Income Taxation

LECTURE
MODULE 1- GENERAL PRINCIPLES
PRE-ACTIVITY COMPARISON OF THE INHERENT POWERS
1. This is the power of the State enforce proportional
contribution from its subjects to sustain itself. Taxation
2. Taxes are the main form of government Revenue
3. This is the place of taxation Situs
4. This is the process of transferring the tax burden to other
taxpayers. Shifting

INHERENT POWERS OF THE STATE

 A government has its basic needs and rights which co-exist
with its creation.
Rights of government:
 Sustenance - by the power of taxation
 Protection - by police power
 Properties - by the power of eminent domain
 These rights dubbed as “powers” are natural, inseparable and
inherent to every government.
- No government can sustain without these powers.
- It is presumed from the establishment of government. TAXATION
- Exercisable independently of the constitution
 Taxation is the inherent power of the state, exercised through
 Taxation - to enforce proportional contribution from its the legislature, to impose burdens upon subjects and objects
subjects to sustain itself. within its jurisdiction for the purpose of raising revenues to
carry out the functions of government.
 Police Power - to legislate for the protection of the health,
general welfare, safety and morals of the public. 1. Inherent Power of the State
2. Exercised through the Legislature
- It involves the power to regulate both liberty and property
3. Impose Burdens
The police power of the State may be exercised through taxation because 4. Subjects and Objects
taxes may be levied for the promotion of the welfare of the public.
5. Within its Jurisdiction
 Eminent Domain - to take private property for public use after 6. Purpose of Raising Revenues
paying just compensation. (expropriation) 7. Carry Out the Functions

SIMILARITIES OF THE INHERENT POWERS PURPOSES OF TAXATION

1. They are all necessary attributes of the sovereignty. The exercise of the power of taxation may be classified as to its
2. They are all inherent to the State. purpose:
3. They are all legislative in nature. Revenue or Fiscal - The primary purpose of taxation on the part
4. They are all ways in which the State interfere with private of the government is to provide funds or property with which to
rights and properties. promote the general welfare and the protection of its citizens and
5. They all exist independently of the Constitution. However, the to enable it to finance its multifarious activities.
Constitution may impose condition or limits.
Non-Revenue or Regulatory - Taxation may also be employed for
6. They all presuppose an equivalent form of compensation purposes of regulation or control, e.g., imposition of tariffs on
received by the persons affected by the exercise of the power. imported goods to protect local industries, the adoption of
. progressively higher tax rates to reduce inequalities in wealth and
. income and the increase or decrease of taxes to prevent inflation
. or ward off depression.
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 FUNDAMENTAL THEORIES AND DOCTRINES  Non-Compensation or Set-Off - Taxes are not subject to
automatic set-off or compensation.
 Theory of Taxation - A system of government is indispensable
Exceptions:
to every society. Without it, the people will not relish the
benefits of a civilized and orderly society. a. Where the taxpayer's claim has already become due and
demandable such as when the government already
- the government need to be fund to pay its expenses, so it
recognized the same and an appropriation for refund was
has a right to compel all its citizens and properties within
made
its limits to contribute.
b. Cases of obvious overpayment of taxes
- The governments necessity for funding is the theory of
taxation c. Local taxes
 Basis of Taxation - The basis of taxation is found in the  Non-Assignment of Taxes - Tax obligations cannot be
reciprocal duties of protection and support between the State transferred to another entity by contract.
and its inhabitants. both the government and the people  Imprescriptibility in Taxation - The government's right to
receive mutuality of benefits. collect taxes does not prescribe unless the law itself provides.
 Benefit Received Theory - This theory bases the power of the In the Philippines, tax prescribes if not collected within 5 years from the
State to demand and receive taxes on the reciprocal duties of date of its assessment. In the absence of an assessment, tax prescribes if
support and protection. not collected within 3 years from the date the return is required to be
filed. However, taxes due from taxpayers who did not file a return or those
- The taxpayer cannot question the validity of the tax law who filed a fraudulent returns do not prescribe.
because it will render him impoverished, because the
obligation to pay taxes is involuntary and compulsory  Doctrine of Estoppel - The error of any government employee
does not bind the government. the erroneous act of public
- It does not mean that only those who are able to and do pay officer is subject to correction
taxes can enjoy the privileges and protection given to a
citizen by the government.  Judicial Non-Interference - Generally, courts are not allowed
to issue injunction against the government's pursuit to collect
- Presupposes that the more benefit one receives from the
tax as this would unnecessarily defer tax collection.
government, the more taxes he should pay
Receipt of benefits conclusively presumed SCOPE OF TAXATION
Every citizen and resident of the state directly or indirectly benefits from
the public services rendered by the government. it includes the comfort of
 The power of taxation is the most absolute of all powers of the
living in a civilized and peaceful society which is maintained by the government. It has the broadest scope of all the powers of
government. government because in the absence of limitations, it is
considered as comprehensive, unlimited, plenary and
In taxation, the receipt of these benefits by the people is conclusively
presumed, thus, taxpayers cannot avoid payment of taxes under the
supreme.
defense of absence of benefit received. The direct receipt or actual  However, the power of taxation should be exercised with
availment of government services is not a precondition to taxation. caution to minimize injury to the proprietary rights of the
 Ability to Pay Theory - The ability to pay theory presupposes taxpayer. It must be exercised fairly, equally, and uniformly
that taxation should also consider the taxpayer's ability to pay.
LIMITATIONS OF TAXATION
 Lifeblood Doctrine - Taxes are the lifeblood of the  Despite the unseemingly unlimited nature of taxation, it is not
government and should be collected without necessary absolutely unlimited. Taxation has its own inherent limitations
hindrance. and limitations imposed by the Constitution.
- They are what we pay for a civilized society.
INHERENT LIMITATIONS
- Without taxes, the government would be paralyzed
 Situs/Territoriality - tax can be imposed only within its
OTHER FUNDAMENTAL DOCTRINES territories.
Exceptions:
 Marshall Doctrine - “The power to tax is the power to 1. In income taxation, resident citizens and domestic corporations are
destroy.” Taxation power can be used as an instrument of taxable on income derived both within and outside the Philippines.
police power. It can be used to discourage or prohibit
2. In transfer taxation, residents or citizens such as resident citizens, non-
undesirable activities or occupation. resident citizens and resident aliens are taxable on transfers of
 Holme’s Doctrine - “Taxation power is not the power to properties located within or outside the Philippines.
destroy while the court sits.” Taxation power may be used to  International Comity - This pertains to mutual courtesy or
build or encourage beneficial activities or industries by the reciprocity between states. in case treaties are in conflict with
grant of tax incentives. local laws, the treaties are given primacy.
 Prospectivity of Tax Laws - Tax laws are generally  Public Purpose - taxation must be exercised absolutely for
prospective in operation. However, tax laws may operate public purpose and cannot be exercised to further any private
retrospectively if so intended by Congress under certain interest.
justifiable conditions.
.  Exemption of the Government – taxing government will only
. impute additional costs, except for profit-oriented activities
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 Non-Delegation of the Taxing Power - pursuant to the  Non-diversification of tax collections - Tax collections
doctrine of separation of the branches of the government. should be used only for public purposes. It should never be
Exceptions: diversified or used in private purpose.
1. local government units are allowed to exercise the power to tax to  Non-delegation of Taxing Power - The impact of taxation
enable them to exercise their fiscal autonomy cannot be delegated. It may be delegated on matters involving
2. the President is empowered to fix the amount of tariffs to be flexible to expedient and effective administration.
trade conditions.
 Non-impairment of the jurisdiction of the Supreme Court
3. Other cases that require expedient and effective administration a to review tax cases – aside from court of tax appeals, all cases
implementation of assessment and collection of taxes. involving taxes can be raised to and be finally decided by the
Supreme Court of the Philippines.
CONSTITUTIONAL LIMITATIONS
 Appropriations, revenue and tariff bills shall originate
 Due Process of Law - No one should be deprived of his life,
exclusively from the House of Representatives - Tax Laws
liberty or property without due process of law. Tax laws should
should emanate from the House of Representatives, however,
neither be harsh nor oppressive.
the Senate may propose tax laws and may concur amendment.
Aspects of Due Process:
 Each LGU shall exercise the power to create its own
Substantive Due Process - Tax must be imposed only for public purpose, sources of revenue and shall have a just share in the
collected only under authority of valid law and only by the taxing power
national taxes - This is a constitutional recognition of the local
having jurisdiction. An assessment without legal basis violates the
requirement of due process. autonomy of LGUs and an express delegation of taxing power.
Procedural Due Process - There should be no arbitrariness in assessment STAGES OF EXERCISE OF TAXATION POWER
and collection of taxes and the government shall observe the taxpayer's
right to notice and hearing. 1. Levy or Imposition - This process involves the enactment of a
tax law by Congress. It is also referred to as the legislative act
 Equal Protection of the Law - Taxpayers should be treated
in taxation.
equally both in terms of rights conferred and obligations
imposed. This rule applies where taxpayers are under the same 2. Assessment and Collection - The tax law is implemented by
circumstances and conditions. the administrative branch of the government. Implementation
includes the assessment or determination of the tax liabilities
 Uniformity Rule - Taxpayers under dissimilar circumstances of taxpayers and subsequent collection. This stage is referred
should not be taxed the same. Taxpayers should be classified to as the administrative act of taxation.
and each class is taxed differently but taxpayers falling under
the same class are taxed the same.
SITUS OF TAXATION
 Progressive System - tax rates increase as the tax base
increases. This is consistent with the ability to pay theory. Aids  Situs – is the place of taxation. It is the tax jurisdiction that has
in an equitable distribution of wealth to society the power to levy taxes upon the tax object.
 Non-Imprisonment for Non-Payment of Debt or Poll Tax –
tax is different from debt, only the non-payment of Basic Poll
Tax (cedula) is within the scope of this limitation.
 Non-Impairment of Obligation and Contract - Tax
exemptions granted under contract should be honored and
should not be cancelled.
 Free Worship Rule - The Philippine government adopts free DOUBLE TAXATION
exercise of religion and does not subject its exercise of taxation.
 Double Taxation – occurs when the same tax payer is taxed
 Exemption of religious, charitable or educational entities, twice by the same tax jurisdiction for the same thing, it can be
nonprofit cemeteries, churches and mosques, lands, either direct or indirect.
building, and improvements from property taxes
Elements of Direct Double Taxation:
 Non-appropriation of public funds or property for the - Taxing the same object twice
benefit of any church, sect, or system of religion - it - By the same taxing authority
highlights the separation of the church and the state and to
- Within the same jurisdiction
support freedom of religion
- For the same purpose
 Exemption from taxes of the revenues and assets of non- - In the same period
profit, non-stock, educational institutions - The
Constitution recognizes the necessity of education in state  The absence of one or more of the given circumstances
building by granting tax exemption. It only applies on assets constitute indirect double taxation.
and revenues actually, directly and exclusively devoted for Constitutionality of Double Taxation:
educational purposes.
The Philippine Constitution does not prohibit double taxation. However,
 Concurrence of a majority of all members of Congress for while it is not forbidden, it is something not favored. Such taxation should,
the passage of a law granting tax exemption – Absolute whenever possible, be avoided and prevented. In addition where there is
majority is required to grant tax exemption while relative direct double taxation, there may be a violation of the constitutional
majority is only required for the withdrawal of tax exemption. precepts of equal protection and uniformity in taxation.

