and one claiming personal exemption)
b. Business/ Professional Income
 Business/ Professional Expenses paid or incurred during taxable year
 Interest paid on indebtedness
 Taxes paid – except income tax
 Losses – which are not compensated by insurance
 Net Operating Loss – deduct from gross income for 3 consecutive years; mining – 5 consecutive
years
 Bad Debts – ascertained to be worthless
 Depreciation
 Depletion of Oil and Gas Wells and Mines – reasonable allowance for the extraction or has the
option to deduct 25% from the net income from mining
 Charitable/Donations and Other Contributions – donations made to government is deducted in
full amount. Net taxable income X 10% (individual) or 5% (corporation) = allowable
deduction, whichever is lower
 Representation and Entertainment – gross sales/ receipts X 0.50%(goods) or 1% (services) =
allowable deduction, whichever is lower
 Research and Development
 Pension Trust
  Optional Standard Deduction
 Premium Payments on Health or Health Insurance
 Free Legal Services – amount that could have been collected for the actual free legal services
or up to 10% of the gross income derived from actual performance, whichever is lower. 60-
hour legal aid
c. On Passive Income – no deductions
2) Nonresident Alien
a. ETB – same deductions from resident except taxes, losses, depreciation and depletion that must
be connected or located within the Philippines
b. NETB – no deductions
c. RAH, ROH, OBU – no deductions

6. Items Not Deductible from Gross Income

a. Personal, living, and family expenses
b. Amounts paid for new buildings or for permanent improvements
c. Amount spent for restoring property
d. Premiums paid on any life insurance company
e. Losses from sale or exchange of property

7. Personal Exemptions
a. Basic Personal Exemptions – 50,000 for each individual taxpayer
b. Additional Exemption – 25,000 for each legitimate, illegitimate or legally adopted and maximum
of 4 dependents
Requisites:
- Chiefly dependent upon the taxpayer
- Living with the taxpayer – custody rule
- Not more than 21 years old – incapacitated – mentally challenge
- Unmarried
- Not gainfully employed

Basic Personal Additional Premium paid on

Exemption Exemptions Health
RC YES YES YES
NRC YES YES YES
RA YES YES YES
NRA-ETB YES* YES NO
NRA-NETB NO NO NO
 BPE – reciprocity clause - will not exceed the amount fixed by the NIRC

8. Tax Rates
a. Compensation and Business/ Profession Income
SUMARRY OF TAX BASE AND TAX RATES ON COMPENSATION INCOME AND
BUSINESS INCOME OF INDIVIDUAL TAYPAYERS
Taxpayers Tax Base Tax Rate
Resident Citizen TCI or TBI 5% - 32%
RC - RAH, ROH TGCI 15% or 5% - 32%
RC - OBU TGCI 15%
RC – Petroleum Contractor TGCI 15%
Nonresident Citizen TCI or TBI 5% - 32%
 Resident Alien TCI or TBI 5% - 32%
RA - RAH, ROH TGCI 15%
RA - OBU TGCI 15%
RA – Petroleum Contractor TGCI 15%
Nonresident Alien Taxable Gross Income 25%
 Minimum Wage Earner – exempt from the payment of income tax
 TCI – Taxable Compensation Income
TBI – Taxable Business Income
TGCI – Taxable Gross Compensation Income
SUMMARY OF WITHHOLDING TAX RATES FOR INDIVIDUALS
Type of Income Resident Citizen NRA - ETB NRA - NETB
or Alien
 Dividends from a domestic 10% final 20% final 25% final
corporation
 Royalties 20% final 20% final 25% final
 Royalties on books, literary works, 10% final 10% final 25% final
and musical composition
 Interest income from Philippine 20% final 20% final 25% final
currency bank deposits and deposit
substitute
 Interest income on long-term
deposits
4 years to less than 5 years 5% final 5% final
3 years to less than 4 years 12% final 12% final
Less than 3 years 20% final 20% final
 Interest income on foreign currency 7.5% final EXEMPT EXEMPT
bank deposit
 Prizes exceeding 10,000 & 20% final 20% final 25% final
Winnings (except PCSO and Lotto
Winnings)
 Cash or Property Dividends 10% final 20% final 25% final
 Gains from sales of shares of stock 25% final
not traded in stock exchange
Not over 100,000 5% final 5% final
On any amount in excess of 100,000 10% final 10% final
 Gains from sale of real property 6% final 6% final 6% final
classified as capital asset
 Informer’s Reward 10% final
 Prizes and Winnings – international (whole), 10,000 or less, PCSO and lotto winnings – graduated tax
 Capital Gains – gains from sale or exchange of capital asset (property held by taxpayer) –graduated tax
Not including:
Stock in trade of taxpayer
Property included in the inventory of taxpayer
Property held primarily for sale to customer
Property used in business subject to depreciation
Real Property used in business
 Informer’s Reward – 10% of the revenues, fine or penalty imposed or 1,000,000, whichever is lower
 Withholding Tax – Creditable – credited against taxpayer final tax and adjusted; Final – no tax credit
and adjustment
9. Filling of Returns
a. Persons required to file income tax return
i) Every Filipino citizen
Except:
Person not required
 Gross income does not exceed BPE and AE
 Minimum wage earners
 Income subject to final withholding tax
Subject to substituted filling
 Receiving purely compensation from one employer
ii) Every NRC, RA, NRAETB, on income from sources within the Philippines
b. E-filling and Payment System – must register to BIR – Integrated Tax System. Large taxpayer must
go to Authorized Agent Bank

