compel all citizens and properties within its limits to

TAX REVIEWER contribute; hence, the emergence of the power to

tax.1

GENERAL PRINCIPLES OF TAXATION (2) The power to tax is inherently

legislative in character. – Being inherently
legislative in character, the legislature can enact tax
CHAPTER 1. laws in order to raise revenues even without the
BASIC CONCEPTS OF TAXATION grant of said power in the Constitution. It must be
noted though that the Constitutional provisions
relating to the power of taxation do not operate as
I. Concept and Purposes of Taxation grants of the power of taxation to the Government,
but instead merely constitute as limitations upon a
1. What is the meaning of the term "Taxation"? power which would otherwise be practically
without limit.2
"Taxation" is the exercise of the State’s inherent
power to impose, through its lawmaking body, a charge or (3) The power to tax is the State’s
burden upon persons, properties or property rights, strongest power; hence it is sometimes called “the
privileges, income and receipts from employment or power to destroy.” - As a general rule, the power to
business transactions or practice of profession and other tax as an incident of sovereignty is unlimited in its
taxable activities within its jurisdiction for the purpose of range, acknowledging in its very nature no limits, so
raising revenue to defray the legitimate expenses of the that security against its abuse is to be found only in
government. the responsibility of the legislature which imposes
the tax on the constituency who is to pay it. So
II. Nature and Characteristics of potent indeed is the power that it was once opined
the Power of Taxation that ”the power to tax involves the power to
destroy.” However, it should be exercised with
2. Describe the nature and characteristics of the power caution to minimize injury to the proprietary rights
of taxation. of a taxpayer. Thus, it must be exercised fairly,
equally and uniformly, “lest the tax collectors kill
(1) The power to tax is an essential and the hen that lays the golden egg.”3
inherent attribute of sovereignty. - The power to tax
proceeds upon the theory that the existence of a
III. Purposes of Taxation
government is a necessity and this power is an
essential and inherent attribute of sovereignty 3. What are the purposes of taxation?
belonging as a matter of right to every independent
state or government without being expressly (1) Revenue-raising purpose. - The
conferred by the people. No sovereign state can primary and principal purpose of taxation is to raise
continue to exist without the means to pay its revenue to defray the necessary expenses of the
expenses; and for that reason, it has the right to

Tridharma Marketing Corp. v. CTA, G.R. 215950, June 20, 2016 [Per J.
2 Ibid. Bersamin, First
3 Roxas v. CTA, GR L-25043, April 26, 1968 [Per J. Bengzon, En Banc], Div.]
cited in
 government. Revenue generation has undoubtedly This is the inherent This is the inherent power This is the
been a major consideration in the passage of the power of the of the sovereign state to of the so
Tax Code of 1997.4 sovereign state to make, ordain, and appropria
levy taxes to be used establish wholesome and property
(2) Special or regulatory purposes (non- as a means of raising reasonable laws, not upon obs
revenue purposes). Taxation is also used for special process
revenue in order to repugnant to the
or regulatory purposes, such as regulating a payment
defray the Constitution, to promote
business. The imposition must bear a reasonable compensa
necessary expenses public health, public essentiall
relation to the probable expenses of regulations, of the government.6 morals, public safety and
taking into account not only the costs of direct nature,
It is the strongest of the general welfare of the validly de
regulation but also its incidental consequences. If
all the powers of people by restraining and LGUs.9
generation of revenue is the primary purpose and
government.7 regulating the use of
regulation is merely incidental, the imposition is a
liberty and property.8
tax; but if regulation is the primary purpose, the
fact that revenue is incidentally raised does not
V. Theories and Bases of Taxation
make the imposition a tax. It is a well-established
doctrine that the police power may be exercised by
5. What are the theories and bases of taxation?
the State to regulate business and incidentally
generate revenues.5
(1) Lifeblood-of-the government
theory. - Taxes are the lifeblood of the Government
IV. Power of Taxation Distinguished from and their prompt and certain availability is an
Other Inherent Powers of the State imperious need, for without taxes, the
government can neither exist nor endure,10 and it
4. Distinguish the power of taxation from the other would be paralyzed for lack of power to
inherent powers of the State.
Power of Taxation Police Power Power of Eminent Domain
5 Cagayan de Oro City v. CEPALCO, GR 224825, Oct. 17, 2018 [Per J. A.
Reyes, Jr., Second Div.]
6 CAPWIRE v. Prov’l. Treasurer of Batangas, GR 180110, May 30,

2016 [Per
J. Peralta, Second Div.]
7 HSBC v. CIR, GR 13188, Nov. 15, 1918 [Per J.
Malcolm, En Banc]
8 Gerochi v. Dept. of Energy, G.R. 159769, July 17,
2007 [Per J. Nachura, En Banc]
9 Mun. of Cordova v. Pathfinder Dev’t. Corp. and
Topanga Dev’t. Corp., GR
205544, June 29, 2016 [Per J. Peralta, Third Div.]
10 Republic v. Caguioa, GR 168584, Oct. 15, 2007 [Per
J. Carpio-Morales, En Banc].
activate and operate it, resulting in its destruction. 5 A
principal attribute of sovereignty, the exercise of taxing
power derives its source from the very existence of the

4 CIR v. Fortune Tobacco Corp., GR 167274-75, July 21, 2008 5 CIR v. Algue, Inc., G.R. L-28896, Feb. 17, 1988 [Per J. Cruz, First Div.]
[Per J. Tinga, Second Div.]
State whose social contract with its citizens obliges it to to provide benefits and protection to the object of the tax.8
promote public interest and common good. Since taxes are .
the lifeblood of the government that should be collected VI. Situs of Taxation
without unnecessary hindrance, every precaution must be
taken not to unduly suppress it.6 6. What is meant by “Situs of Taxation”?

(2) Necessity theory. –The theory behind the The term “situs of taxation” simply means “place of
exercise of the power to tax emanates from necessity for taxation” and that a tax may only be imposed by the State
without taxes, the government cannot fulfill its mandate of on persons, property, or business within its jurisdiction in
promoting the general welfare and well-being of the accordance with the principle of territoriality. Thus, the
people. It is a prerogative essential to the perpetuity of the State has the right to compel only all persons, properties or
government. No sovereign state can continue to exist objects within the limits of its jurisdiction to contribute
without the means to pay its expenses; and that for those taxes. It only means that a State may lay a personal tax
means, it has the right to compel all citizens and property upon persons subject to the jurisdiction of its sovereignty,
within its limits to contribute, hence, the emergence of the a property tax upon properties located within its territory,
power to tax.7 and an excise tax upon acts done therein; but, however
broad the power of taxation in its character and searching
(3) Benefits-protection theory (Symbiotic in its extent, it is necessarily limited to persons, properties,
relationship theory). - The basis of taxation is founded in or business within its jurisdiction, to subjects within its
the reciprocal duties of protection and support between jurisdiction, or over which it can exercise dominion. The
the state and its inhabitants. The state demands and financial exigencies of the State afford no justification for
receives taxes from the subjects of taxation within its sustaining a tax on a transaction beyond the borders of the
jurisdiction that it may be enabled to carry its mandate into State. Within the territorial jurisdiction, the taxing authority
effect and perform the functions of government; and the may determine the “place of taxation” or what is known as
citizen pays from his property the portion demanded in the “tax situs.” The basic rule is that the State where the
order that he may, by means thereof, be secured in the subject to be taxed has a situs may rightfully levy and collect
enjoyment of the benefits of organized or civilized society. the tax, and the situs is necessarily in the State which has
Hence, despite the natural reluctance to surrender part of jurisdiction or which exercises dominion over the subject in
one’s hard-earned income to taxing authorities, every question. This is based on the theory that the tax laws of a
person who is able to pay must contribute his share in the State can have no
running of the government. The government for its part is extraterritorial operation. 15
expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and That is the reason why the imposition of a tax upon
enhance their moral and material values. This symbiotic person or property or transaction abroad is generally
relationship is the rationale of taxation and should dispel considered a violation of the Constitutional provision that
the erroneous notion that it is an arbitrary method of no person shall be deprived of his property without due
exaction by those in the seat of power. The fundamental process of law.
basis of the right to tax is the capacity of the government

6Pilmico Mauri Foods Corp. v. CIR, G.R. 175651, Third Div.]

Sept. 14, 2016 [Per J. 8 CIR v. San Miguel Corp., GR 205045, Jan. 4, 2017 [Per J. Leonen,

Reyes, Third Div.] Second

7 CIR v. Basf + Inks Phils, Inc., G.R. 198677, Nov. 26, 2014 [Per J. Div.]
Peralta,
7. What is meant by “mobilia sequuntur personam”? and enforced with the least inconvenience to the
taxpayers and to the tax administrators. Non-
The situs of intangible personal property is the observance of the canon, however, will not render
place where the owner is domiciled and only there because a tax imposition invalid except to the extent that
taxation follows the person who shall be subject to tax. This specific constitutional or statutory limitations are
is in accordance with the principle of mobilia sequuntur impaired.1011
personam. Income from intangible personal property is
generally taxable where the obligation arises. That is why, (3) Theoretical justice or equality
income of a nonresident foreigner from shares of stock in a means that the tax burden should be proportionate
domestic corporation, whether as dividends or as gains to the taxpayer’s ability to pay. Justice and equality
from sale, are taxable in the Philippines. The reason is that are abstract terms. But justice means at least that a
said shares receive the protection and benefit of our tax tax system should appeal to the average person as
laws. In the same manner, interest income from a loan is fair, and that it should represent public opinion at
taxable in the state where the loan obligation arises. the time as to what is fair. Justice, moreover, always
refers primarily to the tax system as a whole rather
VII. Principles of a Sound Tax System than to any particular tax.12

Mun. of Cainta v. City of Pasig and Uniwide Sales Warehouse, GR

15
VIII. Stages or Aspects of Taxation
Nos.
176703 & 176721, June 28, 2017 [Per J. Martires, Second Div.] 9. What are the stages or aspects of taxation? Explain
8. What are the principles of a sound tax system? each.

The three basic principles of a sound tax system are There are three (3) stages or aspects of taxation,
as follows: namely:
(1) Fiscal adequacy simply means that (1) Levy or imposition of the taxes.–
the sources of revenue should be sufficient to meet This refers to the act of the Legislative Department
the demands of public expenditures. Fiscal of the government of enacting tax laws authorizing
adequacy requires that the revenues should be the imposition of taxes on persons, rights and
capable of expanding or contracting annually in privileges, property or business. Levy is an exercise
response to variations of public expenditures. This of the power to tax which is
is in consonance with the theory that “taxes are the exclusively legislative in nature and character.13
lifeblood of the government.” 9
(2) Assessment and Collection of
(2) Administrative feasibility simply taxes.1411 – This refers to the acts of the Executive
means that the tax system should be capable of Department of the Government thru its
being efficiently administered by the government Administrative Agencies in charge of implementing

Abakada Guro Party List v. Ermita, GR 168056, Sept. 1,

9 12 Diaz v. Secretary of Finance and CIR, G.R. 193007, July 19,
2005 [Per J. 2011 [Per J.
Austria-Martinez, En Banc] Abad, En Banc]
10 Mun. of Cainta v. City of Pasig and Uniwide Sales 13 NPC v. Albay, GR 87479, June 4, 1990 [Per J. Sarmiento, En

Warehouse, G.R. Nos. Banc]

11 & 176721, June 28, 2017 [Per J. Martires, Second Div.] 14 Mandanas v. Ochoa, GR 199802, April 10, 2019 [Per CJ Bersamin, En

Banc]
 and administering the assessment and collection of The requisites of a valid tax are as follows:
taxes. Assessment refers to the act of a government
agency to determine the correct amount of taxes (1) A tax must be levied by the
due to and payable by a taxpayer, while collection legislative authority in the exercise of its taxing
is the actual effort exerted by the government power through the enactment of tax laws, and by
agency to effect the exaction of what is due from the local government units
the taxpayer. through the enactment of
tax ordinances, subject to such guidelines
(3) Payment of taxes. - This refers to and limitations as the law may provide;
the last stage of taxation wherein the taxpayer
complies with its tax obligations by paying the (2) It should comply with the
correct amount of taxes due from him. requirements of due process, i.e., the assessment
and collection of taxes must not be arbitrary, in that
IX. Definition, Elements and Requisites of a Valid a
Tax taxpayer should be given proper notice and the opportunity
to be heard;
10. What is the meaning of the term “taxes”?
(3) It is an enforced charge or burden
Taxes are the enforced proportional contributions imposed to persons, properties, business and
exacted by the State upon persons and properties pursuant rights within the territorial jurisdiction of a
to its sovereignty in order to support the Government and country in accordance with the principle of
to defray all the public needs.20 territoriality;

11. What are the elements of taxes? (4) Its purpose must be to defray the
legitimate expenses
Every tax has three elements, namely: of the government or for a public purpose; 16

(1) It is an enforced proportional (5) It must be uniform and equitable,

contribution from persons and properties; NOT unjust, excessive,
oppressive, confiscatory or discriminatory;
(2) It is imposed by the State by virtue
of its sovereignty (6) It must not violate the
through the Legislative Branch of the government; and inherent and Constitutional
limitations of the power of taxation;
(3) It is levied for the support of the
Government and to defray (7) Being a burden, it should not be
all public needs.15 presumed beyond what the
applicable statute expressly and clearly declares:17
12. What are the requisites of a valid tax?

15 Ibid. 17 CIR v. Filinvest Devt. Corp., GR 163653, July 19, 2011 [Per
16 Gaston v. Republic Planters Bank, GR L-77194, March 15, J. Perez, En Banc]
1988 [Per J. Melencio-Herrera, En Banc]
 (8) It should be proportionate in assure them a reasonable margin of income. ‘Toll Fees’ are
character, or laid by some rules of apportionment not
which are usually based on the ability to pay: taxes.20

(9) It is compulsory rather than a (3) Taxes vis-a-vis License Fees

matter of bargain:1819
The term ‘Taxes’ has been defined by case law as
(10) It is generally a pecuniary burden the enforced proportional contributions from persons and
which must be in legal property levied by the state for the support of government
tender, although the law may provide for payment in and for all public needs. While, under the Local
kind.25 BQ2013
Government Code, a ‘License Fee’ is defined as any charge
fixed by law or local ordinance for the regulation or
X. Tax Distinguished inspection of a business or activity.
from Other
From the foregoing jurisprudential and statutory
Forms of Exactions 13. Distinguish tax definitions, it can be gleaned that the purpose of an
imposition will determine its nature as either a tax or a fee.
from other forms of exactions. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction
Tax may be distinguished from other forms of is properly classified as an exercise of the power to tax. On
exactions as follows: the other hand, if the purpose is primarily to regulate, then
it is deemed an exercise of police power in the form of a
(1) Taxes vis-a-vis Customs Duties license fee, even
though revenue is incidentally generated.
‘Tax’ is broader in terms than ‘Customs Duties’,
because tax includes all kinds of impositions, including Stated otherwise, if generation of revenue is the
customs duties; while the term ‘Customs Duties’ indicates a primary purpose, the imposition is a tax but, if regulation is
particular kind of tax, being commonly applied to levies the primary
made by the government on the importation or exportation purpose, then the imposition is properly categorized as a
of commodities in or out of the country. license fee.21

(2) Taxes vis-a-vis Toll Fees (4) Tax vis-a-vis Special Assessment
A ‘Tax’ is imposed under the taxing power of the ‘Tax’ is an enforced contribution from persons,
government principally for the purpose of raising revenues properties, activities, transactions and income, while
to fund public expenditures, while ‘Toll Fees’ are collected ‘Special Assessment’ is an enforced proportional
by private tollway operators as reimbursement for the contribution from owners of lands especially or peculiarly
costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to

18 Philex Mining Corp. v. CIR, GR 125704, Aug. 28, 1998 [Per 20 Diaz v. Sec. of Finance, GR 193007, July 19, 2011[Per J.
J. Romero, Third Abad, En Banc]
Div.] 21 Cagayan de Oro City v. CEPALCO, GR 224825, Oct. 17,

19 Am. Jur. 38-39 2018 [Per J. A.

Reyes, Jr., Second Div.]
benefited by public improvements introduced by the local Professional Tax, Local Business Taxes, Real Property Tax,
government. etc.

(5) Tax vis-a-vis Debt (2) As to object or subject matter-

‘Taxes’ and ‘Debts’ are of different nature and (a) Personal, capitation, or poll tax. - Generally,
character. Strictly speaking, a ‘Tax’ is not a ‘Debt’ in that personal, capitation or poll tax is a tax of a fixed amount
there can be no set-off between the taxpayer and the imposed upon persons, or upon all the persons of a certain
Government. A ‘Tax’ is created by law, while a ‘Debt’ arises class, residing within a specified territory, without regard to
from contract, whether express or implied. No person shall their property, occupation or business in which they may
be imprisoned for nonpayment of debt, while be engaged in.30 Example: The current Community Tax
imprisonment may be provided by law for delinquency in Certificate which supplanted the Residence Tax Certificate
the payment of a tax, except for non-payment of a poll tax. is purely a poll tax.
Taxes are due to the Government in its sovereign capacity,
while. debts are due to the Government in its corporate (b) Property tax. - In general, taxes on property
capacity,22 The statute of limitation governing the right of are taxes assessed on all properties, whether real or
recovery of a debt is provided in the Civil Code, while the personal, or on all property of a certain class located within
right to assess and collect a tax is governed by the NIRC, by a certain territory on a specified date in proportion to its
the CMTA, and by the LGC. value, or in accordance with some other reasonable
methods of apportionment, the obligation to pay of which
XI. Kinds of Taxes is absolute and unavoidable and is not based upon any
voluntary action of the person assessed. Example: The real
14. What are the kinds of taxes? property tax imposed by the LGUs under the authority of
the LGC of 1991, as amended.
(1) As to scope or authority to impose
(c) Privilege tax. - This is the tax imposed upon
(a) National taxes - are the taxes being performance of an act, the enjoyment of a privilege, or for
imposed and collected by the National Government. These engaging in business or exercising a profession. Example:
are the (i) National internal revenue taxes under the NIRC, The annual Professional Tax levied
namely, Income tax, Estate Tax, Donor's Tax, VAT, Other by the province or city.31
Percentage Taxes, Excise Taxes, Documentary Stamp Taxes
and such other taxes as may be imposed and collected by (3) As to burden or incidence.BQ2001, 2006 –
the BIR under the NIRC; and the (ii) Customs duties, under
the CMTA.23 (a) Direct tax – This is a tax wherein both the
incidence of or liability for the payment of the tax, as well
(b) Local taxes – are the taxes imposed and as the impact or burden of the tax falls on the same person.
collected by the Local Government Units. Examples: In other words, it is a tax exacted from the very person who,

22 Air Canada v. CIR, GR 169507, Jan. 11, 2016, [Per J. have either or both the generation of revenue and the regulation of
Leonen, Second Div.] economic or social activity as their moving purposes, it is often difficult
23 Strictly speaking, customs duties are also taxes because to say which of the two is the principal objective in a particular instance,
they are exactions whose proceeds become public funds. According to for, verily, customs duties, much like internal revenue taxes, are rarely
Garcia v. Executive Secretary, customs duties is the nomenclature given designed to achieve only one policy objective. We further note that
to taxes imposed on the importation and exportation of commodities Section 102 (oo) of R.A. 10863 (Customs Modernization and Tariff Act)
and merchandise to or from a foreign country. Although customs duties expressly includes all fees and charges imposed under the Act under the
blanket term of taxes.
it is intended or desired, should pay it; an imposition for increased imports which could inflict serious injury on
which a taxpayer is directly liable on the transaction or them.

(5) As to tax rates. -

It is clear from the foregoing clarification that the exclusion of
other national taxes like customs duties from the base for determining (a) Progressive or graduated tax rates - The
the just share of the LGUs contravened the express constitutional edict rate of the tax increases as the base of the tax increases.
in Section 6, Article X of the 1987 Constitution. Mandanas v. Ochoa, GR Example: Income tax rates for individual taxpayers.
199802, April 10, 2019 [Per C.J. Bersamin, En Banc]
30 Villanueva v. City of Iloilo, GR L-26521, Dec. 28, 1968 [Per J.
(b) Fixed or proportionate tax rates - The tax is
Castro, En
Banc] based on a fixed percentage of the amount of income, sales
31 Sec. 139, in relation to Sec. 151, LGC or receipts derived by the taxpayer or other basis of the
business he is engaged in, hence, cannot be shifted to taxes being paid. Examples: VAT , Other Percentage Taxes.
another.24
Examples: Income tax, Estate Tax, Donor’s Tax.

(b) Indirect tax – This is a tax wherein the incidence

of or liability for the payment of the tax falls on one person
but the burden or impact thereof can be shifted or passed
on to another. In other words, it is a tax which is demanded,
in the first instance, from one person in the expectation and
intention that he can shift the burden to someone else, not
as a tax, but as part of the cost of the goods or service that
the buyer buys, and the burden finally resting on the
ultimate buyer or consumer. 25 Examples: VAT, Other
Percentage Taxes, Excise Tax, Documentary Stamp Tax.

(4) As to purpose. -

(a) General or fiscal tax - It is a tax which is

levied for the general purpose of supporting the
government.

(b) Special, regulatory or sumptuary tax - It is a

tax which is levied for a special purpose to achieve some
social or economic objectives. Thus, a government’s levy on
goods considered socially undesirable, such as alcohol and
tobacco, is a sumptuary tax. Another example is Safeguard
Duty, which is a special duty imposed for the purpose of
protecting domestic industries and producers from

24Silkair (Singapore) Pte., Ltd. v. CIR, GR 184398, Feb. Leonardo-De Castro, First Div.]
25, 2010 [Per J.
INCOME TAXATION - ATTY. FRANCIS M. DE ASIS and covering the same kind of character of tax. It violates
the equal protection clause of the constitution.

A. Doctrines in Taxation Requisites:

1. Prospectivity of Tax Laws 1. Both taxes are imposed on the same property or subject
matter;
General Rule: Tax Laws are prospective in application. 2. For the same purpose;
3. Imposed by the same taxing authority;
Exceptions: 4. Within the same jurisdiction;
5. During the same taxing period;
a. Where no vested right will be impaired; 6. Covering the same kind or character of tax.
b. Where the law allows retroactive application; and
c. If there is bad faith on the part of the taxpayer. b) Double Taxation in Broad Sense – is the opposite of
direct double taxation and is not legally objectionable. The
Note: Section 246 of the NIRC says that tax rulings or any absence of one or more of the foregoing requisites of
revocation, modification, or reversal of any of the rules and obnoxious direct tax makes it indirect.
regulations promulgated by the Commissioner or any rulings or
circulars promulgated by him shall not be given retroactive c) Constitutionality of Double Taxation
application if such revocation, modifications, or reversal is
prejudicial to the taxpayers except: Double taxation in its stricter sense is unconstitutional, but
that in the broader sense is not necessarily so.
1. When the taxpayer deliberately misstated or omitted from
his return certain facts or documents required by him by General Rule: Our Constitution does not prohibit double
the BIR; taxation, in broad sense. Hence, it may not be invoked as a
defense against the validity of tax laws.
2. When the facts subsequently gathered are different from
the facts on which the tax ruling was based; and Exception: Double taxation will not be allowed if it results in
a violation of the equal protection clause.
3. When the taxpayer is in bad faith.
d) Modes of Eliminating Double Taxation
2. Imprescriptibility of Taxes
(i) Tax Deduction – a subtraction from gross income in
General Rule: Taxes are imprescriptible. arriving at the taxable income:

Exceptions: When provided otherwise by the tax law itself. Section 4(a) of the Expanded Senior Citizens Act of 2003,
which provides that the 20% discount given to senior
Example: NIRC provides for statutes of limitation on the citizens shall be considered a tax deduction, rather than a
assessment and collection of taxes therein imposed. tax credit on the part of the establishment granting the
same, is not unconstitutional. While the Constitution
3. Double Taxation protects property rights, the State, in the exercise of the
police power, can intervene in the operations of a business
It means taxing the same person for the same tax period which may result in an impairment of property rights in the
and the same activity twice, by the same jurisdiction. process ([Link],
G.R. No. 166494, June 29, 2007).
a) Double Taxation in Strict Sense – same property is
taxed twice when it should be taxed only once; and that (ii) Tax Credit - an amount subtracted from an
both taxes are imposed on the same property or subject individual’s or entity’s tax liability (tax due) to arrive at
matter for the same purpose, by the same State, the total tax liability.
Government or taxing authority within the same
jurisdiction or taxing district during the same taxing period
 ▪ A deduction differs from a tax credit, in that a deduction implications on international relations, and unduly
reduces taxable income while a credit reduces tax discourages foreign investors. While the consequences
liability. sought to be prevented by RMO No. 1-2000 involve an
administrative
▪ Under the Expanded Seniors Citizens Act of 2003, the
20% discount shall be considered as a tax deduction procedure, these may be remedied through other system
not as a tax credit. management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are
(iii) Treaties with other states entitled to the benefit of a treaty for failure to strictly
comply with an administrative issuance requiring prior
▪ A tax treaty sets out the respective rights to tax of the state of application for tax treaty relief. (Deutsche Bank AG Manila
source (situs) and the Branch [Link], GR No. 188550, August 19, 2013)

state of residence with regard to certain cases, an exclusive (iv) Tax Exemption - grant of immunity to particular persons
right to tax is conferred on one of the contracting states; or entities from the obligation to pay taxes.
however, for other items of income or capital, both states
are given the right to tax, although the amount of tax that 4. Power to Tax Involves the Power to Destroy
may be imposed by the state of source is limited.
“The power to tax is the power to destroy”
▪ It applies whenever the state of source is given full or limited
right to tax. The treaty makes it incumbent upon the state The taxing power may impose government requirements to the
of residence to allow relief in order to avoid double extent that it may prohibit, discourage, or even destroy a
taxation. certain business provided that it is exercised within the
constitutional limitations. It refers to a valid tax.
Note: The BIR issued RMO No. 1-2000, as amended by RMO
No. 72-2010, requiring taxpayers to file for a Tax Treaty “The power to tax is not the power to destroy while this
Relief Application on or before the transaction date before Court sits”
availing of the provisions of a tax treaty.
If so great an abuse is manifested as to destroy the natural
“Failure to comply with the requirements of RMO No. 1- and fundamental rights, it is the duty of the judiciary to hold
2000, as amended by RMO No. such an act unconstitutional. It refers to an invalid tax.
72-2010, is not fatal to the availment of tax treaty
relief” The power of taxation is sometimes called also the power
to destroy. Therefore, it should be exercised with caution
Tax treaties are entered into to minimize, if not eliminate, to minimize injury to the proprietary rights of a taxpayer.
the harshness of international juridical double taxation, It must be exercised fairly, equally and uniformly, lest the
which is why they are also known as double tax treaty or tax collector kill the "hen that lays the golden egg". And, in
double tax agreements. order to maintain the general public's trust and confidence
in the Government this power must be used justly and not
Laws and issuances must ensure that the reliefs granted treacherously. It does not conform with our sense of justice
under tax treaties are accorded to the parties entitled in the instant case for the Government to persuade the
thereto. The BIR must not impose additional requirements taxpayer to lend it a helping hand and later on to penalize
that would negate the availment of the reliefs provided for him for duly answering the urgent call (Roxas vs CTA, G. R.
under international agreements more so, when the Tax No. L-25043 April 26, 1968).
Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement. To say that “the power to tax is the power to destroy” is to
describe not the purposes for which the taxing power may
be used but the but the degree of vigor with which the
The obligation to comply with a tax treaty must take taxing power may be
precedence over the objective of RMO No. 1-2000. employed in order to raise revenue. (1 Cooley 179-181)
Logically, noncompliance with tax treaties has negative
 5. Escape From Taxation liability (e.g. termination of deposits subject to 20% final tax
and re-investing it in tax-exempt government bonds).
a) Shifting of Tax Burden
c) Tax evasion
The transfer of the burden of tax by the original payer or the
one on whom the tax was assessed or imposed to another. It is the use of taxpayer of illegalorfraudulentmeans to evade
or lessen the payment of a tax (e.g. deliberate non-reporting
(i) Ways of Shifting Tax Burden or under-reporting of an income).

a. Forward shifting- transfer of the tax burden from a Indicia of Fraud in Tax Evasion
factor of production through the factors of distribution until
finally rests on the consumer. a) Failure to declare for taxation purposes true and actual
b. Backward shifting- transfer of the tax burden from the income derived from business for 2 consecutive years; or
consumer through the factors of distribution to the factor
of production. b) Substantial under declaration of revenues in the income
c. Onward shifting- transfer of the tax burden two or more tax returns of the taxpayer for 4 consecutive years coupled
times either forward or backward. with intentional overstatement of deductions.

