BASIC PRINCIPLES OF TAXATION

 The Inherent Powers of State (PET)

 Police Power – it is the power to enact laws to
promote general welfare of the people.
 Eminent Domain – it is the power to take
private property for public use upon payment
of just compensation.
 Taxation Power – it is the power to take
property for the support of the government and
or public purpose.
 Similarities among Taxation, Eminent
Domain and Police Power
 They are inherent in the state.
 Underlie and exist independently of the
constitution although the conditions for their
exercise may be prescribed by the Constitution.
 Methods by which the state interferes with private
rights and property.
 Presuppose equivalent compensation.
 Exercised primarily by the legislature.
 Distinctions among Taxation, Eminent
Domain and Police Power
Police Power Eminent Domain Taxation

1. SCOPE Regulated both Affects only Affects only

liberty and property rights property rights
pr0perty
2. AUTHORITY Exercised only by Maybe exercised Exercised only by
the government by private entities the government
3. PURPOSE Promotion of For public use For the support of
general welfare the government
4. PERSONS Community or a Only the owner of Community or a
AFFECTED class of individual the private class of individual
property
5. EFFECT No transfer or There is a transfer Contributions
title; there may of title to property become part of
just be a restrain public fund.
on the injurious
use of the
property
6. TYPE OR Property is noxious Property is Property is
PROPERTY or intended for a wholesome and is wholesome and is
noxious purpose and devoted to public devoted to public
as such taken and use or purpose use or purpose
destroyed

7.BENEITS Compensation is the Compensation is the Compensation is the

RECEIVED intangible, altruistic full and fair protection and
feeling that the equivalent (FMV) of public
individual has the property taken improvements
contributed to the instituted by the
public good government for the
taxes paid
8. AMOUNT OF Sufficient to cover No imposition. The No Limit.
IMPOSITION cost of the license owner is paid FMV
and the necessary of his property.
expenses of police
surveillance and
regulation
 Purpose of Taxation
 Primary purpose – to raise revenue/funds to
defray the necessary expenses of the government.
Also called the Revenue Purpose.
 Secondary purpose – as a tool for general, social
and economic welfare. Also called
Regulatory/Sumptuary/Compensatory Purpose.
 Regulation
 Promotion of general welfare
 Reduction of social inequality
 Encourages economic growth
Nature or Characteristics of Taxation
 Inherent power
 Legislative in character
 Subject to Inherent and Constitutional
Limitations

*NOTE: In the absence of inherent and constitutional

limitations, the power to tax is comprehensive, plenary,
supreme and unlimited. It is so comprehensive that in the
words of Justice Marshall, the power to tax is the power to
destroy.
Theory on Taxation
 Necessity Theory – the existence of
government is a necessity, it cannot
continue without means to pay its
expenses, for this reason, it has the
right to compel all its citizen and
property to contribute.
Basis of Taxation
 The Benefits–Protection theory – taxes
are what we pay for a civilized society.
The government and people have a
reciprocal and mutual duties of
support and protection to one another
(symbiotic relationship between the
government and the Taxpayer).
 Lifeblood Theory – taxes are the
lifeblood of the government without
which it can neither exist nor endure.
Tax Defined
-Are enforced proportional contributions
from persons and property, levied by the
state by virtue of its sovereignty for the
support of the government and for all its
public.
Essential Characteristic of Tax
 A tax is a forced charge, imposition or
contribution;
 It is pecuniary burden payable in money;
 It is imposed for public purpose;
 It is levied within the territorial and legal
jurisdiction of a state;
 It is assessed in accordance with some
reasonable rule of apportionment;
 Scope of the Legislative Taxing Power
 The person, property, or occupation to be
taxed. Excises or privileges, provided they are
within the taxing jurisdiction, are also
included.
 The amount or rate of the tax;
 The purpose for which taxes shall be levied
provided they are for public purposes;
 The kind of tax to be collected;
 The apportionment of the tax;
 The situs of taxation;
 The method of collection;
 Stages or Process of Taxation (LAP)
 Levy or Imposition – this process involves
the passage of tax laws or ordinances
through the legislature.
 Assessment and Collection – this process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as
the BIR or Bureau of Customs.
 Payment of Tax – this process involves the
act of compliance by the taxpayer in
contributing his share to pay the expenses
of the government.
 Basic Principles of a Sound Tax System (FAT)
 Fiscal adequacy – the sources of government
revenue must be sufficient to meet government
expenditures and other public needs.
 Administrative feasibility – tax laws must be
capable o convenient, just and effective
administration – free from confusion and
uncertainty.
 Theoretical justice – a good tax system must be
based on the taxpayer’s ability to pay. This
suggests that taxation must be progressive
conformably with the constitutional mandate
that congress shall evolve a progressive system
of taxation.
 Limitations on the Taxing Power
 A. Inherent Limitations – proceeds from the
very nature of taxing power itself. The
taxing power has very distinct and positive
limitations some o which inhere in its very
nature and exist whether declared or not
declared in the written constitution.
 Kinds of Inherent Limitations (D-PINES)
 Double taxation
 Direct duplicate taxation(strict sense), this is
objectionable and prohibited because it violates
uniformity and equality. It means;
 Taxing twice
 By the same taxing authority
 Within the same jurisdiction
 For the same purpose
 In the same year or taxing period
 Same kind or character of tax
 Indirect duplicate taxation (broad sense), is not
legally objectionable. It extends to all cases in
which there is a burden of two or more pecuniary
imposition but imposed by different taxing
authorities.
 Public purpose – proceeds from tax must be use
for:
 Support of the government
 Some of the recognized objects of government
 To promote the welfare of the community (not
individuals).
 International comity or treaty – a State cannot tax
another State based on the principle of Sovereign
Equality among States. E.g. tax law passed
imposing taxes on foreign ambassadors is not a
valid law.
 Non-delegability of the taxing power – power of
taxation is purely legislative, hence the power
cannot be delegated either to the executive or
judicial departments. The limitation arises from the
doctrine of separation of powers among the three
branches of the government.
 Exception to the Rule against the Delegation of the
Taxing Power
 Delegation to the President, subject to some
limitations and restrictions, to fix within specified
limits, tariff rates and tonnage or wharfage duties and
other duties and imposts.
 Delegation to local governments the power to create
its own sources of revenues and to levy taxes, subject
to such limitations as may be provided by law.
 Delegation to administrative agencies certain aspects
of the taxing process that are not legislative such as:
i. The power to fix value of property for purposes of
taxation pursuant to fixed rules.
ii. The power to assess and collect taxes.
 Exemption of the government
 Agencies performing governmental functions are tax
exempt unless expressly taxed.
 Agencies performing proprietary functions are subject to tax
unless expressly taxed.
 GOCCS performing proprietary functions are subject to tax,
however the following are granted exemptions:
 GSIS, SSS, PHIC, PCSO