10. Place of Filing

The return shall be filed with an Authorized Agent Bank, Revenue District Officer, Collection Agent
or Treasurer of the city
Information returns (BIR Form 1701AIF) shall be filed with Revenue District Officer, Collection Agent

11. Time of Filling

a. Individuals income derived from compensation – on or before April 15
b. Individuals subject to final schedular tax from sales or exchange of stock – April 15 or within 30
days after each transaction
c. Individuals subject to capital gain tax on sale or disposition of real property – within 30 days
following each sale or disposition
d. BIR Form 1701AIF – on or before April 15

12. Payment of Tax

Income tax is payable at the time the return is filed. Income due exceeds 2,000, it may be paid in two
equal installments: first, when return is filed; second, on or before 15th day of July

13. Penalties
a. Imposition of fine and/or imprisonment
b. Imposition of surcharge of 50% or 25%
c. Imposition of interest on any unpaid amount of tax at 20% annually
d. Deportation of the taxpayer, if an alien
 Tax Reform for Acceleration and Inclusion (TRAIN) Law
INDIVIDUAL INCOME TAX
1. RA 10963
December 19, 2017 – approved
December 27, 2017 – published
January 1, 2018 – effected
Purpose: SIMPLE, FAIR and EFFICIENT
2. Definition of Terms
a. Compensation Income – services performed by an employee for his employer (employer-employee
relationship)
b. Employee – individual performing services under employer-employee relationship, including
employees appointed by Government
c. Employer – any person for whom an individual performs services
d. Fringe Benefits – any good, services or other benefit granted in cash by an employer to employee
(except rank and file employee)
Housing, Expense Account, Vehicle, Household Personnel, Interest on Loan, Membership Fees at
social or athletic clubs, Expenses for Foreign Travel, Holiday and Vacation Expenses, Education
Assistance, Life or Health Insurance
e. Gross Receipts – total amount of money or equivalents representing the contract price,
compensation, rental, including the amount charged for materials supplied with the services and
deposits and advance payments received during taxable year except returnable security deposits
f. Gross Sales – total sales transactions net of VAT, reported during the period, without any other
deduction. However, gross sales subject to 8% shall deduct the following: sales return and
allowances and sales discount
g. Minimum Wage Earner – worker in private sector who is paid with statutory minimum wage
(SMW) rates, or worker in public sector with compensation not more than the SMW rates. Exempt
from income tax including the holiday pay, hazard pay, overtime pay, and night shift differential
pay
h. Rank and File Employee – employee holding neither managerial nor supervisory position
i. Self-employed – sole proprietor or an independent contractor who reports income from self-
employment
j. VAT Threshold – ceiling fixed by law to determine VAT registrable, 3,000,000 (1,919,500 NIRC)

