Income Taxation

2025
─

Compiled by
MICHELLE M. CANDELARIA
Faculty
Accounting Education
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UNIT 1- BASIC PRINCIPLES

Introduction to Taxation

Learning Objectives
After studying this chapter, you should be able to:

1. Define taxation.
2. Describe the nature, basis and objectives of taxation.
3. Differentiate the three inherent powers of the State.
4. Explain the principles of a sound taxation system.
5. Identify and explain constitutional and inherent limitations.
6. Describe various sources of taxation laws.
7. Name and describe the situs of taxation and its application.
8. Define tax and describe its essential characteristics.
9. Identify and distinguish classification of taxes.
10. Have a fair knowledge of the sources of tax authority and the sources of tax laws.
11. Describe the powers of the Commissioner of Internal Revenue.
12. Distinguish between income and capital.

Overview Definition, Nature and Basis of Taxation

Taxation – is the process or means by which the sovereign, through its lawmaking body, raises income to defray the
necessary expenses of the government.

- Taxation, as a power of the State, is inherent in sovereignty.

Objectives of Taxation
• Taxation is much more than just a means of raising revenue for the government.
• It is one of the major means by which the national government attempts to achieve various economic and
social objectives. These objectives include shifting wealth from the rich to the poor, maintaining price stability,
stimulating economic growth, and encouraging full employment.

In its efforts to achieve these objectives, Congress tends to use tax provisions in two different ways.
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1. Some tax rules are enacted for the purpose of mitigating certain undesirable economic and social
conditions already existing.
Example: low-income individuals often pay little or no national income taxes because of the elaborate system
of exclusions, deductions, and credits of current law

2. Other tax rules provide incentives for certain desirable activities.

Example: business can claim deductions for depreciation of productive assets much faster than the assets
actually wear out. This provides incentive for businesses to invest in these assets, leading to increased
employment of low- and middle-income workers.

State Powers
1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary expenses of
the government.
2. Eminent Domain. The power of the state to take private property for public use upon payment of just
compensation.
3. Police Power. The power of the state to enact laws to promote public health, public morals, public safety and
the general welfare of the people.

Aspects of Taxation
1. Levying of the tax. The imposition of tax requires legislative intervention. In the Philippines, it is Congress that
levies taxes; and
2. Collection of the tax levied. This is essentially an administrative function.

Basic Principles of a Sound Tax System

1. Fiscal adequacy. Sources of revenue are sufficient to meet government expenditures;
2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayer's ability to pay; and
3. Administrative feasibility. The law must be capable of convenient, just and effective administration.

Limitations on the Power of Taxation

The power of taxation is, however, subject to constitutional and inherent limitations.

1. Constitutional limitations are those provided for in the constitution or implied from its provisions.
2. Inherent limitations are restrictions to the power to tax attached to its nature.
The following are the inherent limitations:
a. Purpose. Taxes may be levied only for public purpose;
b. Territoriality. The State may tax persons and properties under its jurisdiction;
c. International comity. The property of a foreign State may not be taxed by another;
d. Exemption. Governmental agencies performing governmental functions are exempt from taxation;
e. Non-delegation. The power to tax being legislative in nature may not be delegated.
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Prospectivity of Tax Laws, Double Taxation

Prospectivity of Tax Laws

Taxes must be imposed prospectively. But if the legislative intent is for a tax statute to operate retroactively, then
such statute must state so explicitly and clearly. In the words of the Supreme Court: "Taxes may be imposed
retroactively by law but, unless so expressed by such law, these taxes must only be imposed prospectively." (Hydro
Resources vs. Court of Appeals, G.R. 80276, Dec. 21, 1990, 192 SCRA.

Double Taxation

Double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the
legality of a tax measure. However, if double taxation amounts to a direct duplicate taxation, in that the same subject
is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose by the
same taxing authority, within the same jurisdiction or taxing district, for the same taxable period and for the same
kind or character of a tax, then it becomes legally objectionable for being oppressive and inequitable.

Indirect double taxation is one other than the direct double taxation. Though this type may not prove
unconstitutional, it is being avoided so as not to bring injustice to the taxpayer.

Example: when business tax is imposed by the municipal government prior to the issuance of a business license to a
taxpayer for engaging in an advertising business. His income from his advertising business shall later be imposed
income tax by the national government.

When an item of income is taxed in the Philippines and the same income is taxed in another country, there is only a
case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing
authorities.

