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Taxation is the inherent power of the government to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising revenues to carry out legitimate objects
of the government. It is the mode of raising revenue for public purposes.
It is the power by which the government raises revenue to defray the expenses of the
government.
The basic and primary purpose of taxation is to raise revenue to enable the state to
promote the general welfare and protection of its citizens.
However, there are also secondary or non-revenue purposes. These are to reduce social
inequality, encourage growth of local industries, protect local industries against unfair
competition, and implement the police power of the state (regulatory measure).
Reduction of social inequality Our present tax system has adopted the progressive
system of taxation and it aims to reduce the inequality in the distribution of wealth by
preventing its undue concentration in the hands of few individuals.
Encouraging growth of local industries tax exemptions and reliefs serve as incentives to
encourage investment in our local industries thus promoting economic growth.
Protecting local industries against unfair competition the Tariff and Customs Code
allows imposition of certain taxes upon imported goods or articles to further protect our
local industries.
Implementation of police power (regulatory measure) the power of taxation may be
used as an implement of the police power of the state with the end in view of regulating a
particular activity.
B. Nature of Taxation
The nature if the power of taxation is two-fold: it is both an inherent power, and a legislative
power.
On the other hand, it is a power that is purely legislative. This means that the legislature has
the discretion to determine the nature, purpose, extent, subjects, and situs of taxation. It has the
authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or
things within its jurisdiction.
C. Power of Taxation as distinguished from other inherent powers of the state
The Lifeblood Theory taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need. Without the power of taxation, the government
can neither exist nor endure because they cannot have the means to raise revenue to
defray the necessary expenses. However, such collection should be made in accordance
with law because any arbitrariness will negate the very reason for the government itself.
The theory suggests that an assessment of a tax is enforceable despite a contest because
of the governments urgency to collect taxes and raise revenue.
Necessity theory taxation is a necessary burden to preserve the States sovereignty and
a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements for the enjoyment
of citizenry and those which come within the States territory, and facilities and
protection which a government is supposed to provide.
Benefits-Protection Theory (Symbiotic Relationship) the basis of taxation is found in
the reciprocal duties of support and protection between the State and its inhabitants. The
citizens support the State by paying an amount that is demanded by the government, and
the latter for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values.
Inherent limitations
Public purpose the revenues collected from taxation should be devoted to a public
purpose. It is the purpose which determines the public character of the tax law, not the
number of persons benefited. As long as the ultimate result favors the welfare of the
public in general, the appropriation of a public revenue is deemed done for public
purpose.
The power to determine whether the purpose of taxation is public or private resides in
Congress. However, this does not prevent the court from questioning the proprietary of a
statute on the ground that it is not enacted for public purpose, but once it is settled that
the law is for a public purpose, it may no longer inquire into the wisdom, expediency or
necessity of such tax measure.
Non-delegability of the taxing power only legislature can exercise the power to tax,
unless the same is delegated by the Constitution, or through a law that does not violate
the Constitution.
Exceptions:
1) Delegation of tariff powers to the President under the flexible tariff clause provided in
Article 6, Section 28(2) of the Constitution.
2) Article 10, Section 5 of the Constitution provides that each local government unit
shall have the power to create its own sources of revenue, fees, charges, subject to such
guidelines and limitations as the Congress may provide xxx.
Territoriality or Situs of Taxation the taxing power should be exercised only within the
territorial jurisdiction of the taxing authority.
Exceptions:
1) Where tax laws operate outside territorial jurisdiction like taxation of resident citizens
on their incomes derived from abroad
2) Where tax laws do not operate within territorial jurisdiction of the state like when
exempted by treaty obligations and when exempted through international comity.
Rules Observed:
Poll, or community taxes are based upon the residence of the taxpayer, regardless of
the source of income or location of the property.
Real property is subject to taxation in the state or country where it is located,
regardless of whether the owner is a resident or non-resident.
Personal Property is subject to taxation on the domicile of its owner, wherever the
property may be kept or stored, following the doctrine of mobilia sequuntur personam.
Exception: Properties which have acquired actual situs in the Philippines
provided in RA 8424, Section 104. As a rule, the properties enumerated herein are taxed
in the Philippines, irrespective of the residence of its owner. Except, when the foreign
country grants exemptions or does not impose taxes on intangible properties of Filipino
citizens.
International Comity the property or income of a foreign state or government may not
be the subject of taxation by another. Comity is respect accorded by one nation to each
other as co-equals. Even the strongest state cannot assume jurisdiction of another state no
matter how weak, nor can it question the validity of its acts in so far as they are made to
take effect within its own territory.
Constitutional Limitations
Due Process Due Process is usually violated where the tax imposed is for a private
purpose, or a tax imposed on properties outside the State, and when arbitrary or
oppressive methods are used in assessing and collecting taxes. Also, when it amounts to
confiscation of property, or in violation of inherent limitations.
Equal Protection of the Law equality of taxation is accomplished when the burden of
the tax falls equally and impartially upon all persons and property subject to it, so that no
higher rate or greater levy in proportion to value is imposed upon one person or species
of property than upon others similarly instituted or of like character. It does not require
equal rates of taxation on different classes of property, nor prohibit unequal taxation as
long as the inequality is not based upon arbitrary classification.
Uniformity the rule of taxation shall be uniform and equitable. Our Constitution
requires uniformity in taxation, meaning, all taxable articles or kinds of property of the
same class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class.
Progressive the congress shall evolve a progressive system of taxation. Taxation is said
to be progressive when its rate goes up depending on the resources of the person affected.
The higher the amount of resource taxed (tax base), the higher the rate. The Constitution
does not prohibit the imposition of regressive taxes. Evolving a progressive system is a
mere directive upon Congress, not a justiciable right or a legally enforceable one. We
cannot avoid regressive taxes, but we can minimize them.
Non-impairment Clause no law shall be passed impairing the obligations of contract.
This is significant when the topic goes to tax exemptions.
Non-imprisonment for non-payment of poll tax no person shall be imprisoned for non-
payment of a debt or poll tax.
Bills to originate from the House of Representatives
Veto power of the President the president shall have the power to veto any particular
item or items in an appropriation, revenue, or tariff bill but the veto shall not affect the
item or items to which he does not object.
Presidents Power to Tax flexible tariff clause
Taxation and Freedom of the Press no law shall be passed abridging the freedom of
speech, of expression, or of the press.
Taxation and Freedom of religion No law shall be made xxx prohibiting the exercise of
religion. The free exercise and enjoyment of religious profession and worship without
discrimination or preference shall forever be allowed. However, the income of such
organization from any activity conducted for profit or from any of their real or personal
property, regardless of the disposition made of such income, is taxable.
Tax exemption of Properties Actually, Directly, and Exclusively used for Religious,
Charitable, and Educational Purposes cemeteries are exempt from the payment of taxes
because of the difficulty in collecting a tax thereon and the obvious impropriety of selling
the graves of the dead to defray the expenses of the government. While, churches and
parsonages or convents appurtenant thereto are exempt because such institutions perform
work which would otherwise have to be carried on by the public at the expense of
taxpayers and the expenses of such institutions from taxation lessens rather than increases
the burden upon other taxpayers. It is noteworthy that only property tax is exempt.
Tax exemptions granted to Non-stock, Non-profit Educational Institutions covers
exemption to income tax, custom duties, and property tax.
Appropriation of Public Money no public money or property shall be appropriated,
applied, paid, or employed directly or indirectly for the use, benefit, or support of any
sect, church, denomination, sectarian institution, or system of religion, or of any priest,
preacher, minister, or other religions teacher or dignitary as such, except, when priest,
preacher, minister, or dignitary, is assigned to the armed forces or to any penal institution
or government orphanage or leprosarium.