(ii) Taxes That Can Be Shifted - Indirect taxes e.g., Value Connotes the integration of 3 Factors:
Added Tax
1. The end to be achieved, i.e. the payment of less than that
(iii) Meaning of Impact and Incidence of Taxation known by the taxpayer to be legally due;
2. An accompanying state of mind which is described as being
Impact of Taxation - The point on which a tax is “evil”, in “bad faith”, “willful”, or
originally imposed. “deliberate and not merely accidental”, and
3. A course of action or failure of action which is unlawful
Incidence of Taxation – the point on which a tax burden
finally rest or settle down
Note: See also Section 248(B) of NIRC providing for prima
Tax capitalization – it means the reduction in the price of facie evidence of filing a false or fraudulent return.
the taxed object equal to the capitalized value of future taxes
which the purchaser expects to be called upon to pay. 6. Exemption From Taxation

A special form of backward shifting except that while the latter a) Meaning of Exemption from Taxation
involves the shifting back of a single tax, A grant of immunity, express or implied, to particular
the former involves the throwing back of a persons or corporations from the obligation to pay taxes.
whole series of taxes and taxes place
before any of them, with the exemption of Basis of the Grant of Exemption: “No law granting any tax
the first is paid. exemption should be passed without the concurrence of a
majority of all the members of Congress (Section 28(4), Article
Transformation – it is the method whereby the VI, 1987 Constitution).
manufacturer or producer upon whom the tax has been
imposed, fearing the loss of his market if he should add the b) Nature of Tax Exemption
tax to the price, pays the tax and endeavors to recoup himself
by improving his process of product at a lower cost. 1. It is a personal privilege of the grantee.
2. It is generally revocable by the government unless the
b) Tax avoidance exemption is founded on a contract, which is protected
from impairment, but the contract must contain the other
It is the use by the taxpayer of essential elements of contracts.
legallypermissiblealternativetaxratesormethodsof assessing
taxable property or income in order to avoid or reduce tax
 ▪ It implies a waiver on the part of the government to 6
collect what otherwise would be due, and in this sense
is prejudicial thereto. .
3. It is not necessarily discriminatory so long as the
exemption has a reasonable foundation or rationale basis. B

Construction and Interpretation of c

1. Tax Laws l

Tax laws must be construed reasonably to carry out the e

purpose, the intent, and the objective of the law.
a
General Rule: If the tax law is clear and unambiguous, apply
the law strictly against the taxpayer and in favor of the r
government.
l
Exception: If the law is doubtful and ambiguous, then the law
must be construed strictly against the e
Government and liberally in favor of the taxpayer.
g
2. Tax Exemption and Exclusion
i
General Rule: Must be construed strictly against the grantee
s
and liberally in favor of the taxing authority.
l
Tax Exemptions are not favored and are construed
strictissimijurisagainst the taxpayer and liberally in favor a
of the taxing authority.
([Link],[Link].155491,Jul t
y21, 2009)
Taxation is the rule and exemption the exception, and i
therefore, he who claims exemption must be able to justify
his claim or right thereto, by a grant expressed in terms v
“too plain to be mistaken and too categorical to be
misinterpreted.” (CIR vs. [Link] Co., Ltd., G.R. No. L- e
24754, July 18, 1975)
i
Exceptions:
n
1. Where the statute granting exemption expressly provides
for a liberal interpretation; t
2. Special taxes relating to special cases and affecting only
special classes of persons; e
3. Property held in private ownership;
4. Traditional exemptees, such as those in favor of religious n
and charitable institutions; 5. In favor of the
government, its political subdivisions or instruments; and t

.
I r

m u

p e

l d

i ”

c i. Tax exemptions must never be presumed. It must

be established and proved by the taxpayer.
a
ii. The law must be limited to what it says. It must be
t
confined to the statutory language. iii. Should be
i
personal to the exemptee, or personal to the tax
o
beneficiary.
n
3. Tax Rules and Regulations
o
The general principles in the construction of tax laws
f applies in the interpretation of tax rules and regulations.
To be valid, the tax rules must be consistent with the
“
provisions of the tax law which they seek to implement.
Requisites for valid tax regulation:
s
a) Publication;
t
b) Germane to the public purpose embodied in the governing
r statute; and
c) Exercised within the authority.
i
4. Penal Provisions of Tax Laws
c
Strictly construed against the government and liberally in
t favor of the accused.

l 5. Non-Retroactive Application to Taxpayers

y General Rule: Rulings cannot be given retroactive effect for

to do so will be prejudicial to the taxpayer.
c
Exceptions: Even if a retroactive application is prejudicial to
o the taxpayer, rulings can be given retroactive application in the
following cases:
n
(1) Where the taxpayer deliberately misstates or omits
s material facts from his return or any document required
of him by the BIR;
t
(2) Where the facts subsequently gathered by the BIR revenue tax, or in collecting
(3) are materially different from the facts on which the ruling
is based; or any such liability, or in
(4) Where the taxpayer acted in bad faith.
evaluating tax compliance,

14. Taxing Authority (Jurisdiction, power, and functions the Commissioner is

of the Commissioner of Internal revenue, Rule-making
authority of the Secretary of Finance) authorized:
1. Jurisdiction, Power and Functions of the
Commissioner of Internal Revenue (i) To examine any book, paper, record, or other data
which may be relevant or material to such inquiry;
a) Powers and Duties of the Bureau of Internal
(ii) To obtain on a regular basis from any person other
Revenue
than the person whose internal revenue tax
The assessment and collection of all internal revenue liability is subject to audit or investigation, or from
taxes, fees, and charges; any office or officer of the national and local
governments, government agencies and
The enforcement of all forfeitures, penalties, and fines
instrumentalities, including the Bangko Sentral ng
connected therewith;
Pilipinas and government-owned or -controlled
The execution of judgments in all cases in its favor by the
corporations, any information such as, but not limited to,
CTA and ordinary courts;
costs and volume of production, receipts or sales and
Giving effect to and administering the supervisory and
gross incomes of taxpayers, and the names, addresses,
police powers conferred to it by the Tax Code or other laws.
and financial statements of corporations, mutual fund
(Sec. 2, NIRC)
companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts,
b) Power of the Commissioner to interpret tax laws
associations, joint ventures of consortia and registered
and to decide tax cases partnerships, and their members;

The CIR shall have the exclusive and original jurisdiction to

Provided, That the Cooperative Development
interpret the provisions of the Tax Code and other special Authority shall submit to the Bureau a tax incentive
tax laws, subject to review by the Secretary of Finance. report, which shall include information on the
The CIR shall also have the power to decide the following income tax, value-added tax, and other tax
tax cases but subject to the exclusive appellate jurisdiction
incentives availed of by cooperatives registered and
of the CTA: enjoying incentives under Republic Act No. 6938, as
i. Disputed assessments, amended: Provided, further, That the information
ii. Refunds of internal revenue taxes, fees or other submitted by the Cooperative Development
charges, Authority to the Bureau shall be submitted to the
iii. The penalties imposed in relation thereto, or Department of Finance and shall be included in the
iv. Other matters arising under the Tax Code, other tax database created under Republic Act
laws or portions thereof administered by the BIR. (Sec.
No. 10708, otherwise known as ‘The Tax Incentives
4, NIRC) Management and Transparency Act
(TIMTA)’. (Sec. 5(B) of NIRC, amended by TRAIN Law)
Other Powers of the Commissioner
(iii) To summon the person liable for tax or required
to file a return, or any officer or employee of such
Power of the Commissioner to Obtain Information, and
person, or any person having possession, custody, or
to Summon, Examine, and Take
care of the books of accounts and
Testimony of Persons. - In ascertaining the correctness of
other accounting records containing entries relating to the
any return, or in
business of the person liable for tax, or any other person,
making a return when none has been made, or in determining
to appear before the Commissioner or his duly authorized
the liability of any person for any internal
representative at a time and place specified in the
 summons and to produce such books, papers, records, or (iv) Authority to Terminate Taxable Period;
other data, and to give testimony;
(v) Authority of the Commissioner to Prescribe Real
(iv) To take such testimony of the person concerned, Property Values - The Commissioner is hereby
under oath, as may be relevant or material to such authorized to divide the Philippines into different
inquiry; and zones or areas and shall, upon mandatory
consultation with competent appraisers both from
(v) To cause revenue officers and employees to make the private and public sectors, and with prior notice
a canvass from time to time of any revenue district or to affected taxpayers, determine the fair market
region and inquire after and concerning all persons value of real properties located in each zone or
therein who may be liable to pay any internal revenue area, subject to automatic adjustment once every
tax, and all persons owning or having the care, three (3) years through rules and regulations
management or possession of any object with respect to issued by the Secretary of Finance based on the
which a tax is imposed. current Philippine valuation standards: Provided,
That no adjustment in zonal valuation shall be valid
The provisions of the foregoing paragraphs notwithstanding, unless published in a newspaper of general
nothing in this Section shall be construed as granting the circulation in the province, city or municipality
Commissioner the authority to inquire into bank deposits other concerned, or in the absence thereof, shall be
than as provided for in posted in the provincial capitol, city or municipal
Section 6(F) of the NIRC. (Sec. 5, NIRC) hall and in two (2) other conspicuous public places
therein: Provided, further, That the basis of any
Power of the Commissioner to Make Assessments and valuation, including the records of consultations
Prescribe Additional Requirements for Tax done, shall be public records open to the inquiry of
Administration and Enforcement any taxpayer. (Sec.6(E) of NIRC, amended by TRAIN
Law)
(i) Examination of Returns and Determination of Tax
Due - After a return has been filed as required under For purposes of computing any internal revenue tax,
the provisions of the NIRC, the Commissioner or his the value of the property shall be, whichever is the
duly authorized representative may authorize the higher of:
examination of any taxpayer and the assessment of
the correct amount of tax, notwithstanding any law 1. the fair market value as determined by the
requiring the prior authorization of any government Commissioner; or
agency or instrumentality: Provided, however, That 2. the fair market value as shown in the schedule
failure to file a return shall not prevent the of values of the Provincial and City Assessors.”
Commissioner from authorizing the examination of
any taxpayer. (vi) Authority of the Commissioner to Inquire into Bank
(Sec. 6(A) of NIRC, as amended by TRAIN Law) Deposit Accounts and Other Related information
held by Financial Institutions. - Notwithstanding any
(ii) Failure to Submit Required Returns, Statements, contrary provision of Republic Act No. 1405, Republic Act
Reports and other Documents. - When a report No. 6426, otherwise known as the Foreign Currency
required by law as a basis for the assessment of any Deposit Act of the Philippines, and other general or special
national internal revenue tax shall not be forthcoming laws, the Commissioner is hereby authorized to inquire
within the time fixed by laws or rules and regulations or into the bank deposits and other related information held
when there is reason to believe that any such report is by financial institutions of:
false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable. (a) A decedent to determine his gross estate;
(Best Evidence Obtainable Rule)
(b) Any taxpayer who has filed an application for
(iii) Authority to Conduct Inventory-taking, compromise of his tax liability under Section 204(A)(2)
Surveillance and to Prescribe Presumptive Gross of this Code by reason of financial incapacity to
Sales and Receipts; pay his tax liability.
 In case a taxpayer files an application to compromise requesting State under the tax treaty or convention to
the payment of his tax liabilities on his claim that his which the Philippines is a signatory or a party of. (Sec. 6,
financial position demonstrates a clear inability to pay NIRC, as amendedby R.A. 10021)
the tax assessed, his application shall not be
considered unless and until he waives in writing (vi) Authority to Accredit and Register Tax Agents;
his privilege under Republic Act No. 1405, Republic Act
No. 6426, otherwise known as the Foreign Currency (viii) Authority of the Commissioner to Prescribe
Deposit Act of the Philippines, or under other general Additional Procedural or Documentary Requirements.
or special laws, and such waiver shall constitute the (Sec. 6, NIRC)
authority of the Commissioner to inquire into the bank
deposits of the taxpayer; and Authority of the Commissioner to Delegate Power.

The Commissioner may delegate the powers vested in him

(c) A specific taxpayer or taxpayers subject of a request under the pertinent provisions of this Code to any or such
for the supply of tax information from a foreign tax subordinate officials with the rank equivalent to a division
authority pursuant to an international convention or chief or higher, subject to such limitations and restrictions as
agreement on tax matters to which the Philippines is a may be imposed under rules and regulations to be promulgated
signatory or a party of: Provided, That the information by the Secretary of Finance, upon recommendation of the
obtained from the banks and other financial institutions Commissioner.
may be used by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement However, the following powers of the Commissioner shall not
purposes. be delegated:
(a) The power to recommend the promulgation of rules and
Contents of the Request regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse,
(1) The identity of the person under examination or revoke or modify any existing ruling of the Bureau;
investigation; (c) The power to compromise or abate, under Sec. 204 (A)
(2) A statement of the information being sought, including its and (B) of this Code, any tax liability: Provided, however,
nature and the form in which the said foreign tax authority That assessments issued by the regional offices involving
prefers to receive the information from the Commissioner; basic deficiency taxes of Five hundred thousand pesos
(3) The tax purpose for which the information is being sought; (P500,000) or less, and minor criminal violations, as may
(4) Grounds for believing that the information requested is held be determined by rules and regulations to be promulgated
in the Philippines or is in the possession or control of a by the Secretary of finance, upon recommendation of the
person within the jurisdiction of the Philippines; Commissioner, discovered by regional and district officials,
(5) To the extent known, the name and address of any person may be compromised by a regional evaluation board which
believed to be in possession of the requested information; shall be composed of the Regional Director as
(6) A statement that the request is in conformity with the law Chairman, the Assistant Regional Director, the heads of the
and administrative practices of the said foreign tax Legal, Assessment and Collection
authority, such that if the requested information was within Divisions and the Revenue District Officer having
the jurisdiction of the said foreign tax authority then it jurisdiction over the taxpayer, as members; and
would be able to obtain the information under its laws or in (d) The power to assign or reassign internal revenue officers
the normal course of administrative practice and that it is to establishments where articles subject to excise tax are
in conformity with a convention or international agreement; produced or kept. (Sec. 7, NIRC)
and
(7) A statement that the requesting foreign tax authority has Duty of the Commissioner to Ensure the Provision and
exhausted all means available in its own territory to obtain Distribution of Forms, Receipts,
the information, except those that would give rise to Certificates, and Appliances, and the Acknowledgment
disproportionate difficulties. of Payment of Taxes. (Sec. 8, NIRC)
(Sec. 7, RR 10-2010)
The term "foreign tax authority," as used herein, shall
refer to the tax authority or tax administration of the
c) Non-retroactivity of rulings(Sec. 246, NIRC) a) Authority of the Secretary of Finance to
Promulgate Rules and Regulations
General Rule: The rulings of the BIR are not retroactive. Any
revocation, modification or reversal of any of the rules and Sec. 244 of the NIRC states that, upon recommendation of the
regulations promulgated or any of the rulings or circulars CIR, the Secretary of Finance shall promulgate all needful rules
promulgated by the CIR shall not be given retroactive and regulations for the effective enforcement of the provisions
application if it will be prejudicial to the taxpayers. of the NIRC.

Exceptions: b) Specific Provisions to be Contained in Rules and

Regulations
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of It must contain provisions specifying, prescribing, or defining:
him by the BIR; (Sec. 245, NIRC)
2. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is 1. The time and manner in which Revenue Regional Director
based; or shall canvass their respective Revenue Regions to discover
3. Where the taxpayer acted in bad faith. (Sec. 246,NIRC) persons and property liable to national internal revenue
taxes, and the manner their lists and records of taxable
Rulings, circulars, rules and regulations promulgated by persons and taxable objects shall be made and kept.
the Commissioner of Internal Revenue would have no
retroactive application if to so apply them would be 2. The forms of labels, brands or marks to be required on
prejudicial to the taxpayers ([Link], goods subject to excise tax, and the manner how the
et al., G.R. No. 117982, 6 February 1997). labelling, branding or marking shall be effected.

Cases related to Non-retroactivity of rulings: 3. The condition under which and the manner in which goods
intended for export, which if not exported would be subject
In order for Sec. 246 to apply, the ruling must be issued to the to an excise tax, shall be labelled, branded or marked.
taxpayer invoking the same. (CIRvs.
Filinvest Development Corporation, GR No. 163653, July 19, 4. The conditions to be observed by revenue officers
2011) respecting the institutions and conduct of legal actions and
2. But, if the ruling issued is a general interpretative rule, all proceedings;
taxpayers may rely on the ruling and invoke Sec. 246 if
proper. 5. The conditions under which goods intended for storage in
bonded warehouses shall be conveyed thither, their
(CIR vs. San Roque, GR No. 187485, February 12, 2013) manner of storage and method of keeping entries and
records, also the books to be kept by Revenue Inspectors
3. Section 246 is not limited to a reversal only by the and the reports to be made by them in connection with
Commissioner because this Section expressly states, "Any their supervision of such houses.
revocation, modification or reversal" without specifying
who made the revocation, 6. The conditions under which denatured alcohol may be
modification or reversal. Hence, a reversal by the Supreme removed and dealt in, the character and quantity of the
Court is covered under Section 246. CIR denaturing material to be used, the manner in which the
vs. San Roque, GR No. 187485, February 12, 2013) process of denaturing shall be effected, so as to render the
alcohol suitably denatured and unfit for oral intake, the
bonds to be given, the books and records to be kept, the
2. Rule-making authority of the Secretary of Finance
entries to be made therein, the reports to be made to the
CIR, and the signs to be displayed in the business or by
the person for whom such denaturing is done or by whom,
such alcohol is dealt in.
 7. The manner in which revenue shall be collected and paid, a) Income Tax Systems
the instrument, document or object to which revenue
stamps shall be affixed, the mode of cancellation, the (i) Global tax system
manner in which the proper books, records, invoices and
other papers shall be kept and entries therein made by the A system employed where the tax system views
person subject to the tax, as well as the manner in which indifferently the tax base and generally treats in common
licenses and stamps shall be gathered up and returned all categories of taxable income of the individual.
after serving their purposes.
▪ It generally provides for uniform rules.
8. The conditions to be observed by revenue officers ▪
respecting the enforcement of Title III imposing a tax on
estate of a decedent, and other transfers mortis causa, as I
well as on gifts and such other rules and regulations which t
the CIR may consider suitable for the enforcement of the g
said Title III. e
n
9. The manner in which tax returns, information and reports e
shall be prepared and reported and the tax collected and r
paid, as well as the conditions under which evidence of a
payment shall be furnished the taxpayer, and the l
preparation and publication of tax statistics. l
y
10. The manner in which internal revenue taxes, such as i
income tax, including withholding tax, estate and donor's m
taxes, value-added tax, other percentage taxes, excise p
taxes and documentary stamp taxes shall be paid through o
the collection officers of the BIR or through duly authorized s
agent banks which are hereby deputized to receive e
payments of such taxes and the returns, papers and s
statements that may be filed by the taxpayers in u
connection with the payment of the tax: Provided, n
however, that notwithstanding the other provisions of the i
NIRC prescribing the place of filing of returns and payment f
of taxes, the CIR may, by rules and regulations require that o
the tax returns, papers and statements and taxes of large r
taxpayers be filed and paid, respectively, through collection m
officers or through duly authorized agent banks: Provided, t
further, That the CIR can exercise this power within 6 years a
from the approval of RA 7646 or the completion of its x
comprehensive computerization program, whichever r
comes earlier: Provided, finally, That separate venues for a
the Luzon, Visayas and Mindanao areas may be designated t
for the filing of tax returns and payment of taxes by said e
large taxpayers. .
▪

Income Tax I
t
d
1. Definition, Nature and General Principles
o
e
 s f
n f
o e
t r
g e
e n
n t
e t
r a
a x
l r
l u
y l
c e
l s
a .
s ▪
s
i I
f t
y i
i m
n p
c o
o s
m e
e s
. d
i
(ii) Schedular tax system f
f
A system employed where the income tax treatment varies e
and is made to depend on the kind or category of taxable r
income of the taxpayer. It itemizes the different incomes e
and provides for varied percentages of taxes, to be applied n
thereto. t
▪ It classifies income. t
▪ a
x
I r
t a
p t
r e
o s
v .
i
d (iii) Semi-Schedular or Semi-Global Tax System
e
s This is adapted in the Philippine setting. It is a system
d which provides:
i
 (a) Taxable Income for an individual is subjected to c) Criteria
graduated rates; and
(b) Taxable Income for a Corporation is subjected to one in
normal corporate income tax rate.
Imposing
Global Schedular
Philippine
Rate Unitary or Different tax
single rate rates Income
Categories No need for Different
of taxable classification as categories of Tax (i)
income all taxpayers taxable income
are subjected Citiz
to a single rate

Use Corporation Individuals

enship

Rules Uniform rules Different rules Principle

b) Features of Philippine Income Tax Law
A citizen taxpayer is subject to income tax:
(i) Direct Tax: Tax burden is borne by the income
recipient upon whom the tax is imposed. (ii) ▪ On his worldwide income (income within and without the
Progressive: Tax rate increases as the tax base Philippines; or
increases. ▪ Only on his income from sources within the Philippines, if
he qualifies as a non-resident citizen.
Progressivity of taxation is also mandated by the
(ii) Residence Principle
Constitution. Our income tax system is one good
example of such progressivity because it is built on the
A resident alien is liable to pay income tax on his income
principle of the
from sources within the Philippines but exempt from tax
on his income from sources outside the Philippines.
taxpayer’s ability to pay. Taxation is progressive when its
rate goes up depending on the resources of the person (iii) Source Principle
affected. (Reyes vs. Almanzor, G.R. Nos.49839-46, April 26,
1991). A non-resident alien is subject to Philippine income tax on
his income from sources within the
(iii) Comprehensive: The income tax is imposed on practically Philippines such as dividend, interest, rent or royalty.
all forms of income irrespective of nature, whether
compensation. d) Types of Philippine Income Taxes

(i) Income Tax

(ii) Final Income Tax
(iii) Gross Income Tax
(iv) Improperly Accumulated Earnings Tax
(v) Minimum Corporate Income Tax
(vi) Optional Corporate Income Tax
(vii) Fringe Benefits Tax (FBT)
(viii) Creditable Withholding Tax (Expanded)
(ix) Special Income Tax on certain corporations
(x) Capital Gains Tax
 (xi) Branch Profit Remittance Tax (xii) Withholding
Nonresident Resident Partnership
Tax on Compensation Citizen (NRC) foreign
corporation
(RFC)
e) Taxable Period
Resident Alien Nonresident Estate
(i) Calendar period: Accounting period from January 1 to (RA) foreign
corporation
December 31.
(NRFC)
Taxable income is computed based on calendar year if: Nonresident Trust
▪ Accounting period is other than fiscal year. alien not
▪ Taxpayer has no accounting period. engaged in
▪ Taxpayer does not keep books. trade or
business
▪ Taxpayer is an individual. (NRA-NETB)
(ii)
Fiscal period: Accounting period of 12 months ending on Nonresident
the last day of any month other than
December. (e.g. July 1, 2019-June 30, 2020) alien engaged
in trade or
(iii) business
Short period: A taxpayer may have a taxable period of less (NRA-
than 12 months when:
ETB)
▪ Taxpayer dies
Minimum wage
▪ Corporation is newly organized
earners (MWE)
▪ Corporation changes its accounting period
Detailed discussion on Income Tax on Individuals.
▪ Corporation is dissolved
Change of Accounting Period 2. Income
▪ If a taxpayer, other than an individual, changes his accounting period, the net income shall, with the
approval of the Commissioner, be computed on the basis ofDefinition:
such new accounting period, subject to
the provisions of Sec. 47 (Sec. 46, NIRC).
▪ If the change is from fiscal year to calendar year, a separate final Anorincome is thereturn
adjustment return in be
shall money
madefrom one's business,
labor, or capital invested; gains, profit or private revenue.
for the period between the close of the last fiscal year for which the return was made and the following
(Black’s Law Dictionary)
Dec. 31.
▪ Anadjustment
If the change is from calendar year to fiscal year, a separate final or income may be defined
return as the gain derived from
shall be made
for the period between the close of the last calendar year for which return was made and the date combined, provided it
capital, from labor, or from both
designated as the close of the fiscal year. be understood to include profit gained through a sale or
conversion of capital assets
▪ If the change is from one fiscal year to another fiscal year, a separate final
(Eisner [Link],
adjustment
252return
U.S., shall
189)
be made for the period between the close of the former fiscal year and the date designated as the
close of the new fiscal year. Income is a flow of service rendered by capital by the
payment of money from it or any other benefit rendered
▪ BIR approval is necessary. by the fund through a period of time. Income is the “fruit”
of the capital or labor severed from the “tree” (Madrigal vs.
f) Kinds of Taxpayers Rafferty, GR 12287,August 7, 1918)
Summary
Income, Capital, Revenue, Receipts Distinguished
Individuals Corporations Others
Income Capital Revenue Receipts
Domestic Joint
Resident As to Definition
corporation Venture and
Citizen (RC)
(DC) Consortium
it includes fund or may all funds or him without restriction. On the other hand,
flow, property constitute income appreciation in value of property is not even an accrual
service of existing capital as derived by of income to a taxpayer prior to the realization of such
at one well as appreciation through sale or conversion of the
wealth and the
distinct income; property.
fruits government
during a point of broader whether Recognition of Income
definite time. scope from tax or
period of than other Income is received not only when it is actually handed
time. income. sources. to a person but also when it is merely constructively
When Income is Taxable: received by him.

i. Existence of income The gain must not be excluded by law or treaty

ii. Realization of income from taxation.
iii. Recognition of income
iv. Cash method of accounting versus Accrual method of An income can be exempted either by:
accounting - Tax Code
- Special law or Treaties
i. Existence of Income

a. There must be gain or profit whether in cash or i. Realization Test: Unless the income is deemed
equivalent. “realized,” there is no taxable income.
Sec. 38, RR No. 2-40 February 10, 1940
Note: Income tax only applies only when there is income, gain
or profit. Income, in its broad sense, means all wealth that All items of gross income shall be included in the gross
flows into the taxpayer other than as a mere return of capital. income for the taxable year in which they are received by
Unless otherwise specified, it means cash or its equivalent. the taxpayer and deductions taken accordingly, unless in
order clearly to reflect income such amounts are to be
b. The gain must be realized or received properly accounted for as of a different period.