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 ESCAPES FROM TAXATION  Without Loss of Government Revenue - Escaping from
taxation, however, may not result into loss of government
 Escapes from taxation are the means available to the taxpayer revenue. Common examples of which are as follows.
to limit or completely avoid the impact of taxation.
 Shifting - the process of transferring the tax burden to
 With Loss of Government Revenue - The following are the other taxpayers.
escapes from taxation that would result to loss of government
revenue.  Capitalization - pertains to the adjustment of the value of
an asset caused by changes in tax rates.
 Tax Evasion - Also known as tax dodging, it refers to any
act or trick that tends to illegally reduce or avoid the  Transformation - This pertains to the elimination of
payment of tax. wastes and losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.
 Tax Avoidance - Also known as tax minimization, refers
to any act or trick that reduces or totally escapes taxes by TAX AMNESTY VS. TAX CONDONATION
any legally permissible means.
 Tax amnesty - is a general pardon given by the government to
 Tax Exemption - Also known as tax holiday, refers to erring taxpayers.
immunity, privilege or freedom from being subject to a tax
- It generally operates retrospectively by forgiving past
which others are subject to.
violations.
- It is conditional upon the taxpayer paying a portion of the
tax.
 Tax condonation - or tax remission prospectively applies to
forgiving any unpaid balance of tax.
- The portion already paid is not refunded and no further
payment is necessary.
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Income Taxation
LECTURE
MODULE 2 – TAXES, LAWS, SYSTEM & ADMINISTRATION
D. As to Amount
PRE-ACTIVITY
 Specific Tax - fixed amount imposed on a per unit basis
Ad Valorem - most likely similar with proportional tax
Fiscal Adequacy - sources of funds must be sufficient to cover costs  Ad Valorem - A tax of a fixed proportion upon the value of
CIR - the highest official of the Bureau of Internal Revenue the tax object
Toll - a charge for the use of others’ property E. As to Rate
BOC - an agency tasked for collection of tariffs
 Proportional Tax - a flat or fixed rate tax, emphasize
Progressive - tax rates increase as the tax base increase
equality
Revenue Issuance - a source of tax law from the BIR
 Progressive or graduated tax - increasing rates as the tax
base increases, emphasize equitable taxation
TAXES
 Regressive Tax - decreasing rates as the tax base increases
 Taxes - are the enforced proportional contributions from
 Mixed Tax - a combination of any of the above types of tax
persons and property levied by the law-making body of the
State by virtue of its sovereignty for the support of the F. As to Authority
government and all public needs.  National Tax – imposed by the national government
Essential Elements:  Local Tax - imposed by local government units
1. It is an enforced contribution
Examples of National Taxes:
2. It is generally payable in money a. Income tax - tax on annual income, gains or profits
3. It is proportionate in character b. Estate tax - tax on gratuitous transfer of properties by a decedent
upon death
4. It is levied on persons, property, or the exercise of a right or
privilege c. Donor's tax - tax on gratuitous transfer of properties by a living donor
d. Value Added Tax - consumption tax collected by VAT business
5. It is levied by the State which has jurisdiction over the subject taxpayers
or object of taxation
e. Other percentage tax - consumption tax collected by non-VAT
6. It must be uniform and equitable business taxpayers
7. It must not violate constitutional and inherent limitations f. Excise tax - tax on sin products and non-essential commodities such
as alcohol, cigarettes and metallic minerals. This should be
8. It is levied by the law-making body of the State differentiated with the privilege tax which is also called excise tax.
9. It is levied for public purpose or purposes g. Documentary stamp tax - a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance, assignment, sale
CLASSIFICATIONS OF TAXES or transfer of an obligation, right or property incident thereto.
A. As to Purpose Examples of Local Taxes:
a. Real property tax
 Fiscal or Revenue - A tax imposed for general purpose b. Professional tax
 Regulatory - A tax imposed to regulate business, conduct, c. Business taxes, fees, and charges
acts or transactions d. Community tax
 Sumptuary - A tax levied to achieve some social or e. Tax on banks and other financial institutions
economic objectives
OTHER GOVERNMENT COLLECTION TERMS
B. As to Subject Matter
Tax vs. Revenue
 Personal, Poll or Capitation - A tax on persons who are  Tax - amount imposed by the government for public purposes.
residents of a particular territory
 Revenue - all income collections of the government which
 Property Tax - A tax on properties whether real or include taxes, tariff, licenses, toll, penalties and others.
personal
 The amount imposed is tax but the amount collected is
 Excise or Privilege - A tax imposed upon the performance
revenue.
of an act, enjoyment of a privilege or engagement in an
occupation Tax vs. License Fee
 Tax has a broader subject than license, it emanates from
C. As to Incidence taxation power to raise revenue.
 Direct Tax - A tax where the statutory and economic  License fees emanate from police power and is imposed to
taxpayer are the same person regulate exercise of such privilege
 Indirect Tax - A tax where the statutory and economic
 Tax is a post-activity imposition whereas license is pre-activity
taxpayers are not the same person
imposition.
Statutory taxpayer - the one named by the law to pay the tax levied .
Economic taxpayer - the one who actually pays and carries the burden of the tax