Usual Methods of Avoiding the Occurrence of Double Taxation

1. allowing reciprocal exemptions either by law or by treaty

2. allowance of tax credit for foreign taxes paid
3. allowance of deduction for foreign taxes paid
4. reduction of the Philippine tax rate.

Set-off of Taxes, Escape from Taxation

Set-off of Taxes

• Taxes are not subject to set-off or legal compensation under Article 1279 of the Civil Code.
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Escape from Taxation

1. Tax avoidance – happens when the taxpayer minimizes his tax liability by taking advantage of legally available
tax planning opportunities. This is otherwise known as tax minimization; others call it tax planning.
- It is the process of controlling one’s actions to avoid undesirable tax consequences.
- Tax avoidance is a completely legal activity.

2. Tax evasion – occurs when the taxpayer resorts to unlawful means to lessen or to get away with his tax
liability. This is also known as tax dodging.
Examples: under-declaration of sales, overstatement of expenses and backdating an important document.

Situs of Taxation
The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and collect the tax where
the subject being taxed has a situs under its jurisdiction. The situs of taxation is determined by a number of factors:

1. Subject matter – or what is being taxed. He may be a person or it may be a property, an act or activity;
2. Nature of tax – or which tax to impose. It may be an income tax, an import duty or a real property tax;
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer.

The following situs of taxation apply:

1. Persons - Residence of the taxpayer.
2. Real property or tangible personal property - Location of the property.
3. Intangible personal property - As a rule, situs is the domicile of the owner unless he has acquired a situs
elsewhere.
4. Income - Taxpayer's residence or citizenship, or place where the income was earned.
5. Business, occupation and transaction - Place where business is being operated, occupation being practiced
and transaction completed.
6. Gratuitous transfer of property - Taxpayer's residence or citizenship, or location of the property.

Taxes
Definition of Tax
Taxes – are enforced proportional contributions from persons and property levied by the lawmaking body of the State
by virtue of its sovereignty for the support of the government and all public needs.

- is any contribution imposed by the government upon individuals, for the use and service of the state, whether
under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.
- Tax, in its essential characteristics, is not a debt (Black's Law Dictionary).
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Essential Characteristics of a Tax

1. It is an enforced contribution;
2. It is levied by the law-making body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purpose.

Types of Tax Rate Structure

1. regressive - the average rate decreases as the tax base increases.
2. proportional taxes - also called flat or uniform taxes)
- The average rate of tax remains constant for all levels of the tax base
3. progressive tax - the average rate increases as the amount of the tax bases increases.

Constitutional Provision on Progressive System of Taxation

The Supreme Court declared Republic Act (R.A.) 9337 or the VAT Reform Act constitutional. In the same decision, it
clarified the constitutional provision on progressive system of taxation. The increase in corporate income. tax rate
and the removal of certain exemptions are meant to distribute the burden of taxation. Although indirect taxes, e.g.
VAT, are regressive by nature, the constitution does not prohibit the imposition of indirect taxes. When the
Constitution mandated Congress to evolve a progressive system of taxation, it simply meant that direct taxes should
be preferred and that the regressive indirect taxes can be minimized with exemptions and differentiated rates
(G.R.168056, G.R. 168207, G.R. 168461, G.R. 168463, and G.R.168730, Sept. 1, 2005).

Classification of Taxes
1. As to subject matter or object
a. Personal, poll or capitation – tax of a fixed amount imposed on individuals, whether citizens or not,
residing within a specified territory without regard to their property or the occupation in which they
may be engaged. Example: community tax.
b. Property – tax imposed on property, whether real or personal, in proportion either to its value or in
accordance with some other reasonable method of apportionment. Example: real estate tax.
c. Excise – tax imposed upon the performance of an act the enjoyment of a privilege or the engaging in
an occupation. Examples: estate tax, donor’s tax, income tax, value-added tax.

2. As to who bears the burden

a. Direct – tax demanded from persons who are intended or bound by law to pay the tax. Examples:
community tax, income tax, estate tax, donor's tax.
b. Indirect- Tax which the taxpayer can shift to another. Examples: customs duties, value-added tax,
some percentage taxes.
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3. As to determination of amount
a. Specific – tax imposed based on a physical unit of measurement, as by head or number, weight, or
length or volume. Examples: tax on distilled spirits, fermented liquors, cigars, wines, fireworks, etc.
b. Ad valorem – tax of a fixed proportion of the value of property; needs an independent appraiser to
determine its value. Examples: real estate tax, certain customs duties, excise taxes on cigarettes,
gasoline and others.