Realization of Income For instance, in any case in which it is necessary to use

an inventory, no accounting in regard to purchases and
Realization Test: Unless the income is deemed “realized,” sales will correctly reflect income except an accrual
there is no taxable income. method.

Sec. 38, RR No. 2-40, February 10, 1940 A taxpayer is deemed to have received items of gross
income which have been credited to or set apart for him
All items of gross income shall be included in the gross without restriction. On the other hand, appreciation in
income for the taxable year in which they are received value of property is not even an accrual of income to a
by the taxpayer and deductions taken accordingly, taxpayer prior to the realization of such appreciation
unless in order clearly to reflect income such amounts through sale or conversion of the property.
are to be properly accounted for as of a different
period. ii. Claim of Right Doctrine or Doctrine of Ownership,
Command, or Control
For instance, in any case in which it is necessary to use
an inventory, no accounting in regard to purchases and This doctrine provides that if a taxpayer receives earnings
sales will correctly reflect income except an accrual under a claim of right and without restriction as to its
method. disposition, he has received income even though one may
claim he is not entitled to the money. Should it later appear
A taxpayer is deemed to have received items of gross that the taxpayer was not entitled to keep the money; the
income which have been credited to or set apart for
 taxpayer would be entitled to a deduction in the year of abroad as a member of the complement of a vessel
repayment. (BIRRuling(C-168)519-08, December 12, 2008) engaged exclusively in international trade shall be
treated as an overseas contract worker.
Two branches of “claim of right” doctrine: 4. An alien individual whether as resident or not of the
(1) Income; and (2) Philippines is taxable only on income derived from
sources within the Philippines.
Deduction iii. Economic
5. A domestic corporation is taxable on all income derived
Benefit Test, Doctrine from sources within and without the
of Proprietary Interest Philippines
6. A foreign corporation whether engaged or not in the
Income is earned when the recipient could enjoy trade or business in the Philippines is taxable only on
economic benefits over the gain that is received. income derived from sources within the Philippines.
(Sec. 23, NIRC)
iv. Severance Test

There is no taxable income until there is a separation

from capital of something of exchangeable value,
thereby supplying the realization or transmutation which
would result in the receipt of income.

Test of Realization

Actual Vis-À-Vis Constructive Receipt

Actual receipt – is the actual and physical receipt.

Constructive receipt – there is no physical receipt but

deemed accrued to the taxpayer. It occurs when the
consideration is placed under his complete dominion.

An item of income must be included in gross income if it is

credited to the account of or set apart for the taxpayer, or
otherwise made available to the taxpayer, although not yet
physically received or placed to his actual possession.

The Assignment of Income doctrine holds that income is

taxable to the taxpayer even if he did not receive the
amount by reason of assigning it to another person in a
form of a gift or donation.
SITUS OF INCOME

1. A citizen of the Philippines, residing therein is taxable

on all income derived from sources within and without
the Philippines
2. A non-resident citizen is taxable only on income
derived from sources within the Philippines
3. An individual citizen of the Philippines who is working
and deriving income from abroad as an Overseas
Filipino Worker is taxable only on income from sources
within the Philippines: Provided that a seaman who is
a citizen of the Philippines and receives compensation
Income Taxation - Atty. Francis De Asis (Lecture #4)

INCOME TAXATION - ATTY. FRANCIS M. ▪ Taxpayer has not taken or is not taking title to the property or
DE ASIS has no equity other than that of a lessee, user or possessor.
▪ Property must be used in trade or business.
Allowable Deductions ▪ Subjected to withholding tax of 5% otherwise it shall be
disallowed as a deduction.
(1) Salaries, wages and other forms of compensation for
personal services actually rendered, including the (5) Repairs and maintenance
grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have Minor or ordinary repairs are deductible from gross income
been paid. because it keeps the assets in its ordinary working conditions.

It includes: Major or extraordinary repairs are not deductible since major

repairs tend to prolong the life of the asset (these are capitalized
▪ Salaries, wages, commissions, professional fees, vacation or added to the cost of the asset subjected to repair)
leave pay, retirement pay and other compensation.
▪ Bonus are deductible expenses if paid in good faith as (6) Expenses under lease agreements
additional compensation for services rendered and
subjected to withholding tax It is not the cost of the leasehold improvements but only its
annual depreciation that is considered as rental expense.
In Aguinaldo vs. CIR, G.R. No. L-29790, February 25, 1982,
the bonus given to corporate officers was disallowed as a Finance lease: Not deductible; capitalized as asset; depreciation
deduction. is deductible

▪ Pensions and compensations for injuries, if not (7) Expenses for professionals
compensated for by insurance or otherwise.
▪ Grossed-up monetary value of fringe benefit provided for, A professional may claim as deductions the cost of supplies used
as long as the final tax imposed has been paid. The by him in the practice of his profession, expenses paid in the
related operation and repair of transportation equipment used in making
professional calls, dues in professional societies and subscription
▪ fringe benefit tax paid on such, if applicable, are likewise to professional journals, the rent paid for office rooms, the
deductible. expenses of the fuels, light, water, telephone, etc., used in such
offices, and the hire of office assistant. Amounts currently
(2) Traveling/Transportation expenses expended for books, furniture, and professional instruments and
equipment, the use of which is short, maybe deducted but the
For travel here and abroad while away from home in the pursuit amounts expended for books, furniture and professional
of trade, business or profession. instruments and equipment of a permanent character are not
allowable as deduction. (Sec. 69, RR No. 2)
(3) Cost of materials (8) Entertainment/ Representation expenses

Deductible only to the amount actually consumed or used in For entertainment or recreation connected to the trade,
operation during the year. business or profession or directly related to or in furtherance of
the conduct of the business, PROVIDED however that expense
(4) Rentals and/or other payments for use or possession incurred contrary to law, morals, public policy or public order
of property shall not be deductible.

Requisites of deductibility: Presence of the client is required.

▪ Made as a condition to the continued use or possession of Limitation on the amount deductible:
property.
Income Taxation - Atty. Francis De Asis (Lecture #4)

Under Sec. 5 of RR No. 10-02, there shall be allowed a deduction (2) Non-deductible interest expense
from gross income for entertainment, amusement and
recreation expense in an amount equivalent to the actual Interest expense not allowed as deduction:
entertainment, amusement and recreation expense paid or
incurred within the taxable year by the taxpayer, but in no case 1. Individual taxpayer on the cash basis paying interest in
shall such deduction exceed: advance through discount or otherwise. But interest is
allowed as deduction in the year the indebtedness is
1. 0.50 percent (%) of net sales (i.e., gross sales less sales paid; if payable in amortization then an aliquot portion
returns/allowances and of the interest corresponding to the ratio of the principal
paid is allowed as deduction.
sales discounts) for taxpayers engaged in sale of goods 2. Interests on loans between related parties referred in
or properties; or Section 36 (B).
2. 1.00 percent (%) of net revenue (i.e., gross revenue 3. Interest on indebtedness incurred to finance petroleum
less discounts) for taxpayers engaged in sale of exploration.
services, including exercise of profession and use or
lease of properties (3) Interest subject to special rules

(9) Political campaign expenses (a) Interest paid in advance

Political contribution for campaign expenses are deductible Individual taxpayer on the cash basis paying interest in
provided they are subject to the applicable withholding tax rate advance through discount or otherwise. But interest is
of 5% whether allowed as deduction in the year the indebtedness is paid; if
goods or services (RMC 30-2016, Sec VI) payable in amortization then an aliquot portion of the
interest corresponding to the ratio of the principal paid is
Exception: allowed as deduction.
(b) Interest periodically amortized
▪ No corporation, domestic or foreign, shall give donations in aid
of any political party or candidate or for purposes of General Rule: The interest period commences at the date
partisan political activity. (Sec. 36, Corporation Code) of the indebtedness arises.

(10) Training expenses Exception: With respect to business interests earned out
of sales, lease or supply or goods and services which are
Constitute ordinary and necessary expenses of a taxpayer. considered as trade accounts or receivables or payables.

Specific Itemized Deductions: (c) Interest expense incurred to acquire

property for use in trade, business or
(a) Interest exercise or a profession.

(1) Requisites for deductibility It may be allowed as a deduction or treated as a capital

expenditure.
1. There must be indebtedness
2. Taxpayer is the debtor. (d) Reduction of interest expense/ interest
3. Interest expense was paid or incurred upon such arbitrage rule
indebtedness
4. Debt must be related to the business or profession of Taxpayer’s allowable deduction for interest expense shall be
the taxpayer. reduced by 33% of the interest income subject to final tax.
5. Interest is stipulated in writing
6. Interest should be legally due. Thus, if a taxpayer incurred P5,000 interest expense and
7. Interest paid or accrued during the taxable year. earned P10,000 interest income form bank deposits subject
Income Taxation - Atty. Francis De Asis (Lecture #4)

to final tax, his deduction for interest expense shall only be Definition: refer to those debts resulting from the
P1,700 (P5,000 reduced by P3,300 worthlessness or uncollectibility, in whole or in part, of amounts
[33% of P10,000]) and not the whole due the taxpayer by others, arising from money lent or from
P5,000. uncollectible amounts of income from goods sold or services
rendered.
(b) Taxes
Requisites for deductibility
(1) Requisites for deductibility
(1) There must be an existing indebtedness due to the taxpayer
i. Related to the business of the taxpayer. which must be valid and
legally demandable;
ii. Imposed by law on, and payable by, taxpayer. iii. Paid (2) The same must be connected with the taxpayer’s trade,
or accrued during the taxable year. business or practice of profession;
(3) The same must not be sustained in a transaction entered
Examples of deducible taxes: local business tax, real property into between related parties enumerated under Sec. 36(B)
tax, documentary stamp tax, fringe benefits tax. of the Tax Code of 1997;
(4) The same must be actually charged off the books of
(2) Non-deductible taxes accounts of the taxpayer as of the end of the taxable year;
and
i. Income tax. (5) The same must be actually ascertained to be worthless and
ii. Income tax paid or incurred to any foreign country, if uncollectible as of the end of the taxable year
the taxpayer is claiming a tax credit for such foreign tax. (Sec.3,[Link].5-1999as amended by R.R. 25-2002).
iii. Estate or donor’s tax.
iv. Taxes assessed against local benefits of a kind tending For debts to be considered as “worthless,” and thereby qualify
to increase the value of the property assessed (special as “bad debts” making them deductible, the taxpayer should
assessment). show that:

VAT is not among the deductible taxes for income tax purposes. (1) There is a valid and subsisting debt.
However, the portion of the input VAT paid in relation to VAT- (2) The debt must be actually ascertained to be worthless and
exempt sales may be deducted as part of the expense to which uncollectible during the
they relate. taxable year;
(3) The debt must be charged off during the taxable year; and
(c) Losses (4) The debt must arise from the business or trade of the
taxpayer. Additionally, before a debt can be considered
(1) Requisites for deductibility worthless, the taxpayer must also show that it is indeed
uncollectible even in the future ([Link], G.R. No. 118794,
i. Must be actual; nature of the loss must be “sudden”; May 8, 1996).
ii. Sustained in a close and completed transaction;
iii. Not be compensated for by insurance or otherwise; Effect of recovery of bad debts
iv. Must be liquidated and charged-off during the taxable
year. Tax Benefit Rule
v. Not claimed as a deduction for estate tax purposes; and
vi. If due to casualty, robbery, theft or embezzlement, must The recovery of bad debts previously allowed as deduction in
be reported to the BIR within 45 days from date of the preceding years shall be included as part of the taxpayer’s
discovery. gross income in the year of such recovery to the extent of the
income tax benefit of said deduction.
(e) Bad Debts The total bad debts recovered will not necessarily form part of
the taxpayer’s income but only to the extent that he was
benefitted.
Income Taxation - Atty. Francis De Asis (Lecture #4)

(f) Depreciation An amount set aside for a specific project which comes
within one or more purposes of the accredited
Definition: It is the gradual diminution in the service or useful nongovernment organization may be treated as a
value of tangible property due from exhaustion, wear and tear utilization, but only if at the time such amount is set aside,
and normal obsolescence. the accredited nongovernment organization has
(1) Requisites for deductibility established to the satisfaction of the Commissioner that the
amount will be paid to be prescribed in rules and
i. Must be reasonable; regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner, but not to
ii. Must be on property used in the conduct of the business; exceed five (5) years, and the project is one which can be
and better accomplished by setting aside such amount than by
immediate payment of funds.
iii. Must be treated as expenditure for the taxable year. (g)
Charitable and Other Contributions
Partial Deduction vs. Full Deduction on Charitable
a) Requisites for deductibility Contributions
Partial Deduction Full Deduction
1. The contribution must actually be paid, or made payable to Allowable Deduction
the Philippine government or any political subdivision
Must not exceed 10% Deductible for the full
thereof, or any domestic corporation or association
specified by the NIRC. for Individual /5% for amount
corporation of Net
2. No part of the net income of the beneficiary must inure to Income without
the benefit of any private stockholder or individual. benefit of the
contribution
3. It must be made within the taxable year. To whom was the donation
made/purpose
4. It must not exceed 10% in case of an individual, and 5% in
Donations made to: Donation to Gov’t
case of a corporation, of the taxpayer’s taxable income
-Government of RP finance undertaking
(except when the donation is deductible in full) to be
exclusively for public priority activities in
determined without the benefit of the contribution.
purpose accordance with the
5. It must be evidenced by adequate records or receipts. national priority plan
determined by the
b) Amount that may be deducted NEDA
10% (individual) or 5% (corporation) of the taxable income of
Subject to such terms and conditions as may be prescribed by the donor, if made to the following donees:
the Secretary of Finance, the term “utilization” means:
a. To Government of the RP or any of its agencies / political
i. Any amount in cash or in kind (including administrative subdivision thereof
expenses) paid or utilized to accomplish one or more exclusively for public purposes, or
purposes for which the accredited non-government b. Accredited domestic corporations or associations organized
organization was created or organized. and operated exclusively for religious, charitable,
scientific, youth
ii. Any amount paid to acquire an asset used
(or held for use) directly in carrying out one c. And sports development, cultural or educational purposes
or more purposes for which the accredited nongovernment or for the rehabilitation of veterans, or to social welfare
organization was created or organized. institutions, or to non-governmental organizations.
Income Taxation - Atty. Francis De Asis (Lecture #4)

▪ No part of the net income of which inure to the benefit of any 5. The payment has not been allowed as deduction.
private stockholder or individual. 6. The deduction is apportioned in equal parts over a period
of ten (10) consecutive years beginning with the year in
Full Deduction: which the transfer or payment was made.
The deduction to be apportioned in equal parts over a period of
If made to the following: 10 years pertains to the contributions to the retirement fund
pertaining to past service cost. Such that if for the year the
1. Donations to the Government of the taxpayer made a contribution equivalent to P1,000,000 but the
Philippines and any of its agencies/political subdivisions current service cost of the pension plan is only P900,000 based
fully-owned government corporation. on the actuarial valuation, the P100,000 difference is deemed
contributions for past service cost and is apportioned over a
The donation must be exclusively to finance undertaking period of 10 years.
priority activities in accordance with the national priority plan Accordingly, the taxpayer can only claim
determined by the NEDA in the following fields: P910,000 (P900,000 plus P10,000 [P1,000,000/10 years]) as
▪ Science deductions and not the P1,000,000 actual contributions for the
▪ Education year.
▪ Youth and Sport Development
▪ Culture (i) Deductions under Special Laws
▪ Economic Development
▪ Human Settlement The following are institutions governed by special laws that
allow full deductions on donations:
2. Donations to Certain Foreign Institutions or International
Organizations. ▪ National Museum, Library and Archives (P.D.
373)
3. Donations to Accredited Nongovernmental Organizations ▪ Development Academy of the Philippines
whose purpose are exclusively for: (P.D. 205)
▪ Intramuros Administration (P.D. 1616)
a. Scientific ▪ The Cultural enter of the Philippines
b. Educational ▪ International Rice Research Institute
c. Character building and Youth and Sports ▪ Ministry of Youth & Sports Commission
Development ▪ Museum of Philippine Costumes
d. Cultural ▪ University of the Philippines and other state colleges and
e. Health universities
f. Research ▪ The Integrated Bar of the Philippines (P.D.
g. Social Welfare 81)
h. Charitable and
i. Any combination of the above.
Optional Standard Deduction
(h) Contributions to Pension Trusts
In lieu of the above enumerated allowable deductions. Section
(1) Requisites for deductibility 34(L) of the Tax Code provides for an optional standard
deduction
1. The employer must have established a pension or (OSD) which is :
retirement plan to provide for the payment of reasonable
pensions to his employees. ● For Individuals - 40% of Gross Sales/ gross receipts
2. The pension plan is reasonable and sound.
3. It must be funded by the employer. ● For Corporations – 40% of Gross
4. The amount contributed must no longer be subject to the Income
control or dispositions of the employer.
Income Taxation - Atty. Francis De Asis (Lecture #4)

Basis for Optional Standard Deduction Itemized Deduction vs. Optional Standard
Individual Corporation Deduction

Basis Itemized Optional

Deduction Standard
Gross Sales/Receipts Gross Sales/Receipts Deduction
x40% = OSD – Cost of
Sales/Services + Amount Allowable to be Deducted
Other Income not Actual amount of 40% of Gross
subject to VAT= Total expenses incurred Sales/Gross Receipts
Gross income x40%= (For Individual) or
OSD 40% of Gross Income
How Applied (For Corporation)

Gross Sales/Receipts Gross Sales/Receipts Supporting

Invoices/Receipts/Documents
– OSD = Net – Cost of
Income/Taxable Sales/Services + Yes. All expenses No longer need to be
Income Other Income not need to be supported supported by
Subject to Final Tax by invoices/receipt or invoices/receipts
= other competent
Total Gross Income – supporting
OSD = Net documents
Income/Taxable Audited Financial Statements
Income
Individuals and No longer need to file
As can be noted: Corporations are Audited Financial
required to file Statements for BIR or
● Individuals availing OSD are not allowed to deduct Cost
audited financial Income Tax Return
of Sales/Services as the basis of OSD is gross
statements filing purposes
sales/receipts
SITUS OF INCOME
● While for Corporations, they are allowed to deduct the
cost of sales/services
1. A citizen of the Philippines, residing therein is taxable on
Who are allowed to deduct OSD? all income derived from sources within and without the
Philippines
● Individuals 2. A non-resident citizen is taxable only on income derived
o Allowed to all kinds of individual except non – from sources within the
resident aliens Philippines
o Those who are under the graduated 3. An individual citizen of the Philippines who is working
tax table of 0-35% and deriving income from abroad as an Overseas Filipino
● General professional Partnership or its partners – Worker is taxable only on income from sources within
however may avail of it only once. the Philippines: Provided that a seaman who is a citizen
● Domestic /Resident Corporations – only corporations of the Philippines and receives compensation abroad as
whose income in whole or in part is not exempt or a member of the complement of a vessel engaged
preferential rate. exclusively in international trade shall be treated as an
overseas contract worker.
Rules on OSD o Taxpayer wishing to be deducted using OSD 4. An alien individual whether as resident or not of the
shall signify its intention in its first quarter income tax Philippines is taxable only on income derived from
return. sources within the Philippines.
o Once exercise is irrevocable for the taxable year the 5. A domestic corporation is taxable on all income derived
election was made from sources within and without the Philippines
Income Taxation - Atty. Francis De Asis (Lecture #4)

6. A foreign corporation whether engaged or not in the (a) The use of or the right or privilege to use in the
trade or business in the Philippines is taxable only on Philippines any copyright, patent, design or model, plan,
income derived from sources within the secret formula or process, goodwill, trademark, trade,
Philippines. (Sec. 23, NIRC) brand or other like property or right;

(b) The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;
Gross Income and Taxable Income from
Sources Within the Philippines (c) The supply of scientific, technical, industrial or
commercial knowledge or
1. Interest information;

a) Interest derived from sources within refers to (d) The supply of any assistance that is ancillary and
interest earned from deposits on banks located subsidiary to, and is furnished as a means of enabling
in the Philippines (location of the bank), or the application or enjoyment of, any such property or
right as is mentioned in paragraph (a), any such
a. Residence of the debtor – interest on bonds, equipment as is mentioned in paragraph (b) or any such
notes, or other interest bearing obligations. knowledge or information as is mentioned in paragraph (c);

b. Interest Income which are already subject to (e) The supply of services by a nonresident person or his
final tax (such as those in the passive income employee in connection with the use of property or
charts) need not be included in the rights belonging to, or the installation or operation of
computation for gross income for a tax payer’s any brand, machinery or other apparatus purchased
annual income tax return. from such nonresident person;

2. Dividends – any distribution made by a corporation to its (f) Technical advice, assistance or services rendered in
shareholders out of its earnings or profits and payable to connection with technical management or
its shareholders, whether in money or in other property. administration of any scientific, industrial or commercial
(Sec. 73 (A) of NIRC) undertaking, venture, project or scheme; and

(g) The use of or the right to use:

Amount received as dividend from a domestic corporation or (i) Motion picture films;
from a foreign corporation, subject to the 50% rule, or at (ii) Films or video tapes for use in connection with
least 50% of its gross income is from sources within the television; and
Philippines. (iii) Tapes for use in connection with radio broadcasting.

● 50% rule: If for the 3-year period preceding the 5. Sale of real property – gains, profits and income from sale
declaration of such dividend, the ratio of such of real property located in the Philippines
corporation’s Philippine income to its world
(total-within and without) income is: ▪ Less than 6. Sale of personal property - the following rules apply:
50% - Entirely without
▪ 50% or more – proportionate (a) Production and Sale

3. Compensation for labor or personal services – ▪ Production in whole within and sold within– income
services performed in the purely within
Philippines. ▪ Produced in whole without and sold without– income
purely without
4. Rentals and royalties – Rentals and royalties from ▪ Produced within and sold without – income partly within
property located in the Philippines or from any interest in and partly without
such property, including rentals or royalties for:
Income Taxation - Atty. Francis De Asis (Lecture #4)

▪ Produced without and sold within – income partly within Net

and partly without Global gross x = P xxx
income sales
(b) Mere cases of buy and sell (No To summarize:
Production)
In order for one to determine the taxability of a certain person
▪ Place of market rule (place of sale) applies. the following must be considered: - Was there an income or
▪ Exception: If the personal property sold are shares of mere return on capital?
stock of DOMESTIC corporation, the income is purely - Who earned the income? Is it a natural person or
within even if the seller sells it abroad. juridical person? A citizen or alien? A domestic or
(irrespective of place of sale) foreign corporation?
- Is the income sourced within or without?
Gross Income and Taxable Income from - What income was earned? Passive Income? Capital
Sources without The Philippines Gains or Ordinary Income?

1. Interest other than those derived from sources within the

Philippines;
2. Dividends other than those derived from sources within the
Income Tax on Individuals
Philippines; The individual taxpayers can be classified as follows:
3. Compensation for labor or personal service performed
without the Philippines; (A) Citizens – persons considered as Filipino as per our
4. Rentals or royalties from property located without the Philippine Constitution:
Philippines or from any interest in such property including
rentals or royalties for the use of or for the privilege of using (i) Resident Citizens - are those citizens who reside in the
without the Philippines, patents, copyrights, secret Philippines.
processes and formulas, goodwill, trademarks, trade
brands, TAXABILITY: Taxed on income sourced within and without the
franchises and other like properties; and Philippines and maybe taxed at a rate of 0%-35% (effective
5. Gains, profits and income from the sale of real property 2018-2022) or 8% tax rate on gross annual sales or receipts (if
located without the Philippines. applicable).

▪ From the items of gross income specified above there shall (ii) Non – Resident Citizens - Filipino citizen who:
be deducted the expenses losses, and other deductions
properly apportioned or allocated thereto and a ratable ▪ Establishes to the satisfaction of the Commissioner the fact of
part of any expense, loss or other deduction which cannot his physical presence abroad with a definite intention to
definitely be allocated to some items or classes of gross reside therein.
income. The remainder, if shall be treated in full as taxable ▪ Leaves the Philippines during the taxable year to reside abroad,
income from sources without the Philippines. either as an immigrant or for employment on a permanent
basis.
Income From Sources Partly Within or ▪ Works and derives income from abroad and whose
Partly Without the Philippines employment thereat requires him to be physically present
abroad most of the time during the taxable year. “Most of
From the income partly within and partly without, income the time” meaning at least 183 days.
purely within is derived as follows: ▪ Has been previously considered as non-resident citizen
and who arrives in the Philippines at any time during the
Net
taxable year to reside permanently in the Philippines shall
Value of property within = P xxx x income
likewise be treated as a non-resident citizen for the taxable
Total Value of property
year in which he arrives in the Philippines with respect to
Sales within
Income Taxation - Atty. Francis De Asis (Lecture #4)

his income derived from sources abroad until the Philippines and does not perform any of the above-
date of his arrival in the Philippines (Section 22[E], NIRC). mentioned.