 Situs of taxation – the taxing power of a country is

limited to person and property within and subject to its
jurisdiction.
 Place of taxation
 The state where the subject to be taxed has a situs may
rightfully levy and collect the tax.
 The situs is necessarily in the state which has jurisdiction or
which exercises dominion over the subject in question.
 Factors to consider in determining Situs of taxation
 Subject matter (person, property, or activity)
 Nature of the tax
 Citizenship
 Residence of the taxpayer
 Source of income
 Application of Situs of taxation
 Persons – residence of the taxpayer
 Real property – location
 Tangible personal property – location
 Intangible personal property – domicile of the owner
 Income – residence, or citizenship, or source o income
 Business - place of the business
 Occupation – where the occupation is engaged in
 Transaction – where the transaction took place
 Gratuitous Transfer of property – residence/citizenship of
taxpayer/location of property
 NOTE: Shares of stock in a domestic corporation of a nonresident
alien are taxable in the Philippines because said shares receive the
protection and benefit of the Philippine laws.
 B. Constitutional Limitations on the Taxing Power
 Observance of due process of law
 Equal protection of law
 Uniformity in taxation
 Progressive scheme of taxation
 Non-imprisonment for non-payment of poll tax
 Non-impairment of the obligations of contracts
 Free-worship clause
 Exemption of charitable institutions, churches, parsonage,
or convents appurtenant thereto, mosques, and non-profit
cemeteries, and all lands, buildings and improvements
actually, directly and exclusively used for religious,
charitable or educational purposes. (Real Property Tax)
 Exemption from taxes of the revenues and assets of non-
profit, non-stock educational institutions including grants,
endowments, donations or contributions for educational
purposes.
 Non-appropriation of public funds or property for the
benefit of any church, sect or system of religion, etc.
 No money shall be paid out of the Treasury except in
pursuance of an appropriation made by law.
 Concurrence of majority of all members of congress for
the passage of a law granting the tax exemption.
 Non-diversification of tax collections.
 The President shall have the power to veto any particular
item/s in an appropriation, revenue, tariff, but the veto shall
not affect the item/s to which no objection has been made.
 Non-impairment of the jurisdiction of the Supreme Court
to review tax cases.
 Appropriations, revenue or tariff bills shall originate
exclusively in the House of Representatives but the Senate
may propose or concur with amendments.
 Each LGU shall exercise the power to create its own sources
of revenue and shall have a just share in the national taxes.
 TAX LAWS
 Nature of Internal Revenue Laws – tax laws are
civil and not penal in nature, although there are
penalties provided for their violation. The purpose
of tax laws in imposing penalties for delinquencies
is to compel the timely payment of taxes or to
punish evasion or neglect of duty in respect thereof.
 Construction or Interpretation of Tax Laws in
case of doubt or ambiguity:
 Tax statutes are construed strictly against the
government. Taxes, being burdens, are not to be
presumed beyond what the statute expressly and clear
declares.
 Provisions granting tax exemptions are construed
strictly against the taxpayer claiming tax exemption.
 APPLICATION OF TAX LAWS
 General Rule – tax laws are prospective in
operation because the nature and amount of the
tax could not be foreseen and understood by the
taxpayer at the time the transactions which the law
seeks to tax was completed.
 Exception – while it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent.
But a tax law should not be given retroactive
application when it would be harsh and oppressive.
 CLASSIFICATION OF TAXES
 According to Subject Matter
 Personal, Poll or Capitation Tax – tax of a fixed amount
imposed upon individual, whether citizens or not,
residing within a specified territory without regard to
their property or the occupation in which he may be
engaged.(basic community tax)
 Property Tax – tax imposed on property, whether real or
personal, in proportion either to its value, or in
accordance with some reasonable method of
apportionment.(real property tax)
 Excise tax – any tax which does not fall within the
classification of a poll tax or a property tax. This is a tax
on the exercise o certain rights and privileges.(VAT,
Income Tax, donor’s tax)
 According to Who Bears the Burden:
 Direct tax – imposed on the person obliged to pay the
same and this burden cannot be shifted or passed to
another.
 Indirect tax – the payment is demanded from a person
from a person who is allowed to transfer the burden of
taxation to another (VAT)
 According to Determination of Amount
 Specific tax – this is a fixed amount based on volume,
weight or quantity of goods.
 Ad Valorem tax – this imposition is based on the value
of the property subject to tax.
 According to Purpose
 Fiscal/General/Revenue tax
 Regulatory/Special/Sumptuary tax
According to Jurisdiction/Scope of
Authority
 National tax

 Local tax

According to Graduation or rate

 Proportional/Flat Rate tax

 Progressive/Graduated tax

 Regressive Tax
 Systems of Income Taxation
 Global System – all items of gross income, deductions are reported
in one income tax return and the applicable tax rate is applied on
the tax base.
 Schedular Syste – different types of income are subject to different
sets of graduated or flat income tax rates.

 Other Doctrines/Rules in Taxation

 Equitable Recoupment – claim for refund which is prevented by
prescription may be allowed to be used as payment for unsettled
tax liabilities if both taxes arise from the same transaction in
which overpayment is made and underpayment is due.
 Set-off Taxes – taxes are not subject to set-off or legal
compensation because the government and the taxpayer are not
mutual creditors and debtors of each other.
 Taxpayer Suit – this provide that a taxpayer suit can only be
allowed if the act involves a direct and illegal disbursement of
public funds derived from taxation.
 Escape from Taxation
 Evasion or Dodging, the taxpayer uses unlawful means to
evade or lessen the payment of tax.
 Avoidance, also called tax minimization, it is the reduction
or totally escaping payment of tax through legally
permissible means.
 Shifting, basically, it is the transfer of tax burden to another.
The imposition of tax is transferred from the statutory
taxpayer to another without violating the law.
 Impact is the point at which a tax is originally imposed.
 Incidence is the point at which the tax burden finally rests or
settles down.
 Three kinds of Shifting:
 Forward
 Backward
 Onward
 Capitalization, the seller is willing to lower the price of
the commodity provided the taxes will be shouldered by
the buyer.
 Transformation, the manufacturer absorbs the
additional taxes imposed by the government without
passing it to the buyers for fear of lost of his/its market.
Instead, he/it increases quantity of production, thereby
turning their units of production at a lower of cost
resulting to transformation of tax into a gain through the
medium of production.
 Exemption, it is an immunity, privilege or freedom from
payment of a charge or burden to which others are
obliged to pay.
 TAX REMEDIES
REMEDY – is a method by which a cause of action can be
enforced by law or equity. It is the procedure or type of
action which may be availed of by the plaintiff as a means
to obtain the relief desired.