Excise taxes on certain specific goods imposed under the National Internal Revenue Code are either specific
or ad valorem taxes.

4. As to purpose
a. General, fiscal or revenue – tax with no particular purpose or object for which the revenue is raised,
but is simply raised for whatever need may arise. Examples: income tax, value-added tax.
b. Special or regulatory – tax imposed for a special purpose regardless of whether revenue is raised or
not, and is intended to achieve some social or economic end. Example: protective tariffs or customs
duties on certain imported goods to protect local industries against foreign competition.

5. As to authority imposing the tax or scope

a. National – Tax imposed by the national government. Examples: internal revenue taxes, tariff and
customs duties.
b. Municipal or local – Tax imposed by municipal governments for specific needs. Examples: real estate
taxes, municipal licenses.

6. As to graduation or rate
a. Proportional – Tax based on a fixed percentage of the amount of property income or other basis to
be taxed. Examples: percentage taxes, real estate taxes.
b. Progressive or graduated – Tax rate Increases as the tax base increases. Examples: income tax, estate
tax, donor's tax.
c. Regressive – Tax rate decreases as the tax base increases. Example: value-added tax.

Tax Distinguished from Other Fees

1. From toll. Toll is a sum of money for the use of something, generally applied to the consideration which is
paid for the use of a road, bridge or the like, of a public nature.
A toll is a demand of proprietorship, is paid for the use of another's property and may be imposed by the
government or private individuals or entities; while tax is a demand of sovereignty, is paid for the support of
the government and may be imposed only by the state.
2. From penalty. Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious.
Violation of tax laws may give rise to imposition of penalty.
A penalty is designed to regulate conduct and may be imposed by the government or private individuals or
entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the
government.
3. From special assessment. Special assessment is an enforced proportional contribution from owners of lands
for special benefits resulting from public improvements.
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Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on
benefits and is exceptional both as to time and place. Tax is levied on persons, property, or exercise of
privilege, which may be made a personal liability of the person assessed, is based on necessity and is of
general application.

4. From permit or license fee. Permit or license fee is a charge imposed under the police power for purposes of
regulation.
License fee is imposed for regulation and involves the exercise of police power while tax is levied for revenue
and involve the exercise of the taxing power. Failure to pay a license fee makes an act or a business illegal
while failure to paya tax does not necessarily make an act or a business illegal.

5. From debt. A debt is generally based on contract, is assignable and may be paid in kind while a tax is based
on law, cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for
non-payment of debt while he can be for non-payment of tax (except poll tax).

6. From revenue. Revenue is broader than tax since it refers to all funds or income derived by the government
taxes included. Other sources of revenues are government services, income from public enterprises and
foreign loans.

7. From customs duties. Customs duties are taxes imposed on goods exported from or imported to a country.
Customs duties are actually ta es but the latter is broader in scope.

Tax Laws
Sources of Tax Authority
The three branches of the national government are:

1. the President and his administration (executive),

2. the Congress (legislative), and
3. the Courts (judicial).

Congress creates statutory law. Republic Act 8424, The National Internal Revenue Code (NIRC) of 1997, is a
statutory law.

• The administrative branch of the national government includes the Department of Finance (DOF), of which
the Bureau of Internal Revenue is a bureau.
• Two commonly encountered types of administrative tax authorities are Revenue Regulations and Revenue
Rulings.
• Most Revenue Regulations are administrative interpretations of the statutes enacted by Congress and tend to
be somewhat more detailed than the Code itself.
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• Revenue Rulings are much more detailed, as they are issued in order to explain the tax results of very specific
transactions.
• Court decisions occur when the BIR and taxpayers are unable to agree on what constitutes the correct
application of the tax statutes to specific situations.
• While Congress writes the statutes, an administrative branch implements them, the judiciary branch has the
final say on what the words of the statutes really mean in actual application.

In summary, tax “law”, in general, is composed of all three elements: (1) the Code; (2) Regulations and
Rulings, and (3) decisions of various courts that hear tax cases.