3. Income Tax Rates on Individual Citizen and Resident Alien

a. Individuals Earnings Purely Compensation Income
 Shall be taxed based on the graduated income tax
 Gross Compensation Income LESS 13th month pay/ Christmas Bonus/ Incentives (90,000),
SSS, GSIS, PHIC, Pag-ibig, Union Dues = TAXABLE INCOME
 Husband and wife shall compute their individual income tax separately based on their taxable
income
 Minimum Wage Earner is exempt from income tax including the holiday pay, hazard pay,
overtime pay, and night shift differential pay
b. Self-employed Individuals Earning Income from Purely Self-employment or Practice of Profession
 Gross sales/ receipt and other non-operating income does not exceed VAT Threshold have the
option to avail:
a. Graduated Income Tax Rate (On Net Income)
b. 8% Income Tax Rate (On Gross Sales/ Receipts + Other Income LESS 250,000 = Taxable
Income X 8% = Tax Due)
  Taxpayer elected the 8% in the 1st Quarter, problem silent: taxpayer elected Graduated Income
Tax Rate. Election is irrevocable and no amendment of option
 The option to be taxed at 8% income tax rate is not available to: VAT-registered taxpayer,
taxpayer subject to Other Percentage Tax, and partners of General Professional Partnership
 Taxpayer who signifies the intention to avail 8% income tax rate: does not exceed VAT
Threshold and the Financial Statement is not required to be attached in filling
 Taxpayer subject to graduated income tax rate: VAT-registered, exceed VAT Threshold,
elected, fail to signify to be taxed at 8% is subject to business tax and percentage tax and
Financial Statements is required as an attachment
 Taxpayer shall be automatically be subject to graduated income tax rates, even if he/she elected
8% income tax rate, when taxpayer gross sales/receipts and other non-operating income
exceeds VAT Threshold – income tax shall be computed by graduated tax and allowed tax
credit for the previous quarters income tax payment under 8% income tax rate
c. Individuals Earning Income from Purely Compensation and from Self-employment
 On Compensation Income – subject to graduated income tax rate
On Business/ Profession Income – if the gross sales/ receipt does not exceed the VAT
Threshold have the option to avail:
a. Graduated Income Tax Rate (On Net Income)
b. 8% Income Tax Rate (On Gross Sales/ Receipts + Other Income = Taxable Income X 8%
= Tax Due)
 The 250,000 is not available on 8% income tax rate because it is incorporated on the purely
compensation income
 Total Tax Due = Tax Due from Compensation + Tax Due from Business/ Profession Income
 Mixed Income Earner who opted to tax at graduated income tax rate shall combine the taxable
income from both compensation and business/ profession income
d. Income Tax Rates on Certain Passive Income
 Interest from any currency bank deposits, other monetary benefit from deposit substitute, and
from trust fund – 20%
 Interest income on foreign currency bank deposit – 15%
 Interest income on long-term deposits
4 years to less than 5 years – 5%
3 years to less than 4 years – 12%
Less than 3 years – 20%
 Royalties – 20%
 Royalties on books, literary works, and musical composition – 10%
 Prizes (except 10,000 or less) – 20%
 Winnings (except PCSO and Lotto Winnings amounting 10,000 or less) – 20%
 Cash or Property Dividends – 10%
 Gains from sales of shares of stock not traded in stock exchange – 15%
 Gains from sale of real property classified as capital asset – 6%

4. Income Tax Rates on Nonresident Alien Individual

a. NRA-ETB – same in resident citizen on the taxable income within the Philippines
b. NRA-NETB – at gross income X 25%
c. RHQ, ROHQ, OBU, and Petroleum subcontractors – graduated income tax