Grant of Tax Exemptions in granting tax exemptions, an absolute majority vote of the
Members of the Congress is required, while in cases of withdrawal of such exemption, a
relative majority vote is sufficient.
Local Taxation
Supreme Courts Jurisdiction over tax cases
DEFINITION
CHARACTERISTICS OF TAXES
(1) Taxes are ENFORCED CONTRIBUTIONS (not a contract but a positive act of the
government)
(2) Taxes are PROPORTIONAL IN CHARACTER, since taxes are based on ones ability
to pay
(3) Taxes are LEVIED by the authority of the law
(4) Taxes are levied on persons, property and excise;
(5) Taxes are levied for public purpose
(6) Taxes are personal to the taxpayer
(Ex: a corporations tax delinquency cannot, for instance, be enforced against its
stockholders because not only would this run counter to the principle that taxes
are personal, but it would not also be in accord with the rule that a corporation
is vested by law with a personality that is separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it
may be related. Nevertheless, stockholders may be held liable for the unpaid
taxes of a dissolved corporation if it appears that the corporate assets have
passed into their hands) (DOCTRINE OF PIERCING THE CORPORATE VEIL)
I.REQUISITES OF A VALID TAX
(1) That either the person or property taxed be within the JURISDICTION OF THE TAXING
AUTHORITY
(2) That the ASSESSMENT AND COLLECTION OF CERTAIN KINDS OF TAXES GUARANTEE
AGAINST INJUSTICE TO INDIVIDUALS, Especially by providing notice and opportunity for
hearing;
(5) The tax must not impinge on the inherent and constitutional limitations on the power of
taxation.
TAX LICENSE
Levied in the exercise of the taxing Emanate from the police power of
power the state
PRIMARY PURPOSE: to generate Are imposed for REGULATORY
revenues for the support of the PURPOSES; If REGULATION IS THE
government; and REGULATION is PRIMARY PURPOSE, the fact that
merely INCIDENTAL incidental revenue is also obtained
DOES NOT MAKE THE IMPOSITION A
TAX
TAX TOLL
Demand of SOVEREIGNTY for the Demand of PROPRIETORSHIP, an
purpose of raising revenues for the amount charged for the cost and
support of the government maintenance of the property used
TAX PENALTY
Is a CIVIL LIABILITY. A person is Punishment for the commission of a
criminally liable in taxation ONLY crime
when he fails to satisfy his civil
obligation to pay taxes
TAX DEBT
Is NOT A DEBT for the reason that a an obligation based on contract or
tax DOES NOT depend upon the judgment
consent of the taxpayer and there is assignable
NO express or implied contract to Imposed by private individuals
pay taxes.
An obligation based on LAW
NOT ASSIGNABLE
Imposed by public authority
K. KINDS OF TAXES
DIRECT INDIRECT
A direct tax is a tax for which a taxpayer is Indirect tax is a tax primarily paid by
directly liable on the transaction or business persons who can shift the burden upon
it engages in. someone else.
Ex: custom duties and ad valorem taxes Ex: excise and ad valorem taxes
SPECIFIC AD VALOREM
A specific tax is imposed and based on Based on selling price or other specified
weight or volume capacity or any other value of the goods.
physical unit of measurement. Ex: excise tax on automobiles and non-
Ex: excise taxes on distilled spirits, tobacco essential goods.
products and petroleum products.
NATIONAL LOCAL
Is imposed by the national government Levied and collected by the local
Ex: revenue taxes under the NIRC and government
custom duties Ex: real property tax and business tax
PERSONAL PROPERTY
Of fixed amount imposed on individuals, Imposed on property, real or personal, in
whether citizens or not, residing within a proportion to its value.
specified territory, without regard to their Ex: real estate tax
property or occupation.
Ex: community tax
PROGRESSIVE REGRESSIVE
Is one whereby the rate increases as the tax Is one where the tax rate decreases as the
base (amount) increases. tax base increases.
Ex: income tax, estate and donors tax under Ex: In Tolentino v. Secretary of Finance, the
the NIRC Supreme Court ruled that VAT is a form of
regressive tax.
L. SITUS OF TAXATION
It is the place or authority that has the right to impose and collect taxes.
GENERAL RULE:
A state may not tax property lying outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or privilege derived from the laws of another
state and therein exercised or enjoyed.
EXCEPTIONS:
1. TAX LAWS
CIR v. YMCA (1998) Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict interpretation in construing tax exemptions. Furthermore, a
claim of statutory exemption from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, the claimed exemption must expressly be
granted in a statute stated in a language too clear to be mistaken.
Statutes levying taxes or duties are to be construed strongly AGAINST THE GOVERNMENT
AND IN FAVOR OF THE SUBJECT OR CITIZENS, because burdens are not to be imposed or
presumed.
CIVIL in NATURE AND NOT PENAL IN CHARACTER; HENCE NOT SUBJECT TO EX POST
FACTO LAW PROHIBITIONS.
(1) Constitution
(2) Legislation or statues, including presidential decrees and executive orders on taxation
and tax ordinance, tax treaties and conventions with foreign countries;
(4) Administrative rules and regulations, rulings and opinions of tax officials particularly
the CIR, including opinions of the Secretary of Justice; and
O. Doctrines in Taxation
The general rule under the Civil Code that laws shall have prospective application applies
to tax laws. Retroactive application of revenue laws may be allowed if it will not amount to
denial of due process. There is violation of due process when the tax law imposes harsh and
oppressive tax.
2. Imprescriptibility of Taxes
As a rule, taxes are imprescriptible as they are the lifeblood of the government. However,
tax statutes may provide for statute of limitations. In particular, the National Internal Revenue
Code (NIRC) and the Local Government Code (LGC) provide for prescriptive periods for
assessment and collection of taxes.
In CIR v. B.F. GOODRICH PHILS, the Supreme Court noted that our tax laws provides
for a statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers
from any unreasonable examination, investigation or assessment.
3. Double Taxation
Double taxation is defined as taxing the same property twice when it should be taxed but
once. It has also been defined as taxing the same person twice by the same jurisdiction over the
same thing. It is sometimes known as duplicate taxation.
The Constitution does not prohibit the imposition of double taxation in the broad sense.
However, if double taxation amounts to a direct double taxation, then it becomes legally
objectionable for being oppressive and inequitable. It violates the equal protection and
uniformity clauses of the Constitution.
a. Direct constitutes double taxation in the objectionable or prohibited sense. This occurs when
the same property is taxed twice when it should be taxed but once; both taxes must be imposed
on the same property or subject matter, for the same purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or taxing district, during the same taxing period,
and they must be of the same kind or character of tax.
b. Indirect is permissible double taxation. Double taxation is indirect where some elements of
direct double taxation are absent such as when the taxes are of different nature or character,
imposed by different taxing authorities.
Taxation is a destructive power which interferes with the personal and property rights of
the people and takes from them a portion of their property for support of the government.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen
that lays the golden egg". And, in order to maintain the general public's trust and confidence in
the Government, this power must be used justly and not treacherously. (Roxas v. CTA, 23 SCRA
276)
a. Shifting of Tax Burden - is the process by which the burden of a tax is transferred from the
statutory taxpayer or the one whom the tax was assessed or imposed to another without violating
the law. Only indirect taxes may be shifted.
Ways of Shifting the Tax Burden
1. Forward shifting - When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate purchaser or
consumer.
2. Backward shifting When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factors of production.
3. Onward shifting When the tax is shifted two or more times either forward or
backward.
b. Tax Avoidance - is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length.
c. Tax Evasion - is a scheme used outside of those lawful means. It connotes fraud through the
use of pretenses and forbidden devices to lessen or defeat taxes.