Sources of Tax Laws

1. Constitution;
2. Statutes and Presidential Decrees;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals;
The "rational basis test" is applied to gauge the constitutionality of an assailed law in the face of an equal
protection challenge. It has been held that, "in areas of social and economic policy, a statutory classification
that neither proceeds along suspect lines nor infringes constitutional rights must be upheld again equal
protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis
for the classification.” Under this test, it is sufficient that the legislative classification is rationally related to
achieving some legitimate State interest (British American Tobacco vs. Jose Isidro Camacho, et al., G.R. 163583,
April15, 2009).
6. Provincial, city, municipality, and barangay ordinances subject to limitations set forth in the Local Government
Code; and
7. Treaties or international agreements the purpose of which is to avoid or minimize double taxation.

Republic Act 9282

R.A. 9282 expanded the jurisdiction of the Court of Tax Appeals (CTA). This law took effect on Apr. 22, 2004. It amended
R.A. 1125 – the law creating the CTA. Some salient features of R.A. 9282 follow:

• The CTA shall be of the same level as the Court of Appeals (CA).
• It shall be composed of a presiding justice and five associate justices. For en banc sessions, four justices shall
constitute a quorum. The affirmative vote of four members shall be necessary to render a decision or
resolution.

• There shall be two divisions (with three members each); the chairmen shall be the presiding Justice and the
most senior associate. Two justices constitute a quorum for sessions of a division. In order to render a
decision/resolution, the affirmative vote of two members of a division is necessary.
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• The CTA has exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC and
other laws administered by the BIR where the principal amount of taxes and fees (exclusive of charges and
penalties) claimed is P1 million and above. For the same amount of claim, the CTA has exclusive original
jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and
penalties.

• The CTA has the exclusive jurisdiction to review on appeal decisions of the Commissioner of Internal Revenue
(CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties, or other matters. In case of inaction by the BIR where the NIRC provides a specific period of action,
the inaction shall be deemed a denial and the CT A has the jurisdiction to review the same.

• The Supreme Court has ruled that while the Revised Rules of the CTA confers on the CTA jurisdiction to resolve
tax disputes in general, this does not include cases where the constitutionality of a law or rule is challenged
(British American Tobacco vs. Jose Isidro Camacho, et. of., G.R. 163583). The regular courts have jurisdiction
to pass upon the validity of a law, or a rule or regulation issued by an administrative agency in the performance
of its quasi-legislative function.

Interpretation and Construction of Tax Statutes

The recognized rules in statutory construction also apply to tax statutes. As in other statutes, the legislative intent is
the primary concern. However, where there is doubt in determining the legislative intent, the doubt must be resolved
liberally in favor of taxpayers and strictly against the taxing authority.

• Exemptions in taxation are highly disfavored in law. they are not to be presumed nor implied but must be
clearly expressed.
• A tax exemption, when granted, shall be strictly construed against the grantee. Thus, he who claims the tax
exemption must be able to justify his claim or right.
As decided by the Supreme Court: "The exception contained in the tax statutes must be strictly construed against the
one claiming the exemption because the law does not look with favor on tax exemptions and that he who would seek
to be, thus, privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted."
(Commissioner of Internal Revenue vs. J. Kiener Company, Ltd., 65 SCRA 143)

Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (P.O. 1158, as amended);
a. income taxes (individual and corporate);
b. estate and donor's taxes;
c. value-added tax;
d. other percentage taxes;
e. excise tax; and
f. documentary stamp tax.
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2. Tariff and Customs Code of 1978 (P.D. 1464, as amended);

a. Import duties; and
b. Export duties

3. Local Government Code of 1991 (R.A. 7160);

a. Real property tax
b. Business taxes, fees and charges;
c. Professional tax
d. Community tax; and
e. Tax on banks and other financial institutions

4. Special Laws
a. Motor Vehicle Law (R.A. 4136) - motor vehicle fees;
b. Private Motor Vehicle Tax Law (P.O. 1958) - private motor vehicle tax; Philippine Immigration Act of
1940 (C.A. 613, as amended) - immigration tax; and
c. Travel Tax Law (P.O. 1183, as amended) - travel tax.

Tax Laws Versus GAAP and GAAS

All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax
Code, and the rules and regulations issued implementing said Tax Code.

• Taxability of income and deductibility of expenses shall be determined strictly in accordance with the
provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code.
• In case of difference between the provisions of the Tax Code and the rules and regulations implementing the
Tax Code, on one hand, and the generally accepted accounting principles (GAAP) and the generally accepted
auditing standards (GAAS) on the other hand, the provisions of the Tax Code and the rules and regulations
issued implementing the said Tax Code shall prevail (Revenue Memorandum Circular 22-04, Apr. 12, 2004).