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 Tax vs. Toll  The penalties are merely intended to secure compliance or
 Tax is a demand of sovereignty. punishes tax evasion for neglect of duty
 Toll is a charge for the use of other’s property; a demand of  Revenue laws are not remedial laws. They do not include
ownership. procedures to protect rights; and prevent or rectify wrong
 The amount of tax depends upon the needs of the government, doings.
but the amount of toll is dependent upon the value of the  The Tax Code are special laws which prevail over general laws
property leased.
SOURCES OF TAXATION LAW
Tax vs. Debt
 Tax arises from law while debt arises from private contracts.  Constitution of the Philippines
 Non-payment of tax leads to imprisonment, but non-payment - The body of rules and maxims in accordance with which the
of debt does not lead to imprisonment. powers of sovereignty
 Debt can be subject to set-off but tax is not. - often referred to as the Supreme or Fundamental Law of
the land
 Debt can be paid in kind but tax is generally payable in money.
- It is the basis in determining the legality of all-
Tax vs. Special Assessment governmental actions and decisions.
 Tax is an amount imposed upon persons, properties or
privileges.  Statutes
 Special assessment is levied by the government on lands - Statutes are laws enacted and established
adjacent to a public improvement. It is imposed on land only - The present tax statutes of the Philippines are embodied in
and is intended to compensate the government for a part of the the Republic Act No. 8424, which is now the prevailing
cost of the improvement. NIRC
Tax vs. Tariff  Judicial Decisions
 Tax is broader than tariff, it is an amount imposed upon - The decisions of Supreme Court and the Court of Tax
persons, properties and privileges. Appeals on tax laws form part of the legal system of the
 Tariff is the amount imposed on imported or exported Philippines.
commodities. - The decision of the Supreme Court on any matter is final
Tax vs. Penalty and executory.
 Tax is an amount imposed for the support of the government.  Executive Orders
 Penalty is an amount imposed to discourage an act. Penalty - regulations issued by the President or some administrative
may be imposed by both the government and private authority for the purpose of interpreting, implementing, or
individuals. giving administrative effect to a provision of the
Constitution or of some law or treaty.
TAX LAWS
 Tax Treaties and Conventions
 Taxation law refers to any law that arises from the exercise of
the taxation power of the State. - refer to the treaties or international agreements with
foreign countries regarding tax enforcement and
Types of taxation law: exemptions. They have the force and effect of law.
 Tax Laws - These are laws that provide for the assessment
 Local Tax Ordinances
and collection of taxes.
- These are tax ordinances issued by the Province, City,
Examples:
Municipality and Barrio subject to such limitations as
1. The National Internal Revenue Code (NIRC)
provided by the Local Government Code and the Real
2. The Tariff and Customs Code
Property Tax Code.
3. The Local Tax Code
4. The Real Property Tax Code STEPS IN THE LEGISLATIVE PROCESS
 Tax Exemption Laws - These are laws that grant immunity  Under the Constitution, all revenue and tariff bills shall
from taxation. originate from the House of Representatives, but the Senate
Examples: may propose or concur with amendments.
1. The Minimum Wage Law
 Revenue bill - one that levies taxes and raises funds for
2. The Omnibus Investment Code of 1987 (E.O. 226)
the government
3. Barangay Micro-Business Enterprise (BMBE) Law
4. Cooperative Development Act  Tariff bill - specifies the rates or duties to be imposed on
imported article.
NATURE OF PHILIPPINES TAX LAWS  Often, major tax proposals are initiated by the Executive
 The Philippine Internal Revenue laws are generally civil in Department and then introduced into Congress
nature; they are neither political nor penal in nature. The steps in the legislative process are as follows:
 They remain effective even if foreign invaders occupy our 1. A tax bill is introduced in the House of Representatives and is
country referred to the House Committee on Ways and Means. This is
 They are not penal in nature because they do not define crimes known as the first reading.
and provide for their punishment. .
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 2. The proposal is considered by the Committee on Ways and Revenue Memorandum Orders (RMQOs)
Means. Moreover, the committee may introduce amendments  These are issuances that provide instructions and guidelines
or propose substitute bill. on how BIR will implement its policies, goals, objectives, plans
3. The tax bill is voted on by the Committee and if approved, is and programs in all areas of operations, except auditing.
reported out to the House of Representatives for a vote. This Revenue Memorandum Rulings (RMRs)
is known as the second reading in the House.  These are ruling, opinions and interpretations of the CIR with
4. If passed by the House, the bill is transmitted to the Senate for respect to the provisions of the Tax Code. These explain how
consideration by the Senate Committee on Ways and Means tax laws apply to specific situations or facts.
and public hearings are held. This is known as the second Revenue Memorandum Circulars (RMCs)
reading in the senate.  These are issuances that publish applicable portions, as well as
5. Upon approval by the Senate, both the Senate and the House amplifications, of laws, rules, regulations and precedents
versions are sent to the Bicameral Conference Committee issued by the BIR and other agencies/ offices. They help clarify
consisting of representatives of the House and of the Senate. or expand on existing laws or rules.
6. The two versions are generally dissimilar. Thus, the conflict is Revenue Administrative Orders (RAOs)
reconciled in the Bicameral Conference Committee.  These are about the internal structure and organization of the
7. A final bill as approved by the Bicameral Conference BIR. They deal with how the BIR is set up, including roles,
Committee, is then resubmitted to the House and Senate for responsibilities, and staffing.
approval. This is known as the third reading. Revenue Delegation of Authority Orders (RDAOs)
8. If the Bicameral Conference Committee bill is approved by the  These refer to functions delegated by the Commissioner to
House and Senate, it is sent to the President for approval or revenue officials in accordance with law.
veto. This is known as the "enrolled bill."
Revenue Bulletins (RB)
9. If the President approves the bill, he shall sign it and the bill  These refer to the official announcement of the CIR that
becomes a law. When the President vetoes it, both Houses consolidate the BIR’s position on certain specific issues of law
may override the veto by two-thirds vote of all the members or administration for the guidance of the public.
of each house. Moreover, the bill may become a law when the
President does not act upon the measure within thirty days BIR Rulings
after it shall have been presented to him.  These are official positions of the BIR to queries raised by
taxpayers and other stakeholders relative to clarification and
INTERPRETATION OF TAX LAWS interpretation of tax laws.
 Though the power of taxation may be broad, incase the TAX SYSTEM
application is difficult to determine, proper interpretation of
said laws should be done with consideration of the original  The tax system refers to the methods or schemes of imposing,
intent of the lawmakers. assessing, and collecting taxes. It includes all the tax laws and
regulations, the means of their enforcement, and the
The maxim, strictissimi juris, indicates that he, who a tax statute is
construed against, bears the burden of proving relation to said statute.
government offices, bureaus and withholding agents which are
Taxation is the rule, exemption is the exception. part of the machineries of the government in tax collection.
 Vague Tax Laws - Ambiguous Tax Laws are construed against  The Philippine tax system is divided into two: the national tax
the government and in favor of the taxpayer. system and the local tax system.
- a vague tax law means no tax law, obligation arising from  Types According to Imposition
law is not presumed.
 Progressive - This is employed in the taxation of income of
- This is in conjunction with the uniformity and equal individuals, and transfers of properties by individuals.
protection clause granted by the Constitution.
 Proportional - This is employed in taxation of corporate
- approved law should be clear and concise. income and business.
 Vague Tax Exemptions - exemptions are construed against  Regressive - This is not employed in the Philippines.
the taxpayer and in favor of the government.
 Types According to Impact
- A vague exemption law means no exemption law.
 Progressive System – emphasizes direct taxes, it
- This is in accordance with the lifeblood doctrine. encourages economic efficiency. This impacts more upon
ADMINISTRATIVE ISSUANCES the rich.
 Regressive System - emphasizes indirect taxes, the impact
 To facilitate the administrative act of taxation, the Bureau of
of taxation rests upon the bottom end of the society and it
Internal Revenue as a body under the Department of Finance,
is anti-poor. the Philippines has a dominantly regressive
releases revenue issuances. The following would be the
tax system due to the prevalence of business taxes.
differences of the issuances.
.
Revenue Regulations (RRs) .
 These are issuances signed by the Secretary of Finance, upon .
recommendation of the CIR. These define the rules and .
regulations for the effective enforcement of the (NIRC) and .
related laws. .
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 D. Assessment or Enforcement System - Under this collection
TAX COLLECTION SYSTEMS
system, the government identifies non-compliant taxpayers,
A. Withholding System on Income Tax assesses their tax dues and penalties, and enforces collections
 The employer will withhold taxes on their income by coercive means such as summary proceeding or judicial
payments. These withheld taxes are called "withholding proceedings when necessary.
tax", these are the tax of the employee. Employer will file a
withholding tax return, and remit the withheld tax to the
PRINCIPLES OF SOUND TAX SYSTEM
government. According to Adam Smith, governments should adhere to certain
Non-compliance to the withholding tax rules shall expose the taxpayer to principles or canons to evolve a sound tax system:
penalties and fines aside from the disallowance of the expense as 1. Fiscal Adequacy
deductions against income.
- The sources of revenue should be sufficient and elastic to
The following are the withholding taxes collected under this system: meet the demands of public expenditures.
 Creditable Withholding Tax - These are taxes withheld on - The government must not incur a deficit, a budget deficit
certain passive and active income where can be credited paralyzes the government
against income tax due.
- taxes should increase in response to increase in
 Withholding tax on compensation - The tax is withheld by government spending.
the employer from payments of compensation income to
2. Theoretical Justice
employees
- The tax system should be fair to the average taxpayer and
 Expanded withholding tax - A withholding tax prescribed
based upon his ability to pay.
on certain income payments and is creditable against the
income tax due of the payee - the exercise of taxation should not be oppressive, unjust, or
confiscatory.
 Final Withholding Tax - A kind of withholding tax which is
prescribed on certain income payments and is not creditable 3. Administrative Feasibility
against any income tax due of the payee for the taxable year - The tax system should be capable of being properly and
efficiently administered by the government and enforced
Final Withholding Creditable with the least inconvenience to the taxpayer.
Tax Withholding Tax
The following are applications of the principle of administrative
Income tax withheld Full. Only a portion
feasibility:
Coverage of Certain passive Certain passive and
withholding income active income 1. E-filing and e-payment of taxes
Income payor for the 2. Substituted filing system for employees
Who remits the CWT and the 3. Final withholding tax on non-resident aliens or corporations
Income payor
actual tax taxpayer for the 4. Accreditation of authorized agent banks in the filing and payment
balance of taxes
Necessity of income
tax return for Not required Required
TAX ADMINISTRATION
taxpayer
B. Withholding System on Business Tax - This is the tax  Tax administration - refers to the management of the tax
withheld by the national government agencies and system. Tax administration of the national tax system in the
instrumentalities including government-owned and controlled Philippines is entrusted to the Bureau of Internal Revenue
corporations on their payments to taxpayers, suppliers, or which is under the supervision and administration of the
payees. Department of Finance.