1. The end to be achieved (which is payment of less taxes than that known by the
taxpayer to be legally due or non-payment of a tax when it is shown that a tax is due);
Note that in granting tax exemptions, an absolute majority vote of the Members of
Congress is required, while in cases of withdrawal of such tax exemption, a relative majority
vote is sufficient.
Since taxation is the rule and exemption therefrom is the exception, the exemption may
be withdrawn at the pleasure of the taxing authority. However, the exemption cannot be
withdrawn if the exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and thus covered by the non-impairment clause
of the Constitution (MCIAA v. Marcos, 261 SCRA 667).
Instances where tax exemptions may be granted other than by act of Congress:
1. Where the President exercises his power under the flexible tariff clause to remove
existing protective tariff rates (Section 28(2), Article VI, 1987 Constitution)
2. The local government may grant exemptions from the payment of local taxes without
congressional approval consequent to its power to levy taxes, fees and other charges (Section 5,
Article X, 1987 Constitution)
3. Where the President enters into and ratifies a tax treaty granting certain exemptions
subject only to Senate occurrence
3. Implies a waiver on the part of the Government of its right to collect what otherwise
would be due; and
Taxes cannot be the subject of compensation between the government and the taxpayer.
As held in Caltex v. COA, taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.
Taxes cannot be the subject of set-off because they are not in the nature of contracts
between parties but grow out of a duty to, and, are positive acts of, the Government, to the
making and enforcing of which, the personal consent of the taxpayer is not required (Republic v.
Mambulao Lumber, 4 SCRA 622)
Compromise
Taxes can be the subject of a compromise. Compromises are allowed and enforceable
when the subject matter thereof is not prohibited from being compromised and the person
entering into it is duly authorized to do so. In fact, under Section 204 of the Tax Code, payment
of internal revenue taxes may be compromised on the grounds of (1) doubtful validity of the
assessment or (2) financial incapacity.
Tax Amnesty
A tax amnesty is a general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax.
(Republic v. IAC, 196 SCRA 335)
Difference between Tax Amnesty and Tax Exemption
Deductions items or amounts authorized by law to be subtracted from the pertinent items of
gross income to arrive at taxable income. These are expenditures permitted to be subtracted from
income in the determination of income subject to tax. They partake of the nature of tax
exemptions, thus they are likewise construed against the taxpayer.
General rules:
Deductions must be paid or incurred in connection with the taxpayers trade, business, or
profession.
Deductions must be supported by adequate receipts or invoices (except standard
deduction).
Additional requirement relating to withholding.
Return of Capital
Itemized Deductions
A taxpayer must point to some specific provisions of the statute authorizing the deduction, and
he must be able to prove that he is entitled to the deduction authorized or allowed.
1) Business Expenses
Requisites:
2) Interest on Indebtedness
Requisites:
3) Taxes
Requisites
Requisites:
a) Losses must actually be sustained and charged off within the taxable year
b) Evidenced by a closed and completed transaction
c) Loss is not compensated by insurance or otherwise
d) In the case of an individual, the loss must have been incurred in the business, trade, or
profession of the taxpayer, or incurred in any transaction entered into for profit though
not connected with trade or business
e) In the case of casualty loss, declaration filed within 45 days from the occurrence of the
loss.
5) Bad Debts
Requisites:
a) There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable
b) Debt must be connected to taxpayers trade, business, or practice of profession
c) Must not be sustained in a transaction entered into by relatives
d) Must be charged off during the taxable year.
e) Ascertained to be worthless and uncollectible as of the end of the taxable year (BSP
through monetary board shall ascertain).
f) Debts are uncollectible despite diligent effort by the taxpayer.
6) Depreciation
Requisites:
Requisites:
a) Actually paid or made to the Philippine Government or any political subdivision thereof,
or any domestic corporation or association specified in the tax code
b) Made within the taxable year
c) Not exceeding 10% for individuals or 5% for corporations, of the taxpayers taxable
income before the charitable contributions
d) Evidenced by adequate receipts or records
8) Contributions to pension trusts
Requisites:
a) Employer must have established a pension or retirement plan for the payment of
reasonable pension to its employees
b) Pension plan is reasonable and actuarially sound
c) Funded by employer
d) Amount contributed must no longer be subject to the control of the employer
e) Payment has not yet been allowed as deduction.
Resident Citizen taxable on all income derived from sources within and without the
Philippines.
Non-resident Citizen taxable only on income derived from sources within the Philippines.
Resident or Non-resident Alien taxable only on income derived from sources within the
Philippines.
All remunerations for services rendered by an employee for his employer are subject to tax,
unless specifically excluded by law. Designation of remuneration is immaterial. What is
important is that it is derived from an employer-employee relationship. These include:
Salaries
Wages
Emoluments
Honoraria
Bonuses
Allowances
Fringe benefits
Directors fee
Taxable pensions
Retirement pay
Other income in similar nature, including compensation paid in kind.
Allowable Deductions
1) Personal exemptions
2) Additional exemption for qualified dependent child: php25,000 each but not to exceed 4.
Here, the fair market value is the book value of the shares of stock as shown in the
financial statements
If listed and traded through local stock exchange: % of 1% of gross selling price in the
nature of percentage tax. Here, fair market value is the actual selling price.
Income tax on Non-Resident Aliens Engaged in Trade or Business
An alien who stays in the Philippines for more than 180 days, computed on aggregate basis for
the whole year. Consequently, he shall be subject to income tax on income derived from sources
within the Philippines, taxable in the same manner as an individual citizen or resident alien
subject to the scheduler rate of 5-32%.
He is allowed to avail of itemized deductions including the personal and additional exemptions,
subject to the rule on reciprocity.
These are aliens who stay in the Philippines for 180 days or less. They are taxed using the final
tax rate of 25% on its gross income within the Philippines. Not entitled to personal and
additional exemptions.
a) Minimum wage earners worker in the private sector paid in the statutory minimum
wage or to an employee in the public sector with compensation income of not more than
the statutory minimum wage in the non-agricultural sector to which he is assigned. They
are exempt from the payment of income tax on their taxable income, provided further,
that the holiday pay, overtime pay, night shift differential received by them shall likewise
be exempt.
b) Senior citizens generally, qualified senior citizens deriving returnable income during
the taxable year, whether from compensation or otherwise are required to pay the tax.
Except in the following circumstances
Returnable income is in the nature if compensation income, but he qualifies as a
minimum wage earner.
If the aggregate amount of gross income earned by the senior citizen during the
taxable year does not exceed the amount of his personal exemptions.
Note that exemption to senior citizens from income tax does not extend to all types of
income earned during the taxable year such as those subject to final taxes.
c) Under international agreements certain persons and entities are exempt because of the
Philippines signatory to treaties which provide for such exemptions.
Income Tax on Corporations
Regular Tax
For corporations, taxable income would mean net income. For domestic and resident foreign
corporations, regular corporate income tax (30%) is imposed on taxable income. Whereas
for non -resident foreign corporations, it is imposed on its gross income.
More specifically, the regular corporate income tax, in cases of domestic corporations, shall
be imposed on taxable income from sources within and without the Philippines. While for
resident foreign corporations, it is imposed on taxable income from sources within the
Philippines.
The minimum corporate income tax is greater than the regular corporate income tax for
the taxable year
Such operation has zero or negative taxable income.
Tax for profits applied for or earmarked for remittance (15% final tax). Attempts to equalize the
income tax burden on foreign corporations maintaining, on one hand, local branch offices, and
on the other hand, subsidiary domestic corporations where at least a majority of the latters
shares of stock are owned by such foreign corporations.