Internal Revenue Laws

Revenue law is a law passed for the purpose of authorizing the levy and collection of taxes in some form to raise
revenue. A revenue law is said to be a national revenue law when it is applicable all over the country.

Internal revenue laws are neither political nor penal in nature although there are penalties in case of violations. Tax
laws are civil in nature.

History of the Philippine Internal Revenue Law

The first Philippine Internal Revenue Law, patterned after that existing in the United States, was approved by the
Philippine Commission on July 2, 1904, as Act 1189 effective Aug. 4, 1904. Subsequent internal revenue laws were
approved in 1913, 1916 and 1917. On June 15,1939, the National Assembly approved the National Internal Revenue
Code (NIRC) as Commonwealth Act 466, which took effect on July 1, 1939. The Code was amended by Republic Act
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6110 otherwise known as The Omnibus Tax Law in 1969, Presidential Decree 69 in 1972, NIRCs of 1977 and 1986, and
various presidential decrees and executive orders.

Enacted on July 28, 1997, by the Philippine Congress was Republic Act 8424, An Act Amending the National Internal
Revenue Code, As Amended, And For Other Purposes, otherwise known as the "Tax Reform Act of 1997." The Act
declares the policy of the State to promote sustainable economic growth through the rationalization of the Philippine
internal revenue tax system, including tax administration; to provide, as much as possible, an equitable relief to a
greater number of taxpayers in order to improve levels of disposable income and increase economic activity; and to
create a robust environment for business to enable firms to compete better in the regional as well as the global
market, at the same time that the State ensures that Government is able to provide for the needs of those under its
jurisdiction and care.

The Code imposes progressive rates of income taxes on citizens and resident aliens. The progressive scheme of
income taxation was introduced in our tax system as a measure of raising more revenues to meet adequately the
increasing needs of the government and at the same time to correct inequalities in taxation by equitably distributing
the tax burden based upon the principle of ability to pay.

Bureau of Internal Revenue

• The Bureau of Internal Revenue (BIR) functions under the supervision and control of the Department of
Finance (DOF).
• The Bureau was created by Commonwealth Act 466, approved by the National Assembly on June 15, 1939,
effective July 1, 1939, which revised and codified the then internal revenue laws of the Philippines.

Tax Collection System

With a growing taxpayer population and limited resources, the BIR adopted the "self-assessment system" when
Republic Act 2343 was enacted in 1959. Republic Act 8424 otherwise known as the Tax Reform Act of 1997 retained
this principle.

• Under the self-assessment system, the taxpayer calculates the tax by himself or through an accountant, fills
up his tax return, files it with the proper tax office, and pays the tax due thereon upon filing. The process by
which the tax is computed and determined is what is called the "self-assessment" method and the resulting
tax a "self-assessed tax.

Methods of Collection Utilized By The BIR

1. Voluntary Compliance (voluntary payment) – the act of tendering the payment of the self-assessed tax
2. Collection By Enforcement – is conducted through the identification of sectors of business or industries,
and/or segments of economic activities where the degree of compliance is low, and the subsequent audit or
investigation of enterprises and companies that are part of these selected industries.
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BIR Issuances and Rulings Defined

Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective
enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.

Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations and precedent issued by the BIR and other agencies/offices.

Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions; prescribe guidelines; and
outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of
stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.

Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal
Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with
or without established precedents, and which the Commissioner may issue from time to time for the purpose of
.providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot
contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio.

BIR Rulings are official positions of the BIR on inquiries of taxpayers, who request clarification on certain provisions
of the Tax Code, other tax laws, or their implementing regulations, usually for seeking tax exemptions. Rulings are
based on particular facts and circumstances presented and are interpretations of the law at a specific point in time.
Tax rulings cannot be cited as precedent, but can provide useful information on how the BIR may treat-a similar
transaction. They are also issued to answer questions of individuals and juridical entities regarding their status as
taxpayers, and the effect of their transactions for taxation purposes.

Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of
Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or
administration in relation to the provisions of the Tax Code, relevant to tax laws and other issuances for the guidance
of the public.

The BIR also issues Revenue Audit Memorandum Orders (RAMOs).