 Stages in the Imposition of Taxes

 Levy – imposition of the tax by the
legislature
 Collection – the getting of the amount
of tax due from the taxpayer.
 Assessment of Taxes
 Assessment – official action of an officer authorized
by law in ascertaining the amount due and giving
notice to the taxpayer requiring payment within a
specified time of the tax due fro him, including
penalties and interest.
 Presumption of Correctness – assessments made by
the CIR and his authorized agents are presumed
correct. The burden of proof to show the
incorrectness or inaccuracy of such assessments or
the details thereof lies on the taxpayer.
 Time of assessment – within 3 years after the return is
filed. If no assessment is made, no proceeding in
court shall begun after the expiration of such period.
 Start of Running of the 3 year period:
 After the last day of filing – if the return was filed
before the last day.
 From the date of filing – if the return was filed late.
 Exception: the 3 year period is extended if;
 false or fraudulent return with intent to evade the
tax is filed – within 10 years after the discovery of
the falsity or fraud.
 Failure or omission to file return – within 10 years
after the discovery of the failure or omission to file a
return.
 Agreement in writing between the CIR and the
taxpayer before the expiration of the 3 year period
for assessment of taxes.
 Effect of filing an amended return
 Filing of an amended return, statement or
declaration is allowed provided:
 The amendment shall be made within 3 years from the
date of filing the original and
 No notice of audit or investigation of such return,
statement or declaration has, in the meantime, been
actually served upon the taxpayer
 If an amended return is filed, the prescriptive
period for assessment starts to run
 From the filing of the original return – if the same is
sufficiently complete to intelligently determine the
proper amount of tax to be assessed.
 From the filing of the amended return – if the amended
return is substantially different from the original return
 Collection of Taxes
 With assessment – the government can collect the
tax within 5 years after the assessment by means of:
 Distraint – seizure by the government of the personal
properties of the taxpayer.
 Levy – seizure by the government of the real properties
of the tapayer.
 Judicial proceedings
 No assessment – only judicial proceedings, within
3 years after the return was filed or the last day
required by law for filing, if filed before the last
day.
Remedies of the Government in Tax enforcement
 A.Role of the government in the assessment
process includes the ff:
 Examination of the books of accounts and other
accounting records of taxpayers by revenue officers to
determine his correct tax liability.
 Preparation of tentative findings and holding of
informal conference.
 Issuance of Preliminary Assessment Notice (PAN).
 Issuance of Formal Assessment Notice (FAN) and
letter of demand.
 B.Administrative Remedies of the government
in the collection of internal revenue taxes
 1.Summary remedies such as distraint of personal
property, or levy of real property or garnishment of
bank deposits.
 NOTE: remedies of distraint and levy shall not be
availed of if the amount of tax involved not more than
100.
 2.Tax lien – it is a legal claim or charge on property,
whether real or personal, established by law as
security for the payment of tax obligations;
 Characteristics of tax lien
 The claim is superior to that of any other creditor.
 Not valid against any mortgage, purchaser or judgment
creditor until such lien has been filed by the CIR in the
office of the Register of Deeds of the province or city
where the property of the taxpayer is situated.
 3.Sale or destruction of forfeited chattels – not less
than 20 days after the notice to the owner or possessor
of the property and the publication or posting of such
notice.
 4.Forfeiture – if there is no bidder for the real property
in the public sale, or if the amount of the highest bid
is insufficient to pay the taxes, penalties and costs;
within one year from date of forfeiture, the taxpayer or
anyone for him, may redeem said property by paying
the full amount of taxes, penalties, interests and costs
of the sale, if property is not redeemed, the forfeiture
shall become absolute.
 5.Compromise or abatement
 6.Penalties and fines
 7.Suspension of business operations
 C.Judicial remedies
 Civil action – collection without imprisonment
 Criminal action – this is resorted to in order to enforce
the penalties (fines and imprisonment) for the violation
of TAX CODE.

 Grounds for Compromise payment of cases involving

internal revenue tax
 Civil cases – allowed if:
 Reasonable doubt as to validity of claim against the taxpayer
exist, or
 Financial position of the taxpayer demonstrates clear
inability to pay the assessed tax
 Criminal cases – allowed, except:
 Those already filed in court, or
 Those involving fraud.
 Minimum Compromise settlement of any tax
liability
 In case of financial incapacity – 10% of basic
assessed tax.
 Other cases – 40% of basic assessed tax.