Passive income- subject to FINAL TAX; the withholding agent withholds the tax and remits
the same to the BIR;
PASSIVE INCOME SUBJECT FROM SOURCES WITHIN FROM SOURCES WITHOUT
TO FINAL TAX THE PHILIPPINES THE PHILIPPINES
RC, NRC, RA, NRA-NETB RC NRC, RA,
NRA-ETB NRA-ETB,
NRA-NETB
1.INTEREST INCOME
2. ROYALTIES
3. PRIZES
4. WINNINGS (EXCEPT
PCSO AND LOTTO)
Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange
A final tax of 6% based on the gross selling price or current fair market value is
imposed upon capital gains presumed to have been realized from the sale, exchange or
other disposition of real property located in the Philippines, classified as CAPITAL
ASSETS.
Exceptions:
EXCEPTION: Any interest income derived from foreign currency loans granted to
residents, other than offshore banking units or local commercial banks, including local
branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units,shall be subject only to a final tax at the rate of 10%.
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign
currency deposit system units and other depository banks under the expanded foreign
currency deposit system shall be exempt from all taxes, except net income from such
transactions as may be specified by the secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular tax payable by banks: Provided, however. That
interest income from foreign currency loans granted by such depositors banks under said
expanded system to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at the rate of ten
percent (10%).
There is imposed for each taxable year, in addition to other taxes imposed, a tax
equal to 10% of the improperly accumulated taxable income of corporations formed
or availed of for the purpose of avoiding the income tax with respect to its shareholders or
the shareholders of any other corporation, by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or distributing them to the
shareholders. The rationale is that if the earnings and profits were distributed, the
shareholders would then be liable to income tax thereon, whereas if the distribution were
not made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. Thus, a tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them by the corporation.
The touchstone of the liability is the purpose behind the accumulation of the income
and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to
some other causes, such as the use of undistributed earnings and profits for the reasonable
needs of the business, such purpose would not generally make the accumulated or
undistributed earnings subject to the tax. However, if there is a determination that a
corporation has accumulated income beyond the reasonable needs of the business, the
10% improperly accumulated earnings tax shall be imposed.
c. Publicly-held corporations;
d. Taxable partnerships;
g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227, as well as other enterprises duly
registered under special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of other taxes,
national or local.
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes and
without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or a mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization of a
purely local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;
After partition of property, should the co-owners invest the income of the co-
ownership in any income-producing properties after partition, they would constitute
themselves into an unregistered partnership which is subject to income tax as a
corporation.
TAX RETURN is a report made by the taxpayer to the BIR on all gross income
received during the taxable year, the allowable deduction including exemptions, the net
taxable income, the income tax rate, the income tax due, the income tax withheld, if any, and
the income tax still to be paid or refundable.
Under substituted filing, an individual taxpayer although required under the law to
file his income tax return, will no longer have to personally file his own income tax return but
instead the employers annual information return filed will be considered as the substitute
income tax return of the employee inasmuch as the information in the employers return is
exactly the same information contained in the employees return.
Every employer required to deduct and withhold the taxes in respect of the wages of
his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to
the Commissioner an annual information return containing a list of employees, the total
amount of compensation income of each employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of the statement referred to in the
preceding paragraph, and such other information as may be deemed necessary. This return, if
made and filed in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect of such wages.
INDIVIDUAL TAXPAYERS- the return of any individual shall be filed on or before the
15th day of April of each year covering income for the preceding taxable year.
CORPORATE TAXPAYERS
(a) shall file an annual return on or before the 15 th day of the 4th month following the
taxable year;
(b) shall file quarterly return 60 days after the close of each of the first 3 quarters of
the taxable year.
GR: The following individuals are required to file an income tax return:
EXCEPTION: The following individuals shall NOT be required to file an income tax
return:
(a) An individual whose gross income DOES NOT EXCEED HIS TOTAL
PERSONAL AND ADDITIONAL EXEMPTIONS FOR DEPENDENTS, PROVIDED
THAT A CITIZEN OF THE PHILIPPINES and any alien individual engaged in
business or practice of profession within the Philippines shall file an income
tax return, regardless of the amount of gross income;
(b) An individual with respect to Pure compensation income derived from such
sources within the Philippines, the income tax on which has been correctly
withheld; PROVIDED, THAN AN INDIVIDUAL DERIVING COMPENSATION
CONCURRENTLY FROM TWO OR MORE EMPLOYERS AT ANY TIME DURING
THE TAXABLE YEAR SHALL FILE AN INCOME TAX RETURN;
(c) An individual whose sole income has been subjected to final withholding
tax;
(d) A minimum wage earner or an individual who is exempt from income tax
Substituted filing is a mode of filing when the employers annual information return of
withholding taxes on compensation may be considered as the substitute ITR of employee
inasmuch as the information provided in his ITR would exactly be the same information
contained in the employers annual information return.
Under substituted filing, an individual taxpayer although required under the law
to file his income tax return, will no longer have to personally file his own income tax return
but instead the employers annual information return filed will be considered as the
substitute income tax return of the employee inasmuch as the information in the employers
return is exactly the same information contained in the employees return.
Non-filing is applicable to certain types of individual taxpayers who are not required
under the law to file an income tax return. An example is an employee whose pure
compensation income does not exceed P60,000, and has only one employer for the taxable
year and whose tax withheld is equivalent to his tax due.
c. Employees whose monthly gross compensation income does not exceed Five Thousand Pesos
(P5, 000) or the statutory minimum wage, whichever is higher, and opted for non-withholding
of tax on said income
e. Individuals deriving purely compensation income from a single employer, although the
income of which has been correctly subjected to withholding tax, but whose spouse is not
entitled to substituted filing
Except in cases where the Commissioner otherwise permits, the return shall be filed
with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such person has his legal residence or principal
place of business in the Philippines, or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner.
CIVIL PENALTIES- there shall be imposed, in addition to the tax required to be paid, a
penalty equivalent to 25% of the amount due in the following cases:
(a) Failure to file any return and pat the tax due as required;
(b) Filing a return with an internal revenue officer other than those with whom the
return is required to be filed; or
(c) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
(d) Failure to pay the full or part of the amount of tax shown on any return required to
be filed or the full amount of tax due for which no return is required to be filed, on
or before the date prescribed for its payment.
In case of willful neglect to file the return within the period prescribed by this Code or
by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty
to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any
payment has been made on the basis of such return before the discovery of the falsity or fraud:
Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner pursuant to the
rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima
facie evidence of a false or fraudulent return: Provided, further, That failure to report sales,
receipts or income in an amount exceeding thirty percent (30%) of that declared per return,
and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render
the taxpayer liable for substantial underdeclaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.
INTEREST
In General. (A) There shall be assessed and collected on any unpaid amount
of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as
may be prescribed by rules and regulations, from the date prescribed for payment until
the amount is fully paid.
Deficiency Interest. - Any deficiency in the tax due, shall be subject to the
interest prescribed in Subsection (A) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.
(2) The amount of the tax due for which no return is required, or
A deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the Commissioner, there shall be assessed and collected on the unpaid
amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid,
which interest shall form part of the tax.