Powers and Duties of the Bureau of Internal Revenue

The chief officials of the Bureau are the Commissioner and seven (7) Deputy Commissioners. The Deputy
Commissioners are tasked to handle particular groups within the Bureau such as information systems, legal and
inspection, operations, resource management, tax reforms administration, special concerns and large taxpayers. Its
powers and duties follow:
1. Assessment and collection of all national internal revenue taxes, fees and charges;
2. Enforcement of all forfeitures, penalties, and fines;
3. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and ordinary courts; and
4. Administration of supervisory and police powers conferred to it.
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Powers of the Commissioner

1. Interpret tax laws and decide tax cases;
2. Obtain information, and to summon, examine, and take testimony of persons;
3. Make assessments and prescribe additional requirement for tax administration and enforcement.
4. Delegate powers vested in him by the Code to any subordinate officer with rank equivalent to a division chief
or higher.
5. Suspend business operations of a taxpayer.
6. Compromise, abate and refund or credit taxes.

Tax Incentives
An example of a law that grants tax incentives is the Adopt-a-School Act of 1998 (R.A. 8525). Revenue Regulations 10-
2003 implements the tax incentive provisions of said law. A pre-qualified adopting private entity which enters into an
agreement with a public school shall be entitled to the following tax incentives:

• Deduction from gross income of the amount of contribution/donation that were actually, directly and
exclusively Incurred for the Program, subject to limitations, plus an additional amount equivalent to 50% of
such contribution/donation;
• Exemption of the Assistance made by the donor from payment of donor’s tax.

Income and Income Taxes

Income Defined and Distinguished from Capital
Income, in its broad sense, means all wealth, which flows into the taxpayer other than a mere return of capital. It is
the return in money from one's business, labor, or capital invested, e.g., gains, profits, salary and wages. The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted from the
class of taxable income under our laws {Commissioner vs. BOAC L-65773, April 30, 1987, citing Madrigal vs. Rafferty,
38 Phil. 14).

Income is also defined as the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income may also be thought of as a flow of the fruits of one's labor.

Capital is a fund or property existing at one distinct point of time. Income, on the other hand, denotes a flow of wealth
during a definite period of time. Income, on the other income is the service of wealth. In the Madrigal case, Supreme
Court made an essential distinction between capital and income: "…capital is a fund, while income is a flow; capital is
wealth, while income is the service of wealth; capital is a "tree" and income is the "fruit"."
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Income Tax Defined, Base and Nature

• Income tax is a tax on all yearly profits arrs1ng from property, profession, trade or business, or isa tax on a
person's income, emoluments, profits and the like.
• Income tax is generally regarded as an excise (privilege) tax. It is not levied upon persons, property, funds, or
profits as such but upon the right of a person to receive income or profits. Income tax is based on income,
either gross or net, realized in one taxable year.

General Procedures in Determining Income Tax

Step 1 is to identify the taxpaying party or "entity,' to which the tax computation formula applies. Some legal entities
are taxed; others are not. Taxpaying entities include individuals, most corporations, private partnerships and estates.
Unincorporated businesses such as proprietorships and general professional partnerships(GPPs) are not taxed;
rather, their income is taxed directly to the owners of such businesses. Citizenship and residency are also considered.
Other entities such as trusts are treated in yet another fashion, with their incomes being taxed to the trusts if retained
but taxed to the trust's beneficiaries if distributed.

Step 2 is to determine the taxpayer's "gross income." Appreciation in market value is not generally regarded as income
for tax purposes unless realized through a sale or exchange. Even if income is realized, the Code provides for several
specific types of income to be "excluded," that is, not counted for purposes of measuring gross income. The source
of income (whether within the Philippines or without) must also be known.

Step 3 is to determine the expenses and certain other items that can be "deducted'' in computing the taxpayer's
"taxable income."

Step 4 is to apply the appropriate "tax rate" to the taxpayer's taxable income to find the "tax due." For any particular
taxpayer, the applicable rate depends on the type of taxpaying entity, level of income, and in the case of an individual,
his or her citizenship, residency and certain other aspects. The rules for determining appropriate tax rates for each
type of taxpayer are covered in the chapters cited in Step 1.

Step 5 is to subtract any applicable "tax credits/payments" from the taxpayer’s tax due in finding the "tax payable.”
Unlike deductions that reduce taxable income, tax credits/payments are a direct offset to the tax itself.

Step 6 is to increase the tax by "penalties and interests" to obtain the “total amount payable."

Source: Ballada, W. & Ballada, S. (2024) Income Taxation Made Easy. Domdane Publishers & Made Easy Books