C. Voluntary Compliance System - the taxpayer himself BIR OFFICIALS

determines his income, reports the same through income tax
1. Commissioner of Internal Revenue (CIR) - This is the head
returns and pays the tax to the government.
of the whole bureau.
- also referred as the "Self-assessment method."
2. Deputy Commissioners - Four Deputy Commissioners are
- The government relies on the good faith of taxpayers but assigned to the following: (1) Operations Group, (2) Legal
employs detective techniques to ascertain non-compliance Enforcement Group, (3) Information Systems Group and (4)
or under-compliance. Resource Management Group.
A portion of the tax due payable herein may have been withheld 3. Assistant Commissioners - Thirteen assistant commissioners
under the withholding system, such as: are designated to each of the service divisions.
a. Withholding tax on compensation by compensation 4. Head Revenue Executive Assistants - Thirteen head revenue
earners executive assistants are designated to each of the service
b. Expanded withholding tax by taxpayer engaged in divisions.
business or exercise of profession 5. Regional Directors - They are the heads of each revenue
- The taxes withheld are treated as tax credit (deduction) region which administers and enforces internal revenue laws
against the tax due of the taxpayer in the income tax return. including the assessment and collection of all internal revenue
The taxpayer shall pay any balance still due after such taxes, charges and fees from taxpayers within the region's
credit or claim refund or tax credit for excess tax withheld. jurisdiction, as well as ensures proper and effective
. implementation of National Office's policies and programs
. within the Regional Office.
.

8
6. Revenue District Officers - They are the heads of the 123
NON-DELEGATED POWER OF THE CIR
revenue district offices which mainly provide frontline
assistance and service to taxpayers. 1. The power to recommend the promulgation of rules and
regulations to the Secretary of Finance.
POWERS OF THE BIR 2. The power to issue rulings of first impression or to reverse,
1. Assessment and collection of taxes revoke or modify any existing rulings of the Bureau.
2. Enforcement of all forfeitures, penalties and fines and 3. The power to compromise or abate any tax liability
judgments in all cases decided in its favor by the courts 4. The power to assign and reassign internal revenue officers to
3. Giving effect to, and administering the supervisory and police establishments where articles subject to excise tax are
powers conferred to it by the NIRC and other laws produced or kept.
4. Assignment of internal revenue officers and other employees
RULES IN ASSIGNMENTS OF REVENUE OFFICERS TO OTHER DUTIES
to other duties
1. Revenue officers assigned to an establishment where excisable
5. Provision and distribution of forms, receipts, certificates,
articles are kept shall in no case stay there for more than 2
stamps, etc. to proper officials
years.
6. Issuance of receipts and clearances
2. Revenue officers assigned to perform assessment and
7. Submission of annual report, pertinent information to collection function shall not remain in the same assignment for
Congress and reports to the Congressional Oversight more than 3 years.
Committee in matters of taxation
3. Assignment of internal revenue officers and employees of the
POWERS OF THE CIR Bureau to special duties shall not exceed 1 year.
1. To interpret the provisions of the NIRC, subject to review by AGENTS AND DEPUTIES FOR COLLECTION OF NATIONAL INTERNAL
the Secretary of Finance REVENUE TAXES
2. To decide tax cases, subject to the exclusive appellate 1. The Commissioner of Customs and his subordinates with
jurisdiction of the Court of Tax Appeals respect to collection of national internal revenue taxes on
3. To obtain information and to summon, examine, and take imported goods.
testimony of persons to effect tax collection 2. The head of appropriate government offices and his
4. To make assessment and prescribe additional requirement for subordinates with respect to the collection of energy tax.
tax administration and enforcement 3. Banks duly accredited by the Commissioner with respect to
5. To examine tax returns and determine tax due thereon receipts of payments of internal revenue taxes authorized to be
6. To conduct inventory taking or surveillance made thru banks. These are referred to as authorized
7. To prescribe presumptive gross sales and receipts for a government depositary banks (AGDB).
taxpayer when:
OTHER REVENUE-RELATED GOVERNMENT BODIES
a. The taxpayer failed to issue receipts; or
b. The CIR believes that the books or other records of the  Bureau of Customs (BOC)
taxpayer do not correctly reflect the declaration in the - Aside from its regulatory functions, the Bureau of Customs
return. is tasked to administer collection of tariffs on imported
articles and collection of the Value Added Tax on
8. To terminate tax period when the taxpayer is:
importation.
a. Retiring from business
- BOC is under the supervision of the Department of Finance,
b. Intending to leave the Philippines
headed by the Customs Commissioner and is assisted by
c. Intending to remove, hide, or conceal his property five Deputy Commissioners and 14 District Collectors.
d. Intending to perform any act tending to obstruct the
 Board of Investments (BOI)
proceedings for the collection of the tax or render the same
ineffective - The BOI is tasked to lead the promotion of investments in
the Philippines
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers - It supervises the grant of tax incentives under the Omnibus
Investment Code.
11. To inquire into bank deposits, only under the following
instances: - The BOI is an attached agency of the Department of Trade
and Industry (DTI), composed of five full-time governors,
a. Determination of the gross estate of a decedent
excluding the DTI secretary as its chairman.
b. To substantiate the taxpayer's claim of financial incapacity
to pay tax in an application for tax compromise - The President of the Philippines shall appoint a vice
chairman of the board who shall act as the BOI's managing
12. To accredit and register tax agents
head.
13. To refund or credit internal revenue taxes
 Philippine Economic Zone Authority (PEZA)
14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary - The PEZA is created to promote investments in export-
oriented manufacturing industries in the Philippines and,
requirements
among other myriads of functions, supervise the grant of
16. To delegate his powers to any subordinate officer with a rank both fiscal and non- fiscal incentives.
equivalent to a division chief of an office

9
 - PEZA-registered enterprises enjoy tax holidays for certain B. As to financial conditions and results of operations
years, exemption from import and export taxes including 1. Gross receipts or sales - P1,000,000,000 total annual
local taxes. gross sales or receipts
- The PEZA is also an attached agency of the DTI, headed by 2. Net worth - P300,000,000 total net worth at the close of
a director general and is assisted by three deputy directors. each calendar or fiscal year
 Local Government Tax Collecting Units 3. Gross purchases - P800,000,000 total annual purchases
- Provinces, municipalities, cities and barangays also for the preceding year
imposed and collect various taxes to rationalize their fiscal Automatic classification of taxpayers as large taxpayers
autonomy.
1. All branches of taxpayers under the Large Taxpayer's Service
TAXPAYER CLASSIFICATION 2. Subsidiaries, affiliates, and entities of conglomerates or group
 Large taxpayers - under the supervision of the Large of companies of a large taxpayer
Taxpayer Service (LTS) of the BIR National Office. 3. Surviving company in case of merger or consolidation of a
 Non-large taxpayers - under the supervision of the respective large taxpayer
Revenue District Offices (RDOs) where the business, trade or 4. A corporation that absorbs the operation or business in case
profession of the taxpayer is situated. of spin-off of any large taxpayer
The following are the criteria for determining large taxpayers: 5. Corporation with an authorized capitalization of at least
A. As to payment P300,000,000 registered with the SEC
1. Value Added Tax - At least P200,000 per quarter for the 6. Multinational enterprises with an authorized capitalization
preceding year or assigned capital of at least P300,000,000
2. Excise Tax - At least P1,000,000 tax paid for the 7. Publicly listed corporations
preceding year 8. Universal, commercial, and foreign banks (the regular
3. Income Tax - At least P1,000,000 annual income tax paid business unit and foreign currency deposit unit shall be
for the preceding year considered one taxpayer for purposes of classifying them as
large taxpayer)
4. Withholding Tax - At least P1,000,000 annual
withholding tax payments or remittances from all types 9. Corporate taxpayers with at least P100,000,000 authorized
of withholding taxes capital in banking, insurance, telecommunication, utilities,
petroleum, tobacco, and alcohol industries
5. Percentage tax - At least P200,000 percentage tax paid or
payable per quarter for the preceding year 10. Corporate taxpayers engaged in the production of metallic
minerals
6. Documentary stamp tax - At least P1,000,000 aggregate
amount per year Top corporate taxpayer listed and published by the Securities and
. Exchange Commission shall also be under LTS.
.
.
.
.