F. WITHHOLDING OF TAXES
(1) FINAL WITHHOLDING TAX -constituted as a full and final payment of the
income due from the payee on the said income;
RENTAL INCOME
Real properties 5%
Personal properties 5%
Poles, satellites and transmission facilities 5%
Billboards 5%
INCOME DISTRUBUTION TO 15%
BENEFICIARIES
TRANSFER TAXES
A. ESTATE TAX
Estate Tax
A tax levied on the transmission of properties from a decedent to his or her heirs. It is
the tax on the privilege to transmit property at death and on certain transfers which are made
the equivalent of testamentary dispositions by the statute
Basic Principles
The transfer of the net estate of every decedent, whether resident or non-resident, is
subject to estate tax
Estate tax is imposed upon the basis of the net estate of the decedent, considered as a
unit, regardless of the number of shares into which it may be divided or the relationship
of the beneficiaries
Estate taxation is governed by the statute enforced at the time of the death of the
decedent
Estate tax accrues upon the death of the decedent
The accrual of the estate tax is distinct from the obligation to pay the same
Nature
The properties and rights are transferred to the successors at the time of death of the
decedent. However, despite the transfer of properties and rights at the time of death, the
executor or administrator shall not deliver a distributive share to any party interested in the
estate unless there is a certification from the CIR that estate tax has been paid.
4. CLASSIFICATION OF DECEDENT
a. Resident citizens
b. Non-resident citizens
c. Resident alien
d. Non-resident alien
**Note: Only natural persons can be held liable for estate tax.
Gross Estate
The value of all the property, real or personal, tangible or intangible, of the decedent
wherever situated to the extent of his interest at the time of his death as well as other items
includible in the gross estate
Note: In the case of a non-resident alien decedent, only that part of the entire gross estate
which is situated in the Philippines shall form part of his gross estate.
Net Estate
The value of the gross estate less the ordinary and special deductions
Rule of Reciprocity
There is reciprocity if the foreign country of which the decedent was a citizen or
resident at the time of his death:
Rule in determining the situs of intangible personal property for estate tax purposes
General Rule
The intangible property is taxed based on the domicile of the owner (res mobilia
sequuntur personam)
Exceptions
1. Ordinary Deductions
2. Special Deductions
a. Family Home
the amount equivalent to the current FMV of the decedents family home which
shall not exceed P1,000,000
the family home must be the actual residential home of the decedent and his family
at the time of his death as certified by the barangay captain
b. Standard Deduction
P1,000,000 without need of substantiation
c. Medical Expenses
those incurred by the decedent within 1 year prior to his death which shall be duly
substantiated with receipts, but in no case to exceed P500,000
d. Amount received by heir under RA 4917
the amount received from the decedents employer as a consequence of the death
of the decedent-employee as retirement benefits under RA 4917 is allowed as a
deduction provided that the amount of benefit is included in the gross estate
1. Ordinary Deductions
**Note: Non-resident alien decedent cannot avail of special deductions. No deduction shall be
allowed unless the executor, administrator, or anyone of the heirs, as the case may be, includes
in the estate tax return of the decedent the value at the time of his death that part of the gross
estate of the non-resident not situated in the Philippines
B. DONORS TAX
Donors Tax
An excise tax imposed on the privilege to transfer property by way of gift inter vivos
based on pure act of liberality without any or less than adequate consideration and without any
legal compulsion to give
Basic Principles
Nature
a. To raise revenues
b. To tax the wealthy and reduce certain other excise taxes
c. To discourage inter vivos transfers of property which could reduce the mortis causa
transfers on which a higher tax, the estate tax, would be collected
d. It will tend to reduce the incentive to make gifts in order that distribution of future
income from the donated property may be to a number of persons with the result that
the taxes imposed by the higher brackets of the income tax are avoided
A transfer becomes complete and taxable only when the donor has divested himself of
all beneficial interests in the property transferred and has no power to recover any such
interest in himself or his estate.
a. Capacity of donor
All persons who may contract or dispose of their property may make a donation
b. Donative intent (intention to donate)
Necessary only in case of a direct gift. If the gift is indirectly taking place by way
of sale, exchange or other transfer of property as contemplated in cases of
transfers for less than adequate and full consideration, donative intent is not
always essential to constitute a gift
c. Delivery, whether actual or constructive, of the subject gift
There is delivery when the subject matter is within the dominion and control of
the donee
d. Acceptance by the done
Necessary because nobody is obliged to received a gift against his will
e. Form prescribed by law
Where property, other than real property classified as capital asset subject to final
capital gains tax, is transferred for less than an adequate and full consideration in money or
moneys worth, the amount by which the fair market value of the property exceeded the value
of the consideration shall, for purposes of donors tax, be deemed a gift.
**Note: The element of donative intent is conclusively presumed in transfers of property for less
than an adequate or full consideration in money or moneys worth
7. CLASSIFICATION OF DONOR
**Note: A corporation can be subject to donors tax because it is capable of entering into a
contract of donation through the appropriate Board Resolution
Gross Gift
All property, real or personal, tangible or intangible, that is given by the donor to the
donee by way of gift, without the benefit of any deduction
Net Gift
The net economic benefit from the transfer that accrues to the donee
a. For resident citizen, non-resident citizen, and resident alien (wherever situated)
1. Real property wherever situated (within & without the Philippines)
2. Personal property wherever situated, tangible or intangible
b. For non-resident alien (only within)
1. Real property situated within the Philippines
2. Personal property
i. Tangible property situated within the Philippines
ii. Intangible personal property with situs in the Philippines unless
exempted on the basis of reciprocity
a. Personal property
The fair market value of the property given at the time of the gift shall be the
value of the gross gift
b. Real property
The fair market value the fair market value as determined by the CIR or the fair
market value as shown in the schedule of values fixed by the provincial and city
assessors (zonal value), whichever is higher. If there is no zonal value, taxable
base is FMV that appears in the latest tax declaration
The donors tax imposed upon a donor who is a citizen or a resident at the time of
donation shall be credited with the amount of any donors taxes of any character and
description imposed by the authority of a foreign country
Only donors who are citizens or residents at the time of the donation are entitled to
claim tax credit
The donors tax imposed by the Philippines shall be credited with the amounts of a
donors tax imposed by the authority of a foreign country. However, the amount of tax
credit is subject to the following limitations:
o Per country basis: The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against which such
credit is taken which the net gifts situated within such country taxable under
donors tax bears to his entire net gifts
o Overall basis: The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the donors
net gifts situated outside the Philippines taxable under donors tax bears to
his entire net gifts
**Note: Non-resident aliens are exempt from donors tax with respect to (b) and (c) as
enumerated above
Other Exemptions allowed on Gross Gift
Husband and wife are considered as separate and distinct taxpayer's for purposes of the
donor's tax. However, if what was donated is a conjugal or community property and only the
husband signed the deed of donation, there is only one donor for donor's tax purposes, without
prejudice to the right of the wife to question the validity of the donation without her consent
pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of
the Philippines.
a. The tax shall be computed on the basis of the total net gifts made during the calendar
year in accordance with the graduated donors tax rates
b. The applicable donors tax rate shall depend upon the relationship between the donor
and the donee
if the donee is a stranger to the donor, the tax rate is 30% of the net gifts
if the donee is not a stranger to the donor, the tax for each calendar year shall be
computed on the basis of the total net gifts made during the calendar year in
accordance with the schedule provided in Section 99(A) of the Tax Code
**Note: Stranger is a person who is not a:
Formula:
In general:
Gross gifts made
Less: Deductions from the gross gifts
= Net gifts made
Multiplied by: Applicable rate____________
= Donors tax on the net gifts
Jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim that
public funds are illegally disbursed or that public money is being deflected to any improper
purpose, or that public funds are wasted through the enforcement of an invalid or
unconstitutional law or ordinance (Landbank vs. Cacayuran, G.R. No. 191667, April 17,
2013).
b. As distinguished from a citizens suit
In a taxpayers suit, one can sue where there is an assertion that public funds are illegally
disbursed or deflected to an illegal purpose, or that there is a wastage of public funds
through the enforcement of an invalid or unconstitutional law. On the other hand, in a
citizens suit, the person complaining must allege that he has been or is about to be denied
some right or privilege to which he is lawfully entitled or that he is about to be subjected to
some burdens or penalties because of the statute or act complaint of (Province of North
Cotabato vs. Government of the Philippines, G.R. No. 183591, October 14, 2008).
