INCOME TAXATION: GENERAL OVERVIEW

Definition of Taxation:
 Taxation is the process or means by which the sovereign (independent state), through its law-making body (the
legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of government.

TAXATION – defined as a state of power, legislative process, and a mode of government cost distribution.

THEORY OF TAXATION – a government cannot exist without a system of funding; therefore, the government’s necessity
for funding is the theory of taxation.

BASIS OF TAXATION – the government provides benefits to the people in the form of public services, and the people
provide the funds that finance the government. The mutuality of support between the people and the government is the
basis of taxation.

THEORIES OF COST ALLOCATION:

1. BENEFIT RECEIVED THEORY – the more benefit one receives, the more he should pay.
2. ABILITY TO PAY THEORY – should consider the taxpayer’s ability to pay; contribute based on their relative capacity.
Aspects:
 Vertical Equity (Gross concept) - the extent of one's ability to pay is directly proportional to the level of his tax
base.
 Horizontal Equity (Net concept) – requires consideration of the particular circumstance of the taxpayer

LIFEBLOOD DOCTRINE – TAXES are lifeblood of the government. Without taxes, the government would be paralyzed for
lack of motive power to activate or operate it.

INHERENT POWERS OF THE STATE:

1. TAXATION POWER – power of the state to enforce proportional contribution from its subjects to sustain itself.
2. POLICE POWER – general power of the state to enact laws to protect the well-being of the people.
3. EMINENT DOMAIN POWER - power of the state to take private property for public use after paying just
compensation.

SCOPE OF THE TAXATION POWER – the scope of taxation is widely regarded as comprehensive, plenary, unlimited and
supreme, but not absolutely unlimited as is has inherent and constitutional limitations.

SUBSTANTIVE DUE PROCESS – Tax must be imposed only for public purpose, collected only under authority of a valid
law and only by the taxing power having jurisdiction.

PROCEDURAL DUE PROCESS – There should be no arbitrariness in assessment and collection of taxes, and the
government shall observe the taxpayer’s right to notice and hearing.

EQUAL PROTECTION OF THE LAW – no person shall be denied the equal protection of the law. Taxpayers should be
treated equally both in terms of rights conferred and obligations imposed.

UNIFROMITY RULE IN TAXATION – taxpayers under dissimilar circumstances should not be taxed the same.
NON-PAYMENT OF TAX compromises the public, while NON-PAYMENT OF DEBT compromises private interest. NON-
PAYMENT OF TAX is similar to a crime. The Constitutional guarantee on non-payment of debt does not extend to non-
payment of tax, except poll tax.

EXEMPTED INSTITUTIONS
Religious, charitable, or educational entities, non-profit cemeteries, churches, and mosques, lands, buildings, and
improvements from property taxes.

STAGES OF THE EXERCISE OF TAXATION POWER:

1. LEVY or IMPOSITION – (referred to as the legislative act) process involves the enactment of a tax law by Congress and
is called impact of taxation.
Composition of Congress:
▪ The House of Representatives
▪ The Senate
2. ASSESSMENT and COLLECTION – (referred to as incidence of taxation or administrative act of taxation) Tax law is
implemented by the administrative branch of the government. Implementation involves assessment or the
determination of the tax liabilities of taxpayers and collection.

SITUS OF TAXATION – is the place of taxation. Serves as frame or reference in gauging whether the tax object is within or
outside the tax jurisdiction of the taxing authority.
Situs Rules:
1. Business Tax Situs – businesses are subject to tax in the place where the business is conducted.
2. Income Tax Situs on Services – service fees are subject to tax where they are rendered.
3. Income Tax Situs on Sale of Goods – the gain on sale is subject to tax in the place of sale.
4. Property Tax Situs – properties are taxable in their location.
5. Personal Tax Situs – persons are taxable in their place of residence.

Income tax
 A tax on all yearly profits arising from property, professions, trades, or offices, or
 A tax on a person’s income, emoluments, profits and the like
 It may succinctly defined as a tax on income, whether gross or net, realized in one taxable year
TN: Yearly profits because insofar as income taxation is concerned, collection of income tax is on a year-to-year basis.

Nature of Income Tax

National Tax
 Tax imposed by the National Government (specifically the legislative department)
 It is the BIR who implements or administers the collection of taxes
You cannot go to the municipal treasurer to pay your income taxes. Even if your payment is received by
the municipal treasurer, it will be as if you have not paid because it is a wrong jurisdiction.

Excise Tax
 It is levied upon the right or the privilege of a person to receive income or profits, of which not all
taxpayers have the privilege to do so
 Direct Tax
 The tax burden is borne by the income recipient upon whom the tax is imposed. It is tax demanded from
the very person, who it is intended for and who should pay the tax.
In other words, the impact as well as the incidence of taxation falls on the very same person. Thus, the
statutory tax payer will have the burden.

Purposes of Income Tax

 Fiscal Purpose
1. To provide large amounts of revenue (general revenue)
 Non-Fiscal Purpose
2. To offset regressive sales and consumption taxes
3. To mitigate the evils arising from the inequalities in the distribution of income & wealth which are considered
deterrents to social progress, by a progressive scheme of taxation.

General Principles of Income Taxation

a. A RESIDENT CITIZEN is taxable on all income derived from sources WITHIN AND WITHOUT the Philippines.
b. A NON-RESIDENT CITIZEN is taxable only on incomes derived from sources WITHIN the Philippines
c. An OVERSEAS CONTRACT WORKER is taxable only on income from sources WITHIN the Philippines. A seafarer
who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of
the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas
contract worker.
d. An ALIEN INDIVIDUAL whether a resident or no of the Philippines, is taxable only on income derived from
sources WITHIN the Philippines.
e. A DOMESTIC CORPORATION is taxable on all income derived from sources WITHIN AND WITHOUT the
Philippines.
f. A FOREIGN CORPORATION whether engaged or not in trade of business in the Philippines, is taxable only on
income derived from sources WITHIN the Philippine.