10
Income Taxation
LECTURE
MODULE 3 – INCOME TAX CONCEPTS
PRE-ACTIVITY  Life
- The value of life is immeasurable by money. Under Sec. 32
1. of the NIRC, the proceeds of life insurance policies are
2. exempt from income tax.
3.
- The proceeds of a life insurance contract collected by an
4.
employer as a beneficiary from the life insurance of an
5.
officer or any person directly interested with his trade are
likewise exempt. These proceeds are viewed as advanced
CONCEPT OF INCOME recovery of future loss.
 Definition of income However, the following are taxable return on capital from insurance
- the amount of wealth accumulated plus savings and the policies:
value of the personal consumption. a. Any excess amount received over premiums paid by the
- refers to all earnings derived from service rendered, from insured upon surrender or maturity of the policy (i.e. the
capital, or both including gain derived from sale or insured outlives the policy.)
exchange of personal or real property classified as either b. Gain realized by the insured from the assignment or sale of
ordinary or capital asset. his insurance policy
 Why is income subject to tax? - Income is regarded as the c. Interest income from the unpaid balance of the proceeds of
best measure of taxpayers’ ability to pay tax. It is an excellent the policy
object of taxation in the allocation of government costs. d. Any excess of the proceeds received over the acquisition
 What is income for taxation purposes? costs and premium payments by an assignee of a life
insurance policy
- The tax concept of income is simply referred to as "gross
income" under the NIRC. Gross income is broader to  Health - Any compensation received in consideration for the
pertain to any income that can be subjected to income tax. loss of health such as compensation for personal injuries or
tortuous acts is deemed a return of capital.
- taxable item of income - referred to as an "item of gross
income" or "inclusion in gross income".  Human Reputation - The value of one's reputation cannot be
- taxable income - refers to certain items of gross income measured financially. Any indemnity received as
less deductions and personal exemptions allowable by law. compensation for its impairment is deemed a return of capital
exempt from income tax.
- Gross income - any inflow of wealth to the taxpayer from
whatever source, legal or illegal, that increases net worth. RECOVERY OF LOST CAPITAL VS. RECOVERY OF LOST PROFITS
ELEMENTS OF GROSS INCOME  The loss of capital results in decrease in net worth while the
loss of profits does not decrease net worth.
1. It is a return on capital that increases net worth.
 The recovery of lost capital merely maintains net worth while
2. It is a realized benefit. the recovery of lost profits increases net worth.
3. It is not exempted by law, contract, or treaty.
 The recovery of lost profits through insurance, indemnity
The following must be considered if a transaction would result to an contracts, or legal suits constitutes a taxable return on capital.
increase in net worth:
REALIZED BENEFIT
 Capital - any wealth or property. Gross income is a return on
wealth or property that increases the taxpayer's net worth.  Benefit – any form of advantage derived by the taxpayer, i.e.
there is an increase in the net worth of the taxpayer
 return on capital - that increases net worth is income subject
to income tax.  Realized - The term realized means earned. It requires that
there be a degree of undertaking or sacrifice from the taxpayer
 return of capital - merely maintains net worth; hence, it is not to be entitled of the benefit.
taxable.
Requisites of a realized benefit:
CAPITAL ITEMS DEEMED WITH INFINITE VALUE 1. There must be an exchange transaction
There are capital items that have infinite value and are incapable 2. The transaction involves another entity
of pecuniary valuation. Anything received as compensation for 3. It increases the net worth of the recipient
their loss is deemed a return of capital.
.
1. Life .
.
2. Health .
3. Human Reputation .

11
 EXCHANGE TRANSACTION
1. Income of qualified employee trust fund
 Bilateral transfers 2. Revenues of non-profit non-stock educational institutions
- referred as onerous transactions
3. SSS, GSIS, Pag-Ibig, or PhilHealth benefits
- involve exchange
4. Salaries and wages of minimum wage earners and qualified
- gains from these transactions taxable as income. senior citizen
- e.g. sale and barter 5. Regular income of Barangay Micro-business Enterprises
 Unilateral transfers (BMBEs)
- referred as gratuitous transactions 6. Income of foreign governments and foreign government-
- simply involve transfer owned and controlled corporations
- it does not involve an earning process. 7. Income of international missions and organizations with
income tax immunity
- e.g. donations and succession
- subject to transfer tax CLASSIFICATIONS OF TAXPAYERS
 Complex transactions - transfers for less than full and General Classification Rule
adequate consideration are taxable under income tax and - In classifying individual taxpayers based on residency, one
transfer tax. ought to consider the intention of an individual's stay within
the Philippines or abroad. The taxpayer shall submit
INVOLVEMENT OF ANOTHER ENTITY documentary proofs such as visas, work contracts and other
 Natural person - living person documents indicating such intention.
 Juridical persons - created by law such as partnerships and A. Individual Taxpayers
corporations 1. Citizen
 Every person, natural or juridical, is an entity. An entity may be a. Resident citizen (RC) - A Filipino citizen residing in the
a taxable entity or an exempt entity. A taxable item of gross Philippines
income arises from transactions which involve another natural
b. Non-resident citizen (NRC) – The following are
or juridical entity.
considered as non-resident citizens:
 Gains or income derived between relatives, corporations, and
I. A citizen of the Philippines who establishes to the
between a partner and the partnership are taxable since it is
satisfaction of the BIR Commissioner the fact of his
made between separate entities
physical presence abroad with a definite intention to
 However, the sales of a home office to its branch office are not reside therein
taxable because they pertain to one and the same taxable
II. A citizen of the Philippines who leaves the country
entity.
during the taxable year to reside abroad, either as an
 the income between businesses of a proprietor should not be immigrant or for an employment on a permanent basis
taxed since proprietorship businesses are taxable upon the III. A citizen of the Philippines who works and derives
same owner. Note that a proprietorship business is not a income from abroad and whose employment thereat
juridical entity. requires him to be physically present abroad most of
TAX TREATMENT OF INCREASE IN THE VALUE OF PROPERTY the time during the taxable year
IV. A citizen who has been previously considered as non-
 The increase in wealth of the taxpayer in the form of
resident citizen and who arrives in the Philippines at
appreciation or increase in the value of his properties or
any time during the taxable year to reside permanently
decrease in the value of his obligations in the absence of a sale
in the Philippines shall likewise be treated as non-
or barter transaction is not taxable.
resident citizen for the taxable year in which he arrives
 A mere increase in the value of property is not income, but in the Philippines with respect to his income derived
merely and unrealized increase in capital, these are referred to from sources abroad until the date of his arrival in the
as unrealized gains or holding gains because they have not yet Philippines
materialized in an exchange transaction.
V. In the absence of information on taxpayer's intent,
RENDERING OF SERVICES citizens staying abroad for a period of at least 183 days
are considered non-resident citizens.
 The rendering of services for a consideration is an exchange
but does not cause a loss of capital. Hence, the entire Filipinos working in Philippine embassies or Philippine
consideration received from rendering of services such as Consulate Offices are not considered non-resident citizens.
compensation income or service fees is an item of gross Definition of a Citizen under the Constitution:
income. a. Those who are citizens of the Philippines at the time of
adoption of the Constitution on February 2, 1987
NOT EXEMPTED BY LAW, CONTRACT, OR TREATY
b. Those whose father or mother are citizens of the Philippines
 An item of gross income is not exempted by the Constitution,
law, contracts or treaties from taxation. c. Those born before January 17, 1973 of Filipino mothers who
elected Filipino citizenship upon reaching the age of majority
 The following items of income are exempted by law from d. Those who are naturalized in accordance with the law
taxation; hence, they are not considered items of gross income: .

12
 2. Alien An irrevocable trust is treated as it is an individual
a. Resident Alien (RA) - A resident alien is someone who is taxpayer and revocable trust is not considered as
residing in the Philippines but is not a citizen. Such as: individual taxpayer. When the trust agreement is silent,
the trust is presume to be revocable
I. An alien who lives in the Philippines without definite
intention as to his stay B. Corporate Taxpayers
II. One who comes to the Philippines for a definite purpose 1. Domestic Corporation (DC) - A corporation formed and
which in its nature would require an extended stay and authorized to conduct trade and business under the
to that end makes his home temporarily in the Philippine law.
Philippines, although it may be his intention at all times 2. Resident Foreign Corporation (RFC) - A corporation
to return to his domicile abroad organized, authorized, or existing under the laws of any
III. In the absence of information on intention, aliens who foreign country but is authorized to engage in trade or
stayed in the Philippines for more than 1 year as of the business in the Philippines through a permanent
end of the taxable year are considered resident aliens. establishment.

An alien who has acquired residence in the Philippines 3. Non-Resident Foreign Corporation (NRFC) - A
retains his status as such until he abandons the same or corporation organized, authorized, or existing under the
actually departs from the Philippines. laws of any foreign country and is not authorized to engage
in trade or business in the Philippines.
b. Non-Resident Alien Engaged in Trade or Business
 If a company is incorporated in the Philippines, it is considered a
(NRA-ETB) - An individual who is not residing on the domestic corporation, even if it is controlled by foreigners.
Philippines and is not a resident thereof, intends to conduct  If a foreign company does business with people in the Philippines through
trade, business or exercise of his profession. a local branch, it will be taxed as a resident foreign corporation. But if
it does business directly with people outside of its branch, it will be taxed
In the absence of information as to taxpayer's intent, aliens as a non-resident foreign corporation.
who stayed in the Philippines for an aggregate period of
 If a person creates a one-person corporation (OPC), they will be taxed
more than 180 days during the year are presumed to be as a corporation for the company's business activities. However, they will
engaged in trade or business. still pay personal taxes on any individual income or transactions outside
the business.
c. Non-Resident Alien not Engaged in Trade or Business
(NRA-NETB) - An individual who is not residing on the  Other Corporate Taxpayers
Philippines and is not a resident thereof, not intending to
conduct trade, business or exercise of his profession.  Partnership - a business organization owned by two or
more persons who contribute their industry or resources
Aliens who come to the Philippines for a definite purpose
to a common fund for the purpose of dividing the profits
which in its nature may be promptly accomplished shall not
from the venture.
be considered to be engaged in trade or business.
General Classification Rule for Individuals
 Joint Venture - a business undertaking for a particular
1. Intention purpose. It may be organized as a partnership or
- Documents purporting short term stay shall not result in the corporation.
reclassification of the taxpayer’s normal residency
 Co-Ownership - It is a joint-ownership of a property
- Documents purporting a long term stay would result in the automatic
reclassification of the taxpayer’s normal residency
formed for the purpose of preserving the same and/or
2. Length of stay
dividing its income.
a. Citizens staying abroad for a period of at least 183 days are considered  General Professional Partnerships is not a taxable entity, but the partners are
non-resident. taxable individually
b. Aliens who stayed in the Philippines for more than 1 year as of the end of  Joint Ventures for construction projects and energy operations under a service
the taxable year are considered resident. contract with the government are not taxable, but venturers are taxable
c. Aliens who are staying in the Philippines for not more than 1 year but individually
more than 180 days are deemed non-resident aliens engaged in business.  Co-ownership that is limited to property preservation or income collection is
d. Aliens who stayed in the Philippines for not more than 180 days are not taxable, but co-owners are taxable individually
considered non-resident aliens not engaged in trade or business.
TAXABILITY
 Other Individual Taxpayers
 The income earned by a taxpayer may be taxed depending on
 Estate - This refers to the properties, rights and the situs or place where it was earned. Following is a table
obligations of a deceased person not extinguished by summarizing taxability of a taxpayer’s income based on its
death. situs.
Estates under judicial settlement are treated as individual
taxpayers. Estates under extrajudicial settlement are
exempt entities. The income of properties of the estate
under extrajudicial settlement is taxable to the heirs.
 Trust - an arrangement whereby one person called the
grantor or trustor transfers property to another person
called the beneficiary, which will be held under the
management of a third party called the trustee or
fiduciary.
.
.