Criteria of being ripe for judicial determination - a closely related requirement is ripeness,
that is, the question must be ripe for adjudication. And a constitutional question is ripe for
adjudication when the governmental act being challenged has a direct adverse effect on the
individual challenging it (ABAKADA Guro Party List, etc., vs. Purisima, etc., et al., G. R. No.
166715, August 14, 2008).
b. Power of the Commissioner to interpret tax laws and to decide tax cases the power to
interpret the provisions of the National Internal Revenue Code (NIRC) and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner, subject to review
by the Secretary of Finance. The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the NIRC or other laws or portions thereof administered by the bureau is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals (CTA). (p.54-55 Ampongan IT)
c. Non-retroactivity of rulings
1. Income taxation
a. Definition, Nature and General Principles
a.1 Income Tax systems
o Global a system or tax treatment which views, indifferently the tax base, and
generally treats in common all categories of taxable income of the taxpayer (Tan vs.
del Rosario) (p.2 Dimaampao IT)
Provides for uniform tax rules/tax rates
Income Tax of Corporations (Secs. 27 and 28) generally does not
categorize/classify income
Imposes uniform corporate tax rates
o Schedular system in law, where the income tax rules/treatment varies and made
to depend on the kind/category of taxable income of the taxpayer (Tan vs. del
Rosario). It operates under the following characteristics: (p.1 Dimaampao IT)
Categorizes/classifies income: Sec. 32a; Secs. 24, 25 and 26 (imposes
different tax rates) categorizes income of individual taxpayers
Provides for different tax treatment
Imposes different tax rates
A.6.1. Individuals
Citizens
o Resident Citizens all sources inside and outside; net income.
o Engaged in trade or business or profession entitled to deductions on
his business income and personal and additional exemptions
o Purely compensation income earners not entitled to deductions; only
personal and additional exemptions
o Non-resident Citizens all sources inside
ADDENDUM: Certain aliens are entitled to preferential tax rates if they are employed by: (1) regional or
area headquarters and regional operating headquarters of multinational companies in the Philippines;
(2) offshore banking units established in the Philippines; and (3) foreign service-contractor or sub-
contractor engaged in petroleum operations in the Philippines. This is provided that their Filipino
counterparts are also afforded the same preferential tax rate. These Filipinos have the option to be taxed
under the preferential tax rate or under the graduated tax rates.
NOTA BENE: Co-ownership is considered a separate taxable entity like estates and trusts. The co-owners
are subject to income tax on their individual distributive share only. However, if the co-owners, after
partition of property invest the income of co-ownership in any income-producing properties, this
constitutes an unregistered partnership and subject to income tax as a corporation. But if it is merely an
isolated transaction, then it cannot be said that a partnership has been formed.
Foreign
NOTA BENE: The principle of constructive receipt of income is applied in partnerships. This means that
the partners are taxable on their distributive shares in the taxable year that the profit was made,
regardless of whether such has already been distributed and received by the partners.
Exempt Partnership
o General professional partnership partnerships formed by
persons for the sole purpose of exercising their common
profession; exempt from income tax but must still file an
income tax return - the partners are the ones liable for income
tax based on their respective distributive shares
i. REALIZATION TEST
b.3.1 DEFENITION
b.3.2 CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED
i. COMPENSATION INCOME
Income is received not only when it is actually handed to a person but also when it is
merely constructively received by him
When is income considered realized? (2011 BAR)
Recognition of income is when an income is reflected on the books and is based upon
the method of accounting used.
Cash method is a method of accounting whereby all items of gross income received
during the year shall be accounted for in such taxable year and that only expenses actually paid
shall be claimed as deductions the year. Income is realized upon actual or constructive receipt
of cash or its equivalent while expenses are deductible only upon actual payment thereof.
(Mamalateo)
Accrual method is a method of accounting for income in the period it is earned,
regardless whether it has been received or not. On the other hand, expenses are accounted for
in the period they are incurred and not the period they are paid. (ibid.)
In cash method, income is reported in the year payments are received while expenses
are deducted in the year paid. On the other hand, in accrual method, income is reported in the
year it is earned while expenses are deducted in the year it is incurred, regardless of receipt or
disbursement of cash. (ibid.)
The necessity of adopting an accounting method is based upon the express mandate of
the law that the method of accounting regularly employed by the taxpayer in keeping his books
must clearly reflect his income for the year. (see sec. 43 NIRC)
Taxpayer must choose only one accounting method but if no such method of accounting
has been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income. (see sec. 43 NIRC)
i. REALIZATION TEST
Claim of right doctrine - A taxable gain is conditioned upon the presence of a claim of
right to the alleged gain and the absence of a definite unconditional obligation to return or
repay that which would otherwise constitute a gain. (Mamalateo)
Any economic benefit to the employee that increases his networth, whatever may have
been the mode by which it is effected, is taxable.
Total assets - total liabilities = networth (ibid.)
Income is reportable when all the events have occurred that fix the taxpayers right to
receive the income and the amount can be determined with reasonable accuracy. (CIR v.
Isabela Cultural Corp, G.R. NO. 172231)
As to source:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
(Sec. 23 NIRC)
Services = Place of performance of the services. ( Non-resident alien taxed only on her
commission income for services rendered in the Philippines)
International shipping line = Gross Philippine billings. (Gross Philippine billing means gross
revenue whether for passenger, cargo, or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight documents.)
International air carrier = Gross Philippine billing. (GPB refers to gross revenue derived from
carriage of persons, excess baggage, cargo or mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or payment of ticket.
a) Produced within and sold without or produced without and sold within = partly
within and partly without the Philippines.
b) Purchased within and sold without or purchased without and sold within = Country
where sold.
c) Shares of stocks of DC = within the Philippines.
(Mamalateo)
b.3.1 DEFENITION
Gross income was defined by Tax code by giving items included therein.
Except when otherwise provided, all income derived from whatever source, including,
but not limited to, the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions; and
11. Partners distributive share from the net income of the GPP
Income from whatever sources refers to all income not expressly excluded or exempted
from the class of taxable income, irrespective of the voluntary or involuntary action of the
taxpayer in producing the income (Gutierrez v. CIR, CTA CASE NO. 65, AUGUST 31, 1965]
"Net income" means gross income less statutory deductions and exemptions. ( sec. 36
rev. reg. nos. 2)
Taxable income means the pertinent items of gross income specified in this Code, less
the deductions and/or personal and additional exemptions, if any, authorized for such types of
income by this Code or other special laws. (sec. 31 NIRC)
i. COMPENSATION INCOME
In general, the term "compensation" means all remuneration for services performed by
an employee for his employer under an employer-employee relationship,
Employee refers to any individual who is the recipient of wages and includes an officer,
employee or elected official of the government or any political subdivision, agency or
instrumentality thereof.
Officers and directors of a Corporation is considered employee. (First Lepanto v. CIR GR
no. 197117)
Compensation income falling within the meaning of "statutory minimum wage" shall be
exempt from income tax and withholding tax. (R.A. No. 9504)
Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by
Minimum Wage Earner (MWE) shall
likewise be covered by the above exemption, (ibid.)
Subject to withholding tax on wages because they are still considered as compensation
and should be allocated over the years corresponding to such amount.