The power to compromise or abate shall not be delegated

by the Commissioner, except:
 Assessment issued by regional offices involving basic
taxes of 500,000 or less and
 Minor criminal violations
 Remedies of the Taxpayer
 1.Procedure in the assessment of tax
 Notice of informal conference
 Pre-assessment notice
 Issuance of assessment
 2.Where tax has not been paid
 A.Protest the assessment – file a request for
reconsideration or reinvestigation within 30 days
from receipt of assessment, otherwise it shall
become final and unappealable and submit all
relevant supporting documents within 60 days fro
the filing of the protest.
  B.Appeal to the Court of Tax Appeals – if the protest
is denied in whole or in part, or is not acted upon
within 180 days from submission of documents, the
taxpayer may appeal within 30 days fro receipt of
decision, or from the lapse of 180 days.
 3.Where tax has been paid
 A.Remedy – claim for refund of the tax within 2
years from date of payment.
 B.Grounds for refund – tax was erroneously
collected and tax was illegally collected.
 C.Appeal to the Court of Tax Appeals – within 30
days from receipt of CIR’s decision but within 2
years from the date of final payment.
 Additions to the Tax
 Sources of additions
 Deficiency tax – the amount still due and collectible
from a taxpayer upon audit or investigation.
 Delinquency – the failure of the taxpayer to pay the tax
due on the date fixed by law or indicated in the
assessment notice or letter of demand.
 Civil Penalties/Surcharge
 25% - in any of the ff. cases:
 Failure to file any return and pay the tax due on time.
 Filing a return with an internal revenue officer other than
those with whom the return is required to be filed, unless
authorized by CIR.
 Failure to pay the deficiency tax within the time prescribed
for its payment in the notice of assessment.
 Failure to pay the full or part of the amount of tax shown on
any return, or the full amount of tax due for which no return
is required to be filed.
  50% - in any of the ff. cases:
 Willful neglect to file the return on time
 False or fraudulent return is willfully made.
 Interest – 20% per annum on unpaid amount of
tax from the date prescribed for payment until the
amount is fully paid in case of failure to pay the:
 tax due on any return required to be filed; or
 Tax due for which no return is required;
 Deficiency tax on the due date appearing in the
notice and demand of the CIR.
 Other Matters
 Prima facie evidence of false or fraudulent return
 Substantial underdeclaration (more than 30%) f taxable
sales, receipts or income.
 Substantial overstatement (more than 30%) of
deductions.
 Neglect to file return
 Willful neglect 50% - in case the taxpayer files only after
prior notice in writing by the BIR
 Simple neglect 25% - taxpayer voluntarily files the
return after the deadline without notice from BIR.
 Penalty for deficiency tax
 General rule: no surcharge is imposed on deficiency tax
and on the basic tax
 Exception: if the amount due inclusive of penalties is
not paid on or before the due date stated on the demand
letter, the corresponding surcharge shall be imposed.
 The BUREAU OF INTERNAL REVENUE
 Shall be under the supervision and control of the
Department of Finance;
 Shall have the following powers and duties:
 Comprehend the assessment and collection of all
national internal revenue taxes, fees, and charges;
 Enforcement of all forfeitures, penalties and fines
connected therewith;
 Execution of judgments in all cases decided in its favor
by the Court of Tax Appeals and ordinary courts;
 Give effect to and administer he supervisory and police
powers conferred to it by the NIRC
 Shall have a chief to be known as Commissioner of
Internal Revenue and 4 assistant chiefs to be called as
Deputy Commissioners.
 Powers of the Commissioner
 To interpret tax laws and decide tax cases.
 To obtain information, and to summon, examine
and take testimony of any persons.
 To make assessment and prescribed additional
requirements to tax administration and
enforcement
 To delegate power.
 Authority of the Commissioner to compromise,
abate and refund or credit taxes:
 Compromise of internal revenue taxes – is a contract
whereby the parties by reciprocal concessions avoid a
litigation or put an end to one already commenced.
 Abate(reduce) or cancel tax liability when:
 The tax or any portion thereof appears to be unjustly or
excessively assessed or
 The administration and collection costs involved to not
justify the collection of the amount due.
 Credit or refund taxes erroneously or illegally
received or penalties imposed without authority.
 No credit or refund o taxes or penalties shall be allowed
unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within 2 years
after the payment of the tax or penalty.
 Power to make assessments
 To examine returns and determine tax due
 To conduct inventory taking, surveillance and to
prescribe presumptive gross sales and receipts.
 To terminate taxable period.
 To prescribed real property values.
 To inquire into bank deposit accounts.
 To accredit and register tax agents; and
 To prescribe additional procedures or documentary
requirements.
 The Court of Tax Appeals
 In the same level as the Court of Appeals
 Inferior to Supreme Court
 Composed of a Presiding Justice and 5 associate
Justices.
 Divided into 2 divisions consisting of 3 justices in each
division.
 Two justices shall constitute a quorum for each
division.
 Affirmative vote of the majority justices is needed to
render a decision.
 Decision of a division is appealable to the Court en
banc.
 Decision of the Court en banc is appealable to the
Supreme Court.
Tax Collection Programs and Prosecution of Tax Evaders
 eComplaint System – an electronic system by which
taxpayers can report their complaint/s via email, the BIR
website or portal and/or through SMS or text message.
 Non-issuance of Official Receipts(No OR) – a program of
the BIR penalizing non-issuance of official receipts or sales
invoices and/or use of OR or SI not duly registered with
the BIR, including but not limited to fake of spurious
receipts/invoices.
 RATE(run after tax evaders) – a program initiated by the
DOF and BIR to investigate and prosecute individuals
and/or entities engaged in tax evasion and other criminal
violations of the NIRC.
 DISCIPLINA Program – applies to erring revenue officials
and employee
 Oplan Kandado – under this program, business operations
of non-complaint taxpayers will be suspended and their
establishments will be temporarily closed if they will be
found to have violated certain laws.
 Community Tax
 INDIVIDUALS
 Who are liable? Every inhabitant of the Phils eighteen
years of age or over.
 Has been regularly employed on a wage or salary basis for at
least thirty consecutive working days during any calendar
year or
 Engaged in business or occupation or
 Owns real property with an aggregate assessed value of
P1,000 or more, or
 Required by law to file an income tax return.
 Tax payable: P5.00 plus an additional of 1 but not
exceeding P5,000 for every P1,000 of income regardless
whether from:
 Business
 Salary, occupation, exercise of profession, or
 From property
  In case of husband and wife:
 Each of them shall be liable to pay the basic tax of P5.00
 The additional of P1.00 for every P1,000 shall be based
on the total property owned by them or the total gross
receipts or earnings derived by them.
 Persons exempt from payment of community tax
 Diplomatic and consular representatives and
 Transient visitors when their stay in the Philippines
does not exceed three months.
 JUDICIAL PERSONS
 Every corporation no matter how created or
organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines.
 Amount Payable
 Basic tax – P500
 Additional tax –
 P2.00 for every P5,000 worth of real property in the
Philippines owned by it during the preceding year based
on the assessed value of the city or municipality where
the real property is situated.
 P2.00 for every P5,000 of gross receipts or earnings
derived by it from its business in the Philippines during
the preceding year.
 Maximum additional tax – P10,000
 Dividends received by corporations – for purposes
of additional tax, shall be considered as part of the
gross receipts or earnings of said corporation.
 ACCRUAL AND PAYMENT
 Time of payment
 Those who are already liable: it shall accrue on the first
day of January and payable not later than the last day of
February of each year.
 Those becoming liable for the first time: if a person
reaches the age of 18 years or loses the benefit of
exemption on or before.
 March 31 he shall have 20 days to pay the community tax
without becoming delinquent;
 June 30 he shall be liable for the payment of community
tax on the day he reaches such age or upon the day the
exemption ends.
 July 1 – not liable to community during that year.
 Place of Payment
 In the city or municipality where the residence of the
individual is located.
 Any person who pays community to a city or
municipality other than the city or municipality where
his residence is located.
 Corporation-place where the principal office is located.
 Penalties for late payment: if the tax is not paid
within the prescribed period, there shall be added
to the unpaid amount an interest of 24% per annum
from the due date until it is paid.
 Community tax certificate: this is issued to every
person upon payment of community tax. It is also
issued to any person not subject to community tax
upon payment of P1.00
 ACCOUNTING METHODS AND ACCOUNTING
PERIODS
 Accounting periods of income taxpayers:
 Calendar year
 Fiscal year
 Instances whereby taxable income must be
computed on the basis of calendar year
 If the taxpayer is an individual
 If the taxpayer does not keep books
 If the taxpayer has no annual accounting period
 If the taxpayer’s annual accounting period is other
than fiscal year.
 Instances whereby short accounting period arises
 When the taxpayer dies
 When a corporation is newly organized
 When a corporation is dissolved
 When a corporation changes accounting period.
 Methods of accounting
 Cash method – income is reported in the year it is
received actually or constructively. Expense is deducted
in the year it is paid.
 Accrual method – income is reported in the year in
which it is earned. Expense is deducted in the year in
which it is incurred.
 Hybrid method – combination or fusion of both the
cash basis and the accrual method.
 Percentage of completion method – applicable only in
long term construction contracts covering a period in
excess of one year.
 Installment method – applicable in the following 3
cases only:
 Sale of personal property by a dealer
 Casual sale of personal property where the
 Selling price is over P1,000
 Initial payments do not exceed 25% of SP;
 Sale of real property where the initial payments do not
exceed 25% of SP.
 Crop year basis – applicable only to farmers engaged
in the production of crops which take more than a
year from the time of planting to the process of
gathering and disposal. Expenses paid or incurred
are deductible in the year the gross income from
sale of the crops are realized.
 Formulas
 Selling price:
Cash received by the seller xx
fmv of property received (if any) xx
installment oblg of the buyer xx
mortgage assumed by buyer xx
selling price xx
 Initial payment:
down payment xx
installment received xx
excess of mortgaged over cost xx
initial payment xx
 Contract price
selling price xx
mortgage assumed by buyer (xx)
balance xx
excess of mortgage over cost xx
contract price xx
 Filing of Returns and Payment of Tax
 Individuals required to file income tax returns
 Resident citizens receiving income from sources within or
outside the Philippines
 Employees deriving purely compensation income from 2 or more
employers, concurrently or successively at anytime during the
taxable period and those income tax which has not been withheld
correctly resulting to collectible or refundable return
 Self-employed individuals
 Individuals deriving mixed income
 Individuals deriving other non-business, non-professional related
income not subject to final tax
 Individuals receiving purely compensation income from a single
employer, although the income of which has been correctly
withheld, but the spouse is not entitled to substituted filing.
 Marginal income earners.
 Non-resident citizens receiving income from sources
within the Philippines