Note: Taxpayer shall submit proof to the Commissioner to show ❖ TAXABILITY: Taxed on income sourced WITHIN the
his intention of leaving the Philippines to reside permanently Philippines. Based on the fixed rate of 25% of the GROSS
abroad or income.

to return to and reside in the Philippines as the case may be. Gross Income vs. Net Taxable Income

TAXABILITY: Taxed on income sourced within maybe taxed at Gross income – Income after deduction of
a rate of 0%-35% of net taxable income (effective 2018-2022) Cost of Sales/Services
or 8% tax rate on gross annual sales or receipts (if applicable).
Net income – Income after deduction of Cost of Sale/Services
(B) Aliens - those who are not citizens of the and other allowable deductions or Optional Standard Deduction
Philippines as determined by the Philippine Gross Sales/Revenue/Receipts Xxx
Constitution /foreigners.
Add Other income Xxx
Aliens are classified as follows: Less: Cost of Sales or Cost of Xxx
Services
(1) Resident Alien (RA) - Individual who is not a citizen but
Total Gross Income Xxx
resides in the Philippines
Less: Allowable Deductions Xxx
❖ TAXABILITY: Taxed on income sourced WITHIN the (Itemized)
Philippines. Based on the graduated rate of 0%-35% of the Taxable Income Xxx
NET taxable income. Summary for Individual Taxpayers:
Income Tax
Kind Tax base
source rate
Worldwide
Net
(2) Non-Resident Aliens (NRA) RC (within and 0%-3
taxable
without) 5%
income
a. Engaged in trade or business (NRA-ETB) - Individual Income Tax
Kind Tax base
who is not a citizen, with residence outside the source rate
Philippines, BUT: NRC
▪ Engages in trade and/or business in the Philippines (Principle RA
of Habituality in Commercial Transactions). Within
NRA-ETB
▪ Exercises a profession in the Philippines.
▪ Comes to and stays in the Philippines for an aggregate period NRA- Gross
25%
NETB income
of more than 180 days during any calendar year (Revenue
Regulation 2-98). Income Taxation on Individuals

❖ TAXABILITY: Taxed on income sourced WITHIN the Kinds of Taxable on

How taxed?
Individuals income
Philippines. Based on the graduated rate of 0%-35% of the
NET taxable income.

a. Not engaged in trade or business (NRA-NETB) -

Individual who is not a citizen, with residence outside the
Income Taxation - Atty. Francis De Asis (Lecture #4)

These are all remuneration for services performed by an

Resident Within and Graduated
employee for his employer under an employer-employee
Citizen (RC) Without tax table (0%
-35%) /8% relationship, unless specifically excluded by the Tax Code.
(Global)
Gross
Sales/Receipt Note: Gross compensation income does not include
(if applicable) compensation for services rendered by an independent
contractor since income is not derived from employer-employee
Nonresident Within ONLY Graduated
relationship.
Citizen (NRC) tax
table(0%-35
TAXABILITY: Taxed on individuals earning purely
%) /8%
compensation income are taxed at 0%-35% graduated tax table
Gross
Sales/Receipt on their net taxable compensation income.
(if applicable)
Section 78, RR 2-98, January 01, 1998
Resident Alien Within ONLY Graduated
(RA) tax table The withholding of tax on compensation income is a method of
(0%-35%)
collecting the income tax at source upon receipt of the income.
/8% Gross
It applies to all employed individuals whether citizens or aliens,
Sales/Receipt
(if applicable)
deriving income from compensation for services rendered in the
Philippines. The employer is constituted as the withholding
Nonresident Within ONLY Graduated agent.
alien engaged tax table
in trade or (0%-35%) Requisites for compensation to be taxable
business /8% Gross
(NRA-ETB) Sales/Receipt
1. There must be personal services actually rendered
(if applicable)
2. There must be payment for such services rendered
Nonresident Within ONLY 25% on 3. The payment made is reasonable
alien not Gross
engaged in Income Compensation Income Exempt from Tax
trade or
business (a) Convenience of the Employer Rule – it grants
(NRA-NETB) exemption to benefits which are given for the exclusive
Income Stream benefit of the employer (may be subjected to fringe
benefits tax)
RA 10963 has introduced another factor that need to be (b) De minimis benefits – Facilities or privileges furnished or
considered in determining an individual’s income tax which is offered by an
the income stream. Which are individuals earning either by: employer to his employees relatively small in value provided
for merely as a means of promoting of health, goodwill,
(1) Purely Compensation earner contentment or efficiency of his employees. (Exempt from
(2) Purely Self – Employed or Professionals tax)
(3) Mixed Income earner
(c) Non – Taxable 13th month and other benefits
amounting to Php90,000.
Sec 3 RR 8-2018, February 20, 2018
(2) Fringe Benefits
(1) Purely Compensation Income earner
Definition — Any goods, services or benefits furnished or
Individuals whose source of income is purely derived from an granted in cash or in kind by an employer to an individual
employer-employee relationship employee, in addition to basic salaries, except a rank and file
employee. (Sec 2.33 (B), RR (3.98))
Income Taxation - Atty. Francis De Asis (Lecture #4)

Nature of Fringe Benefit Tax (FBT): is a tax imposed on Fringe benefits not taxable under Sec. 33:
fringe benefits which are granted or are paid by an employer to
an employee occupying a managerial or supervisory position. 1. Fringe Benefits which are authorized and exempted under
special laws, such as the 13th month Pay and Other Benefits
Purpose of Fringe Benefit Tax is to enhance the with the ceiling of P90,000 under Sec. 32(B)(7)(e) of the
progressiveness and fairness of the tax system NIRC (asamendedbyR.A.10653datedJuly
28,2014andasfurtheramendedbyR.A.10963,
Supervisory employees – are those who recommend TRAIN Law effective January 1, 2018).
managerial actions if the exercise of such authority is not merely 2. Contributions of the employer for the benefit of the
routinary or clerical in nature but requires the use of employee to retirement, insurance
independent judgment. and hospitalization benefit plans;
3. Benefits given to the rank and file employees, whether
Managerial employees – those who are given the powers or granted under a
prerogatives to lay down and execute management policies collective bargaining agreement or not;
and/or to hire, transfer, suspend, lay-off, recall, discharge, 4. Fringe benefits not considered as gross income: if it is
assign or discipline employees. required/ necessary to the business of the employer or for
the convenience or advantage of the employer.
Rank and file employees – are those employees who are 5. Fringe Benefits not taxable under NIRC (Sec.
neither managerial nor supervisory employees. Rank and file 32(B))
employees are not subject to Fringe Benefit Tax.
De minimis benefits – Those facilities or privileges furnished
to employees that are of relatively small value and are offered
Special Treatment of Fringe Benefits –FBT is paid by the
or furnished merely as a means of promoting heath, goodwill,
employer but he is allowed by law to deduct FBT as a business
contentment or efficiency of employees. Applicable to all types
expense in determining his taxable income.
of employees, whether Supervisory, Managerial or Rank and
Taxable and Non-Taxable Fringe Benefits
File.
Fringe benefits subject to fringe benefit tax:
Note:
The enumeration of De Minimis Benefits are exclusive.
1. Housing
(Section2,RR-2011,May11, 2012)
2. Expense account
Revenue Regulation 3-98 Expenses incurred by the Sec. 6, RR No. 11-2018 dated March 15,
managerial worker were it was reimbursed by the
2018 in relation to R.A. No. 10963
management
3. Vehicle of any kind. The amount of ‘de minimis’ benefits conforming to the
4. Household personnel (maid or driver) ceiling herein prescribed shall not be considered in
5. Interest on loans at less than market rate to the extent of determining the P90,000 ceiling of ‘other benefits’ excluded
the difference between the from gross income under Section 32 (B) (7)
market rate and the actual rate granted (e) of the Code as amended under Sec. 9 of R.A. 10963
6. Membership fees, dues and other expenses borne by the (TRAIN Law).
employer for the employee in social and athletic clubs, and
similar Provided that the excess of the ‘de minimis’ benefits over
organizations their respective ceilings prescribed by these regulations
7. Holiday and vacation expenses shall be considered as part of ‘other benefits’ and the
8. Expenses of foreign travel: The foreign travel must not be in employee receiving it will be subjected to tax only on the
line with the trader or business. excess of the P90,000 ceiling.
9. Educational assistance to the employee or his dependents.
10. Life or health insurance and other non-life insurance Provided further, that aside from the statutory minimum wage
premiums. (SMW), the holiday pay, overtime pay, night shift differential
Income Taxation - Atty. Francis De Asis (Lecture #4)

pay, and hazard pay, earned by the MWE shall likewise be

covered by the exemption.

Additional compensation such as commissions,

honoraria, fringe benefits, benefits in excess of

the allowable statutory amount of ₱90,000.00, taxable

allowances, and other taxable income given to an MWE by the
same employer other than those which are expressly exempt
from income tax shall be subject to withholding tax using the
withholding tax table (RMC No.
105-2017).
Likewise, MWEs receiving other income from
other sources in addition to compensation

income, such as income from other concurrent employers, from

the conduct of trade, business, or practice of profession, except
income subject to final tax, are subject to income tax only to the
extent of income other than SMW, holiday pay, overtime pay,
night shift differential pay, and hazard pay earned during the
taxable year.
Income Taxation - Atty. Francis De Asis (Lecture #4)

Special Class of Individual Employees - Minimum Wage a) Option 1 -Taxed at Graduated Tax table of 0%-
Earner (MWE) 35%.

Worker in the private sector paid the statutory minimum Under this system an individual choosing this option will:
wage or an employee in the public sector with compensation - be taxed on its taxable income using the
income of not more than the statutory minimum wage in the graduated tax table
non-agricultural sector where he/she is assigned. - be allowed to deduct itemized deductions or
optional standard deduction
❖ TAXABILITY: MWEs shall be exempt from the payment of - be liable to percentage tax of three percent
income tax on their taxable income. The holiday pay, (3%) on gross sales/receipts
overtime pay, night shift differential pay and hazard pay
received by such minimum wage earners shall likewise be b) Option 2 -Taxed at 8%.
exempt from income tax.
Under this system an individual choosing this option will:
Purely Self – employed or purely professional income - be taxed at 8% on its gross sales or receipts
earner (including other non-operating income) in
excess of Php250,000
Self-employed is a sole proprietor or an
independent contractor who reports income - NOT be allowed to deduct itemized or optional
earned from self-employment. S/he controls deduction
who s/he works for, how the work is done and - NO longer be liable to the 3% percentage tax
when it is done. lt includes those hired under a on gross sales or receipts as the 8% tax is
contract of service or job order, and already in lieu of percentage tax.
professionals whose income is derived purely
from the practice of profession and not under Who are eligible to exercise the above options?
an employer - employee relationship'
- Those PURELY SELF EMPLOYED or
Professional is a person formally certified by a professional body PROFESSIONAL INCOME EARNER whose gross
belonging to a specific sales/receipts and other non- operating income
profession by, virtue of having completed a required examination DOES NOT EXCEED Php 3 million within the year
or course of studies and
and/or practice, whose competence can usually be measured
against an established set of standards. It also refers to a person - Only to taxpayers whose income falls within
who engages in some art or sport for money, as a means of Section 116 of Tax Code (Income exempt from
livelihood, rather than as a hobby. lt includes but not limited to VAT).
doctors, lawyers, engineers, architects, CPAs, professional
entertainers, artists, professional athletes, directors, producers, Consequently, those individual income taxpayers who are purely
insurance agents, insurance adjusters, management and self-employed or professional income earners whose gross
technical consultants, bookkeeping agents, and other recipients sales/receipts and other non-operating income EXCEEDING
of professional, promotional and talent fee (Section 2 (n) – RR 8 Php 3 million and/or taxpayer whose income is subject
-2018) to percentage tax other than those under Section 116 will
have NO OPTION but be taxed by the graduated income tax
Taxability rates of 0%-35%.

Income earners who are purely self-employed and/earning How to avail of the option?
professional income that has gross annual sales or receipts
not exceeding the VAT threshold of Php 3M shall have the Individual taxpayers who are eligible and would like to be taxed
following options: at 8% (Option 2) shall signify its option on its 1st Quarter
Income Taxation - Atty. Francis De Asis (Lecture #4)

ITR and be irrevocable and no amendment of option shall

be made for the taxable year. (Section 3(C) RR 8-2018, ) Allowed to deduct expenses and Cost of
Sales?
Failure to exercise or to signify its option shall subject the income
to the graduated tax rates of 0%- 35% (as if option 1 was Yes No
chosen) Mixed Income Earner

Summary: Mixed Income Earner - an individual earning compensation

income from employment, and income from business, practice
Gross Annual Gross Annual
of profession and/or other sources aside from employment.
Receipts EXCEEDS Receipts DOES NOT
Php 3M EXCEED Php 3M Taxability
Taxed at 0%-35% Option 1 -Taxed at
graduated tax rates. 0%-35% graduated Taxpayers earning both compensation income and income from
Allowed to deduct tax rates. Allowed to business or practice of profession shall be subject to the
itemized or optional deduct itemized or following taxes:
standard deduction. optional standard
Subject to 12% VAT deduction. Subject 3% All Income from Compensation – The Graduated Tax Rates
tax of 0%-35%

All Income from Business or Practice of Profession -

Option 2- Taxed at 8%
of gross sales a. Income earners who are purely self-employed and/earning
/receipts including non professional income that has gross sales or receipts not
– operating income in exceeding the VAT threshold of Php 3M shall have the
excess of Php following options:
250,000. CANNOT
deduct itemized or i) Option 1 -Taxed at Graduated Tax table of 0%-35%
optional standard
Under this system an individual choosing this option will:
deduction. NOT
- be taxed on its taxable income using the
subject to 3%
graduated tax table both for compensation and
percentage tax.
income earned from business and/or profession.
Option 1 v. Option 2
Option 1 Option 2 - be allowed to deduct itemized deductions or
Tax Base optional standard deduction
- be liable to percentage tax of three percent
Net Income (Sales Gross Sales/receipts
–COS –Deductions) + other non – (3%) on gross sales/receipts ii) Option 2 -
operating income in
excess of Php Taxed at 8%.
250,000
Tax Rate Under this system an individual choosing this option will:
- be taxed at 8% on its gross sales or annual
0%-35% 8%
receipts (including non- operating income)
Subject to 3% Percentage Tax on Gross - NOT be allowed to deduct itemized or optional
Sales/receipts and other non – operating deduction
income?
Yes No
Income Taxation - Atty. Francis De Asis (Lecture #4)

- NO longer be liable to the 3% percentage tax

on gross sales or receipts as the 8% tax is 0%-35%
already in lieu of percentage tax.

- Income earned from compensation will be taxed

at 0%-35% graduated tax table.

b) If Total Gross Sales and/or Gross Receipts and Other

Non-operating Income Exceeds Php 3M VAT Threshold –
Taxed at 0-35% graduated tax rates

Who are eligible to exercise the above options?

Same rules apply with purely self – employed or purely

professional income earner. Option 1 v. Option 2
Option 1 Option 2
How to avail of the option?
Tax Base
Same rules apply with purely self – employed or purely
professional income earner.

Summary:
Gross Annual Gross Annual
Receipts EXCEEDS Receipts DOES NOT
Php 3M EXCEED Php 3M
Taxed at 0%-35% Option 1 -Taxed at
graduated tax rates. 0%-35% graduated
Allowed to deduct tax table. Allowed to
itemized or optional deduct itemized or
standard deduction. optional standard
Subject to 12% VAT deduction. Subject 3%
tax

Option 2- Taxed at 8%
of gross sales /receipts
including non
– operating income.
CANNOT deduct
itemized or optional
standard deduction.
NOT subject to 3%
percentage tax.
However the tax on
compensation income
will be taxed at
graduated tax table of
Income Taxation - Atty. Francis De Asis (Lecture #4)

Compensation Gross Sales/receipts case,

his
Income + Net + other non – income
Income from business operating income tax
(Sales –COS shall be
–Deductions)
Tax Rate
0%-35% on 8% on Business
Compensation and income only
Net Income from
Business and/or 0%-35% - on
profession Compensation income
Subject to 3% Percentage Tax on Gross
Sales/receipts and other non – operating
income?
Yes No
Allowed to deduct expenses and Cost of
Sales?
Yes No
Purely Self Employed v. Mixed Income Earner computed under the graduated income tax rates and shall be
Purely Self Mixed income allowed a tax credit for the previous quarter/s income tax
employed earner payment/s under the 8% income tax rate option.

No compensation Earns from business

income being earned income and
compensation
Tax based on 8% option
Gross sales/receipts Gross sales/receipts
+ other non- + other
operating income less non-operating income
first Php 250,000
Taxability of Compensation Income
No separate tax Has separate tax
computation for computation for
compensation income compensation income
which will be taxed at
0%-35% graduated
income tax.
Effect if within the year the Php 3M gross annual sales
/receipts was breached?

A taxpayer shall automatically be subject to the graduated rates

under Section 2a(A)(2)(a) of the NIRC, as amended, even if the
flat 8% income tax rate option is initially selected, when
taxpayer's gross sales/receipts and other non-operating income
exceeded the VAT threshold during the taxable year. In such
INCOME TAXATION – LECTURE #3 – Atty. De Asis Total Gross Income Xxx

1. Gross Income Less: Allowable Deductions Xxx

(Itemized)
a. Definition: Taxable Income Xxx
b. Classification of Income Subject
All income derived from whatever source, including (but not to Tax
limited to) the following items:
1. Capital Gains
1. Compensation for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions, and Gain from dealings in capital assets which are subject to Capital
similar items; Gains Tax (CGT).
2. Gross income derived from the conduct of trade of business
or the exercise of a profession; (1) Income from Dealings of Real Property
3. Gains derived from dealings in property;
4. Interests; 5. Rents; Income subject to Capital Gains Tax are those properties income
6. Royalties; considered as Capital Gains as compared to those Ordinary
7. Dividends; Gains.
8. Annuities;
9. Prizes and winnings; Ordinary Income Vis-À-Vis Capital Gain
10. Pensions; and, Ordinary Gain Capital Gain
11. Partner’s distributive share from the net income of the
general professional partnership. (Sec.32[A]of the NIRC) Includes any gain
from sale or The gain
derived from
exchange of
Definition the sale or
Gross income – Income after deduction of Cost of property which is
exchange of
not a capital asset
Sales/Services capital assets.
or property.

Net income – Income after deduction of Cost of Sale/Services Source Ordinary asset Capital asset
and other allowable deductions or Some types of
Optional Standard Deduction Holding capital gains
period, Not applicable are adjusted
relevance by the holding
Taxable Income – The amount/basis for the computation for
period
determining income tax due.
Certain types
Only ordinary of capital loss
Deductibilit losses are may be
For Individuals: deductible against deducted as
y
ordinary gains ordinary
Taxable Income is equal to net income. No more deduction losses
for exemptions (personal, additional and premium for health Applicable
insurance) as it is already repealed by TRAIN Law. Net loss
Applicable only to
carry over
Individuals
Deductions
For Corporations: Yes No
allowed
Included in the
Taxable income is equal to net income. gross income
Gross Sales/Revenue/Receipts Xxx subject to Subject to
Tax effect graduated rate Capital Gains
Add Other income Xxx (individuals) or tax
Less: Cost of Sales or Cost of Xxx fixed rate
Services (corporations)
 Reflected in Section 3, RR 7-2003, December 27, 2002
the income Yes No
tax return (a) A property purchased for future use in the business, even
As can be observed from the above table, transactions subject though this purpose is later thwarted by circumstances
to Capital Gains Tax are those transaction from sale of real beyond the taxpayer’s control, does not lose its character
property considered as Capital Asset. as an ordinary asset. Nor does a mere discontinuance of the
active use of the property change its character previously
Hence there is a need again to distinguish between Capital established as a business property.
assets against Ordinary Assets (b) Provided however, that properties classified as ordinary
assets for being used in business by a taxpayer engaged in
Types of Properties business other than real estate business as defined in
Ordinary Asset CapitalSection
Asset 2 (g) hereof are automatically converted into capital
assets upon showing of proof that the same have not been
Definition used
a. Stock in trade Includes all in business for more than two (2) years prior to the
property
consummation
of the taxpayer or held by the taxpayer of the taxable transactions involving said
other properties.
whether or not
properties of a connected in trade
kind which would Actual
or business Gain
but not Vis-À-Vis Presumed Gain
properly be including those
included in the In subjecting
enumerated as a sale of real property to capital gains tax the
inventory of the ordinary assets
presumed gain is considered regardless there if there is
taxpayer; b.
an actual gain or not. As compared to ordinary gains there
Property held by
the taxpayer must be an actual gain to be taxable.
primarily for
sale to customers Domestic corporations are imposed a 6% capital gains tax
in the ordinary (CGT) only on the presumed gain realized from the sale of
course of lands and/or buildings (classified as capital assets). The
business; NIRC of 1997 does not impose the 6% CGT on the gains
c. Personal realized from the sale of machineries and equipment but
Property used
such income is subject to the provisions of the normal
in trade or
business and corporate income tax. (SMI-EDPhilippinesCorporations
subject to vs CIR, G.R. No. 175410, November 12, 2014)
depreciation;
and For domestic corporations, the gains from the disposition of
d. Real property capital assets are subject to a capital gains tax (which is a Final
used in trade or Withholding Tax) even if the property is located abroad.
business.
Gain In the case of an individual, if the property is capital asset
Ordinary gain Capital gain
derived located within the Philippines it is not included in the
Determin income tax return because it is subject to capital gains tax (final
ation of Actual Gain income
Presumed Gaintax).
Income
Tax Subject to Exception to the above rule that sale of real property (capital
imposed graduated or asset)
Subject of an individual is subject to capital gains tax is the sale
to Capital
corporate income Gainsof
Taxprincipal residence.
tax
Tax Rate 0-35% 6% ofSale
GrossofSelling
principal residence
for Real (Individual) or Price or Fair Market
Property 30% ValueExemption
whichever isof certain individual from the capital gains tax on the
(Corporation) HIGHERsale or disposition of a Principal Residence.
“Ordinary Asset Always an Ordinary Asset”
Conditions: Tax rate 6/10 of 1% 15%
1. Sale or disposition of the old principal residence; Net capital gain
2. By natural persons – citizen or resident alien individual Tax base Gross selling price (Selling price less
taxable under Sec. 24 of the Code (does not include an Cost)
estate or a trust);
● Gains derived by
3. The proceeds of which is fully utilized in (a) acquiring or (b) dealers in
constructing a new principal residence within eighteen (18) securities
calendar months from date of sale or disposition; ● Gains which are
4. Notify the Commissioner within thirty (30) days from the specifically
date of sale or disposition through a prescribed return of his exempt from
Exceptions -
intention to avail the tax exemption; income tax
5. Can only be availed of only once every ten (10) years; under existing
6. The historical cost or adjusted basis of his old principal investment
incentives and
residence sold, exchanged or disposed shall be carried over
other special
to the cost basis of his new principal residence.
laws.
7. If there is no full utilization, the portion of the gains
Changes made in TRAIN Law
presumed to have been realized shall be subject to capital
● Increase the rate of capital gains tax on sale of stock
gains tax.
transaction that is not listed/traded in the local stock
exchange from 5-10% graduated rates to a flat rate of
● Sale of principal residence is subject to CGT, if the sale
15% with regards to individual taxpayers and domestic
is made not for the purpose of buying a new principal
corporations only.
residence.
● While the tax rate for sale of stock transaction
In case a real property is sold in installment (initial payment traded/listed in the local stock exchange is
not exceeding 25% of the contract price) wherein the initial increased from ½ of 1% to 6/10 of 1%.
payment was paid in cash and the balance in the form of
(i) Long Term Capital Gain Vis-À-Vis Short Term
interest bearing promissory notes and the seller discounted
the promissory notes in the year of sale, the entire gain on Capital Gain
the sale must be reported in the year of sale
Long Term Capital Gain – if the asset sold or exchanged is
(Bañ[Link],[Link].102967,February 10, 2000).
held for more than 12 months
Thus, where an installment obligation is discounted at a
Short Term Gain – if the asset sold or exchanged is held for
bank or finance company, a taxable disposition results,
12 months or less
even if the seller guarantees its payment, continues to
collect on the installment obligation, or handles
100% of the short term gain is considered in the computation
repossession of the property in case of
of taxable income, while only 50% of the long term capital gain
default. Although the proceeds of a promissory note is not
is taken into account.
considered initial payment, still it must be included as
taxable income in the year it was converted into cash.
(ii) Net Capital Gain, Net Capital Loss
(2) Dealings in shares of stock of Philippine corporations
Net Capital Gain – The excess of the gains from
sales/exchanges of capital assets over the losses from such
In order for a sale of share of stock to be subjected to capital
sales/exchanges.
gains tax of 15% such share of stock must be not be listed
and traded in the local stock exchange.
Net Capital Loss – The excess of the losses from sales or
Listed and Not listed and exchanges of capital assets over the gains from such sales or
Traded in the traded in the exchanges.
Stock Exchange Stock
(iii) Income Tax Treatment of Capital Loss
Exchange
Stock transactions
Tax effect Capital gains tax
tax
a. Capital Loss Limitation Rule (Applicable to Both c) 20% Final Tax on interest on ANY currency deposit, yield or
Corporations and Individuals) other monetary benefits from deposit substitute, trust
fund and similar arrangement.
General Rule: Capital losses are allowed only to the extent of
capital gains; hence the net capital loss is NOT deductible. Changes made in TRAIN Law
● Increase final tax on interest income on foreign currency
Exception: If a domestic bank or trust company, a substantial deposit from 7.5% to 15% only with regards to
part of whose business is the receipt of deposits, sells any bond, individual resident citizen/ resident alien but not as to
debenture, note or certificate or other evidence of indebtedness Resident Foreign Corporations which tax rate remained
issued by any corporation (including one issued by a at 7.5%
government or political subdivision), any loss shall not be
included in determining the applicability of the limitation. b. Dividends

b. Net Loss Carry-Over Rule (Applicable Only to 1. Any distribution made by a corporation to its shareholders out
Individuals) of its earnings or profits and payable to its shareholders,
whether in money or in other property. (Sec. 73 (A) of NIRC)
If any taxpayer, other than a corporation, sustains in any Kinds of Dividends and how they are taxed
taxable year a net capital loss, such loss (in an amount not in
excess of the net income for such year) shall be treated in the a. Cash dividends
succeeding taxable year as a loss from the sale or exchange of Declared by:
a capital asset held for not more than 12 months.
Domestic Foreign
The rule on net capital loss carry-over for the next Corporation Corporation
succeeding year applies only to individuals. Individuals:
RC, NRC, RA 10% (Sec.24A) 0-35% (As
2. Passive Income
amended by
Income in which the taxpayer earns income with little or no NRA-ETB 20% (Sec.25A2) TRAIN

effort which includes, but is not limited to: a. Interest 25% on gross 25% on gross
NRA-NETB income income
a) Interest derived from sources within refers to interest earned (Sec.25B) (Sec.25B)
from deposits on banks located in the
Corporations:
Philippines (location of the bank),
30% (Sec.
Exempt;
b) Interest under foreign currency deposit system 32[A] of the
Inter-corporate
NIRC); subject
DC dividends
Foreign currency deposit system is a deposit of foreign to applicable
(Section 27[D]
treaty
currency in a Philippine Bank of the NIRC)
provisions
● 15% Final Tax if received by a resident citizen/
resident alien or domestic corporation Exempt [Section
RFC
28(A)(7)(D)]
● Exempt if deposited by an OCW or Seaman or Non – General rule:
resident citizen 30% FWT
Exceptions:
● Tax sparing
50% taxable subject to 15% Final Tax if joint account with -
rule: 15%
OCW/Seaman/ Non –resident NRFC
● Preferential
citizen and spouse who is a resident citizen tax rate
under the
treaty
provision
Tax sparing rule:
 15% tax on dividends; subject to the condition that the property between the corporation and the
country in which the stockholder.

nonresident foreign corporation is domiciled shall allow a Royalty Income

credit against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the It is the payment for the use and exhaustion of property such
Philippines equivalent to 15% (Sec. 28(B)(5), NIRC)(CIR vs. as earnings from copyrights, patents, trademarks, formulas and
Procter and Gamble,G.R. No. 66838, December 2, 1991). natural resources under lease.

b. Stock dividend (1) If derived from sources outside the Philippines –

included in the gross income subject to income tax;
General Rule
(2) If derived from sources within the Philippines – subject to
Not subject to tax because it does not constitute income; it final withholding tax.
represents transfer of surplus to capital
account. (Sec. 73[B] of the NIRC) However, a distinction must be made also if such royalty
income is either:
Exceptions: a. Passive royalty income –subject to Final Tax of such
as royalty income from:
1. Under Sec. 73(B) when the following concur:
For Individuals:
a. There is redemption or cancellation of shares of stock.
b. The transaction involves stock dividends, and Resident Citizens (RC)/ Non – Resident Alien Engaged in
c. The “time and manner” of the transaction makes it Trade or Business (NRA – ETB)
“essentially equivalent to a distribution of taxable ● Royalty from literary and musical compositions -
dividends” (CIR vs. CA, CTA & ANSCOR, [Link]. 108576, 10%
January 30, 1999). ● Other royalty fees – 20%
Non – Resident Alien Not Engaged in Trade or Business
2. The recipient is other than the shareholder (Brachrachvs. (NRA – NETB) – 25%
Seifert, G.R. No. L-2659, October 12, 1950).
For Corporations:
3. Change in the stockholder’s equity results by virtue of the ● Domestic Corporations and Resident Foreign
stock dividend issuance. Corporation - 20%

c. Property dividend ● Non – resident Foreign Corporation 30% subject to

provisions of the property
Dividends given other than cash shall be subject to final tax
similar to cash dividends, i.e., 10%. (Sec. b. Active royalty income –subject to graduated/ 8%
24 [B][2] of the NIRC) income tax for individuals or normal/minimum
corporate income tax for corporations.
d. Liquidating dividend
4. Prizes and winnings
When a corporation distributes all of its assets in complete Prizes and winnings ABOVE Php10,000.00 including PCSO Lotto
liquidation or dissolution, the gain realized or loss sustained Winnings is subject to 20% Final Tax.
by the stockholder, whether individual or corporation, is
taxable income or deductible loss, as the case may be Those prizes and winnings which are Php10,000 and below is
(Section 73[A],NIRC). subject to Normal/Graduated Tax.
Changes made in TRAIN Law
A liquidating dividend is not a dividend income. The ● Included PCSO Lotto winnings above Php10,000 to be
transaction is considered a sale or exchange of taxed at final tax of 20% which was previously exempt.
Gross Income subject to Normal Tax b. Lease of real property

The following income, but not limited to this list, is subject to Amount or compensation paid for the use or enjoyment or
Normal Tax: real property.