5. Government Owned and Controlled Corporations (GOCC), Agencies or Instrumentalities

GOCC, Government Agencies or Instrumentalities shall pay taxes except:
 a. Government Service Insurance System – GSIS
b. Social Security System – SSS
c. Philippine Health Insurance Corporation – PHIC
d. Local Water District – LWD
6. Exclusion from Gross Income
a. Proceeds of Life Insurance but not the interest paid to the heirs or beneficiaries
b. Amount received as return of premium
c. Gifts, Bequest and Devises
d. Compensation for injuries/ sickness
e. Income exempts under treaty
f. Retirement benefit, Pensions, Gratuities
g. Miscellaneous Items
 Income from foreign government, financing from foreign governments, investments in loans,
stocks, bonds, and interest on the deposits in the bank of Philippines
 Income derived from public utility or from government function
 Prizes and Awards
 Prizes and Awards granted to athletes
 13th month pay, incentives, Christmas bonus – 90,000
h. GSIS, SSS, Pag-ibig, Philhealth, Medicare and union dues
i. Gains from sale or exchange or retirement of bonds, debentures and other indebtedness certificate,
with a maturity of more than 5 years
j. Gains realized from redemption of shares of stocks

7. Special Treatment for Fringe Benefits

The tax herein imposed is payable by employer
a. Resident Citizen – FBT = (monetary value of fringe benefit / 65%) x 35%
b. NRA-NETB – FBT = (monetary value of fringe benefit / 75%) x 25%

8. Deductions from Gross Income

 Taxpayer are allowed at the option of Itemized Deductions or Optional Standard Deductions (40%
on Gross Sales/Receipts and 40% on Gross Income if Corporation).
Itemized Deductions:
Expenses
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion of Oil and Gas Wells and Mines
Charitable and Other Contribution
Research and Development
Pension Trust
 Taxpayer elected or check the box of OSD in the 1st Quarter, problem silent: taxpayer elected
Itemized Deductions. Election is irrevocable and no amendment of option; it must be consistently
applied
 No deductions allowed to taxpayers earning compensation income and who opted to be tax at 8%
income tax rate. OSD is allowed to all except to Nonresident Alien. General Professional
Partnership may avail OSD only once.
 Determination of OSD for GPP and Partners of GPP
OSD – 40% of its Gross Income
 The share in net income of the partnership shall be reported as taxable income of each partner.
Partners can no longer claim deductions from their share and not allowed to avail 8% income tax
rate option.
If partners also derived other income, the deduction that can be claimed from other income would
either be Itemized Deductions or OSD

9. Individuals Not Required to File Income Tax Return

a. An individual earning purely compensation income does not exceed 250,000
b. An individual whose income tax has been correctly withheld by his employer – one employer
c. An individual whose sole income is subjected to final withholding tax
d. A minimum wage earner

10. Time of Filling of Individual Income Tax Return

Individuals engaged in business/profession – required to file quarterly on or before May 15, August 15,
and November 15 for 1st, 2nd and 3rd quarters. Annual income tax return, 15th day of 4th month following
the close of calendar year or on April 15

11. Installment Payment of Individual Income Tax

Tax due in excess of 2,000 – 2 equal installments – 1st installment, at the time of annual income tax
return is filed and 2nd installment, on or before October 15

12. Registration Updates

 Individual taxpayer who avail 8% income tax rate – shall file Application for Registration
Information Update (BIR Form No. 1905) at the beginning of taxable year or before the due date
for filling/ payment of percentage tax
 Individual taxpayer who opted graduated income tax – required to pay percentage tax
 Taxpayer initially at 8% but exceeded on VAT Threshold – shall immediately update his/her
registration within the month s/he exceeded the VAT. Required to pay percentage tax from the
beginning of taxable year up to the time the taxpayer becomes liable for VAT
 A taxpayer initially at 8% and does not exceed VAT Threshold – shall update the registration of
records on or before the first quarter of a taxable year
 Non-VAT taxpayer who volunteer to be VAT taxpayer and exceeds VAT at 8% on beginning –
update the registration records, 8% to graduated, required to pay percentage tax from beginning of
a taxable year
 Non-VAT taxpayer who volunteer to be VAT taxpayer and exceeds VAT at graduated on beginning
– update the registration of records, required to pay percentage tax upon registration updates