13
 .
SITUS OF INCOME
.
 Situs of income - the place of taxation, it is the jurisdiction that .
has the authority to impose tax upon the income. .
 Source of income - the activity or property that produces the .
income. .
.
The following are the specific income situs rules: .
.
.
.
.
.
.
.
.
.
Gain on sale of properties: .
.
.
.
.
.
Dividend Income: .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

14
Income Taxation
LECTURE
MODULE 4 – INCOME TAX COMPLIANCE
INCOME TAXATION SCHEMES ACCOUNTING PERIODS
 an item of gross income are taxed in different schemes  Accounting period is the length of time over which income is
depending on the nature of said income. measured and reported.
The three income taxation schemes under the NIRC:  Regular Accounting Period - This composes of 12 months in
a. Final Income Taxation length.
b. Capital Gains Taxation  Calendar Year - The calendar accounting period starts from
c. Regular Income Taxation January 1 and ends on December 31. This accounting period is
available to both corporate and individual taxpayers.
 An item of gross income is taxable in any of these tax schemes Under the NIRC, the calendar year shall be used when the:
Mutually Exclusive Coverage 1. taxpayer's annual accounting period is other than a fiscal year
- The tax schemes are mutually exclusive. An item of gross income that is
subject to tax in one scheme will not be taxed by the other schemes.
2. taxpayer has no annual accounting period
Similarly, items of gross income that are exempted in one scheme are 3. taxpayer does not keep books
not taxable by the other schemes.
4. taxpayer is an individual or cooperative
FINAL INCOME TAXATION  Fiscal year - A fiscal accounting period is any 12-month period
 Final Income Taxation - characterized by final taxes where that ends on any day other December 31. The fiscal accounting
taxes are withheld or deducted at source. The taxpayer period is available only to corporate taxpayers and is not
receives the income, net of tax. The payor of income remits the allowed for individual income taxpayers.
tax to the government. Deadline of Filing the Income Tax Return
 Final taxation is applicable only on certain passive income. Not - Under the NIRC, the return is due for filing on the fifteenth day of the
all passive income is subject to final tax. fourth month following the close of the taxable year of the taxpayer.
The regular tax due is payable upon filing of the income tax return.
 Passive incomes - earned with very minimal or even without
active involvement of the taxpayer in the earning process and  Short Accounting Period - This composes of less than 12
are generally irregular in timing and amount (e.g. interest, months.
dividend and royalty) 1. Newly commenced business - The accounting period
 Active income - arises from transactions requiring a covers the date start of the business until the designated
considerable degree of effort or undertaking from the year-end of the business.
taxpayer. 2. Dissolution of business - The accounting period covers the
start of the current year to the date of dissolution of the
CAPITAL GAINS TAXATION business.
 Capital gains tax - imposed on the capital gain on the sale,  Dissolving corporation shall file their return within 30
exchange and other disposition of certain capital assets. days from the dissolution, there is no requirement for
 Ordinary assets – are assets directly used in the business, early filing in case of individual.
trade or profession of the taxpayer such as inventory, supply 3. Change of accounting period by corporate taxpayers - The
and items of property, plant and equipment. accounting period covers the start of the previous
 Capital gains - arise from the sale and other disposition of capital accounting period up to the designated year-end of the new
assets. accounting period. Note that BIR approval is required in
 Capital assets – assets not used in business, trade or changing an accounting period. It is not automatic
profession. It includes all other assets other than ordinary 4. Death of the taxpayer - The accounting period covers the
assets. start of the calendar year until the death of the taxpayer.
 Ordinary gains – arise from the sale and other disposition of
ordinary assets.  The cut-off of income must be made at the point of
death, early filing in case of death is not required
 The taxpayer still file CGT returns and it only applies to
domestic stocks and real property 5. Termination of the accounting period of the taxpayer by the
CIR - The accounting period covers the start of the current
REGULAR INCOME TAXATION year until the date of the termination of the accounting
period.
 The regular income taxation is the general scheme and is the
catch basin for all other incomes not subject to the other tax  The income tax return and the tax shall be due and
schemes. Items of gross income from these sources are payable immediately
measured using an accounting method, accumulated over an .
accounting period, and reported through an income tax return. .
.

15
 Step 3: Check if the Mortgage/Indebtedness assumed exceeds
ACCOUNTING METHODS
the tax basis of the asset - If there is no indebtedness assumed,
 Accounting methods are accounting techniques used to skip this step. If the indebtedness exceeds the tax basis of the asset,
measure income. add the excess to Step 4.
Step 4: Compute for the Initial Payment - This includes all
THE GENERAL METHOD payments, be it in cash or property, made by the buyer at the year
a. Accrual Basis - Under the accrual basis of accounting, income of sale.
is recognized when earned regardless of when received.
Expense is recognized when incurred regardless of when paid.
Income is said to have accrued when the right to receive is
established or when an enforceable right to secure payment is
created against the counterparty.
b. Cash Basis - Under the cash basis of accounting, income is Step 5: Compute for the IP/SP Ratio - This is to check whether
recognized when received and expense is recognized when the use of instalment method is allowed for the second and third
paid. item. If the ratio exceeds 25%, the instalment method is not
allowed.
 Reconciling the Difference - The financial accounting concept
of accrual basis and cash basis are similar to their tax Step 6: Compute for the Contract Price - The contract price is
counterparts, except only for the following tax rules: the amount receivable in cash or property from a buyer.
 Advanced income is taxable upon receipt – this is only
applicable on the sale of services not on goods.
 Prepaid expense is non-deductible
 Special tax accounting requirement must be followed
Refer to the table below to distinguish the two general accounting Step 7: Compute for the Gross Profit - This involves computing
methods for a service taxpayer for the total gross profit from the sale.

Step 8: Compute for the Gross Income for each collection - To

compute for the gross income for each collection, use the formula
below.

INSTALMENT METHOD
Installment method is available to the following taxpayers:  Deferred Payment Method - This is a variant of the accrual
1. Dealers of personal property on the sale of properties they basis and is used in reporting income when a non-interest-
regularly sell bearing note is received as consideration in a sale.
2. Dealers of real properties, only if their initial payment does PERCENTAGE OF COMPLETION METHOD
not exceed 25% of the selling price
 This method is more likely to be used by construction
3. Casual sale of non-dealers in property, real or personal, when companies or those whose earning process takes more than a
their selling price exceeds P1,000 and their initial payment year. IN this method, the estimated gross income from
does not exceed 25% of the selling price. construction is reported based on the percentage of
completion of the construction project. There are several
STEPS FOR INSTALMENT METHOD
methods of estimating project completion in practice, but the
Step 1: Evaluate the seller - Check which item from the three output method based on engineering survey is prescribed by
above the sale is similar to. If it is similar to the first item, proceed NIRC.
directly to Step 6.
Step 2: Compute for the Selling Price - The selling price is the INCOME FROM LEASEHOLD IMPROVEMENT
entire amount for which the buyer is obligated to the seller.  Leasehold improvements - are tangible improvements made
by the lessee to the property of the lessor. Improvements will
benefit the lessor when their useful life extends beyond the
lease term. This benefit is referred to as income from leasehold
improvement.
.
If the item is the last one and the selling price is less than P1,000, you may .
not use the instalment method. .
. .