1. Rentals and royalties (active) – Rentals and royalties b. Tax treatment of:
from property located in the Philippines or from any interest
in such property, including rentals or royalties for: (i) Leasehold Improvements by Lessee

(a) The use of or the right or privilege to use in the Method of reporting the value of permanent improvements
Philippines any copyright, patent, design or model, plan, introduced by the lessee:
secret formula or process, goodwill, trademark, trade, ▪ Outright method – recognized as income to lessor at the
brand or other like property or time when such buildings improvements are completed at
right; fair market value.

(b) The use of, or the right to use in the Philippines any ▪ Spread-out method – the lessor spread over the life (or
industrial, commercial or scientific equipment; remaining period) of the lease, the estimated depreciated
value of such buildings or improvements at the termination
(c) The supply of scientific, technical, industrial or of the lease and report as an income for each year of the
commercial knowledge or information; lease, an aliquot part thereof.

(d) The supply of any assistance that is ancillary and (ii) VAT Added to Rental/Paid by the Lessee
subsidiary to, and is furnished as a means of enabling
the application or enjoyment of, any such property or The amount of the VAT in a VATable lease which the lessor
right as is mentioned in paragraph (a), any such passed on to the lessee does not form part of the rental
equipment as is mentioned in paragraph (b) income of the lessor, since such amount is to be paid by the
or any such knowledge or information as is mentioned in lessor as output VAT on the sale of leasing services to the
paragraph (c); BIR.

(e) The supply of services by a nonresident person or his

employee in connection with the use of property or (iii) Advance Rental/Long Term Lease
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased General rule: Accrual method will apply; taxable when earned
from such nonresident person; and not when the payment is received

(f) Technical advice, assistance or services rendered in Exception: Received under a claim of right and without
restriction as to its use
connection with technical management or
administration of any scientific, industrial or commercial ▪ Security deposit applied to the rental of the terminal month
or period of contract must be recognized as income at the
undertaking, venture, project or scheme; and
time it is applied and not at the time paid.
(g) The use of or the right to use: ▪ If security deposit is to ensure contract compliance, it is not
(i) Motion picture films; income to the lessor until the lessee violates any provision
of the contract.
(ii) Films or video tapes for use in
connection with television; and(iii)
2. Sale of real property – gains, profits and income from sale
Tapes for use in connection with
of real property located in the
radio broadcasting.
Philippines
a. Lease of personal property
3. Sale of personal property - gains, profits and income
Amount or compensation paid for the use or enjoyment of
from sale of personal property located in the Philippines
a personal property.
4. Income from Business e. Exclusions and exemptions
Gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and long term 1. Rationale
construction contracts.
▪ They represent return of capital or are not income, gain or
5. Income from Profession profit.
Fees derived from engaging in an endeavor requiring special
training as a professional as a means of livelihood, which i. Exclusions Under the Constitution:
includes, but is not limited to, the fees of CPAs, doctors, lawyers,
engineers and the like. Income Derived by the Government or its Political
Subdivisions from the Exercise of any Essential
6. Compensation Income Governmental Function
Income derived from the rendering of services under an
employee – employer relationship. Income derived by the Philippine
Government or any political subdivision
7. Income from Any Source Whatever from any: a. Public utility
b. Exercise of any government function
(i) Forgiveness of Indebtedness
Consideration of the services ▪ Thus, income by the government from sources other than
performed by the debtor to Taxable (Income) those mentioned above, are subject to tax. Except: GSIS,
the creditor SSS, PHIC and LWDs.
Without any consideration Taxable (Gift) ▪ A political subdivision however may partly earn income from
Corporation forgives the debt Taxable (a) and (b) and partly
of its stockholder (Dividends)
from other sources. The political subdivision is still liable to
(ii) Recovery of Accounts Previously Written Off
pay tax for the latter income earned.
The recovery of bad debts previously allowed as deduction ▪ All assets and revenues of a non-stock, non-profit private
in the preceding year or years shall be included as part of educational institution used directly, actually, and
the taxpayer’s gross income in the year of such recovery to exclusively for private educational purposes shall be exempt
the extent of the income tax benefit of the said deduction, from taxation [Sec. 4(3), Art. XIV, Constitution].
this is otherwise known as the Tax Benefit Rule.
Note: Pursuant to Section 7 of R.A. 10963, otherwise known as
Tax Reform for Acceleration and Inclusion (TRAIN) Law, the tax
(iii) Receipt of Tax Refunds or Credit
exemption granted to PCSO was removed.
If a taxpayer received a tax credit certificate or refund for
ii. Exclusions Under the Tax Code
erroneously paid tax which was claimed as deduction from
his gross income that resulted in a lower net taxable income a. Tax-free exchanges
or a higher net operating loss that was carried over to the
succeeding taxable year, he realizes taxable income and General Rule: In a sale or exchange of property the entire
must be included in his income tax return in the year of amount of gain or loss is recognized.
receipt.
Exception:
This principle does not apply to tax credits or refunds of
erroneously paid income tax, estate tax, donor’s tax, and Tax-free exchanges refer to those instances enumerated in
special assessments since they are not deductible form Section 40(C)(2) of the National Internal
gross income. Revenue Code (NIRC) of 1997 that are not subject to
Income Tax, Capital Gains Tax, Documentary Stamp Tax
It is as a general rule that all income are taxable from whatever and/or Value-added Tax, as the case may be.
sources. There are some exceptions to such rule which are what
we call “Exclusion to Gross Income”. In summary Section 40(c)(2) are transactions that are:
 ● In a merger/consolidation where a corporation not solely for the purpose of escaping the burden of
taxation:
exchanges property SOLELY for stock in another
corporation, which is also a party to the Provided, further, that in determining whether a bona fide
merger/consolidation. business purpose exists, each and every step of the
transaction shall be considered and the whole transaction
● In a merger/consolidation, where a shareholder or series of transaction shall be treated as a single unit:
exchanges stock in a corporation for the stock of Provided, finally, that in determining whether the property
another corporation, also a party to the transferred constitutes a substantial portion of the property
merger/consolidation of the transferor, the term “property” shall be taken to
include the cash assets of the transferor.
● In a merger/consolidation, where a security holder
The term “control”, when used in this Section, shall mean
of a corporation exchanges his securities in such
ownership of stocks in a corporation possessing at least
fifty-one percent (51%) of the total voting power of all
corporation SOLELY for stock or securities in
classes of stocks entitled to vote. (Section 40(C)(6), NIRC)
another corporation also a party to the
merger/consolidation Is the transfer of properties subject to VAT and DST?

● Where property is transferred to a corporation by a No. Pursuant to Section 4.106-8(b)(3) of RR No. 16-2005, as
person in exchange for stock in the corporation and amended, no VAT shall be due on the transfer made pursuant
the result of such exchange is that the person (and to the Plan of Merger. Likewise, no DST is due on the transfer
up to 4 other persons) gains control of the in accordance with Section 199 (m) in relation to Section
corporation, but the stocks issued for services are 40(C)(2) of the Tax Code. However, DST shall be imposed on
not considered as the original issuance of shares by AAA Co. to the stockholders
issued in return for property of BBB Co. and CCC Co. as a consequence of
the merger as provided under Section 174 of the Tax Code. (BIR
Pursuant to the said section, no gain or loss shall be Ruling No. 075-2018, January 29, 2018)
recognized if:
a) the transferee is a corporation; b. Proceeds of Life Insurance Policies
b) the transferee exchanges its shares of stock for
property of the transferor; ▪ Policy are excluded if payable upon death of the insured
c) the transfer is made by a person, acting alone or whether in lump sum or monthly, except an agreement to
together with others, not exceeding four persons; pay interest between the insured and the insurer, which
and shall be included in the income tax return.
d) as a result of the exchange, the transferor, alone or
together with others, not exceeding four persons, ▪ The proceeds of life insurance policies paid to the heirs or
gains control of the transferee. beneficiaries upon the death of the insured, whether in a
single sum or installment, except if such amounts are held
Definition: by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income.
The term “merger” or “consolidation”, when used in this
Section, shall be understood to mean: (i) the ordinary ▪ Reason: Indemnity rather as gain or profit.
merger or consolidation, or (ii) the acquisition by one
corporation of all or substantially all the properties of c. Return of Premium Paid
another corporation solely for stock:
▪ The amount received by the insured, as a return of premiums
Provided, that for a transaction to be regarded as a merger paid by him under life insurance, endowment, or annuity
or consolidation within the purview of this Section, it must contracts, either during the term or at the maturity of the
be undertaken for a bona fide business purpose and term mentioned in the contract or upon surrender of the
contract.
▪ No death occurs in this case only a maturity of the term. Reason: Compensatory, not gain/profit.

▪ Only the amount of premium paid is excluded. Any income on g. Retirement Benefits, Pensions, Gratuities, Etc.
top of the said premiums which are given to the insured is
taxable. 1. Retirement benefits under R.A. 4917 where:

Reason: Return of the premium is only a return of capital and a. Retiree employed by the same employer for at least 10
is not considered income. years
b. Retiree at least 50 years old
d. Amounts Received under Life Insurance, c. Avails of the benefit only once
Endowment or Annuity Contracts d. BIR approved private benefit plan

1. Amounts received through accident or health insurance or 2. Retirement benefits under R.A. 7641 where:
under workmen’s compensation acts, as compensation for
personal injuries or sickness, plus the amounts of any a. No private retirement plan or retirement plan under the
damages received, whether by suit or agreement, on CBA/employment contract.
account of such injuries or sickness. b. Must have served the company for at least 5 years
c. Retiree at least 60 years old but not more than 65 years
2. Compensations for damages to personal or family rights, of age at the time of retirement.
damages for slander and libel, award for loss of life,
damages for injuries to the goodwill of a taxpayer’s business “CBA is a retirement plan”
unless they exceeded its cost are not taxable.
In International Broadcasting, Inc. vs. Amarilla, GR No.
3. Damages received for patent infringement, breach of 162775, Oct. 27, 2006, the Supreme Court considered the
contract or fiduciary duty and recoveries (except punitive CBA as a “retirement plan,” and as such, the retiree must
damages) under the clayton act for antitrust violations are comply with the requirements under RA No. 4917. In this
excluded from the gross income to the extent that the case, since the CBA was not registered with the BIR, the
losses to which the damages relate did not give rise to a tax retirement benefits were deemed taxable.
benefit either in recovery year or earlier tax years.
“Applicability of RA No. 7641”
e. Value of Property Acquired by Gift, Bequest,
Devise or Descent RA No. 7641 applies only in situations where: (1) there is
no CBA or other applicable employment contract providing
Gifts, Bequests, and Devises are donations because it is given for retirement benefits of an employee; or (2) there is a
gratuitously. CBA or other applicable contract providing for retirement
Reason: These are not the product of capital or industry. benefits for an employee, but it is below the requirements
set by law. (Oxales vs. Abbot Laboratories, Inc., GR
However, the income received by the donee from the said No.152991, July 21, 2008)
property/item is subject to income tax.
CBA or other employee contract providing retirement
f. Amount Received Through Accident or Health benefits to employees to be non-taxable:
Insurance Compensation for Injuries or
Sickness Refers to: If the CBA or other employee contract providing retirement
benefits to employees provides for a less or equal benefit
a. Any amount received by reason of compensation for provided under RA No. 7641, provided the requirements
personal injury or sickness through Accident or Health under RA No. 7641 are met. (BIR Ruling No. DA-151-04,
Insurance or under Workmen’s Compensation Acts. March 31, 2004)
b. Plus the amount of any damages received, whether by suit If it provides more benefits than those under RA No. 7641,
or agreement, on account of such injuries or sickness. must comply with the requirements of
c. The injury or sickness must arise from an employee – Sec. 32(B)(6)(a) of the Tax Code or RA No. 4917.
employer relationship. (Oxales,[Link]-151-04,March31,2004&
 BIR Ruling No. 068-14, February 25, 2014) they are subject to the 5% gross income tax on their gross
income earned, in lieu of all national and local taxes.
1. Monetized value of retiree’s accumulated vacation leave b. Under R.A. No. 6657
and sick leave subject to the following rules: (ComprehensiveAgrarianReformPackageLaw), gain
arising from the transfer of the agricultural property covered
a. For compulsory retirement (60 years for private corp.; under the law shall be exempt from capital gains tax for ten
65 years for government; 70 years for judiciary) – ALL (10) years.
b. For optional retirement (10 years of service and 50 c. Under R.A. No. 7653 (New Central Bank Act),
years of age) up to 10 days only while the excess of VL d. the Bangko Sentral ng Pilipinas is exempt from all national,
and SL is taxable provincial, municipal and city taxes for five (5) years.
e. Under R.A. No. 7279
2. Separation pays due to circumstances beyond the (UrbanDevelopmentHousingActof1992),the National
control of the employee. Housing Authority is exempt from all fees and charges of
any kind, whether local or national, such as income and
3. Social security benefits, retirement gratuities, pensions realty taxes.
and other similar benefits received by citizens and
aliens who come to reside permanently here from Personal Equity and Retirement Account
foreign government agencies and other institution,
private or public. Refers to the voluntary retirement account established by and
for the exclusive use and benefit of the contributor for the
4. Benefits due to residents under the laws of the U.S. purpose of being invested solely in the Personal Equity and
administered by the U.S. Veterans Retirement Account investment products in the Philippines (R.A.
Administration. 9505,Personal Equity and Retirement Account Act of 2008).

5. SSS and GSIS benefits. All income earned from the investments and re-investments of
PERA assets in PERA investment products shall be exempt from
h. Winnings, Prizes, and Awards, Including Those in income taxes provided the said PERA investment products have
Sports Competition been duly accredited by the concerned Regulatory Authority.
Moreover, income from investments and re-investments of
1. Those made primarily in recognition of religious, charitable, PERA assets in government securities is likewise exempt from
scientific, educational, artistic, literary, or civic achievement income taxes. (RMCNo.
but only if the recipient: 30-2017 in relation to RR No. 17-2011)

a. Was selected without any action on his part to enter iv. Income Exempt Under Tax Treaty
the contest or proceeding; and
b. Is not required to render any substantial future service ▪ Income exempt under tax treaty with foreign countries.
as a condition to receiving the prize or award. ▪ Premised on adherence to the generally accepted principles of
International Law.
2. Those granted to athletes in local and international sports
competitions and tournaments whether held in the Note: Not all countries have tax treaty with the Philippines.
Philippines or abroad provided sanctioned by their national
sports associations. 2. Taxpayers who may avail of the exclusions
a. Resident Citizens
iii. Exclusions Under Special Law
b. Resident Aliens
c. Non-Resident Aliens Engaged in Trade of Business
a. Under R.A. No. 7916 (PhilippineExportZoneAuthorityLaw),
d. Domestic Corporations
PEZA–registered enterprises are given income tax holidays
e. Resident Foreign Corporations
of six or four years from the date of commercial operation,
depending on whether their activities are considered as
3. Difference between Exclusions and Exemptions from
pioneer or non-pioneer; after enjoying income tax holidays,
Deductions and Tax Credits
Exclusion Exemption Deduction Tax 2. Deductions must be supported by adequate receipts or
Credits invoices (except standard deduction) 3.
Compliance with additional requirements relating to
Flow of Arbitrary Amount Amount withholding
wealth that amounts deducted deducted
is expressly allowed by from gross against
excluded law to an income. income tax b) Return
from individual Not an due which of
gro taxpayer income but reduces capital
ss income theoretically an income tax (cost of
exempted to expenditure liability sales or
by pro
service
constitution, vide
for s)
statute or
not personal
considered and Items that are closely related to the business or profession that
as income livi without which the sale would have not occurred.
ng expenses
Examples:
These items are deducted from the gross sales or receipts to
arrive at the gross income.
Proceeds Personal Itemized Amount
from life exemption Deductions withheld by
insurance (no withholding
lon agent – Gross Sales/Revenue/Receipts
ger Creditable Less: Cost of Sales or Cost of
applicable) Withholding
Services
Tax
Gross income
(4) Deductions from Gross Income Add Other income
Total Gross Income
Aside from exclusion which are not part of income to be taxed,
Sale of Inventory of Goods by Manufacturers and
our Tax Code also allows the taxpayer certain amounts to be
deducted from the gross income to arrive to the net income Dealers of Properties
which will be the basis for the taxable income to be taxed either
For a Manufacturing Concern:
at graduated tax table or corporate income taxes.
Cost of Goods Manufactured and Sold = All costs of production
Deductions from gross income refer to items which the law of finished goods, such as
allows to be subtracted from pertinent items of gross income to
1. Raw material used;
arrive at the taxable income.
2. Direct labor;
Types of deductions: 3. Manufacturing overhead;
4. Freight cost;
1. Itemized deductions in Section 34(A) to 5. Insurance premiums;
(J) and (M); 6. Other costs incurred to bring the raw materials to the
2. Optional Standard Deductions (40%) under Sec. 34(L); factory or warehouse.
F
3. Special deductions in Sections 37 and 38 of the NIRC, and o
in special laws like the BOI law (E.O. 226). r
t
a) General Rules in Claiming Deductions r
a
1. Deductions must be paid or incurred in connection with d
the taxpayer’s trade, business or profession; i
n
g 1. Invoice cost of the goods sold;
o 2. Import duties;
r 4. Freight in transporting the goods to the place where the goods
m are actually sold including insurance while the goods are in
e transit.
r
c Sale of Services - means the performance of all kinds of
h services in the Philippines for other for a fee, remuneration, or
a consideration. (Section 108, NIRC)
n
d Cost of Services - All direct costs and expenses necessarily
i incurred to provide the services required by the customers and
s clients including:
i
n a. Salaries and employee benefits of personnel, consultants
g and specialists directly rendering the service;
c b. Cost of facilities directly utilized in providing the service. It
o shall not include interest expense except for banks and other
n financial institutions.
c
e ▪ Gross income excludes passive income subject to final tax.
r
n Other income and Extraordinary Income are included since
C RR 9-98 provides that gross sales include sales
o contributory to income taxable under the regular corporate
s tax
t
o c) Itemized deductions:
f
G These are items that are deductible form the gross income
o which are incidental in carrying out a business.
o Gross Sales/Revenue/Receipts
d
Less: Cost of Sales or Cost of
s
Services
S
o Gross income
l Add Other income
d
Total Gross Income
s
h Less: Allowable Deductions
a (Itemized)
l Taxable Income
l Requisites to be Deductible:
i
n 1. It must be ordinary and necessary Expenses.
c
l Ordinary Expenses – normal or usual in the line of business.
u They are directly attributable to, the development,
d management, operation and/or conduct of the trade, business
e or exercise of a profession of the taxpayer.
:
Necessary Expenses – appropriate and helpful in the evidence, it is the duty of the BIR to make an estimate of
development of taxpayer’s business. deduction that may be allowed. (RMC 23-2000).

▪ It must be reasonable.
▪ Not contrary against law, public policy or public morals 6. If subject to withholding taxes, proof of payment to BIR

2. Paid or incurred within the taxable year. ▪ Any amount paid or payable which is otherwise deductible
▪ Cash Basis Method – deducts expenses in the year in from, or taken into account in computing gross income or
which they are paid for which depreciation or amortization may be allowed
▪ Accrual Basis Method – recognizes expenses in the year under this Section, shall be
they accrue or when incurred not when paid. allowed as a deduction only if it is shown that the tax
required to be deducted and withheld
3. Paid or incurred in carrying on a trade or business. therefrom has been paid to the BIR. (Sec. 34[K] ofthe NIRC)

4. Directly attributable to the development, management, The provision under RR No. 12-2013 stating that no
operation and/or conduct of business or exercise of deduction will be allowed notwithstanding the payments of
profession, including the following reasonable allowance. withholding tax at the time of audit investigation or
reinvestigation / reconsideration in cases where no
5. Substantiated with sufficient evidence, such as official withholding tax was made. Hence, the provisions under RR
receipts or other adequate records. No. 14-2002 as amended by RR No. 17-2003 were
reinstated wherein any income payment which is otherwise
Cohan Rule deductible under the Code shall be allowed as a deduction
from the payor's gross income only if it is shown that the
If there is a showing that expenses have been incurred but the income tax required to be withheld has been paid to the
exact amount cannot be ascertained due to lack of documentary Bureau in accordance with Secs. 57 and 58 of the Code (RR
No. 6-2018, January 19, 2018)
FRINGE BENEFIT May be subject to Subject to
regular income tax rates Fringe Benefit Tax
Definition — Any goods, services or benefits for individuals using the
furnished or granted in cash or in kind by an employer to an graduated tax table if it‘s
individual employee, in addition to basic salaries, except a rank 13th Month and other
and file employee. benefits has already
(Sec 2.33 (B), RR (3.98)) exceeded the
Php 90,000 limit.
Fringe Benefit Who pays for the tax?
Given to Rank and Given to Managerial The EMPLOYEE pays for EMPLOYER pays for the
File Employees and Supervisory the tax which will be tax
employees withheld from the
Part of Compensation Income ? employee‘s
compensation
Part of employee‘s Not part of taxable
compensation income compensation income Classification of employees for tax
treated as other benefit. subject to graduated tax purposes:
rates.
Supervisory employees – are those who recommend
Subject to What Tax? managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of
independent judgment.

Managerial employees – those who are given the powers or

prerogatives to lay down and execute management policies
and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees.
Rank and file employees – are those i. Expenses incurred by the employee but which are paid
employees who are neither managerial nor by his employer but is duly receipted and is under the
supervisory employees. Rank and file employees are not name of the employer;
subject to Fringe Benefit Tax. ii. Expenses paid by the employee but reimbursed by
employer but is duly receipted and is under the name of
Fringe benefits subject to fringe benefit tax (FBT) : the employer. (R.R. 3-98)

1. Expenses of Foreign travel Expense Duly Subject

receipted and to FBT
When subject to FBT: under
i. When no documentary evidence is shown that the employee‘s employer‘s
travel was in connection with business meetings or name
conventions Expense of the No Yes
employee
What amount is subject to FBT whether paid or
a. 30% of the cost of the first class airplane tickets reimbursed by
b. Lodging cost in a hotel or the employer
similar
establishment in excess of $ 300
Expense of the Yes No
c. Travel expenses paid by the employer for the family employee
members of the employee whether paid or
(BANGAWAN, Income Taxation, p. 374) When NOT reimbursed by
subject to FBT: the employer
i. Foreign travel is in line with the trader or business.
ii. Inland travel expenses such as food, beverages and local Personal
expenses by the Regardless Yes
transportation.
employee
iii. Lodging cost in a hotel or similar establishment amounting
to an average of To summarize:
$ 300 or less iv. Cost of economy or business class airplane
tickets
v. 70% of the cost of the first class airplane tickets

To summarize:
Travel Expense Subject to FBT
Inland Travel Expense No
Lodging cost in hotel or Yes, only if cost exceeds
similar establish $300
Travel expenses for Yes
family members
Airline tickets:

Economy or No
business class
First class Yes up to 30% of the
cost of the ticket 3. Educational assistance to the employee or his dependents.
2. Expense account
When NOT subject to FBT:
When subject to FBT:
Educational Educational
i. Expenses incurred by the employee but which are paid assistance to assistance to
by his employer; employee dependents
ii. Expenses paid by the employee but reimbursed by
1. Study is directly
employer; and connected with
iii. Personal expenses of the employee paid for or employer‘s trade or
reimbursed regardless the fact it is duly receipted and business and
is under the name of the employer. (R.R. 3-98) Assistance was
When NOT subject to FBT: provided through a
 2. There is a written competitive
contract that the scheme
employee shall
remain employed with
the employer for a
period mutually
agreed upon by the
parties.
4. Life or health insurance and other non-life insurance
premiums.
 When NOT subject to FBT:

a. Cost for the premiums borne by the employer for group

insurance of employees.
b. Cost of contributions of the employer for the benefits of
the employee to the SSS, GSIS and similar contributions
arising from the provisions of law.
i. Voluntary contributions in excess of
the mandatory are taxable. (R.M.C
27-2011)

5. Housing

When subject to FBT:

i. Employer leases a residential property for use of the
employee;
ii. Employer owns a residential property and assigns the
same for use by the employee;
iii. Employer purchases a residential property on
installment basis and
allows the use by employee;
iv. Employer purchases a residential property and
transfers ownership to the employee;
v. Employer provides a monthly
amount for the employee to pay his landlord.(R.R. 3-
98)

When NOT subject to FBT:

i. Housing privileges of military officials of the AFP
consisting officials of the Philippine Army, Philippine
Navyand
Philippine Air Force; ii. Housing unit which is situated
inside or adjacent (i.e. the unit is located within a maximum
of 50 meters from the perimeter of the business premises)
to the premises of a business or factory; and
iii. Temporary housing for an employee who stays in a
housing unit for three months or less. (R.R. 3-98)