 Aliens, whether resident or not, receiving income from
sources within the Philippines
 Corporation shall include partnerships, no matter how
created or organized.
 Domestic Corporations receiving income from sources
within and outside the country
 Foreign corporations receiving income from sources
within
 Estates and trusts engaged in trade or business
 Who are not REQUIRED to File for
Income Tax returns?
 An individual who is a minimum wage earner
 An individual whose gross income does not exceed
his total personal and additional exemptions
 An individual whose compensation income derived
from one employer does not exceed P60,000 and the
income tax on which has been correctly withheld
 An individual whose income has been subjected to
final withholding tax
 Those who are qualified under substituted filing.
 Substituted filing of income tax returns
 Substituted filing of ITR is the manner by which
declaration of income of individuals receiving purely
compensation income and taxes have been withheld
correctly by their employers.
 Who are qualified to avail?
 Receiving purely compensation income
 Working for only one employer in the Philippines
 The employee’s spouse also complies with all 3 conditions
stated above
 The employer files the annual information return(BIR Form
1604-CF)
 The employer issues BIR Form 2316 to each employee
 Returns of Husband and Wife and/or children
 Return of husband or wife
 They shall compute their individual income tax based on
respective income, but they shall file a joint return unless it is
impracticable for them to file one return only.
 If income cannot be definitely identified, it shall be divided equally
between the spouses.
 Return of parent to include income of children (unmarried
minors), except:
 When donor’s tax has been paid on such property, or
 Hen the transfer of such property is exempt from donor’s tax.
 Return of persons under disability
 Taxpayer is unable to make his own return – it may be made by
duly authorized agent or representative, guardian or other person
charged with the care of his person or property.
 In case an erroneous, false or fraudulent return is filed – the
principal and his representative or guardian shall assume the
responsibility of making the return and incurring penalties
provided thereto.
 Language in which books are to be kept:
translation
 Corporations, companies, partnerships or persons shall
keep the books or records in:
 Native language
 English or
 Spanish
 If the taxpayer keep other books or records in a language
other than above, he shall make a true and complete
translation o all entries in such books or records into
native language, english or spanish. Such translation shall
form an integral part of such books of accounts.
 When should the income tax returns be filed?
 Individuals
 If receiving purely compensation on or before april 15
 If receiving business/professional income (est. inc)
 Quarterly – within 45 days after the end of every quarter
 Final adjustment return – on or before April 15
 Tax exempt partnerships on or before April 15
 Corporations
 Quarterly returns – within 60 days after the end of every
quarter
 Final adjustment return – on or before April 15
 Period of payment
 Individuals – at the time return is filed. If the amount
exceeds P2,000 it may pay in two equal installments:
 1st installment – on or before April 15
 2nd installment – on or before July 15
 Corporations
 Quarterly return and final return – at the time the return is
filed (pay-as-you-file system)
 Extension of time to file returns
 The commissioner may, in meritorious cases, grant a
reasonable extension of tie for filing returns of incoe.
 Where to file the return and pay the tax
 Place of filing: with an authorized agent bank, Revenue
District Officer of the City or municipality in which the
taxpayer has his legal residence or place of
employment/business is located.
 Electronic filing and payment system(EFPS)
 E-filing – the process of electronically filing returns including
attachments, if any specifically through the internet.
 E-payment – the process of electronically paying a tax liability
through the internet banking facilities of Authorized Agent
Bank
 OBJECTIVES
 To provide taxpayers with top quality and convenient service
through a much faster processing and immediate confirmation of
filing of tax returns and payment of taxes due thereon.
 EFPS is an alternative mode of filing returns and payment of taxes
which deviates from the conventional manual process of encoding
paperbound tax returns filed which is highly susceptible to human
errors and intervention.
 The system allows taxpayers to directly encode, submit their taxes
due online over the internet through the BIR website.
 To reduce the government’s administrative and operational costs
in interacting with taxpayers and in collecting taxes.
 Large and Non-large Taxpayers
 Non-large taxpayer – is a taxpayer
whose tax payments and financial
conditions do not satisfy the criteria
in the revenue regulations and/or
have not been classified and notified
as a large taxpayer by the CIR.
 Large taxpayer – a taxpayer who has been classified and
duly notified by the CIR for having satisfied any or a
combination of the ff criteria:
 As to payment:
 At least P1,000,000 per year on
 Excise tax
 Income tax
 Withholding tax
 Documentary stamp tax
 At least P100,000 per quarter on
 VAT
 Percentage tax
 As to financial condition
 Gross sales – at least P1,000,000,000 per year
 Net worth – at least P300,000,000 at the close of each
calendar/fiscal year
 Taxpayers required to register
 When to register?
 Generally, within 10 days from date of employment, or on or before
the commencement of business, or before the payment of any tax
due, or upon the filing of a return, statement or declaration as
required under the Code.
 Who are required to register?
 Except cooperatives, individuals earnings purely compensation
income and overseas workers, the following taxpayers are required
to register with the BIR:
 Every person subject to any internal revenue tax shall register with the
appropriate Revenue District Officer;
 Person maintaining head office, branch or facility;
 Person commencing business who expects to realize gross sales exceeding
P1,500,000 for the next 12-month period fro commencement of the
business shall register with the revenue district office which has
jurisdiction over the head office or branch and shall pay the annual
registration fee;
 Any person whose gross sales or receipts in any 12-month period exceeds
P1,500,000.
 Statements to Accompany Tax Returns
 Statement of Net Worth and Operations – if gross receipts from
the business do not exceed P50,000 in any one quarter.
 Balance Sheet and Profit and Loss Statement – if gross receipts
from business in any one quarter exceeds P50,000 but do not
exceed P150,000.
 If gross receipts from business in any one quarter exceed
P150,000, the income tax return shall be accompanied with a
duly accomplished Account Information Form which shall
contain, among others, information lifted from the following
statements certified by an independent CPA:
 Balance Sheet and Profit and Loss Statement certified by an
independent CPA.
 Comparative Profit and Loss Statements for the year for which the
return is filed and the preceding taxable year.
 Schedule of Income producing properties and the corresponding
income therefrom.
 Individual Taxpayers
 Are natural persons with income derived
fro within the territorial jurisdiction of a
taxing authority. These individual
taxpayers are classified as:
 Resident citizens
 Non-resident citizens
 Resident aliens
 Non-resident aliens engaged in business
 Non-resident aliens not engaged in business
but with income from the Philippines
 Special aliens/preferential tax treatment
 Senior citizens
 Personal Exemptions
 Basic personal exemptions – 50,000 personal
exemptions, not allowed to NRA ETB without
reciprocity and NRA-NETB.
 Additional exemptions – 25,000 for each qualified
dependent not exceeding 4 dependents.
 Dependent means, a legitimate, illegitimate or
legally adopted child if such dependent is:
 Not more than 21 years old
 Unmarried
 Not gainfully employed or
 If such dependent regardless of age, is incapable of
self-support because of mental or physical defect.
 Not allowed to NRA ETB without reciprocity and
NRA-NETB.
 Change of Status
 If during the taxable year, the taxpayer marries or should
have additional dependents, the taxpayer may claim the
corresponding personal and additional exemption in full for
such year.
 If the taxpayer dies during the taxable year, his estate may
still claim personal and additional exemptions for himself
and dependents as if he died at the close of such year.
 If during the taxable year, the spouse dies, or marries , or
become 21 years old or become gainfully employed, the
taxpayer may still claim the same exemptions as if any of the
above happened at the close of the year.
 If the spouses, with qualified dependent children, became
legally separated during the taxable period, their combined
additional exemption should not exceed the maximum
amount of P32,000.
 If there is no specific rules applicable fro those above
mentioned, the status of the taxpayer at the end of the year
shall determine his personal exemption.
 Premium Payments on Health and/or
Hospitalization Insurance.
 For individuals – if taken out by him on
himself, including his family will be
allowable as deduction fro the gross
income of the individual who has;
 Gross compensation income;
 Gross business income; or
 Mixed gross income.
 The following conditions must be met:
 The insurance shall be taken by the individual
taxpayer himself for his family.
 The amount being claimed shall not exceed
P2,400 per year or P200 a month per family.
 The family has gross income of P250,000 or
less for the taxable year.
 Only the entitled spouse may claim
 May be claimed by:
 Resident citizen
 Nonresident citizen
 Resident alien
 Minimum Wage
 Statutory Minimum Wage – shall refer to the rate
fixed by the Regional Tripartite Wage and
Productivity Board as define by the Bureau of Labor
and Employments Statistics of the DOLE.
 Minimum wage earner – refer to a worker in the
private sector paid the statutory minimum wage or in
the government having salary grade of 1 to 3.
 They shall be exempt from income tax on:
 Minimum wage
 Holiday pay
 Overtime pay
 Night shift differential
 Hazard pay
 Withholding tax on the items above.
 Income tax on CORPORATION
 For tax purposes Corporation shall include:
 Partnerships, no matter how created or
organized;
 Joint stock companies;
 Joint accounts;
 Associations;
 Insurance companies.
 But does not include:
 General professional partnerships;
 A joint venture or consortium formed for the
purpose of undertaking:
 Construction projects;
 Engaging in petroleum, coal, geothermal and other
energy operations or consortium agreement under a
service contract with the government.
 Classification of Individual Taxpayers
 Domestic corporation (income from within and out)
 Resident foreign corporation (within the phils only)
 Nonresident foreign corporation
*they may be classified further into: ordinary and special
corporation.
 Exempt organizations:
 Labor, agricultural or horticultural org.
 Mutual savings bank not having a capital stock.
 Beneficiary society, order or association
 Cemetery company
 Religious, charitable, scientific, athletic or cultural or
veterans non-stock corporation or org.
 Business league, chamber of commerce or board of
trade
  Civic league or organization not organized for
profit.
 Nonstock and nonprofit educational
institution.
 Government educational institution
 Farmers’ or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company.
 Farmers’, fruit growers’ or like association.
 However, the income of whatever kind and
character of the foregoing org. from any of
their properties or from any of their activities
conducted for profit shall be subject to
income tax.
 Domestic corporation
 Ordinary corporations – the ff taxes shall
apply:
 Final withholding tax
 On certain passive income within the
Philippines;
 Capital gains tax on sale of land and/or
buildings in the Philippines.
 Capital gains tax on sale of shares of stock
 Basic income tax
 Regular corporate income tax
 Minimum corporate income tax.
 Regular Corporate Income tax
 Formula:
Gross income xx
Allowable deduc xx
Taxable inc. xx
Rate 30%
RCIT Pxx