Resident
: domiciled in the Philippines

Citizen
: Section 1, Art. 4, 1987 Constitution
 those who are citizens of the Philippines at the time of the adoption of the Constitution
 those whose fathers or mothers are citizens of the Philippines
 those born before January 17, 1973 (date of adoption of the 1973 Constitution), of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority
 those who are naturalized in accordance with law

Non-Resident Citizen
: Sec. 22 (e), NIRC
 a citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein
 a citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis
  a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires
him to be physically present abroad most of the time during the taxable year
 a citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines
 the taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines as the case may be

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

Resident Alien
 an individual whose residence is within the Philippines and who is not a citizen thereof (Sec. 22 (f), NIRC)

Non-Resident Alien
 an individual whose residence is not within the Philippines and who is not a citizen thereof (Sec. 22 (g), NIRC)
 Non-Resident Alien engaged in trade or business within the Philippines
 Non-Resident Alien not engage in trade or business within the Philippines

Domestic Corporation
 a corporation created and organized in the Philippines and under its laws (Sec. 22 (c), NIRC)

Foreign Corporation
 a corporation which is not domestic (Sec. 22 (d), NIRC)

Resident Foreign Corporation

 a foreign corporation engaged in trade or business within the Philippines (Sec. 22 (h), NIRC)

Non-Resident Foreign Corporation

 a foreign corporation not engaged in trade or business within the Philippines (Sec. 22 (i), NIRC)

Dual Citizens
 in so far as Philippines is concerned, he/she is a Filipino Citizen

Seafarers who are engaged exclusively in international trade

 considered as overseas contract workers; subject to income tax for income earned within the Philippines

Seafarer engaged in coastwise shipping (vessel operating within the country

– inter-island shipping)
 taxable on all income derived from sources within and without the Philippines; considered a resident citizen
Fringe benefit tax
 The term “compensation under section 2.78.1 of RR 2*98, as amended, means all remuneration for services
performed by an employee for his employer ender an employer-employee relationship, unless specifically
excluded by the Code.
 Fringe benefit is defined under section 2(f) of RR 8*2018 as any goods, service or other benefits furnished or
granted by an employer in cash or kind, other than the basic compensation, by an employer to an individual
employee.
 Fringe benefit tax (FBT) is a monetary burden imposed by the sovereignty on any good, service, or other benefit
furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee,
other than a rank and file employee.

Tax exempt fringe benefits

 Fringe benefits which are authorized and exempted from income tax under any special law such as:
a. Contributions required under SSS law
b. Contributions required under GSIS law
c. Similar contributions under an existing law
d. Premiums for group insurance of employees
 If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business
or profession of the employer.
 De minimis benefits
 If the grant of benefits is for the convenience or advantage of the employer.
De minimis benefits
 Facilities and Privileges such as entertainment, medical services, or so called “courtesy” discounts on purchases,
otherwise known as “De minimis benefits” furnished or offered by an employer to his employees, are not
considered as compensation subject to income tax and consequently to withholding tax, if such facilities or
privileges are of relatively small value and are offered or furnished by the employer merely as means of
promoting the health, goodwill contentment or efficiency of his employees.

The following shall be considered de minimis benefits not subject to income tax as well as withholding tax on
compensation income of both managerial and rank and file employees:

a. Monetized unused vacation leave credits of private employees not exceeding “10 days” during the year.
b. Monetized value of vacation and sick leave credits paid to government officials and employees.
c. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 a month
d. Rice subsidy of not more than P2,000 per month or 1 sack (50) kg rice per month
e. Uniforms given to employees by the employer not exceeding P6,000 per annum (as amended by RR 8-2018).
f. Actual medical assistance given not exceeding P10,000 per annum such as medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance and routine consultations.
g. Laundry allowance not exceeding P300 per month.
h. Employees achievement awards (e.g. for length of service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate with annual monetary value not exceeding P10,000 under
an established written plan which does not discriminate in favor of highly paid employees).
i. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum.
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a
per region basis provided such benefit is given on account of overtime work or if given to employees on night/graveyard
shift.
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentives
schemes provided that the total annual monetary value received from the two (2) items above combined, do not exceed
P10,000 per employee per taxable year.

BIR Ruling No. 293-2015(CBA/CAN and Productivity Incentive Pay)

- If more than P10,000 – considered de minimis
- If more than P10,000 – the entire amount shall be included in the
“other benefits” with P90,000 ceiling

P90,000 Ceiling for 13th month pay/bonuses and “Other Benefits”

Section 32(B)(7)(E) of the tax coded in relation to PD 851 as amended by RA10653 provides that 13th month pay and
other benefits received by officials of public and private entities are exempt from income tax and creditable withholding
tax on compensation, provided, however, that beginning January 1, 2018, the total exclusion shall not exceed P90,000
(RA 10963 -Train Law).
Oher benefits under these regulations include:
a. Christmas bonus
b. Productivity incentive bonus
c. Loyalty awards
d. Gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both
government and private offices.

Other fringe benefit

a. Expense account
b. Expenses for foreign travel
c. Educational assistance to the employer or his dependents
d. Membership dues or fees of employees borne by employer in social and athletic clubs or other similar organizations
e. Life or health insurance and other non-life insurance premiums treated as taxable benefits.