6. Interest on loans

When subject to FBT:

i. When the employer interest free interest loans or at less than
market rate to the extent of the difference between the
market rate and the actual rate granted
7. Membership fees, dues and other expenses borne by the exceed ninety thousand pesos (₱ 90,000), which may
employer for the employee in social and athletic clubs, and be increased through rules and regulations issued by the
similar Secretary of
organizations Finance, upon recommendation of the
8. Vehicle of any kind. Commissioner, after considering among others, the effect on the
same of the inflation rate at the end of the taxable
When subject to FBT: year.(Sec.6,[Link].
i. Employer provides a car to the employee under his 11-2018) iii. De Minimis Benefits
name either by:
a. purchasing in full payment or in installment, or These facilities or privileges furnished to employees that are of
b. providing cash for the purchase vehicle in employee‘s relatively small value and are offered or furnished merely as a
name or means of promoting heath, goodwill, contentment or efficiency
c. shouldering a portion of the purchase price of employees. Applicable to all types of employees, whether
ii. Employer either owns or leases a fleet of motor vehicle Supervisory, Managerial or Rank and File.
for use of the business and the employee
iii. Use of yacht whether owned and maintained or leased The following are the de minimis benefits, as amended
by the employer by the TRAIN LAW (M3R. DALEGUC)
(CASASOLA, NIRC (2013), p 267-269)
1. Monetize
9. Household personnel (maid or driver) d unused
vacation
When subject to FBT: and sick
a. Salaries of household help, personal drivers of the leave
employee or credits
b. Other similar personal expenses like payment of paid to
homeowner‘s association dues governm
ent
10. Holiday and vacation expenses officials
and
Note: The manner and procedure for the tax on fringe benefits employe
or Fringe Benefit Tax shall be discussed in Withholding Taxes es;

ii. 13th month Pay and other benefits The number and nature (both vacation and sick leave) of
not exceeding Php 90,000 monetized unused leaves is NOT subject to any
limitations for employees of the GOVERNMENT officials
a. Thirteenth month pay equivalent to the mandatory one (1) and employee.
month basic salary of official and employees of the
government (whether national or local), including 2. Monetize
government-owned or controlled corporations, and/or d unused
private offices received after the twelfth month pay; and vacation
b. Other benefits such as Christmas bonus, productivity leave
incentives, loyalty award, gift in cash or in kind, and other credits of
benefits of similar nature actually received by officials and private
employees of both government and private employe
offices, including the Additional es not
Compensation Allowance (ACA) granted and paid to all exceedin
officials and employees of the National Government g 10
Agencies (NGAs) including State Universities and Colleges days
(SUCs), Government-Owned and/or during the year;
Controlled Corporations (GOCCs), Government Financial
Institutions (GFIs) and Local Government Units (LGUs).
Only monetized unused VACATION
LEAVE credits not exceeding days are non – taxable.
The above stated exclusions under (a) and (b) shall cover Monetized unused SICK
benefits paid or accrued during the year, provided that the total LEAVE credits shall be taxable
amount shall not
 with Special Topics in Taxation, 2018, p.18) or one
Non taxable unused 50-kg
Employee monetized leave sack of
Limit rice per
of: Sick
Vacation month
Leave
Government None worth
Yes Yes on not more
both than
Private Up to P2,000;
Sector 10 5. Uniforms
Yes No
days and
only cloth
rega ing
rdle allow
ss of ance
day not
s for exceedin
emp g P6,000
loye per
es annum;
of 6. Actual
the medi
PRI cal
VAT assistanc
E e not
SEC exceedin
TOR g
. P10,000
per
annum;
7. Laundry
allowanc
e not
exceedin
g P300
per
month;
8. Employe
es‘
achieve
3. Medical ment
cash awards,
allowanc which
e to must be
depende in the
nts of form of
employe tangible
es, not personal
exceedin property
g P1,500 other
per than
employee per semester or P250 per month; cash or
4. Rice gift
subsidy certificat
of es, with
P2,000 an
 annual m wage;
mon and
etary
value If
not t
exce h
eding e
P10,000 g
received r
by the a
employe n
e under t
an o
establish f
ed m
written e
plan a
which l
does not a
discrimin l
ate in l
favor o
of w
highl a
y paid n
employees; c
9. Gifts e
given w
during a
Christma s
s and n
major o
annivers t
ary f
celeb o
rations r
not o
exce v
eding e
P5,000 r
per t
employe i
e per
m
annum;
e
10. Daily
w
meal
o
allowanc
r
e for
k
overtime
o
work and
r
night/gra
n
veyard
i
shift not
g
exceedin
h
g 25% of
t
the basic
/
minimu
g o
r d
a g
v i
e n
y g
a f
r u
d r
s n
h i
i s
f h
t e
S d
H f
A o
L r
L t
B h
E e
S ―
U a
B d
J v
E a
C n
T t
T a
O g
I e
N o
C r
O c
M o
E n
TAX. (R.R.5-2011) v
e
n
M i
e e
a n
l c
a e
l o
l f
o t
w h
a e
n e
c m
e p
a l
n o
d y
l e
r m
ǁ i
s s
h e
a s
l o
l f
b t
e h
e e
x e
e m
m p
p l
t o
f y
r e
o r
m .
t (
a T
x A
. B
M A
e G
a ,
l I
s n
h c
o o
u m
l e
d T
b a
e x
f a
u t
r i
n o
i n
s 11. Benefits
h received
e by an
d employe
w e by
i virtue of
t a
h Collectiv
i e
n Bargaini
t ng
h Agreeme
e nt (CBA)
p and
r producti
e vity
 incentive semester;
schemes The rice subsidy was increased from
,
provided P
the total 1
annual ,
monetar 5
y value 0
received 0
from t
both CBA o
and P
producti 2
vity ,
incentive 0
schemes 0
combine 0
d do not p
exceed e
P10,000 r
per m
employe o
e per n
taxable t
year. h
;
The a
enumeration n
of De Minimis d
Benefits is The
exclusive. c
(Section 2, l
RR-2011, May o
11, 2012) t
h
Changes Made in TRAIN Law: i
The n
g
medi
a
cal l
cash l
o
allow
w
ance a
was n
c
incre
e
ased w
from a
P750 s
i
to n
P1,5 c
00 r
e
per
a
 s an
e em
d ploy
f er
r shal
o l
m for
P m
4 part
, of
0 com
0 pen
0 sati
t on
o inco
P me
6 subj
, ect
0 to
0 gra
0 dua
p ted
e rate
r s
a but
n only
n to
u the
m am
. oun
De minimis Benefits Fringe Benefits tin
the
Benefits given exc
ess
Subject to limitations of No limitations as to of
amounts amount ceili
ng
Exclusivity of the List
pre
List is exclusive Any benefits can be scri
treated as fringe bed
if
What give
happens n to
when the ran
given de k
minimis and
benefits file
exceeds the em
prescribed ploy
limit? ee
or if
De wer
min e
imis give
gra n to
nte ma
d by
 Productivity 15,000
Incentive
Bonus

Laundry 6,000 3,600 2,400

allowance
TRank and file Excess will
Rice 36,000 24,000 12,000 form part
allowance of
13th
Uniform 10,000 6,000 4,000
allowance month pay
a
Total 13th 93,400 nd
month other
and other benefit
benefits and any
excess
Less :Non (90,000) from the
Taxable Php
13thmonth 90,000
and other limit shall
benefit be taxable
under
Taxable 13th Php 3,400 regular
month and income
other benefit tax rates

nag
eria
l or
sup
ervi
sory
em
ploy
ees,
the
exc
ess
will
be
subj
ect
to Managerial Excess
frin amount is
ge and subject to
ben Supervisory Fringe
efit Benefit
Tax
tax.
(R. Benefit Amount Limit Amount of
M.C 13th month
No. and other
5- benefit
201
13th month Php 30,000
1)
Pay

14th month 30,000

pay

Illustration:
 Laundry 6,000 De minimis
allowance, Php benefit
500 per month for
12 months
(limit is only Php
Mr. Productivity
300 per month or
Juan, Incentive Bonu
Php 3,600 per
a
year)
rank ▪ As can be seen in the above computation, with regards to the
and Rice 36,000 De minimis de minimis benefits given only the excess of the limit was
file Allowance benefit credited as part of 13th month pay and other benefit which
, Php 3,000 per is reclassified as
month for 12 ―other benefit.ǁ
months (limit is
only Php 2,000 or What is the tax implication on the excess?
Php 24,000 per
Mr. Juan being a rank and file employee, the excess shall
year)
form part of his taxable
Uniform 10,000 De minimis
compensation income subject to regular income tax rates
allowance benefits
together with all other taxable compensation income.
(limit Php
6,000)
Total Php112,000
Benefits Given

employ
ee,
during
2019
Comput
was e for
given the
the taxable
followin portion
g of the
benefit benefit
s: s
givens,
if any.

Solution:

Compensation Amount Classification

13th Month Pay Php30,000 13th month

14th Month Pay 30,000 Other Benefit

 Whe uded
n :
excl
Supposing, Mr. Juan is a manager, what will or by his heirs;
i. Received from the employer;
be the tax implication on the excess? It was received as a consequence of the separation of such
official or employee from the service of the employer by reason
ii. of:
Mr. Juan, being a managerial employee, such
a. Because of death, sickness and/or other disability; or
iii. excess shall be treated as fringe benefit subject to fringe
b. For any caused beyond the control of
benefit tax.
such official or employee. (Sec. 32
iv. Convenience of the Employer Rule [B][6][b] of NIRC)
The phrase ―any caused beyond the controlǁ connotes
Benefit given to the employee but proves to be more involuntariness on the part of the official or employee. The
advantageous to the employer. separation from service of the official or employee must not
be asked
Such as a housing unit which is situated inside or
or initiated by the employee (Sec.2
adjacent (i.e. the unit is located within a maximum
[B], R.R. No. 12 - 1986 )
of 50 meters from the perimeter of the business
premises) to the premises of a business
or factory;

v. Amount Received Through Accident or Health

Insurance Compensation for
Injuries or Sickness:

a. Any amount received by reason of

compensation for personal injury or sickness through
Accident or Health Insurance or under
Workmen‘s Compensation Acts.

b. Plus the amount of any damages received, whether

by suit or agreement, on
account of such injuries or sickness.
c. The injury or sickness must arise from an employee –
employer relationship.

Excluded Damages arising from personal injuries

and sickness:
▪ Actual and compensatory damages
▪ Moral, nominal, temperate or moderate, liquidated

Punitive damages or exemplary damages are taxable

within the broad concepts of gross income (Glenshaw
glass vs. CIR, 75 US 473)

Compensation for lost profits is taxable.

(DOMOMDON)

Reason: Compensatory, not gain/profit.

vi. Separation Pay due to death

sickness or other disability or any other cause
beyond the control of the employee
or the official

Amount is received by an official, employee

Corporations for Tax Purposes e. Usually, there is a single transaction.
(MAMALATEO, Income Tax, p.41-42)
The term Corporation shall include: (J2AP)
Kinds of Corporation and Tax implication:
1. Partnerships not matter how created or organized;
2. Joint stock corporation; i. Domestic
3. Joint accounts (cuentasen participation)
4. Associations or Insurance Companies Corporations (DC) Definition

The term Corporation shall not include: A corporation created or organized in the
1. General Professional Partnership (GPP) Philippines or under its laws. (Sec. 27 of NIRC)

Definition Coverage

Partnerships formed by persons for the sole purpose of Taxed on TAXABLE INCOME fromits income from source
exercising their common profession, no part of the income within and without.
of which is derived from engaging in any trade or
business. ii. Foreign

2. Joint venture or corporation formed for the purpose of Corporation (FC)

undertaking :
a. Construction projects or, Definition
b. engaging petroleum, coal, geothermal, and other
energy operations A corporation is one which is not a domestic corporation (Sec.
c. pursuant to an operation or consortium agreement 22[D] of NIRC).
under a service contract with the government (Sec.
22(B) of NIRC) Foreign corporations could either be:
a. Resident Foreign Corporations
Definition (RFC) Definition
A corporation which is not domestic and engaged in trade or
It has been generally understood to mean an organization business in the Philippines. (Sec. 22[H] of NIRC).
formed for some temporary purpose.
([Link], Coverage
G.R. No. 148187, April 16,2008) What
Taxed on TAXABLE INCOME fromits income from source within
constitute a joint venture: and without.

A joint venture is: ―Doing Businessǁ

a. Each party making a contribution, not necessarily
capital but by way of services, skill or knowledge, ▪ In order that a foreign corporation may be regarded as
material or money; b. Profits must be shared doing business within a State, there must be continuity
among the of conduct and intention to establish a continuous
parties; business, such as the appointment of a local agent, and
c. Profit must be a joint proprietary not one of a temporary character.(CIRvs.
interest BritishAirwaysOverseasCorp.,[Link].
d. Right of mutual control over the subject L
matter or enterprise
 - 10% of improperly
accumulated earnings
[Link] tax on passive
income

-65773-74, April 30,1987)

▪ The phrase ―doing businessǁ shall include soliciting orders,
service contracts, opening offices, whether called
―liaisonǁ offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more;
participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the RFC Within Phil 1. NCIT
Only - 30% on Net Income
Tax Rates: 2. MCIT
30% 2% of gross income, if
effective MCIT applies
January 1,
3. GIT (Optional
2009
Corporate Income Tax)
Tax Base: 15% of gross income,
Net taxable if qualified
income [Link] tax on passive
income
[Link] from
deposits and yields and
royalties
[Link] gains from
sale of shares not
traded in the stock
exchange
[Link] derived
under the Expanded
Foreign Currency
Deposit System
[Link]-corporate
dividends
[Link] profit
remittance tax
Non – Within Phil 30% on Gross
Resident ONLY Income(GI)
Foreign
Corporation
Phil er
ippi act
nes or
; act
an s
d tha
an t
y im
oth ply
a me
con of
tin the
uit fun
y ctio
of ns
co nor
m ma
me lly
rcia inci
l de
de nt
alin to,
gs an
or d in
arr pro
an gre
ge ssi
me ve
nts pro
, sec
an uti
d on
con of,
te co
mp m
lat me
e rcia
to l
tha gai
t n
ext or
ent of
the the
per pur
for pos
ma e
nce an
of d
act obj
s ect
or of
wo the
rks bus
, or ine
the ss
exe org
rcis ani
e zati
of on.
so (Se
 c.3 s with
[d]
the
orR
.A. Philippi
70
nes.
42,
For (Sec.
eig 22[I] of
n
Inv NIRC)
est Cover
me
nts age:
Act
) Taxed on GROSS INCOME from income sourced
within the Philippines
b. Non -
Resident Income Taxation on Corporations
Foreign
Corporati Kinds Coverage Imposition of Tax
on
(NRFC) DC Within and 1. NCIT
Without - 30% on Net Income
Definition Tax rates: Phil 2. MCIT
30% (Global)
effective - 2% of gross
A income,if MCIT applies
January 1,
foreign 2009 [Link] (Optional
Corporate Income Tax)
corpora Tax Base: - 15% of gross
Net taxable income,if qualified
tion not
income. [Link]
engage Accumulated Earnings
d in Tax

trade
or
busines

● RCIT - Regular Corporate Income Tax a. Domestic Corporations

● MCIT - Minimum Corporate Income Tax i. Taxation - in general
● GIT – Gross Income Tax (a) Regular Corporate Income Tax (b) Minimum
Corporate Income Tax b. Resident foreign
Common Tax Provisions for Domestic and Resident corporations
Foreign Corporation i. Taxation - in general
(a) Regular Corporate Income Tax
This section will cover the following items in the 2020 Tax law (b) Minimum Corporate Income Tax
bar syllabus:
(a) Regular Corporate Income Tax
6. Income Tax on Corporations
 Taxable Income Php 350,000

(RCIT) An income tax of thirty percent (30%) shall be imposed (See discussion on Deductions under B.3.4)
upon the taxable income derived during the taxable year.
Step 2. Multiply the RCIT Rate of 30% tot the Taxable
▪ Domestic Corporations - all sources within and without the Income:
Philippines
▪ RFC - all sources within the Philippines for RFC If computed using itemized deductions:
Taxable Income Php 350,000
Tax Due under Regular Corporate Income Tax (RCIT) RCIT Tax Rate 30%
How Computed: Tax Due under RCIT Php 105,000
If computed using Optional
Step 1: Compute the taxable income:
Standard Deductions:
Taxable Income - refers to the pertinent items of gross income Taxable Income Php 420,000
specified in the Code, less deductions, if any, authorized for such RCIT Tax Rate 30%
types of income by the Code or other special laws. Tax Due under RCIT Php 126,000
Gross or Net Sales Php 1,000,000 (b) Minimum Corporate Income
/Gross Receipts Tax (MCIT)
Less : Cost of Sales (350,000)
Gross Income 650,000
Add: Non -operating 50,000
income or
other taxable income IMPOSITION

Total Gross Income 700,000 Coverage DCs and RFCs

Less: Itemized (350,000) Amount to 2% of the Gross Income as
Deductions
If computed using itemized deductions:
If computed using Optional Standard Deductions (OSD):
Gross or Net Sales Php 1,000,000
/Gross Receipts
Less : Cost of Sales (350,000)
Gross Income 650,000
Add: Non -operating 50,000
income or other taxable
income
Total Gross Income 700,000
Less: Optional Standard (280,000)
Deduction (40% of
Total Gross Income)
Taxable Income Php 420,000
▪ The difference of the tax base for OSD for individuals and
for corporations are:
OSD Rate 40% of
For Individual For Corporation
Gross sales or Gross Gross Income
Receipts
(no benefit of deducting (with the benefit of
allowable deductions) deducting Cost
of
Sales/Return on Capital
only )
 (Gross
income would
mean gross
sales/receipts
less cost of
sales plus
other income
not subject
to final tax.)
When Starts on the
imposed fourth
taxable
year
following
the year in
which such
corporation
commenced
its business
operations
(date when
the
corporation
registers with
the BIR as
reflected in
its Certificate
of
Registration).
Year Tax Due MCIT/NCIT

2016 42,000.00 NCIT

2017 50,000.00 MCIT

2018 70,000.00 MCIT

2019 105,000.00 NCIT

*This is the tax due whenever the amount of
MCIT is greater than the Normal Corporate
A
Year MCIT (2% of NCIT (30%
GI) of NI)
2016 40,000.00 42,000.00
2017 50,000.00 48,000.00
2018 70,000.00 60,000.00
2019 80,000.00 105,000.00
be opposed to : Income Tax
imposed normal (NCIT) due from
corporate such corporation
income tax determined under
which is Sec. 27[A].
imposed on
the taxable Example:
income.
X X
Com Company
pany, had the
Dom following
estic gross
Corp income
oration, and net
incorporate income for
d and from
registered 2016-
with the BIR 2019:
in 2012. Year Gross Net Income
When would Income (GI) (NI)
X Company 2016 2,000,000 140,000
be liable to 2017 2,500,000 180,000
MCIT? 2018 3,500,000 200,000
2019 4,000,000 350,000
In 2016 or 4 years
Compute the MCIT and NCIT.
after it commence
its operation
(registered with
the BIR).

(a) Carry Forward of Excess Minimum Which years would have an excess MCIT and how much?
Tax (CCF-N)
▪ Any excess of MCIT over the normal income tax can be Years 2017 and 2018 with amounts of 2,000 and 10,000
carriedforward on an annual basis. respectively. This is because there is only excess MCIT if the tax
▪ The excess can be creditedagainstthe normal income tax due is MCIT for the taxable year. The excess MCIT is the
due in the next 3 immediately succeeding taxable years. difference between MCIT and NCIT for the taxable year.
▪ Any amount of the excess MCIT which cannot be credited Year MCIT (2% NCIT (30% Excess
against the normal income tax due in the next 3-year period of GI) of NI) MCIT?
shall be forfeited. 2016 40,000.00 42,000.00 Nil
2017 50,000.00 48,000.00 2,000
▪ The credit must betakeninayearwhere
2018 70,000.00 60,000.00 10,000
NCIT is greater than MCIT.
2019 80,000.00 105,000.00 Nil
Example: For 2019, how much is the tax to be paid by X Co.?

Following the example above: 93,000 (105,000 – 12,000). It is the NCIT due
How much is tax due?

A: Whichever is higher. for the taxable year of Php 105,000 less

the accumulated excess MCIT of 12,000.

Excess MCIT can be deducted from the tax due ONLY if NCIT
(30% CIT) is due the
applicable taxable year. It is an asset in the (d) Applicability of the MCIT Where a Corporation is
Company‘s books good for 3 consecutive years. Governed Both Under the Regular Tax System and a
Special Income Tax
Are excess MCIT subject to expiration?
For Domestic Corporations, the MCIT shall apply on operations
Yes. It is only good for 3 consecutive years. After covered by the regular tax system only. (R.R. 9 -98)
3 years it cannot be used even it has a balance.(Sec 27[E][2],
NIRC) Is MCIT a Tax on Capital?

(b) Relief From the MCIT under Certain The MCIT is imposed on gross income which is arrived at by
Conditions deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from
The Secretary of Finance is authorized to suspend the imposition gross sales. Clearly, the capital is not being taxed. (Chamber of
of the MCIT on any corporation which suffers losses because of: Real Estate andBuilder‘s
(Pro-Fo-Le) [Link],[Link].160756,
March 9,2010)
a. Prolonged labor dispute; Substantial losses incurred from a
labor dispute arising from a strike staged by the employees a. Domestic Corporations
which lasted for more than six (6) months within a taxable
period and which has caused the i. Taxation in general
temporary shutdown of business operation
b. Force majeure; or a cause due to an irresistible force as by (a) Regular Corporate Income Tax (RCIT)
‗Act of God‘ like lightning, earthquake, storm, flood and the (b) Minimum Corporate Income Tax
like. It shall also include armed conflicts like war or
insurgency. (See preceding discussion under Common
c. Legitimate business reverses shall include substantial ProvisionsforDomesticandResidentForeign Corporation)
losses due to fire, theft or embezzlement or for other
economic reason as determined by the Secretary of (c) Tax on Passive Income
Finance(Sec.27[E][3],NIRC)
(See detailed discussion under B. 3. vi. Income on Passive
(c) Corporations Exempt from the MCIT investment income)
(HEDS-F3)
1. Those operating as proprietary educational institutions i. Interest
subject to preferential tax of 10% on their taxable income;
(Domestic) a. From any currency bank deposit, yield, or any
2. Those engaged in hospitaloperationswhich are non-profit other monetary benefit from deposit substitutes
subject to tax at 10% on their taxable income; (Domestic) and from trust funds and similar arrangements
derived from sources within the Philippines: -
3. Those engaged in business as depository banks under the
20%
expanded foreign currency deposit system subject to final
income tax at
b. Interest from foreigncurrency
10% of such income; (Domestic)
depositary units -15%
4. Firms that are taxed under aspecialincome
taxregimesuch as those in accordance with RA 7916 and
7227 (ThePEZAlawandthe Bases Conversion Development ii. Dividends
Act, respectively).
5. Resident foreign international carrier ● From Domestic and Resident Foreign
6. Resident foreign offshore banking units Corporations – Exempt
7. Resident foreign ROHQ ● From Foreign Corporations – subject to
 RCIT or NCIT iii. Royalty income – members who would then have to pay the income tax due on
such dividends received by them.
20% ([Link].,[Link]. L-29485, November
21,1980)
(d) Tax on Capital Gains
The tax which is essentially a penalty tax is imposed for each
([Link] from dealings in taxable year in addition to the other income taxes imposed on
property) corporations.

To summarize: Note: With the additional tax, corporations will be compelled

to distribute corporate gains or earnings not necessary in the
a. Income from sale of shares of stocks of a Philippine business to stockholders in the form of dividends which are now
Corporation -15% of net taxable.
capital gain
Presumptions of Improper Accumulation
b. Income from sale of land and/or
buildings There is prima facie evidence of a purpose to avoid the tax upon
its shareholders where: (1) The corporation is a mere holding
6% of Gross Selling Price or Fair Market Value (FMV) whichever company;
is higher (2) The corporation is an investment company and at any time
during the taxable year more than 50% in value of its
c. Income from sale, exchange or other disposition of outstanding stocks is owned, directly or indirectly, by one
other capital assets person; and
(3) The corporation permits its earnings or profits to be
Subject to RCIT/MCIT on income from sale of capital asset accumulated beyond the reasonable needs of the business.
NOT subject to capital gains tax without the benefit of
Holding Period and Net Capital Loss Carry Over ▪ For purposes of RR No. 2-2001, the term holding or
(e) Improperly Accumulated Earnings investment company, shall refer to a corporation having
practically no activities except holding property, and
Tax Definition collecting the income therefrom or investing the same.
(CASASOLA, NIRC, Annotated)
Improperly Accumulated Earnings
▪ The touchstone of liability is the purpose behind the
Profits of a corporation that are permitted to accumulate instead accumulation of the income and not the consequences
of being distributed to its shareholders for the purpose of of the accumulation. If there is a determination that a
avoiding the income tax with respect to its share holders or corporation has accumulated income beyond the
shareholders of another corporation ([Link].22001) reasonable needs of
the business, IAET shall be imposed.
Improperly Accumulated Earnings Tax (Id.)

10% of the Improperly Accumulated Taxable Income (in

▪ To determine reasonable needs, Immediacy Test shall
addition to other taxes).
be applied. The accumulated profits must be used
Nature and Purpose
within a reasonable time after the close of the taxable
year. The taxpayer must establish by clear and
The underlying purpose of the additional tax in question on a
convincing evidence that such accumulation was for the
corporation's improperly accumulated profits or surplus is as set
immediate needs of the business.(CASASOLA,NIRC
forth in the text of Section 25 of the Tax Code itself to avoid the
situation where a corporation unduly retains its surplus instead Anotated)
of declaring and paving dividends to its shareholders or
How taxed:
Step 1. Compute for Improperly IAET should be paid fifteen (15) days thereafter.
Accumulated Earnings:
Example:
From the corporation‘s taxable income, add the following:
Taxable Income (2018) Php 1,000,000 For the close of the taxable year for 2018. Dividends must be
Add: declared and be paid on or before December 31,2019.

Income subject to final tax 100,000 Otherwise, the company will be imposed a liability under IAET
Net Loss Carry Over (NOLCO) 200,000
which should be paid on or the 15th date from December 31,
2019 which is January 15 (assuming that said date is not a non
Income exempt from income 50,000
tax
– working day).
Exempt Corporations
Income excluded from gross 30,000
income
The tax shall not apply to the following kinds of corporation
Less: 1,380,000
enumerated in Sec 29(B)(2):
Income tax paid (300,000)
Dividends declared or paid 0
Total 1,080,000 a. Publicly-held corporations;
Add: b. Banks and other non-bank financial
intermediaries; and
Retained Earnings, as of the 500,000 c. Insurance
end of the year
Less: companies. and also the following:

100% Paid Capital (350,000) d. Taxable partnerships

Improperly Accumulated 1,230,000 e. General Professional Partnerships
Earnings f. Non-taxable joint ventures
Multiply: g. Enterprises duly registered under the
Philippine Economic Zone Authority under
Improperly Accumulated 10% R.A. 7916
Earning Tax Rate h. Enterprises registered pursuant to the Bases Conversion
Improperly Accumulated 123,000 and Development Act of
Earning Tax 1992 under R.A. 7227
([Link]. 35-2011) i. Other enterprises duly registered under special
economic zones declared by law which enjoy payment
The tax is imposed for each taxable year on the improperly of special tax rate on their registered operations or
accumulated taxable income equal to 10% of such income. activities (Sec 4, RR No. 2-2001).
j. Foreign corporations
▪ Once the profit has been subject to IAET, the same shall no
longer be subject to it
IAET shall not apply in cases where a corporation is entitled to
even if not declared as dividends. This notwithstanding,
a preferential tax rate. The retained earnings of a domestic
once finally declared, the dividends shall still be subject to
corporation with the Subic Bay Metropolitan Authority
tax on dividends under NIRC.
(SBMA) from its gross income earned from registered
Period of Payment activities which were already subjected to 5% preferential
tax
Dividends must be declared and be paid not later than one (1) rate are not subject to IAET.(BIR Ruling
year following the close of the taxable year. DA-587-09, Oct 2009)
 Income derived by a subcontractor ofa petroleum b. Exempt if a non-stock, non-profit educational institution
service contractor of the Government from (Sec. 4,[Link], Constitution).
petroleum subcontracting operations is exempt from the
IAET. However, the exemption shall be limited only to What is meant by unrelated trade, business or other
income derived from petroleum subcontracting under P.D. activity?
1354. Income from other sources shall be subject to normal Any trade business or other activity, the conduct of which is not
income tax rate or MCIT, as the case may be.(BIR Ruling substantially related to the performance by such educational
302-04, June 2004) institution or hospital of its primary purpose or function.(Sec 27
(B), NIRC)
MCIT vs. IAET
Distinguish Non – Stock, Non Profit Educational
Institution from Proprietary
Improperly Educational Institution
Minimum Corporate Accumulated
Income Tax Earnings Tax
Tax Rate and Tax Base

2% of TOTAL GROSS 10% of

INCOME IMPROPERLY
ACCUMULATED
EARNINGS TAX

When Liable

Whenever NORMAL Whenever there is an

INCOME TAX IS ZERO IMPROPERLY
OR LESS THAN MCIT ACCUMULATED
EARNINGS

How is the Tax Based computed?