 Gross income – includes all income not subject to

final withholding tax, capital gains tax and not
considered exempt under the law.
 Allowable deductions:
 Business expenses and losses (itemized deductions)
 Optional standard deduction (40% of gross
income)
 Minimum Corporate Income Tax
 2% of gross income
 Only domestic and resident foreign
corporation are covered whose taxable income
are subject to the normal tax rate of 30%.
 It is imposed beginning on the 4th taxable year
immediately following the year in which such
corporation commenced its business
operations, when the MCIT is greater than
RCIT.
 Excess of MCIT over RCIT paid is creditable
against the RCIT provided RCIT is greater than
MCIT in the next three years.
 May be suspended by the Secretary of
FInance when substantial losses is due to:
 Prolonged labor dispute
 Force majeure
 Legitimate business reverses.
 Special Corporation
 A. Proprietary Non-Profit Educational
Institutions and Hospitals.
 The rules applicable to ordinary corp will also
apply to Proprietary Non-Profit Educational
Institutions and Hospitals except the ff:
 Tax rate is 10%, but if income not related to its
primary purpose is more than 50% of it total
gross income, tax rate shall be 30%
 Not subject to MCIT.
 Expenditures for expansion of school facilities
may not be capitalized but instead claimed as
outright expense.
 B. GOCCs – all corp, agencies or instrumentalities
owned or controlled by the Government shall be
taxable like ordinary corporation, except:
 GSIS
 SSS
 Philippine Health Insurance Corporation
 PCSO
 Local Water Districts
 Improperly Accumulated Earnings Tax
 Who are subject?
 Every domestic corporation formed or availed for
the purpose of avoiding the imposition of income
tax to its stockholders or stockholders of other
corporation by permitting its profits to accumulate
instead of being distributed.
 Tax rate and tax base
 10% of improperly accumulated taxable income.
 Nature of tax
 In addition to RCIT
 Presumption of avoiding the payment of income tax
to stockholders:
 Corp. is mere holding Co.
 Corp. is an investment Co.
 Profits of the corporation are permitted to accumulate
beyond the reasonable needs of the business.
 Closely-held corp.
 Circumstances indicative of improper accumulation
of profits:
 Withdrawals by stockholders disguised as loans.
 Expenditures by the corp for the personal benefit of the
stockholders.
 Yearly substantial advances made to stockholders-
officers.
 Investments in unrelated business.
 Radical change of business when large profits have
been accumulated.
 improperly accumulated taxable profits:
 After tax net income (add)
 Nolco (add)
 Income subject to final tax net (add)
 Income exempt from income tax (add)
 Income excluded from gross income (add)
 Dividends actually or constructively paid (deduct)
 Reserved for reasonable needs of the business (deduct)
 Exempt corporations
 Insurance
 Publicly-held corporations
 Non-bank financial intermediaries
 Banks
 Resident Foreign Corporation
 Ordinary Corporation
 Income tax applicable to ordinary domestic
corporation is applicable except:
 The general principles as to source of taxable
income must be considered
 Sale of land and/or building is not subject to capital
gains tax but basic income tax.
 Resident Foreign Corp exempt from MCIT:
 International carrier

 Offshore banking units

 Regional headquarters

 Regional operating headquarters

 Firms that are taxed under special tax regime

 Special Corporations
 A. International Carriers – subject to 2.5% rate of income
tax from GROSS PHILIPPINE BILLINGS
 GROSS PHILIPPINE BILLINGS:
 International Air Carrier – refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail:
 Originating from the Phils;

 In a continuous and uninterrupted flight;