16
Under Revenue Regulations No, 2, the income from leasehold  Withholding Tax Returns - These provide reports of income
improvement can be reported using either of the two following payments subjected to withholding tax by the taxpayer-
methods at the option of the taxpayer: withholding agent.
1. Outright Method - The lessor may report as income the fair  Information Returns – it do not involve any payment or
market value of such buildings or improvements subject to the withholding of tax but are essential to the government in its tax
lease at the time when such buildings or improvements are mapping efforts and in its evaluation of tax compliance. Non-
completed. filing of required information returns are also subject to
penalties, fines, and or imprisonment.
2. Spread-Out Method - The lessor may spread over the life of
the lease the estimated depreciated value of such buildings or MODES OF FILING INCOME TAX RETURNS
improvements at the termination of the lease and report as
income for each year of the lease an aliquot part thereof. The 1. Manual Filing System - The traditional manual system of
depreciated value of the leasehold improvement is computed filing income tax return is by paper documents where
as follows. taxpayers fill up BIR forms to report income, expenses, or any
declaration required to be filed with the BIR.
Under the NIRC, the income tax return shall be filed to the following,
in descending order of priority, within the revenue district office
where the taxpayer is registered or required to register:
1. An authorized agent bank (AAB)
 It should be pointed out that this rule exists only in the 2. Revenue Collection Officer
regulation and is absent in the NIRC.
3. Duly authorized city or municipal treasurer

CROP YEAR BASIS 2. eBIR Forms - Taxpayers fill up their income tax returns in
electronic spreadsheets without the need of writing on papers
 Farming income is commonly recognized using the cash basis returns. If there are no penalties that require BIR assessments,
or accrual basis. However, long-term crops or those that take taxpayers would have to print a hard copy of the filled tax
more than one year to harvest may be accounted for under the returns and proceed directly to the bank for payment.
crop year basis.
3. Electronic Filing and Payment System (eFPS) - a paperless
 Under the crop year basis, farming income is recognized as the tax filing system developed and maintained by the BIR.
difference between the proceeds of harvest and expenses of Taxpayers file tax returns including attachments in electronic
the particular crop harvested. format and pay the tax through the Internet.

INCOME TAX REPORTING Taxpayers mandated to use the eFPS:

1. Large taxpayers duly notified by the BIR
 Income Tax Returns - provide details of the taxpayer’s
income, expense, tax due, tax credit and tax still due. This is 2. Top 20,000 private corporations duly notified by the BIR
more likely applicable for the self-assessment method. 3. Top 5,000 individual taxpayers duly notified by the BIR
For income tax returns of income subject to regular income taxation, 4. Taxpayers who wish to enter into contracts with government
the following are the deadlines for filing and payment: offices
5. Corporations with paid-up capital of P10,000,000
6. PEZA-registered entities and those located within Special
Economic Zones
7. Government offices, in so far as remittance of withheld VAT
and business tax are concerned
8. Taxpayers included in the Taxpayer Account Management
Program (TAMP)
9. Accredited importers, including prospective importers
required to secure the Importers Clearance Certificate (ICC)
Frequency of Reporting: and Custom brokers Clearance Certificate (BCC)
Grouping of Taxpayers under eFPS

 Substituted Filing System for Employees - Pure compensation

income earners may be relieved from the obligation to file their
annual income tax return if they have no taxable income from
other sources other from their lone employer. The employee
may avail of the substituted filing system wherein the
employer shall withhold the income tax of the employee's
compensation.
.

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 PAYMENT OF INCOME TAXES  The non-filing is considered 'willful neglect' if the BIR
discovered the non-filing first. This is the case when the
 The general rule is “pay as you file". The capital gains tax and taxpayer received a notice from the BIR to file return. If the
regular income tax are paid as the taxpayer files his return. taxpayer filed a return before the receipt of such notice, the
Installment payment of income tax is allowed on certain same is considered simple neglect subject to the 25%
conditions. surcharge.
Taxpayers under the EFPS system shall e-pay their tax online
through internet banking service. The account of the taxpayer 2. Interest - The taxpayer must pay an additional 12% per
will be auto-debited for the amount of taxes to be paid. annum interest on the basic tax due starting from the date of
the deadline of filing the return.
Basic Comparison of Filing and payment system:
3. Compromise penalty - paid in lieu of criminal prosecution
over a tax violation.

PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION

PENALTIES FOR LATE FILING OR PAYMENT OF TAX RETURN
The late filing and payment of taxes is subject to the following  For each failure to file a separate information return, statement
additional charges: or list, or keep any record, or supply any information required
by the Code or by the Commissioner on the date prescribe
1. Surcharge therefore, unless it is shown that such failure is due to
a. 25% of the basic tax for failure to file or pay deficiency tax reasonable cause not to willful neglect, shall be subject to a
on time penalty off P1,000 for each such failure. Provided that the
b. 50% for willful neglect to file and pay taxes amount imposed for all such failure during a calendar year
shall not exceed P25,000.00.

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Income Taxation
LECTURE
MODULE 5 – FINAL INCOME TAXATION
 Interest income from foreign currency deposits and loans
FINAL WITHHOLDING TAX
– These only applies to residents and nonresidents are exempt
 Final Withholding Tax - a kind of withholding tax which is
prescribed only for certain payors and is not creditable  Interest income derived from the following sources shall be
- Income Tax withheld constitutes the full and final payment imposed with the respective rates of final tax:
- Final taxation is applicable only on certain passive income. Foreign Currency Deposits of Residents 15%
- The final withholding tax is built upon the taxpayer and Loans Payable to Offshore Banking Units 10%
government convenience. For taxpayers who are limited by Loans Payable to Non-Resident Foreign Corporations 20%
distance, time and cost to comply. Loans Payable to Foreign Currency Deposit Units 10%
 Passive incomes - earned with very minimal or even without  Offshore Banking Unit (OBU) - a branch, subsidiary or affiliate of a
active involvement of the taxpayer in the earning process and foreign banking corporation which is duly authorized by the Central
are generally irregular in timing and amount Bank of the Philippines to conduct of banking transactions in foreign
currencies involving the receipt of from external sources and
 Active income - arises from transactions requiring a utilization of such funds.
considerable degree of effort or undertaking from the
taxpayer.  Foreign currency deposit unit (FCDU) - unit of a local bank or of a
local branch of a foreign bank authorized by the Central Bank to
The final tax scheme has the following features: engage in foreign currency-denominated transactions.
1. Full and final payment
 Amounts withdrawn from decedent's deposit account -
2. Tax withholding at source
subject to a final withholding tax of six percent (6%) of the
3. Territorial imposition amount to be withdrawn, provided that the withdrawal shall
4. Imposed on certain passive income and persons not engaged only be made within one year from the date of the decedent.
in business in the Philippines Such withheld tax shall not be creditable to the estate tax in
relation to the death of the decedent.
5. No filing of income tax return by the payee
 Tax-free covenant bonds – Interest is subject to final
GENERAL COVERAGE withholding tax of 30%.
 Unless otherwise indicated, the final tax rates shall apply to all
taxpayers, except for non-resident aliens not engaged in trade  Cash and property dividends - Dividends received by the
or business who are taxed at 25% and non-resident foreign following taxpayers, whether in cash or in kind, shall be subject
corporations which are taxed at 30%. to the following final tax rates depending on the payor.

INTEREST INCOME OR YIELD

 Interest income on short-term peso deposits - There shall
be a final tax at the rate of 20% imposed on the interest income
or yield from Savings Deposit, Time Deposit, Government
Securities and Deposit Substitutes/Others
 Interest income on long-term peso deposits - There shall be
a final tax at the rate of 20% imposed on the interest income or
The tax sparing rule shall apply to an NRFC which is a resident or is
yield from long-term deposits and deposit substitutes earned
domiciled in a country which: (1) has no effective tax treaty with the
by corporations. Interest income earned by individuals on the Philippines; (2) has a worldwide system of taxation; and (3) allows a tax
same financial products are exempt from this final tax. credit against the tax due from the NRFC dividend taxes deemed to have
- In the context of this final tax, a deposit/ deposit substitute been paid in the Philippines equivalent to 15%.
is considered long-term if the holding period is at least five
real estate investment trust (REIT) - a corporation whose purpose is
years.
owning income-generating real estate assets
 Since individual taxpayers are exempt if the deposit is long-term, most  Share in net income in a taxable Partnership, Association,
would just open a long-term one and then preterminate such to avoid Joint Account, Joint Venture or Consortium - The share in
the final tax. if the deposit is preterminated before five years, any the net income of the following taxpayers shall be subject to
previously untaxed or exempted interest income will be subjected to the
the respective final tax rates as summarized below:
following final taxes upon pretermination depending on the length of
the holding period.

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 ROYALTY FILING AND PAYMENT OF FINAL TAXES
Passive royalties received by a taxpayer shall be subject to the
following final tax rates:

PRIZES AND WINNINGS OF INDIVIDUALS

Prizes and winnings of individuals obtained from local sources shall
be taxed at the following final rates:

 Less than P10,000 is taxable under regular taxation

 above P10,000 is fully taxable under final taxation.
 Prizes and winnings of corporate taxpayers are subject to
regular income tax.
 Prizes and winnings not subjected to final tax are reportable EXCEPTION TO THE GENERAL FINAL TAX ON NON-RESIDENT
under regular income taxation.
The following are exempt prizes:
1. Prizes received by a recipient without any effort on his part
to join a contest.
2. Prizes from sports competitions that are sanctioned by their
respective national sport organizations
Exempt prizes mentioned above should meet the following
requisites:
1. The recipient was selected without any action on his part to
enter the contest.
2. The recipient is not required to render substantial future
services as a condition to receiving the price or award. .
 Prize - a reward for a contest or competition, it represents a .
remuneration for an effort reflecting one’s superiority. .
.
 Winning - a reward for an event that depends on chance such
.
as winnings from gambling, lottery or raffle ticket.
.
 Informer’s cash reward - A 10% final tax shall be imposed on .
rewards received from informing on violations of NIRC and .
discovery and seizure of smuggled goods which were deemed .
legitimate and collectible against the violator. .
 the amount of reward is 10% of the collection from the .
information or P1,000,000, whichever is lower. .
.
OTHER ITEMS OF INCOME SUBJECT TO FINAL TAX .
.
.
.
.
.
.
.
.
.
.
.
.