Total Gross Income is Improperly Accumulated

computed Earnings is computed
from Gross/Net Sales less from the TAXABLE
Cost of Sales add other INCOME add all income
income not subject not subjected or was
to final taxes exempted from tax and
other tax benefits less all
tax income payments and
dividend payments or
declarations and less paid
up capital
ii. Proprietary educational institutions and hospitals
General Rule: Tax rate is 10%

Exceptions:
a. 30% NCIT rate if the gross income from unrelated trade,
business or other activity exceeds 50% of the total gross
income derived from all sources.
 NON-STOCK, PROPRIETARY
NON-PROFIT EDUCATIONAL
, INSTITUTION
EDUCATIONAL
Privilege granted is Tax privilege granted to
not subject to the latter may be subject
limitations imposed to limitations imposed by
by law since it is law.
constitutionally
granted.
Income is tax Income is subject to
exempt provided income tax.
that the income it
seeks to be The rate shall be at 10%
exempted from if gross income from
taxation is unrelated trade, business
used or activity does not
actually, exceed 50% of its total
directly and gross income,
exclusively for otherwise,30% RCIT.
educational (Predominancy Test)
purposes. (CIR
vs. DLSU, G.R.
No.
196596,
November 9,
2016)
 Even if the charitable institution must be (iii) Government-owned or controlled corporations
(GOCC), agencies or
"organized and operated exclusively" for charitable purposes,
instrumentalities
it is nevertheless allowed to engage in "activities conducted
for profit" without losing its tax-exempt status for its not-for-
General Rule: The rules governing domestic corporations
profit activities. The only consequence is that the "income of
engaged in similar business, industry or activity shall apply.
whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of theExceptions: (GS-PL)
disposition made of such income, shall be subject to tax." a. Government Service Insurance System
Prior to the introduction of Section 27(B), the tax rate on b. Social Security System
such income from for-profit activities was the ordinary c. Philippine Health Insurance Corporation
corporate rate under Section 27(A). With the introduction of d. Local Water districts
Section 27(B), the tax rate is now 10%.([Link]‘s
MedicalCenter,Inc.,GRNo.195909,September 26, 2012) Under the TRAIN Law, the Philippine Charity Sweepstake is not
anymore exempt from payment of income tax.
(ii) Non-Profit hospitals (samerulesas those imposed on
proprietary educational Are GOCC not included in the list taxable?
institutions)
No. Under Sec. 32 (B) (7)* of the NIRC, income derived from
(See also Sec. 27 (B), NIRC) any public utility or from the exercise of essential government
function accruing to the government of the Philippines or to any
Q: Is St. Luke‘s Medical Center Inc., organized as a non – political subdivision are exempt from income tax. Therefore,
stock and non profit charitable institution making it even if the GOCC is not one of those enumerated in Sec. 27 (C),
entitled for tax exemption? it may still exempted under Sec. 32 (B)(7) due to its
governmental function.
A: There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not *Income Derived by the Government or its Political Subdivisions
automatically exempt St. Luke's from paying [Link] be exempt
from income taxes, Section 30(E) of the NIRC requires that a (iv) Domestic Depository banks (foreign currency
charitable institution must be "organized and operated deposit units)
exclusively" for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the Income derived by a depositary bank under the expanded
institution be "operated exclusively" for social welfare. foreign currency deposit system from foreign currency
transactions with non-residents, offshore banking units in the
St. Luke's fails to meet the requirements under Section 30(E) Philippines, local commercial banks and other depositary banks
and (G) of the NIRC to be completely tax exempt from all its under the expanded foreign currency deposit system shall be
income. However, it remains a proprietary non-profit hospital EXEMPT from all taxes.
under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested Exception:
pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is Net income from such transactions shall be subject to the
entitled to the preferential tax rate of regular income tax payable by banks.

10% on its net income from its for-profit activities. Interest income from foreign currency loans granted by such
([Link]‘sMedicalCenter Inc., GR 195909,September depositary banks under said expanded system to residents other
26, 2012) than OBUs in the Philippines or other depository banks under the
expanded system shall be subject to a final tax of 10%(Sec.
27[D][3],NIRC)
 International Air International The amount of gross The gross revenue
Carrier Maintaining Carrier with NO revenue derived from whether for passenger,
to and from PH FLIGHTS or carriage of persons, excess cargo or mail originating
LANDING RIGHTS baggage, cargo and mail from the Philippines up
but operate thru originating from the to final destination,
General Philippines in a regardless of the place of
Sales Agent continuous and sale or payments of the
in PH uninterrupted flight, passage or freight
irrespective of the place of documents.
Taxed as a SPECIAL Taxed as a RESIDENT
sale or issue and the place
CORPORATION at a rate FOREIGN
of 2.5% on GROSS of payment of the ticket or
CORPORATION
PHILIPPINE passage document.
subject to normal income
BILLINGS tax of 30% of taxable
income or minimum Basis
corporate income tax of for
2% of total gross Gross
income. Philip
● Subject to 2.5% tax rate on its pine
Gross Philippine Billings. Billin
● Gross Philippine Billings, defined: gsTax
exem
ption:
Recipr
ocity
may
be
invoke
d by
an
intern
ational
carrier
Philippine carriers. ,
when
That international carriers doing business in its
Home
International Air International
Count
Carrier Shipping ry
grant
sinco
metax
exem
ptiont
o
(Air Canada vs. CIR, GR 169507,January Offshore Banking units
11,2016,penned by J. Leonen)
Resident foreign depositary banks (foreign currency
(b) Resident foreign depositary banks deposit units)(same rules as those imposed on domestic
(foreign currency deposit units) and depositary banks)(Sec. 27[D][3],NIRC)
the Philippines may avail of a preferential rate or exemption from the carriage of persons and their excess baggage on
from the tax herein imposed on their gross revenue derived the basis of an applicable tax treaty or international
 agreement to which the Philippines is a signatory or on the
basis of reciprocity such that an international carrier, whose
home country grants income tax exemption to Philippine
carriers, shall likewise be exempt from the tax imposed
under this provision. (Sec. 1, RA 10378)

An offline international air carrier selling passage tickets in the

Philippines, through a general sales agent, is a resident
foreign corporation doing business in the Philippines. As
such, it is taxable under Section 28(A)(l), and not Section
28(A)(3) of the 1997 National Internal Revenue Code,
subject to any applicable tax treaty to which the Philippines
is a signatory. (AirCanadavs.
CIR,GR169507,January11,2016,pennedbyJ. Leonen)
Off-shore banking units

General Rule: Income derived by OBUs from foreign currency

transactions with non-residents, other offshore banking units,
local commercial banks are exempt from all
taxes

Exception:

Income derived from (NF3):

1. Nonresidents;
2. Foreign currency transactions with local commercial banks;
3. Foreign currency transactions with branches of foreign
banks authorized by the BSP
4. Foreign currency transactions with OBUs in the Philippines

Interest income from foreign currency loans granted to residents

other than OBUs or local commercial banks shall be subject to a
final tax of 10%.(Sec. 28[A][4],NIRC)
(c) Regional or Area Headquarters and Coverage: Taxable on GROSS income at 30%.
Regional Operating Headquarters of Income covered:
Multinational Companies i. Interests,
ii. Dividends,
1. Regional or area headquarters – not subject to tax iii. Rents,
2. Regional operating headquarters – 10% on taxable income iv. Royalties, v. Salaries,
(Sec. 28[A][6],NIRC) vi. Premiums (except reinsurance premiums), annuities,
Regional or Area Regional emoluments or other fixed or
Headquarters OPERATIN determinable annual, periodic or
G vii. Casual gains, profits and income, and
Headquarters viii. Capital gains, except capital gains subject to tax (Sec.
Branch established in Branch established in 28[B][1], NIRC)
the Philippines by the Philippines by
ii. NRFC subject to special rates: On specific
multinational multinational
properties rented owned by non -resident foreign
companies and which companies which are
corporation:
headquarters DO engaged in the
NOT EARN or DERIVE following: general Lease on Rate on Gross
INCOME from the administration, income
Philippines and which business planning and Cinematographic
act as SUPERVISORY, coordination, sourcing 25%
Films
COMMUNICATIONS and procurement of
Foreign vessels 4.5%
and COORDINATING raw materials and
CENTER for their components, Aircraft machineries
7.5%
affiliates, subsidiaries corporate finance and equipment
or branches. advisory services, (Sec.s 28[B][2],[3]&[4],NIRC)
(Sec.22[DD], NIRC) marketing control and
sales promotion, (d) Corporation Exempt From Income
training and personnel Tax (ABS -C2BN2 -GF2)
management, logistic
services, research and These are:
development and
product development, (A) Labor, agricultural or horticultural organization not
technical support and organized principally for
maintenance, data profit;
processing and
communications and Requisites to be exempt : B-E-N
business development. (1) No net income inuring to the benefit of any member;
(Sec. (2) Educational or instructive in character;
22[EE], NIRC) (3) Have as their objects the Betterment of the conditions
of those engaged in such pursuits, the improvement of
Not Subject to tax Taxed at
the grade of their products and the development of a
10% in
higher degree of efficiency in their respective
Taxable Income
occupations.

c. Non – Resident Foreign Corporation (B) Mutual savings bank not having a capital stock represented
(NRFC) by shares, and
cooperative bank without capital stock
i. Taxation of NRFC in General
 organized and operated for mutual purposes and without shall belong to or inure to the benefit of any member,
profit; organizer, officer or any specific person;

Requisites to be exempt: Requisite to be exempt:

(1) It must appear that it is an organization which has no
capital stock represented by shares; and (1) It must be a non-stock and organized and operated for
(2) whose earnings less only the expenses of operation, are one or more specified purposes; and
distributable whole among the depositors. (2) No part of its net income or asset shall belong to or inure
to the benefit of any member.
If it appears that the organization has shareholders who
participate in the profits, the organization will not be ―Charityǁ may be fully defined as a gift, to be applied
exempt. consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
(C) A beneficiary society, order or association, operating for and hearts under the influence of education or religion, by
the exclusive benefit of the members such as a fraternal assisting them to establish themselves in life or otherwise
organization operating under the lodge system, or mutual lessening the burden of government ((CIR
aid association or a nonstock corporation organized by [Link]‘sMedicalCenter,Inc.,GRNo. 195909, September
employees providing for the payment of life, sickness, 26, 2012)
accident, or other benefits exclusively to the members of
such society, order, or association, or nonstock corporation Charitable institutions does not lose its character as such
or their dependents; because it derives income from paying patients so long as
the money received is devoted or used altogether to the
Requisite to be exempt: charitable object which it is intended to achieve.
(1)Operated for the exclusive benefit of the members such
as a fraternal organization operating under the lodge (F) Business league chamber of commerce, or board of trade,
system. not organized for profit and no part of the net income of
(2)Established system for payment to its members of life, which inures to the benefit of any private stock-holder,
sick, accident, or other benefits. or individual;

(D) Cemetery company owned and operated exclusively for Requisite to be exempt:
the benefit of its members; (1) An association of persons having some common
business interest, which limits its activities to work for
Requisite to be exempt: such common
(1)Owned by and operated exclusively for the benefit of its interest; and
lot owners; or if it is (2) Does not engage in a regular business of a kind
(2)Not operated for profit. ordinarily carried on for profit.

(E) Nonstock corporation or association organized and (G) Civic league or organization not organized for profit but
operated exclusively for religious, charitable, scientific, operated exclusively for the promotion of social welfare;
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
m e
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Requisite to be exempt: (K) Farmers', fruit growers', or i
like association v
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beneficial to the community as a whole. e
s
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Institution under Sec. 30 to
What is exempt?
dis
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se
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Income must be No portion of the income ntr
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Source of Exemption
Article XIV, Section 4 Section 30 of the Tax Code
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c a
o n
l i
l n
e h
c e
t r
i e
o n
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s c
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their membership, and are, by nature, intended for the that are "subject to income tax . (AssociationofNon–
maintenance, preservation, and upkeep of the clubs' general ProfitClubs [Link], G.R. No. 228539 , June 26, 2019)
operations and facilities, then these fees cannot be classified
as "the income of recreational clubs from whatever source" (e) Tax on other Business Entities:
General Partnerships, General Professional profits which each partner shall include in his individual
Partnerships, Co-ownerships, Joint return.
Ventures and Consortia ▪ A partner‘s share in the net profits of GPP is not compensation
income. (BIRRulingNo.
General Partnership (Business 008, Jan. 1989)
Partnership) ▪ Payments made to individual partners are subject to 15%
withholding tax, if the gross income for the current year
Partnerships - Under the Philippine setting on taxation, the exceeds Php720,000; and 10% if otherwise. (Sec.
term ―corporationǁ likewise includes partnerships no matter 2.57.2(E), RR. No. 11-18, January 31, 2018 )
how created or organized(Sec.22[B],NIRC)
Determination of the Optional Standard
General rule: Taxable as corporations Deduction for GPP and Partners of GPP
(Sec 8, RR 8-2018)
Exception: General professional partnerships - EXEMPT
from income tax (Sec. 26, NIRC). GPP is not subject to income tax imposed pursuant to Sec. 26 of
the Tax Code, as amended. However, the partners shall be liable
General Professional Partnerships to pay income tax on their separate and individual capacities for
their respective distributive share in the net income of the GPP.
Requisites for Exemption: SP-NT
The GPP is not a taxable entity for income tax purposes since it
a. Formed by persons for the sole purpose of exercising their is only acting as a "passthroughǁ entity where its income is
common profession. ultimately taxed to the partners comprising it. Section 26 of the
b. No part of its income is derived from engaging in any trade Tax Code, as amended, likewise provides that"[f]or purposes of
or business. computing the distributive share of the partners, the net income
of the GPP shall be computed in the same manner as a
If the conditions set by law are not met, the exemption from corporation.'
corporate income tax is withdrawn and the partnership isSubject to CREDITABLE Subject to FINAL
subjected to WITHHOLDING TAX of WITHHOLDING TAX of
tax as an ordinary corporation. (Tanvs.Del15% (if income 10%. The payment
payments exceed Php thereof shall be deemed
Rosario, G.R. No. 109289, October 3, 1994)
720,000) or 10% if full and final and thus no
income payments need to be included in
The income tax is imposed on the partners themselves in their
exceed Php 720,000) the ITR
separate and individual capacity on their separate
and respective distributive shares of the net income of As such, a GPP may claim either the itemized deductions allowed
the partnership computed in the same manner as that of a under Section 34 of the Code or in lieu of it, can opt to avail of
corporation. the OSD allowed to corporations in claiming the deductions in
▪ Unlike an ordinary business partnership which is treated as a an amount not exceeding forty percent (40 %) of its gross
corporation for income tax purposes and, therefore, subject income.
to corporate income tax, a general professional partnership Withholdi
In computing taxable income defined under Section 31 of
is not in itself an income taxpayer.
the Tax code, as amended, the following may be allowed
▪ A General Professional Partnership, provided that no part of its
as deductions:
income is derived from engaging in any other trade or
business, is exempt from corporate income tax.
a. itemized expenses which are ordinary and necessary, incurred
or paid for the practice of
▪ If it derives income from other sources, the GPP nonetheless
Profession; OR
remains to be exempt from the payment of corporate
income tax if the income from other sources has been
b. Optional Standard Deduction (OSD).
subjected to final income tax.
▪ They are required to file tax returns for the purpose of
furnishing information as to the share in the net gains or
The distributable net income of the partnership may be
determined by claiming either itemized deductions or OSD. The
share in the net income of the partnership, actually or The partnership as As a juridical entity they
constructively received, shall be reported as taxable income of separte a juridical entity are taxed like a
each partner. of its own its income is CORPORATION.
EXEMPT from tax.
The partners comprising the GPP can no longer claim further
deduction from their distributive share in the net income of the
GPP and are not allowed to avail of the 8% income tax rate
Distributive Share of the PARTNER
option since their distributive share from the GPP is already net
of cost and expenses Forms part of gross Not part of the partner‘s
income and forms part individual income tax
General Professional Taxable Business
of the individuals return.
Partnership Partnership
partner ITR to compute
How is the PARTNERSHIP is Taxed? for tax liability

Co-ownership The
co-
General Rule: ow
ner
Co-ownerships are generally not taxable.
shi
p of
Reason:
inh
Be
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th
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preservatio egi
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property ed
owned in par
common tne
and rshi
collection p
of the the
income mo
therefrom. me
nt
When taxable: the
sai
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co s in
mm pro
on por
pro tion
per to
ties thei
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/or res
the pec
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om sha
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the inh
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use as
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mm in a
on pro
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wit titio
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pro ed
fits in
for an
the
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 May
Extr 25,
aju 197
dici 2)
al
settl Joint Venture
em
ent Joint Venture and Consortium- Under the
or Philippine setting on taxation, the term
app ―corpor
rov ationǁ
ed
by i
the ncludes
cou
rt in j
the oint
corr
s
esp
ond tock
ing
compani
test
ate es, joint
or
ventures
inte
stat and
e consortia
pro
cee .
din General
g.
(On rule:
av. Taxable
CIR
,G. as
R.N corporati
o.
ons
L-
193
42,
Excep t with
tion: the
Joint govern
ventur ment -
es or EXEMP
consort T from
ium income
formed tax.
for the Summary of Tax Rates on Passive
purpos
Income and Sale of Capital Assets as
e of
undert amended by TRAIN LAW
aking a
constru
ction Transaction Domestic Corporations Resident Forei
Corporations
project
or
engagi Tax on Capital Gains
ng in
petrole Sale of Land and/or 6% of Gross Selling Price Subject to Regul
um, Buildings held as a Capital or FMV whichever is Corporate Incom
Asset higher (FMV – higher of (RCIT)/ Minimum
coal,
Zonal Value by BIR or Corpoate Income
geothe
Assessed Value or LGU (MCIT) or Gross
rmal
Assessor) Income Tax whic
and is applicable
other
energy Sale of shares of stocks 15% of Net Capital Gains 5%- First Php100
operati not listed thru local stock –Domestic Corporations
on exchange 10% - In excess
pursua
nt to an
Tax on Passive Investment Incom
operati
ng
Interest Income on 20% 20%
consort
currency bank deposit, or
ium
other monetary benefits
agree
from deposit substitute,
ment trust fund, and similar
under arrangements
service
contrac
Other royalties, prizes and 20% Cash or Property
20% 30% 20% 20%
winnings above Php Dividends from a domestic
10,000 corporation

Interest on Foreign 15% 7.5%

Currency Deposit

Withholding of Taxes its payment. (LGElectronicsPhilippines,Inc. vs. CIR, December 3,

2014 penned by J. Leonen)
a. Concept of withholding taxes
The duty to withhold is different from the duty to pay income
The concept of a withholding tax on income obviously and tax. The revenue officers generally disallow the expenses
necessarily implies that the amount of the tax withheld claimed as deduction from gross income, if no withholding of
comes from the income earned by the taxpayer. Since tax as required by law or the regulations was withheld and
the amount of the tax withheld constitutes income remitted to the BIR within the prescribed dates.
earned by the taxpayer, then that amount manifestly (MAMALATEO,PhilippineIncomeTaxation, 2010, p.380)
forms part the taxpayer‘s gross receipt. Because the
amount withheld belongs to the taxpayer, he can transfer Purpose: The withholding tax system was devised for three
its ownership to the government in payment of his tax primary reasons:
liability. (ChinaBankingCorporation vs. CA, G.R. No. To provide the taxpayer a convenient manner to meet his
146749, June 10, 2003). probable income tax
liability;
To ensure the collection of income tax which can
The incidence and burden of taxation fall on the same otherwise be lost or substantially reduced through failure
entity, the statutory taxpayer. The burden of taxation is not to file the corresponding returns; and To improve the
shifted to the withholding agent who merely collects, by government‘s cash flow.
withholding, the tax due from income payments to entities (LGElectronicsPhilippines,[Link],December 3, 2014
arising from certain transactions and remits the same to penned by J. Leonen)
the government. (AsiaInternationalAuctioneers,Inc. (AIA)
[Link](CIR), Indirect taxes v. Withholding Tax
G.R. No. 179115, September 26, 20
In indirect taxes, the incidence of taxation falls on one person
but the burden thereof can be shifted or passed on to another
person, such as when the tax is imposed upon goods before
Withholding tax is a method of collecting income tax in
reaching the consumer who ultimately pays for it.
advance. "In the operation of the withholding tax system, the
payee is the taxpayer, the person on whom the tax is imposed,
On the other hand, in case of withholding taxes, the incidence
while the payor, a separate entity, acts no more than an agent
and burden of taxation fall on the same entity, the statutory
of the government for the collection of the tax in order to ensure
taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by withholding,
the tax due from income payments to entities arising from
certain transactions and remits the same to the government.

Due to this difference, the deficiency VAT and excise tax

cannot be "deemed" as withholding taxes merely because
they constitute indirect taxes.
(LGElectronicsPhilippines,[Link], December 3, 2014
penned by J. Leonen).
 a) Kinds of withholding taxes

1) Withholding tax at source (Sec.34K,

57- 59, NIRC);
i) Final withholding tax
ii) Creditable withholding tax
2) Withholding tax on employer‘s compensation or wages
(Sec. 78-83, NIRC);
3) Withholding of value-added tax (Sec 114c, NIRC);and
4) Withholding of percentage tax (Sec. 116-128, NIRC).
Parties to Withholding

Withholding Agent – the buyer/payor who is required to

withhold a certain portion of its payment to its
vendor/supplier/payee which shall represent the income tax
paid on the
vendor/supplier/payee‘s behalf

Payee – persons withheld a portion of its income which

represent his payment of taxes due paid by the withholding
agent on payee‘s behalf.

Requirement for Deductibility

Any income payment which is otherwise deductible under the

Code shall be allowed as a deduction from the payor's gross
income only if it is shown that the income tax required to be
withheld has been paid to the Bureau in accordance with Secs.
57 and 58 of the Code.

A deduction will also be allowed in the following cases where

no withholding of tax was made:

a. The payee reported the income and the withholding

agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax, and surcharges, if applicable, at the time of
the original audit and investigation;

a. The recipient/payee failed to report the income on the due

date thereof, but the withholding agent/taxpayer pays the
tax, including the interest incident to the failure to withhold
the tax and surcharges, if applicable, at the time of the
original audit
and investigation;

b. The withholding agent erroneously underwithheld the tax

but pays the difference between the correct amount and
the amount of tax withheld, including the interest,incident
to such error, and surcharges, if applicable, at the time of
the original audit and investigation.
 Effect of Failure of a Withholding Agent to Collect and and independent from the taxpayer, because the income tax is
Remit Tax still imposed on and due from the latter. The agent is not liable
for the tax as no wealth flowed into him — he earned no income.
Any person required to withhold, account for, and remit any The Tax Code only makes the agent personally liable for the tax
tax imposed by the Tax Code or who willfully fails to withhold arising from the breach of its legal duty to withhold as
such tax, or account for and remit such tax, or aids or abets distinguished from its duty to pay tax since: "the government's
in any manner to evade any such tax or the payment thereof, cause of action against the withholding agent is not for the
shall, in addition to interest, surcharges and compromise collection of income tax, but for the enforcement of the
penalties, be liable upon conviction to a penalty equal to the withholding provision of Section 53 of the Tax Code, compliance
total amount of the tax not withheld, or not accounted for and with which is imposed on the withholding agent and not upon
remitted. (Sec. 251, NIRC) the taxpayer."(Rizal Commercial
[Link]
Time of Withholding Revenue,G.R. No. 170257, September 7, 2011)

The obligation of the payor to deduct and withhold the tax b. Withholding of Final Tax of Certain Income
arises at the time an income payment is:
The amount of income tax withheld by the withholding agent
▪ Paid, or is constituted as a full and final payment of the income
▪ Payable, or tax due from the payee on the said income.
▪ Accrued or recorded as an expense or asset, whichever
is applicable, in the payor‘s books (Section 2.57.4, RR No. 2- The liability for payment of the tax rests primarily on the payor

98, as amended by as a withholding agent. In case of the withholding agent's

Section failure to
4, RR No. 12-2001) the deficiency tax shall be collected from him

Nature of liability of withholding agent The finality of the withholding tax is limited only to the payee‘s
▪ The obligation to withhold is compulsory, as it makes such income tax liability on the particular income. It does not
withholding agent personally liable for payment of the tax extend to the payee‘s other tax liability on said income, such
the government and of the taxpayer, and that the as when the said income is further subject to a percentage
withholding agent is not an tax, such as gross receipts tax in the case of a bank. (Sec.
ordinary government agent 2.57, R.R. No. 2-98)
▪ The liability of the withholding agent is direct and
Income subject to final withholding tax:
independent from the liability of the income recipient
1. Capital gains on sale of real property held as capital asset;
The law sets no condition for the personal liability of the 2. Capital gains on sale of shares of stocks not listed and
withholding agent to attach. The reason is to compel the traded through the local stock exchange;
withholding agent to withhold the tax under all circumstances. 3. Tax on Income of Non Resident Alien Not
In effect, the responsibility for the collection of the tax as well Engaged in Trade or Business 4. Tax on Non
as the payment thereof is concentrated upon the person over Resident Foreign Corporation 5. Tax on Passive
whom the Government has jurisdiction. (Commissionervs. Investment income:
Procter&GamblePMCandCTA,[Link].66838, a. Dividends
Dec. 2, 1991) b. Royalties
c. Rentals
Under the withholding system, however, the agent-payor d. Interest
becomes a payee by fiction of law. His (agent) liability is direct e. Prizes and Winnings
 Income subjected need not be reported in Income Tax Return
as final withholding tax being a full and final payment of the
tax on the income.

Claiming Refund for Final Tax Withheld

This Court notes that the case of Commissioner of Internal

Revenue v. Philippine National Bank involves a refund of
creditable withholding tax and not of final withholding tax.