(a) for agricultural labor paid entirely in products of the farm where the labor is
performed
(b) for domestic service in a private home;
(c) for casual labor not in the course
of the employer's trade or business;
(d) for services by a citizen or resident of the Philippines for a foreign government or an
international organization.
(sec. 78 NIRC)
13th month pay and other benefits are excluded from compensation income (sec 32 (B) NIRC)
Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means
any good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined herein) such as, but not limited
to, the following:.
(1)Housing;
(2)Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows. (sec. 33 NIRC)
General Rule
A final tax of (32%) effective January 1, 2000 and thereafter, is hereby imposed on the
grossed-up monetary value of fringe benefit (unless the
Exception
Fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or advantage of
the employer.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by (68%) effective January 1, 2000 for Citizens, RA,
and NRAETB; (75%) for NRANEBT; (85%) alien employed by RAHQ, ROHQ, OBU and foreign
service contractor engaged in petroleum.
Thereafter multiply the grossed-up monetary value to the applicable fringe benefit tax
rate.
NRANETB = 25%
Alien employed by RAHQ, ROHQ, OBU, or foreign petroleum service contractors or
subcontractors, or any of their Filipino individual employees who are employed and
occupying same positions as those held by the alien employees = 15% (see sec. 33 and
25 of NIRC)
Income recipient is the person liable but the fringe benefit tax is mandated to be
assumed by the employer and allows the latter to deduct such tax as business expense. (NIRC)
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner. (sec. 33 (C) NIRC)
1. Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year;
2. Monetized value of vacation and sick leave credits paid to government officials and
employees;
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more
than P1,500;
8. Employees achievement awards, e.g. for length of service or safety achievement, with
an annual monetary value not exceeding P10,000;
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;48
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding
25% of the basic minimum wage per region basis. (RR 005-11 as amended by RR 008-12)
Income derived from SOP which is the difference of BV or FMV of shares whichever is
higher, at time stock option is exercised, and price fixed on the shares on the grant date that
qualifies as fringe benefit tax is subject to FBT (Mamalateo)
Professional income refers to the fees received by a professional from the practice of his
profession, provided that there is no employer-employee relationship between him and his
clients. (ibid.)
"To engage" is to embark in a business or to employ oneself therein. The word "engage"
connotes more than a single act or a single transaction; it involves some continuity of action
(Imperial vs. Collector, 97 Phil. 992,1002).
Gross income from business In the case of manufacturing, merchandising, or mining
business, "gross income" means the total sales, less the cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In determining the
gross income, subtractions should not be made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the cost of goods sold. (sec. 43 RR no. 2)
Sale of patents and copyrights Income or loss is the difference between the selling
price and the cost increased or decreased by depreciation. (ibid.)
Sale of goodwill income or loss is determined by the difference of selling price and the
FMV as proven by the taxpayer. (ibid.)
Lease of real property rental income is likewise treated as business income subject to
tax in rate as provided by law. (RC, NRC, NRAETB-graduated, NRANETC-25%) (ibid)
Dealings with:
a) Shares of stocks including warrants and options to purchase stocks and units of
participation in partnership.
Rules:
If seller is dealer in securities the shares are ordinary asset (OA), subject to graduated
tax.
If seller not a dealer in securities shares are CA
o If listed and traded in local stock exchange subject to of 1% stock transfer tax
based on gross selling price.
o If shares not listed, or if listed but not traded in local stock exchange subject to
capital gains tax of 5% for 1st 100,000 and 10 % for excess of 100, 000 based on
net capital gains.
b) Real property
Rules:
If seller is real estate dealer the property is OA and subjected to graudated tax rates.
Seller not a real estate dealer determine whether:
o The real property is a) used in tax payers trade, business or profession or b)
treated as a fixed asset used in his trade, business or profession -
ordinary asset subject to graduated tax rates.
o The real property is not among abovementioned capital asset subject to 6%
capital gains tax based on gross selling price or FMV of the property at the time
of sale whichever is higher.
Dealings with other capital assets, except shares of stock of a domestic corporation and
real property located in the Philippines, shall be subjected to graduated tax rate.
a) Stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year,
b) Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business,
c) Property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or
d) Real property used in trade or business of the taxpayer (sec. 39 NIRC).
a) Interest Income
Interest means the amount which a depositary bank may pay on savings and time
deposits in accordance with rates authorized by Bangko Sentral ng Pilipinas. (RR12-80)
Interest income from Philippines currency deposits and deposit substitutes subject to
20% final withholding tax except NRANETB which is subject to 25%
Deposit substitute means an alternative form of obtaining funds from the public other
than deposits, which may be through issuance, endorsement, or acceptance of debt
instrument for the borrowers account for the purpose of relending or purchasing
receivables and other obligations, or financing their own needs or that of their agent or
dealers. (Mamalateo)
o Interest from currency bank deposits and yield or any other monetary benefit
from deposit substitute, trust fund and other similar arrangement - 25% FWT for
NRANETB and the rest is 20% 20%.
o Interest from government debt instrument and securities - the debt instrument
is considered as deposit substitute regardless of number of investor and
subjected to same FWT. (20% or 25%)
o Interest from long term deposits or investment maturity period exceeds 5 years
will be exempted.
o Interest from depositary bank under expanded foreign currency deposit system
7.5% FWT- if interest received by residents
Exempt if interest is received by non-residents
50% exempt 50% 7.5 joint account of a resident and non-resident.
Interest income on foreign currency deposit
o 7.5% FWT - gross interest income from foreign currency deposit with OBU, FCDU.
o 10% FWT - interest income from foreign currency transactions of a bank.
Interest income from traditional loans by local banks and other creditors subject to
graduated tax rates except:
o NRANETB 25% Final tax.
o NRFC 20% Final tax.
Discounts are treated in the same manner as interest income
Interest income from long term deposits or investments of individuals is exempt
o Exceeding 5 years exempt
o 4 years to less than 5 years - 5%
o 3 years to less than 4 years 12%
o Less than 3 years 20%
b) Dividend Income
Dividends comprise any distribution whether in cash or other property in the ordinary
course of business.(Mamalateo)
Dividend is defined as a corporate profit set aside, declared, and ordered by the
directors to be paid to stockholders on demand or at a fixed time. (Fisher v. Collector)
Distinction between Cash dividend and Stock dividend
The former is disbursement to the stockholder of the accumulated earnings, and the
corporation parts irrevocably with all interest therein while the latter is dividend
payable in reserve or increase of additional stock of the corporation.
The former unlike the latter involves disbursement.
The former unlike when declared and paid cannot be reached by corporations creditors
unlike the latter being in essence still the property of corporation can be reached by the
creditors.
Generally exempt from tax except if it gives shareholder an interest different from that which
his former stockholdings represent.
Tax sparing rule is a credit granted by the residence country for foreign taxes that for
some reasons were not actually paid to the source country but that would have been paid
under the countrys normal tax rules. (ibid.)
c) Royalty Income
Royalty is a valuable property that can be developed and sold on a regular basis for
consideration - it is an active business subject to normal corporate income tax. (ibid)
Where a person pays royalty to another for use of intellectual property it is a passive
income and subject to 20% FWT (ibid.)
Rules:
Royalty paid by DC
o Recipient is a citizen, RA , NRAETB, DC, or RFC 20 % FWT
o Recipient is NRANETB 25 % FWT
o Recipient is NRFC 30% FWT.