 Irrespective of the place of sale or issue and the place of payment of the
ticket or passage of document
 International shipping – means gross revenue whether for
passenger, cargo or mail originating from the Phils up to final
destination, regardless of the place of sale or payments of the
passage or freight documents.
 International carriers may avail of preferential rate or exemptions
on basis of:
 Tax treaty
 International agreement
 reciprocity
 B. Offshore Banking Units – shall be taxed as follows:
 Non-residents 0%
 Other OBU’s 0%
 Local Commercial Banks 0%
 Branches of Foreign Banks 0%
 Residents 10%
 If OBU’S earn income other than from foreign currency transactions,
it will be subject to basic tax.
 C. Regional or area headquarters - not subject to income
tax.
 D. Regional operating headquarters – basin income tax rate
is 10% but not subject to MCIT.
 Branch Profit Remittances Tax
 Profit remittances - connected with the conduct
of its trade or business in the Philippines and is
subject to 15% BPRT.
 Exempt entities:
 Philippine economic zone authority
 Subic bay management authority
 Clark development authority
 Nonresident Foreign Corporations
 Ordinary Corporations – gross income from all sources
within the Philippines shall be subject to 30% final
withholding tax, except the following:
 Interest income of foreign loans 20%fwt
 Intercorporate dividends:
 With tax sparing 15%fwt
 Without tax sparing 30%fwt
 Net Capital Gains from sale
Of share of stock not traded
 First 100T 5%
 In excess 10%
 Special Corporations
 Non-resident cinematographic film owner, Lessor
or distributor – tax base is gross income and
subject to 25% tax rate
 Non-resident owner or lessor of vessels, chartered
by Philippine Nationals – tax base is gross rental,
lease or charter fees and subject to 4.5% tax rate.
 Non-resident owner or lessor of Aircraft,
Machineries and Other equipment – tax base is
gross rentals, charters and other fees and subject
to 7.5% tax rate.
 Deadline for Filing of Returns
 Final withholding tax on passive income
 Manual filing
 January to November – 10th day of the month following the month
the withholding was made
 December – January 15 of the succeeding year
 Capital gains tax
 Shares of stock
 Ordinary return – 30 days after each transaction
 Final consolidated return – on or before April 15 of the following year
 Real property – 30 days following each sale or other
disposition.
 Fringe benefits tax – 10th day of the month following the end
of the calendar quarter in which the fringe benefits were
granted to the recipient.
 Basic income tax
 Quarterly
 1st quarter – 60 days from the end of the
quarter
 2nd quarter – the same

 3rd quarter – the same

 Annual – 15th day o the 4th month following the

end of the taxable year.
 Partnership
 Kinds of Partnership
 General Professional Partnerships – are partnerships
formed by persons for the sole purpose of exercising
their common profession, no part of the income of
which is derived from engaging in any trade or
business.
 Taxable partnerships
 General Co-partnerships – are partnerships, which
by law are assimilated within the context of, and so
legally contemplated as corporations,
 Unregistered business partnerships

 Unregistered joint ventures

 General professional partnerships
 Not subject to income tax but required to file returns of their
income for the sole purpose of furnishing information as to
share in the gains or profits which each partner shall include
in his individual return.
 Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of
the partnership and is subject to income tax.
 General Co-Partnership – treated like a corporation and is
subject to corporate tax, while the individual partners are
considered as stockholders and therefore, profits
distributed to them by the partnership are taxable as
dividends(final withholding partner).
 Co-ownership – two or more heirs inherit an undivided
property from a decedent, or a donor makes a gift of an
undivided property in favor of two or more donees.
 General rule : A co-ownership is exempt from income tax.
The income of the co-ownership will be taxable to the co-
owners in their respective capacities.
 Exceptions: the ff are the instances when co-ownership may
become an unregistered general co-partnership and
becomes taxable as corporation:
 Co-owners appoint an administrator who manages the affairs
of the co-ownership by making investment therein from
which profits are realized.
 The co-owners used the common properties and/or income
derived therefrom as a common fund with intent to make
profits.
 When the property remained undivided for more than 10
years and no attempt was ever made to divide the same.
 In all other instances when the co-ownership activities are
already beyond mere preservation of the co-owned property.
 Joint Venture and Consortium: the ff are
requisites in order to be treated as a joint venture:
 Each party to the JV must make a contribution,
not necessarily of capital, but by way of services,
skill, knowledge, material or money;
 There must be an intent to make profits which
must be shared among parties;
 There must be a joint proprietary interest and
right of mutual control over the subject matter of
the enterprise;
 Usually, there is a single business transaction.
 Estates and Trusts
 The taxable income of the estate or trust shall be computed
in the same manner and on the same basis as in the case of
individuals.
 The following additional deductions shall be allowed:
 The amount of the income of the estate or trust for the taxable
year which is to be distributed currently by the fiduciary to the
beneficiaries.
 The amount of income collected by a guardian of an infant
which is to be held or distributed as the court may direct.
 The above additional deductions shall be taxable to the
beneficiaries.
 In case of a trust administered in a foreign country:
 The above mentioned additional deduction is not allowed
 The income distributed to the beneficiaries is not
deductible.
 Personal exemption is only P20,000.
 A. Estates
Judicial vs. Extrajudicial settlement
Judicial
 Taxable as a separate entity
 Fiduciary/trustee files the ITR
and pays the tax thereon
 Trusts
Kinds
 Irrevocable trust
 Revocable trust
 Trust in which income
is for the benefit of the
grantor
Extra Judicial
Not taxable
Heirs and beneficiaries
file the ITR of the Estate
and pay the tax thereon.
Taxation
Taxable as a separate ent
Not taxable as a sep. ent.
The income of the trust
is to be declared and
taxed on the Grantor.
 GROSS INCOME
 Means all income derived from whatever source, including,
but not limited o, the following items:
 Compensation
 Gross income fro business
 Gains derived from dealings in property
 Interests
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partners’ distributive share from the net income of the
general professional partnership.
 Rental income – shall be taxable on the year received,
whether earned or unearned provided there is no restriction
as to its use, and regardless of the method of accounting
employed.
 Valuations
Rental payments xx
Expenses of the lessor assumed by lessee xx
Income from leasehold improvements xx
Total rental income xx
 Security deposit – shall be taxable upon forfeiture in favor of
the lessor or upon application as rental payments.
 Leasehold improvements – shall be treated as income of the
lessor if the improvements will be owned by the lessor at the
end of the lease and the lessor is not required to pay the lessee
the value of such improvement.
 Method to report income – outright or spread-out method.
 Dividend income
 Cash dividends and property dividends – shall be taxable upon
declaration.
 Stock dividends – distribution of stock dividends is not
taxable because they are not realized income. But it
constitutes income I it gives the shareholder an interest
different from that which his former stockholdings
represented and shall be taxed.
 Liquidating dividends – are exempt up to the extent of the cost
of investment being a mere return of capital. However,
anything in excess of the cost shall be considered income and
therefore taxable. If amount received is less than the cost of
investment, the loss is deductible to the extent allowed or
capital losses.
 Gross Income from Whatever Source Derived - means
that it includes income whether coming for illegal or legal
sources.
 Recovery of bad debts – in order for recovery of bad debts
be considered income, the following must be complied:
 bad debts were written off in the previous year/s;
 Such bad debts ere deducted in arriving at taxable income;
 There is a resulting tax benefit on the deduction.
 Refund of taxes – the requirements before refund of taxes
ne considered income:
 There is payment of tax in the previous year/s
 The tax paid was deducted in arriving at the taxable income
 There is a resulting tax benefit on the deduction.
 Forgiveness of Indebtedness
 Debtor performs services to creditor – shall be
treated as Compensation income
 Creditor desires to benefit the debtor without
any consideration – treated as Gift
 Creditor is a corporation and the debtor is a
stockholder of such corp. – treated as
Dividend income.
 Exclusions from Gross Income
 Life insurance – exempt from tax since it is a mere
reimbursement for the loss of life. Except when the
beneficiary was chosen for a valuable consideration and the
interest earned on the insurance policy, which shall be
taxable.
 Return of Premium – the return of premium shall be
exempt from tax but any excess shall be taxed.
 Gifts, bequests and devises – property inherited or
received as a gift is exempt while income derived from such
property shall be taxable.
 Compensation for injuries or sickness
 Retirement benefits, pensions, gratuities
 Miscellaneous items:
 income derived by foreign govt.
 Income derived by the govt or its political
subdivisions
 Prizes and awards
 Prizes and awards from sports competition
 13th month pay and other benefits
 GSIS, SSS, Medicare and other contributions
 Gains from sale of bonds, debentures or other
certificate of indebtedness
 Gains from redemption of shares in mutual
fund.
 Source of Income
Classification
Income from within the Philippines
Income from sources partly within or
partly without the Philippines
Income from sources without the
Philippines.
 Capital Gains and Losses
 Classification of Assets
 Ordinary Assets – are assets that are used in the trade of business.
Sale of this assets will result to either gain or loss. The gain is subject
to basic tax while the loss is fully deductible in arriving the taxable
income.
 Capital Assets – all assets not classified under ordinary.
 Net capital Gain – means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
 Net capital losses – means the excess of the losses from sales or exchanges
of capital assets over the gains from such sales or exchanges.
 Percentage taken into account – in the case of a taxpayer,
other than a corporation, only the following percentages of the
gain or loss recognized upon the sale or exchange of a capital
assets shall be taken into account:
 100% - if the capital asset has been held for not more than twelve
month.
 50% - if the capital asset has been held for more than twelve months
 Limitation on Capital Losses – General Rule: losses
from sales or exchanges of capital assets shall be allowed
only to the extent of the gains from such sales or exchanges.
Exception:
 The seller is a domestic bank or trust comp.
 A substantial part of whose business is the receipt of deposit
 The asset sold is:
 Bond >certificate
 Debenture >other evidence of indebtedness.
 Note
 Net capital loss carry over – if any taxpayer other than
corporation, sustains an net capital loss, such loss shall be
treated in the succeeding taxable year as a loss from the sale
or exchange of a capital asset held for not more than 12
months.
 Determination of Amount and Recognition of Gain or
Loss
 Computation
Money received xx
FMV of property received xx
Amount realized xx
Basis or Adjusted basis (xx)
Gain or loss xx
 Basis for determining Gain or Loss
Manner of Acquisition Basis
 Purchase Cost
 Inheritance FMV at the time of acq.
 Donation Gen. rule – the same as it would
be in the hands of the donor
Exception: FMV at the time of
donation if lower than the gen
rule, for determining loss.
 Exchange of Property
 General rule – upon the sale or exchange of
property, the entire amount of the gain or loss
shall be taxable.
 Exception – no gain or loss shall be recognized if:
 In pursuance of a plan or merger or
consolidation
 If property is transferred to a corporation, by a
person in exchange of stock or unit of
participation in such a corporation of which as a
result of such exchange said person, alone or
together with others, not exceeding 4, gains
control of said corp.
 Fringe Benefits Tax
 Is a final withholding tax imposed on the grossed up the
fringe monetary value of the fringe benefit furnished,
granted or paid by the employer to managerial or
supervisory employees.
 The term fringe benefit means any good, service, or other
benefit furnished or granted by an employer in cash or in
kind, in addition to basic salaries, to an individual employee
(except rank and file) such as but not limited to the
following: ( HEV-HIM-HELF)
 Housing
 Expense account
 Vehicle of any kind
 Household personnel
 Interest on loan at less than market rate
 Membership fees, dues and other expenses
 Formula:
Grossed-up monetary value xx
Rate x%
FBT xx