However, its ruling that proof of remittance is not necessary

to claim a tax refund applies to final withholding taxes. The
same principles used to rationalize the ruling apply to final
withholding taxes: (i) the payor-withholding agent is

responsible for the withholding and remitting of the income Creditable Final Withholding
taxes; (ii) the payee- refund claimant has no control over the Withholding Tax Tax
remittance of the taxes withheld from its income; (iii) the Payee is required to Tax withheld is full and
Certificates of Final Tax Withheld at Source issued by the declare the income at final payment of income
withholding agents of the government are prima gross in the income tax tax due. Thus payee is
facie proof return. no longer needed to
the government itself and are declared under perjury. declare taxes withheld
for income tax
Thus, this Court sees no reason why it should not rule the same purposes`
way. (PhilippineAirlines,Inc.v. Commissioner of Internal Tax withheld from the The tax withheld can no
Revenue, G.R. Nos. payee can be creditable longer be deducted
206079- 80, January 17, 2018, penned by against the income tax against income tax due
[Link]) due
The liability of payment The liability rest upon
c. Withholding of Creditable Tax at Source still rest upon the withholding agent
the taxpayer
Taxes withheld on certain income payments are intended to Withholding agent shall Withholding agent shall
equal or at least approximate the tax due from the payee issue a BIR Form 2307 issue a BIR Form 2306
on said income. to its payee as evidence to its payee as evidence
of its payment of of its payment of
The income recipient is still required to file an income tax withholding tax withholding tax
return, as prescribed in Sec. 51 and 52, to report the income
and/or pay the difference between the tax withheld and the tax
due on the income. (Sec. 2.57, R.R. No. 2-98).

Income subject to creditable withholding tax

General Rule: All income subject to regular income tax rates

is subject to creditable withholding tax.

Final Withholding Tax (FWT) and Creditable Withholding

Tax (CWT)
distinguished
 Note, however, that payees of income subject to FWT are c. Income payments subject to expanded
required to secure a copy of the Certificate of Final Income withholding tax
Tax Withheld (BIR Form No. 2306). Otherwise, the income (Seetableofincomepaymentssubjectto
subjected to final tax may be deemed subject still to normal expandedwithholdingtaxattheendof this chapter)
income tax, as if it was not yet subjected to the FWT.
(Philippine Bank ofCommunicationsvs. d. Effect of withholding tax on the amount to be
CommissionerofInternalRevenue,CTACase paid to vendor/supplier The amount to be
No.6177, June 30, 2008) withheld being part of the gross contract price of
the transaction hence the amount to be received by
shall be reduced.
FWT is imposed on the sale of capital assets. CWT is imposed
on the sale of ordinary assets. (ChamberofRealEstateand For example:
Builder‘s Assocs., Inc vs. Romulo, [Link]. AAA Company leases his offices from BBB
160756, March 9, 2010) Realty Corp., the rental contract provides that the price of rent
per month shall be 112,000 gross of VAT. Lease contract started
Types of creditable withholding tax only in December 2018
i. Expanded withholding tax on certain income payments
made by private How much would be the amount withheld?
persons to resident taxpayers Income payment on Rent, net of Php 100,000*
ii. Withholding tax on compensation income for services vat
done in the Expanded withholding tax rate 5%
Philippines for rent (Php 112,000 x
12%/112%)
i. Expanded withholding tax on certain income payments Expanded Withholding Tax Php 5,000
made by private persons to resident taxpayers Due

Under the existing withholding tax system, the withholding agent How much would be the amount due to
retains a portion of the amount received by the income earner. BBB Realty?
In turn, the said amount is credited to the total income tax Gross contract price Php 112,000
payable in transactions covered by the EWT. Less: Expanded Withholding Tax (5,000)
([Link],[Link].211289,
January 14,2019)
Amount due to be paid to Php 107,000
a. Essential Requirements BBB Realty
1. An expense is paid or payable by the taxpayer, which is
e. Filing and payment of Expanded
income to the recipient thereof subject to income tax;
2. The income is fixed or determinable at the time of payment; Withholding Tax
3. The income is one of the income payments listed in the
regulations that is subject to withholding tax; All taxpayers who has a transaction subject to withholdin
4. The income recipient is a resident of the Applicable to whom:
Philippines liable to income tax; and
withholding
5. The pay or-withholding agent is also a resident of the
Philippines What must be filed and paid when:
b. Tax base of the income to be withhld:
BIR Form 0619E – be filed and the tax remitted on or before
The withholding tax shall be based on the income payment the 10th day following the month in which withholding was
which shall be net of VAT. made. This shall be filed for the first two (2) months of each
calendar quarter.
 BIR Form 1601EQ - This quarterly withholding tax remittance therefrom,
return shall be filed and the tax paid/remitted not later than the ▪ When due: for every month of the quarter within twenty
last day of the month following the close of the quarter during (20) days following the close of the taxable quarter
which withholding was made. Change in TRAIN LAW employed by the payee in filing his/its quarterly income
▪ Section 18 of R.A. 10963 or TRAIN Law tax return or
amended Section 58 of the NIRC as to the ▪ Upon request of the payee, however, the payor must furnish
deadline for filing and payment from such statement to the payee simultaneously with the
monthly to quarterly. income payment.
▪ However, in a tax advisory dated January 31,2018 and signed
by BIR Commissioner Caesar Dulay,pursuant to his power This BIR Form 2307 is conclusive evidence of
as Commissioner under Section 6 which was to prescribe withholding tax and shall be duly attached to the
additional requirements for tax administration and payee‘s income tax return proper crediting against
enforcement, he obliged taxpayers to revert back to income tax due. The Certificates of Creditable Tax
monthly filing citing imperious necessity as his reason for Withheld at Source issued by the withholding agents
such change. of the government are prima facie proof of actual
payment by herein respondent-payee to the
What happens if a taxpayer overpays in his withholding government itself through said agents(CIR vs.
tax? Philippine National Bank,G.R. No. 180290, September
29,
Under R.M.C 27-2018, which circularizes the new tax form BIR 2014,penned by [Link]).
Form 160EQ it now allows taxpayers to carry over the excess or
any overremitted expanded withholding taxes to the next The certificate of creditable tax withheld at source is the
quarter, at least within the same calendar year. competent proof to establish the fact that taxes are
Only the over-remittance in the first to third quarters can be withheld. It is not necessary for the person who
carried forward to the succeeding quarter. executed and prepared the certificate of creditable tax
withheld at source to be presented and to testify
In the event of over-remittance in the fourth or last quarter, the personally to prove the authenticity of the
taxpayer‘s option would be to file for a refund claim. certificates(Id.)
Duty of the withholding agent to present Certificate of
Withholding Tax to payee The probative value of BIR Form 2307 which is basically
a statement showing the amount paid for the subject
taxes under these regulations shall: transaction and the amount of tax withheld
▪ Furnish each payee, whether individual or corporate, with a therefrom, is to establish only
withholding tax statement, using the prescribed form (BIR
Form 2307) showing the income payments made and the
amount of taxes withheld

the fact of withholding of the claimed

creditable withholding tax (Philippine
National Bank vs. CIR, G.R. 206019,
March 18,2015)
Effect of Failure to furnish BIR Form 2307 to payee Overpayment)
Failure to furnish the same (BIR Form 2307) shall be a ground
for mandatory audit of payor‘s income tax liability (including
withholding tax) upon verified complaint of the payee. (R.R.3-
2002) ▪ The amount of Php 100,000 was used for gross receipts as
amounts reported in the income tax return should be net of
f. Tax credit on amount withheld Income upon which any VAT
creditable tax is required to be withheld at source shall be ▪ As can be observed, the amount withheld from BBB Realty by
included in the return of its recipient. AAA Company was used to reduce tax due and therefore
The excess of the withheld tax over the tax due on his return resulting to an excess credits in the process which illustrates
shall be refunded to him subject to the authority of the the 1st scenario. This excess credit can either be refunded or
Commissioner to refund taxes under Sec. 204 of the NIRC. carried over the next taxable year
If the income tax collected at source is less than the tax due
Scenario 2
on his return, the difference shall be paid in accordance with
the provisions of Sec. 56 of the Code. (Sec. 2.58.1, R.R. 2-
Supposing BBB Realty Corp‘s only lease income for 2018 comes
98) from AAA Company he would report the income and compute
for the income tax due and payable as follows. (Assume BBB
To scenarios with creditable withholding tax either:
Realty has cost of services of Php 30,000 uses Optional Standard
Deduction)
1. Refund the excess credit (Credits > Tax
Gross receipts, net of VAT Php 100,000
Due); or
2. Offset the amount to reduce the tax due Less: Cost of Service (30,000)
(Credits <Tax Due) Gross Income 70,000
Less: Optional Standard (28,000)
To illustrate: Deduction -40% of Gross
Income
Scenario 1 Taxable Income 42,000
RCIT Tax Rate 30%
Supposing BBB Realty Corp‘s only lease income for 2018 Tax Due 12,600
comes from AAA Company he would report the income and
compute for the income tax due and payable as follows. Less: Creditable Withholding (5,000)
(Assume BBB Realty incurred cost of services of Php 80,000 Tax – evidenced by a BIR Form
uses Optional Standard Deduction) 2307
(Amount withheld by AAA)
Gross receipts, net of VAT Php
100,000 Tax Due and Payable Php 7,600

Less: Cost of Service (80,000) ▪ As can be observed the amount of Php 5,000 that was withheld
Gross Income 20,000 from BBB Realty was used to reduced his tax due and
payable illustrating the 2nd Scenario.
Less: Optional Standard (8,000)
Deduction -40% of Gross
Income g. Exemption from Withholding of CWT. The withholding
Taxable Income 12,000 of creditable
RCIT Tax Rate 30%
withholding tax prescribed in these Regulations
Tax Due 3,600
shall not apply to income payments made to the
Less: Creditable Withholding (5,000) following:
Tax – evidenced by a BIR
Form i. Sales of real property by a corporation which is
2307 registered with and certified by the Housing and Land
(Amount withheld by AAA) Use Regulatory
Tax Due and Php (1,400) Board (HLURB) or the Housing and
Payable/ (Excess Urban
Credits or
 Development Coordinating Council (HUDCC) as a. Should involve joining or pooling of resources by
engaged in socialized housing project where the licensed local contracts; that is, licensed as general
selling price of the house and lot or only lot does not contractor by the Philippine Contractors Accreditation
exceed the socialized housing price applicable to the Board (PCAB) of the Department of Trade and
area as prescribed and certified by the said Industry (DTI);
board/council as provided under Republic Act No.
7279 and its implementing regulations. b. These local contractors are engaged in construction
business; and
ii. Corporations registered with the Board of
Investments and enjoying exemption from the c. The Joint Venture itself must likewise be duly licensed
income tax provided by Republic Act No. 7916 and as such by the PCAB of the DTI.
the Omnibus Investment Code of 1987;
Joint ventures involving foreign contractors may also be
iii. Corporations which are exempt from the income tax treated as a nontaxable corporation only if the member
under Sec. 30 of the Tax Code, as amended, and foreign contractor is covered by a special license as
governmentowned or controlled corporations exempt contractor by the PCAB of the DTI; and the construction
from income tax under Section 27(A)(C) of the same project is certified by the appropriate Tendering Agency
Code, to wit: the (government office) that the project is a foreign
Government Service Insurance System (GSIS), the financed/internationally-funded project and that
Social Security System SSS), the Philippine Health international bidding is allowed under the Bilateral
Insurance Corporation (PHIC); and the Local Water Agreement entered into by and between the Philippine
Districts (LWD). However, the income payments Government and
arising from any activity which is conducted for profit the foreign/international financing institution pursuant to
or income derived from real or personal property shall the implementing rules and regulations of Republic Act
be subject to withholding tax as No. 4566 otherwise known as
prescribed in these regulations; iv. General Contractor‘s License Law.

Professional Partnerships; vi. Individuals who earn ₱250,000.00 and below from a lone

v. Joint ventures or consortium formed for the purpose of income payor upon compliance with the following
undertaking construction projects or engaging in requirements:
petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium [Link] individual has executed a payee‘s
agreement under a service contract with sworn declaration of gross receipts in
joint ventures or consortium formed for the purpose of [Link] sworn declaration has been submitted to the
undertaking construction projects shall comply with the
following conditions to be considered as joint venture not
taxable as a corporation:

lone
 incomepayor/withholding agent on or before January Every employer must withhold from compensation paid an
15 of each year or before the initial income payment, whichever amount computed in accordance with these Regulations,
is applicable.(Sec.2.57.5,R.R. 2018) ii. Withholding Tax on whether the employee is
Compensation i. a citizen or
ii. an alien, except non-resident alien not engaged in trade or
The withholding of tax on compensation income is a method of business.
collecting the income tax at source upon receipt of the income.
It applies to all employed individuals whether citizens or aliens, Provided, that no withholding of tax shall be required on the
deriving income from compensation for services rendered in the SMW, including holiday pay, overtime pay, night shift differential
Philippines. The employer is constituted as the withholding and hazard pay of MWEs in the private/public sectors as defined
agent.(Sec. 2.78, R.R. No. 2-98) in these Regulations. (Sec.7[A],R.R.82018)

Nature of Withholding Tax on Computation of Withholding Tax on

Compensation Compensation Income in General.

The tax on compensation income is withheld at source under the The procedures prescribed in R.R. 11-2018 shall govern the
creditable withholding tax system wherein the tax withheld is computation of withholding tax on the taxable compensation
intended to equal or at least approximate the tax due of the income of the employees. Provided, however, that taxable fringe
payee on the said income. It was designed to enable (a) the benefits received by employees other than rank and file, as
individual taxpayer to meet his or her income tax liability on defined in the Labor Code of the Philippines, as amended, shall
compensation earned; and (b) the government to collect at be subject to Fringe Benefits Tax pursuant to Section 33 of the
source the appropriate taxes on compensation. Taxes withheld Tax Code, as amended.(Sec.7[B], R.R. 8-2018)
are creditable in nature(INGBANKN.V
[Link],[Link].167679,July22,2015,pennedby Use of Exceptional Computations
J. Leonen) i. Cumulative Average

Compensation Income - in general, means all remuneration Method To whom applicable:

for services performed by an employee for his employer under
an employeremployee relationship, unless specifically excluded a. Particular employee, the regular
by the Code. compensation is exempt from withholding tax but
The discussion on what are the included and excluded supplementary compensation is paid during the calendar
compensation can be found in the topic of Income Tax on year;
Individuals b. The supplementary compensation is equal to or more than
the regular compensation
Taxable base for Withholding Tax on Compensation to be paid;
Income The employee was newly hired and had a previous
employer/s within the calendar year, other than the present
Taxable income for compensation earners is the gross employer doing this cumulative
compensation income less non taxable income/benefits such as computation.(Sec.7[B][5][a],
but not limited to the Thirteenth (13th) month pay and other R.R. 8-2018) ii. Annualized withholding tax method
benefits (subject to limitations, see Section 6(G)(e) of these
Regulations), de minimis benefits, and employee's share in the When applicable:
SSS, GSIS, PHIC, HDMF contributions and union dues. Minimum
wage earners shall be exempt from the payment of income tax a. When the employer-employee relationship is
based on their statutory minimum wage rates. The holiday pay, terminated before end of the calendar year; and
overtime pay, night shift differential pay and hazard pay b. When computing for the year-end adjustment,
received by such earner are likewise exempt. the employer shall determine the
(Sec.3, R.R. 8-2018) amount to be withheld from the
compensation on the last month of employment or
Requirement of Withholding in December of the current calendar year
(Sec.7[B][5][a], R.R. 8-2018)
Exemption from withholding tax on
compensation.

All items under exclusions for taxpayer earning compensation

income.

When are income from bonuses supposed to be

withheld?

The duty to withhold the tax on compensation arises upon its

[Link] ING Bank accrued or recorded the bonuses as
deductible expense in its books. Therefore, its obligation to
withhold the related withholding tax due from the deductions for
accrued bonuses arose at the time of accrual and not at the time
of actual payment.(ING BANK N.V vs. CIR, G.R. No. 167679, July
22, 2015,penned by J. Leonen)

Filing and payment of withholding tax on compensation

Applicable to whom:

Employers

What must be filed and paid?

BIR Form 1601C -Withholding Tax Return for Compensation

When must it be filed?

For the months covering January – November:

On or before the tenth (10th) day of the following month in
which withholding was made.

For the month covering December

On or before January 15 of the following year
I. Taxes Remedies under the National Internal Remedies
Revenue Code Notes to Bar Examinees:
It refers to procedural steps that may be undertaken by the
government or a taxpayer for the resolution of disputes
1. Assessment of internal revenue taxes concerning the levy or imposition, assessment, collection, and
refund of taxes. (DOMONDON, Taxation, Tax
a. Procedural due process in tax Remedies 2014) Kinds of Remedies
assessments Government Remedies
i. Letter of authority and tax audit A. Administrative Remedies 1. Assessment and 2.
ii. Informal conference Collection.
iii. Preliminary assessment notice iv. Formal letter a. Enforcement of tax lien
of demand and final b. Distraint of personal property and
assessment notice garnishment of bank deposits
v. Disputed assessment c. Levy of real property
vi. Administrative decision on a disputed assessment d. Compromise and abatement
vii. Appeal from an administrative decision e. Penalties and fines
on disputed assessment b. Requisites of a valid f. Non availability of injunction to
assessment restraint collection of tax
c. Tax delinquency and tax deficiency g. Forfeiture and
d. Prescriptive period for assessment h. Suspension of business operations
i. General rule
ii. Distinguish: false returns, fraudulent returns, and B. Judicial remedies
non-filing of returns 1. Civil and
iii. Suspension of statute of limitations 2. Criminal

2. Taxpayer's remedies Taxpayer‘s Remedies 1.

a. Protesting an assessment Assessment:
i. Period to file protest a. Protest and
ii. Kinds of protest - request for reconsideration or b. Compromise and abatement
reinvestigation 2. Collection
iii. Submission of supporting documents

iv. Effect of failure to file protest a. Tax refund and

v. Action of the Commissioner on the protest filed b. Tax Credit
(a) Period to act upon or decide on protest filed
(b) Remedies of the taxpayer in case of denial or Basis
inaction of the Commissioner
(c) Effect of failure to appeal Power of the Commissioner to Make Assessments and
syllabus are closely intertwined, the Committee has decided to Prescribe Additional
merge and rearrange the topics in the usual order as per actual Requirements for Tax Administration and Enforcement
practice to provide for a clearer and holistic understanding of the (Section 6 of the NIRC)
topics.

Preliminarie

s Tax
 tax due; Procedure for BIR Assessment
2. Use of the best evidence available; 1. Issuance of a Letter of Authority (LoA);
3. Authority to conduct inventory taking, surveillance and 2. Tax Audit or Investigation;
prescribe gross sales and receipts if there is reason to 3. Issuance of Notice of Informal Conference
believe that the taxpayer is not declaring his correct income, – NIC (RR 7-2018);
sales or receipts for internal revenue 4. Issuance of Preliminary Assessment Notice (PAN);
purposes; 5. Issuance of Final Assessment Notice (FAN) or Formal Letter
of Demand (FLD); and Administrative action / Inaction on
The assessment process starts with the filing of tax return and Disputed.
payment of tax by the taxpayer. The initial assessment
evidenced by the tax return is a self-assessment of the taxpayer. a. Procedural due process in tax assessments
The tax is primarily computed and voluntarily paid by the
taxpayer without need of any demand from government. If tax Procedure for BIR Assessment
obligations are properly paid, the Bureau of Internal Revenue
may dispense with its own assessment. 1. Issuance of a Letter of Authority (LoA) ( II.I.1.a.i in the
2020 Bar Tax syllabus)
After filing a return, the Commissioner or his or her
representative may allow the examination of any taxpayer for A Letter of Authority (LOA) is the authority given to the
assessment of proper tax liability. appropriate revenue officer to examine the books of account and
([Link],G.R. No. 215957, November other accounting of the taxpayer in order to determine the
09, 2016,penned by J. taxpayer's correct internal revenue liabilities95 and for the
Leonen). purpose of collecting the correct amount of tax, in accordance
with Section 5 of the Tax Code, which gives the CIR the power
An assessment, however, is not altogether inconsequential; it is to obtain information, to summon/examine, and take testimony
relevant in the proper pursuit of judicial and extra judicial of persons. The LOA commences the audit process and informs
remedies to enforce taxpayer liabilities and certain matters that the taxpayer that it is under audit for possible deficiency tax
to enforce taxpayer liabilities and certain matters that relate to assessment .(CIR vs. De La Salle University, Inc.,G.R. No.
it, such as the imposition of surcharges and interest, and in the 196596,November 9,2016)
application of statutes of limitations and establishment of tax
liens. (Tupaz v. Ulep, G.R. 127777, October 1, 1999) Requisites of a VALID LOA (RMO
44-2010) (PETTA-30)
● NOTE: concept of assessments: As the above jurisprudence 1. It must be issued by the proper approving official
mentions, the filing of tax returns is voluntary and self – a. Regional Director (RD) – in cases of LOA made by
assessing, meaning it is up to the taxpayer whether to file Regional District Offices
their own taxes and what amount will be reported in the tax (RDO)
returns. The Bureau of Internal Revenue (BIR) in turn, has b. Assistant Commissioner – Large Taxpayer Services
the vital role of checking whether the amounts reported by (ACIR – LTS) and its
the taxpayer is correct through an audit which is initiated divisions
through a BIR document called Letter of Authority (LOA). c. Deputy Commissioner Legal and
Any findings made shall be Inspection Group – Enforcement
communicated to the taxpayer by way of an Services and
of due process responds through filing of protest. (Id.)
d. CIR or any authorized official – Task
Force and Special Teams
 In case officers are replaced, a new LOA should be issued
written character, notation or erasure; indicating the new names of the officers handling said case .
3. Must cover only one (1) taxable year, except in tax fraud (Nikken [Link],CTAEBNo.1569,June7,
cases authorized by the CIR or Deputy Commissioner and 2018)
excise
taxes; 6. It must be served to the taxpayer within thirty (30)
days).
A Letter of Authority [LOA] should cover a taxable period not
exceeding one taxable year. The practice of issuing [LOAs] ▪ It must be served to the taxpayer within 30 days from its date
covering audit of unverified prior years is hereby prohibited. of issuance; otherwise, it shall become null and void. The
If the audit of a taxpayer shall include more than one taxable taxpayer shall then have the right to refuse the service of
period, the other periods or years shall be specifically this LA, unless the LA is revalidated. It can be revalidated
indicated in the [LOA] The requirement to specify the through the issuance of a new LA. It can be revalidated only
taxable period covered by the LOA is simply to inform the once, if issued by the
taxpayer of the extent of the audit and the scope of the Regional Director; twice, if issued by the
revenue officer's authority. Without this rule, a revenue CIR. The suspended LA(s) must be
officer can unduly burden the taxpayer by demanding attached to the new issued LA. (RMO
random accounting records from random unverified years, 38-88)
which may include documents from as far back as ten years
in cases of fraud audit([Link] The absence of a LOA is a violation of the right to due
Salle University, Inc.,G.R. No. process
196596,November 9,2016).
In the absence of such an authority, the assessment or
examination is a nullity.(Medicard v. CIR, G.R. No. 222743,
Effect of issuing a LOA stating
April 5, 2017)
―Fiscal Year Ending 2003 and
Unverified Prior Yearsǁ Cases which need not be covered by a valid LOA:
In the present case, the LOA issued to DLSU is for Fiscal
Year Ending 2003 and Unverified Prior Years. The LOA does 1. Cases involving civil or criminal tax fraud which fall under
not strictly comply with RMO 43-90 because it includes the jurisdiction of the tax fraud division of the Enforcement
unverified prior years. This does not mean, however, that Services; and
the entire LOA is [Link] the CTA correctly held, the 2. Policy cases under audit by the Special
assessment for taxable year 2003 is valid because this Teams in the National Office.(RMO 36-99) Effect of
taxable period is specified in the LOA. DLSU was fully
apprised that it was being audited for taxable year 2003. Issuance LOA:
Corollarily, the assessments for taxable years 2001 and 2002
are void for having been unspecified on separate LOAs as Once a LOA has been issued to a taxpayer, the taxpayer will be
required under RMO No. 43-90. (Id.) precluded to amend its return.

4. Must indicate the taxes covered by the Letter Notice Letter of Authority

BIR officers to audit said entity; (1) Only for the (1) Addressed to a
purpose of notifying revenue officer is
the taxpayer that specifically required

LOA;
Letter Notices are NOT LOAs.
 discrepancy is found under the NIRC before 2. When the
revalidation of the LOA if the prescribed period to audit based on the BIR's an examination of a taxpayer himself
has been exceeded. However, failure of the Revenue RELIEF requests for the re-
taxpayer may be had
Officer to complete audit shall be subject to the investigation or re-
(2) No such limitation (2) LOA is valid only examination of his
applicable administrative sanction.
as to validity until the period being books of accounts
audited is prescribed. and it was granted
(3 years) and have to by the
be issued within 30 Commissioner;
days to the TP to be 3. When there is
valid. a need to verify the
(3) Does not have a (3) LOA gives the taxpayer‘s
period of examination revenue officer only a compliance with
period of 10days from regard to
withholding and
receipt of LOA to
other internal
conduct his
revenue taxes as
examination of the
prescribed in a
taxpayer
Revenue
Number of
Memorandum Orders issued by the
times a
taxpayer
may be
audited

General
rule: A
taxpayer
can be
Simply
subjected put, LN is entirely different and serves a
to different purpose than a LOA. ([Link],
G.R. No. 222743, April 5, 2017)
examinatio
n and
2. Tax Audit or Investigation
inspection
for the
same▪ A Revenue Officer is allowed only 120 days
taxable to conduct the audit and submit the
year ONLY required report of investigation from the date BIR Audit Prog
ONCE. of receipt of an LOA by the taxpayer. If the
RO is unable to submit his final report of The report of in
EXCEPTIONS: investigation within the 120-day period, he covered by elec
1. When the CIR determines that fraud, irregularities, ormust then submit a Progress Report to his pursuant to this
mistakes were committed by the taxpayer;
Head of Office, and surrender the LOA for RO within the
revalidation. calendar days:
Cases covered by eLA: 180 days for Regional cases and 240
days for LT cases, from the date
of issuance of eLA;

VAT Audit: Within 60 to 90 days from the date of issuance of

eLA covering 1 or 2 quarters, respectively.

Effect of failure to complete audit within

120 days

Commissioner;
4. When the taxpayer‘s capital gains tax liabilities must be
verified; and
5. When the commissioner chooses to exercise his power to
obtain information relative to the examination of other
taxpayers (Secs. 5 and 235, NIRC)

Powers that can be used by the BIR

during a BIR audit
The failure of a taxpayer to file his or her return will not hinder
the Commissioner from permitting the taxpayer's examination.
The Commissioner can examine records or other data relevant
to his or her inquiry in order to verify the correctness of any
return, or to make a return in case of noncompliance, as well as
to determine and collect tax liability.
(Commissioner vs. Fitness by Design,G.R. No.
215957, November 09, 2016,penned by J.
Leonen)

i. Power of the Commissioner to Obtain Information,

and to Summon/ Examine, and Take
Testimony of Persons(Sec 5, NIRC)