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Income Taxation
LECTURE
MODULE 6 – CAPITAL GAINS TAXATION
CAPITAL GAINS TAXATION SCOPE OF CAPITAL GAINS TAXATION
 Capital Gains Tax - imposed on the capital gain on the sale, The following are the common capital gains transactions taxed
exchange and other disposition of certain capital assets. under the capital gains taxation scheme:

ASSET CLASSIFICATION RULES 1. Capital gains on the sale of domestic stocks directly to buyer
 Ordinary assets - assets directly used in the business, trade or
profession of the taxpayer 2. Capital gains on the sale of real properties not used in business
 Capital assets - include all other assets other than ordinary
assets. ONEROUS TRANSFERS OF REAL PROPERTIES CLASSIFIED AS
The following are special rules in classifying assets: CAPITAL ASSET
1. A property purchased for future use in business is an ordinary  The sale, exchange, and other disposition of real property
asset even though this purpose is later thwarted by capital assets in the Philippines is subject to a tax of 6% of the
circumstances beyond the taxpayer's control. selling price or the fair value, whichever is higher.
2. Discontinuance of the active use of the property does not Under the NIRC, the fair value of real property is whichever is higher
change its character previously established as a business of the:
property. a. Zonal value - the value prescribed by the Commissioner of
3. Real properties used, being used, or have been previously used, Internal Revenue for real properties for purposes of
in trade of the taxpayer shall be considered ordinary assets. enforcement of internal revenue laws
4. Properties classified as ordinary assets for being used in b. Assessed value - the value prescribed by the City or
business by a taxpayer not engaged in the real estate business Municipal Assessor's Office for purposes of the real property
are automatically converted to capital assets upon showing of tax
proof that the same have not been used in business for more Note that independent appraisal valuation, the fair value commonly used in
than 2 years prior to the consummation of the taxable external financial reporting, is not used in the computation of the capital
transaction involving such property. gains tax.

5. A depreciable asset is an ordinary asset even if it is fully BIR TAX CLEARANCE

depreciated, or there is a failure to take depreciation during
the period of ownership.  No registration of any document transferring real property
shall be effected by the Register of Deeds unless the
6. Real properties used by an exempt corporation in its exempt Commissioner or his duly authorized representative has
operations are considered capital assets. Exempt corporations certified that such transfer has been reported, and the capital
are not business. gains or creditable withholding tax, if any, has been paid. The
7. The classification of property transferred by sale, barter or certificate for purposes of this legal requirement is referred to
exchange, inheritance, donation, or declaration of property as the "Certificate Authorizing Registration (CAR)".
dividends shall depend on whether or not the acquirer uses it
in business. NATURE
8. For real properties subject of involuntary transfer such as  Presumption of capital gains - The 6% capital gains tax
expropriation and foreclosure sale, the involuntariness of such applies even if the sale transaction resulted to loss. Gain is
sale shall have no effect on the classification of such real always presumed to exist. The basis of taxation is the selling
property. price or fair value whichever is higher, not the actual gain.
9. Change in business from real estate to non-real estate business  Non-consideration to the involuntariness of the sale - The
shall not change the classification of ordinary assets previously capital gains tax applies even if the sale is involuntary or is for,
held. circumstances such as in the case of expropriation sale,
foreclosure sale, dispositions by judicial order, and other forms
 Taxpayers engaged in real estate business includes real estate
dealer, real estate developer, real estate lessor and taxpayers of forced disposition. It applies to conditional sales and pacto
habitually engaged in real estate business. de retro sales
 Taxpayers habitually engaged in real estate business include those  Final tax - The capital gains tax shall be withheld by the seller
registered with the HLURB or HUDCC as dealer or developer or those and remit the same to the government.
with at least 6 taxable real estate sales transactions in the preceding
year SCOPE AND APPLICABILITY
.  The 6% capital gains tax is applicable to all individual
. taxpayers and to domestic corporations only. The NIRC did not
. impose final capital gains tax on foreign corporations.
.
.

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 However, in cases where foreign corporations realize gains Example of stocks:
from the sale of real property classified as capital assets, the 1. Preferred stocks
capital gain shall be subject to the regular income tax. 2. Common stocks
 The sale of real property located abroad is not subject to capital 3. Stock rights
gains tax but to the regular income, if the taxpayer is taxable on
global income. For all other taxpayers, the capital gain realized 4. Stock options
abroad is exempt. 5. Stock warrants
6. Unit of participation in any association, recreation, or
ALTERNATIVE TAXATION RULE amusement club
 An individual seller of real property capital assets has the  The capital gains tax covers not only sales of domestic stocks
option to be taxed at either 6% capital gains tax or regular for cash but also exchange of domestic stocks in kind and other
income tax, when the buyer is the government dispositions such as:
EXEMPTION TO THE 6% CAPITAL GAINS TAX UNDER THE NIRC 1. Foreclosure of property in settlement of debt
 The sale, exchange and other disposition of a principal 2. Pacto de retro sales - sale with buy back agreement
residence for the re-acquisition of a new principal residence by 3. Conditional sales - sales which will be perfected upon
individual taxpayers is exempt from the 6% capital gains tax. completion of certain specified conditions
Requisites of exemption: 4. Voluntary buy back of shares by the issuing
1. The seller must be a citizen or resident alien. corporation - redemption of shares which may be re-
issued and not intended for cancellation
2. The sale involves the principal residence of the seller-
taxpayer. The term other disposition does not include:
3. The proceeds of the sale is utilized in acquiring a new 1. Issuance of stocks by a corporation
principal residence. 2. Exchange of stocks for services
4. The BIR is duly notified by the taxpayer of his intention to 3. Redemption of shares in a mutual fund
avail of the tax exemption within 30 days of the sale through 4. Worthlessness of stocks
a prescribed return (BIR Form 1706) and "Sworn Declaration
of Intent". 5. Redemption of stocks for cancellation by the issuing corporation

5. The reacquisition of the new residence must be within 18 6. Gratuitous transfer of stocks
months from the date of sale.
6. The capital gain is held in escrow in favor of the government.  Tax on Sale of Domestic Stocks through PSE - This sale is not
subject to capital gains tax but to stock transaction tax of 60%
7. The exemption can only be availed of once in every 10 years. of 1% of the selling price. Since the basis is the selling price, the
8. The historical cost or adjusted basis of the principal residence sale is taxable whether is results to a gain or loss.
sold shall be carried over to the new principal residence built
or acquired.  Capital Gains Tax on Sale of Domestic Stocks Directly to
Buyer - When the sale is made directly to the buyer, the net
CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS gain on the sale is subject to a 15% flat rate except if the seller
is a non-resident foreign corporation which has a two-tiered
 Sale of land pursuant to the Comprehensive Agrarian rate of 5% on the first P100,000 net gain and 10% on the gain
Reform Program - shall be exempt from capital gains tax. in excess of P100,000.
Similarly, interest income on the selling price that may have
been agreed by the land owner and the tenant-buyer shall he
exempt from income tax. NATURE
 Sale of socialized housing units by the National Housing  Universal Tax - It applies to all taxpayers disposing stocks
Authority - The sale of socialized housing units for the classified as capital assets regardless of the classification of the
underprivileged and homeless citizens by the National taxpayer. by situs, the gain on sale of domestic stocks is within.
Housing Authority (NHA) pursuant to the Urban Development The tax still applies even if the sale is executed outside the
and Housing Act of 1992 is exempt from the capital gains tax. Philippines.
 Documentary Stamp Tax on the Sale of Real Properties -
The sale of real property capital assets is subject to a  Annual Tax - It is imposed on the annual net gain on the sale
documentary stamp tax on the gross selling price or fair of domestic stocks directly to buyer.
market value whichever is higher. The documentary stamp tax
is P15 for every P1,000 and fractional parts of the tax basis THE NET GAIN
thereof. However, if the government is a party to the sale, the
The net gain from the sale is computed using the formula below:
basis shall be the consideration paid.

ONEROUS TRANSFERS OF DOMESTIC STOCKS

 Domestic stocks - are evidences of ownership or rights to
ownership in a domestic corporation regardless of its features,
.
.
.

22
 Not unlike the CGT on sale of real properties, the gain is not
presumed here. There will only be a tax liability if the sale
results to a net gain.

 Since documentary stamp taxes may be paid by either party to

the contract, such tax incurred on the sale is only deducted if it
is paid by the seller.

 Documentary Stamp Tax on the Sale, Exchange, and Other

Dispositions of Domestic Stocks Directly to a Buyer - The
sale of domestic stocks is subject to a documentary stamp tax
of P1.50 for every P200 of the par value of the stocks sold.

 Wash Sales - Wash sale of securities is deemed to occur when

within 30 days before and 30 days after the sale (also referred
to as the 61-day period), the taxpayer acquired or entered into
a contract or option to acquire substantially identical
securities.

- Capital losses on wash sales by non-dealers in securities

are not deductible against capital gains.

- The wash sales rule is intended to prevent taxpayers from

feigning temporary losses which could enable them to
manipulate their reportable taxable net gain.

- The wash sales rule is not applicable to dealers in securities

as it is normal business for them to buy and sell stocks and
realize gains or incur losses within short periods of time.

FILING AND PAYMENT

The following are the required forms in paying for the capital gains
tax and the specified deadlines for filing and payment.

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