 Grossed-up Monetary Value

1. GMV = Monetary Value/GMV factor
GMV Factor = 100% - FBT rate
2. GMV = MV + FBT

 Deadline – 10th day of the month ff the end of the

calendar quarter in which the FBT were granted to
the recipient.
 Monetary Value – in general, the valuation of fringe
benefits shall be as follows:

Kind of Fringe Benefit Valuation

1. Money Amount of money

2. Non-cash property and ownership is Fair market value or Zonal value,

transferred whichever is higher.

3. Non-cash property and ownership is Depreciation value of the property.

not transferred
 EXCEPTIONS:
Kind of Fringe Benefit Valuation
a. Housing
1. Employer leases a residential property MV = Rental paid x 50%
for the use of his employee

2. Employer owns a residential property MV = (FMV vs. ZV, whichever is higher) x

and the same is assigned for the use of his 2.5%
employee
3. Employer purchases a residential MV = AC x 2.5%
property on installment basis and allows AC should be net of interest
the employees to use the same.
4. Employer purchases a residential MV = AC vs. ZV, whichever is higher
property and transfers ownership in the
name of the employee.
5. Employer purchases a residential MV = (FMV vs. ZN, whichever is higher) –
property and transfers ownership to his Cost to the Employee
employee, at a price less than AC.
 Kind of Fringe Benefit Valuation
b. Motor vehicle
1. Employer purchases motor vehicle in MV = AC
the name of the employee
2. Employer provides cash for the purchase MV = Cash given
of a motor vehicle
3. Employer purchases the car on MV = AC/5 years
installment basis, the ownership of which
is placed in the name of the employee
4. Employer shoulders a portion of the MV = amount shouldered by the Employer
amount of the purchase price of a motor
vehicle of which is placed in the name of
the employee
5. Employer owns and maintains a fleet of MV = AC of all motor vehicles fro personal
motor vehicles for the use of the business use/5 years
and the employees

6.Employer leases and maintains a fleet of MV = rental payments of all motor

motor vehicles for the use of the business vehicles for personal use/5 years
and the employees
 Kind of Fringe Benefit Valuation
c. Interest
1. Employer lends money to his employee MV = Principal x 12%
free of interest

2. Employer lends money to his employee MV = Principal x (12% - actual rate)

at a rate lower than 12%

RATE:
1. RC, NRC, OCW, RA and NRA-ETB 32%

2. NRA-NETB 25%

3. SFE 15%

4. SAE 15%
 Deductions from Gross Income
 Allowable Deductions – deductions are items or
amounts which the law allows to be deducted from
gross income of certain taxpayers in order to arrived at
the taxable income.

 Kinds of Deductions:
 Itemized deductions
 Optional standard deduction
 Personal exemption
 Personal deductions allowed in special cases.
 Taxpayer
a. Individuals earning pure
compensation income
b. Individuals deriving income
from trade, business or practice of
profession.
c. Corporations
Allowable Deductions
a. Basic personal exemption
b. Additional personal exemption
c. Premium payments on
hospitalization/health
insurance
a. Basic personal exemption
b. Additional personal exemption
c. Premium payments on
hospitalization/health
insurance
d. Itemized deductions or optional
standard deduction.
Itemized deductions or Optional
standard deduction
 Itemized deductions:
 Ordinary and necessary business expenses in general
 Interest
 Taxes
 Losses
 Bad debts
 Depreciation
 Depletion
 Charitable contributions
 Research and development
 Contributions to pension trust
 Premium payments on health and/or hospitalization
insurance
 Ordinary and necessary trade, business or
professional expenses
 Salaries, wages, and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of fringe benefit granted by the
employer to the employee.
 Travel expenses
 Rentals
 Entertainment, amusement and recreation
expense
 other necessary business expense.
 Requisites for deductibility in general:
 Must be ordinary and necessary;
 Paid or incurred during the taxable year;
 Connected with trade, business or practice of profession;
 Supported by sufficient evidence;
 Not against law, morals, public policy or public order
 It must be subjected to withholding tax, if applicable.
 Entertainment, amusement and recreation expense.
 Amount deductible – lower amount between:
 Actual
 Limit
• Limit:
• Sale of goods or properties = net sales x ½ of 1%
• Sale of services = net revenue x 1%
 Minor or ordinary