Royalty paid by FC
o Recipient is RC and DC subject to graduated rates.
o Recipient is NRC , alien, and FC not taxable because they are liable only from
sources within the Philippines.
d) Rental Income
Rules
Rules:
General Rule:
Exception:
Prizes and awards in local or international sports competition whether held in the
Philippines or not is also excluded from gross income. (sec. 32 NIRC)
Separation pay is included in gross income only when the cause of separation is within
the control of the employee. (Mamalateo)
Retirement benefit and pensions are generally excluded from gross except if the
retirement of employee does not meet requirements laid by RA 4917 and RA 7641. (ibid)
This words disclose the legislative policy to include all income not expressly exempted
within the taxable income under our laws, irrespective of the voluntary or involuntary action of
the taxpayer in producing the gain (Blas Gutierrez v. Collector)
The principle underlying the taxability of an increase in the net worth of a taxpayer rests
on the theory that such an increase in net worth, if unreported and not explained by the
taxpayer, comes from the income derived from a taxable source. (Hermanos v. Commisioner
and CTA)
Exclusions are items not included in determination of gross income because they are
either expressly exempted by the Constitution, Tax Code, tax treaties, or special laws; they are
mere return of capital; or they are subject to another kind of tax.
Exclusions v. Deductions
Former is the flow of wealth to the taxpayer which is not treated as part of gross income
because it is exempted or it does not come within the definition of income while the latter is
the amounts which the law allows to be subtracted from gross income in order to arrive at net
income
Former pertain to the computation of gross income while latter pertains to computation of
taxable income.
Former is something received or earned by the taxpayer but which do not form part of gross
income while the latter are something spent or paid in earning gross income
Former are amounts that are not included in gross income while latter are amounts subtracted
from the computed tax in order to arrive at taxes payable
Former are not income while the latter are taxes that are not collected. (Atty. PM Reyes Bar
Reviewer)
All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties. (sec.
4(3) Art. XIV Constitution)
Section 32 of the Tax Code enumerates the excluded items from gross income
Proceeds of life insurance paid by reason of the death of an insured to any beneficiary
(individual, partnership, or corporation, but not a transferee for a valuable consideration),
directly or in trust, are excluded from the gross income of the beneficiary.
REASON: they are mere compensation for the loss of the recipient.
The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract.
REASON: Proceeds of life insurance, payable upon the death of the insured, are considered
as indemnity rather than income to the heirs or beneficiaries who could be corporations or
individuals (El Oriente Fabrica de Tabacos vs. Posadas, G.R. No. 34774).
Amounts received (other than amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life insurance, endowment, or annuity contract
are excluded from gross income but if such amounts (when added to amounts already received
before the taxable year under such contract) exceed the aggregate premiums or considerations
paid (whether or not paid during the taxable year), then the excess shall be included in gross
income.
Gifts, bequests and devises (which are subject to estate or gift taxes) are excluded, but not
the income from such property. If the amount received is on account of services rendered,
whether constituting a demandable debt or not, or the use or opportunity to use of capital, the
receipt is income (Pirovano vs. Commissioner, 14 SCRA 832).
Compensations for damages to personal or family rights, damages for slander and libel,
award for loss of life, damages for injuries to the goodwill of a taxpayer's business are not
taxable. Unless they exceeded its cost in which case excess is taxable.
Damages received for patent infringement, breach of contract or fiduciary duty and
recoveries under the Clayton Act for antitrust violations are excluded from gross income to the
extent that the losses to which the damages relate did not give rise to a tax benefit either in the
recovery year or earlier tax years.
However, "insider profits" recovered by a corporation from the insider (major stockholder
or director) under the Securities Exchange Act of 1934 or the Investment Company Act of 1940
are taxed to the corporation.
Moral damages are also excluded in gross income because it is in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a penalty on
the wrongdoer (Kierulf v. CA GR No. 142029)
Business profits of a foreign corporation organized under the laws of a treaty country from
sources within the Philippines are not subject to Philippines income tax, unless such profits are
attributable to a permanent establishment of the foreign corporation created or deemed
created in the Philippines
Capital gains from sale of shares of stock of a domestic corporation, which is always
presumed by law to have situs in the Philippines, are generally not subject to Philippine income
tax, if there exist no real property interest.
1) Retirement benefits under RA.. Nos. 4917 and 7641, and under Section 60(B) of Tax
Code.
Retirement benefits received under R.A. No. 7641 and those received by officials and
employees of private firms, in accordance with a reasonable private benefit plan
maintained by the employer (under R.A. No. 4917),
Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
due to death, sickness, or other physical disability or for any cause beyond the control of
said official or employee is excluded, the tax exemption applies to salary or cash equivalent
of accumulated vacation and sick leaves such as the terminal leave pays of retiring
government employees, which are considered not part of the gross salary. (Commissioner
v. Castaneda 203 SCRA 72)
Social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines or aliens who come to
reside permanently in the Philippines from foreign government agencies and other
institutions, private or public.
Payments of benefits to any person residing in the Philippines under the laws of the
United States administered by the United States Veterans Administration.
Benefits received from SSS in Republic Act No. 8282.
Benefits received from the GSIS under Republic Act No. 8291, including
Retirement gratuity received by government officials and employees.
g) Miscellaneous items
Income Derived by the Government or its Political Subdivisions. - Income derived from
any public utility or from the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political subdivision thereof.
Prizes and Awards - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
o The recipient was selected without any action on his part to enter the contest or
proceeding; and
o The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in
local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations.
To be eligible for exemption, the national sports association referred to in the law that
should sanction said sport activity is the Philippine Olympic Committee (BIR Ruling No.
026-2000, June 13, 2000).
GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years.
Gains cannot include interest, since it clearly refers to gains from the sale of bonds,
debentures and other certificates of indebtedness. Whereas, the term gains includes
interest in its general sense, this rule cannot be applied to (this section) in specific
sense. Tax Code defines gross income and it is clear that there is distinction between
gains derived from dealings in property and interest. Gains realized from the sale or
exchange or retirement of bonds, debentures and other certificate of indebtedness
would fall under the category of gains derived from dealings in property. (Nippon Life
Insurance v. CIR Case no. 6142)
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor
upon redemption of shares of stock in a mutual fund company as defined in Section 22
(BB) of this Code.
PEZA-registered enterprises are given income tax holidays of six or four years from the date of
commercial operation and after such, 5% final tax on their gross income.
Gain from transfer of agricultural property covered under the law shall be exempt from capital
gains tax for ten (10) years.
Bangko Sentral ng Pilipinas is exempt from all taxes for (5) years.
National Housing Authority is exempt from all fees and charges of any kind such as
income tax; realty taxes; and documentary stamp tax on sales transactions executed by
and in favor of the NHA in connection with socialized housing projects.
Exempt from the payment of the following national internal revenue taxes
Provided, that the sale or any disposition of lot and/or house and lot packages
beyond the maximum amount of P400,000 (or later amount determined by the
HLURB) shall be subject to the corresponding income taxes;
2) Capital gains tax on sale of raw lands for use in socialized housing project;
3) Value added tax for the project contractor/developer/ seller or owner of socialized
housing project;
4) Donor's tax for lands certified by the proper LGU to have been donated for socialized
housing purposes.
Following tax incentives are granted to a prequalified adopting private entity, which enters into
an Agreement with a public school:
a) deduction shall be availed of in the taxable year in which the expenses have
been paid or incurred
b) taxpayer can substantiate the following with sufficient evidence:
2) Exemption of the Assistance made by the donor from payment of donor's tax
pursuant to Section 101(A)(2) and (B)(1) of the Tax Code of 1997.
R.A. No. 7277, as amended by R.A. No. 9442, (Magna Carta for Persons with Disability)
Persons with disability shall be entitled to claim at least 20% discount from hotels and
restaurants, sports and recreation centers, all drugstores regarding purchase of medicines.
"Statutory minimum wage" (SMW) paid to SMW earners shall be exempt from income tax.
PDIC will be exempt from income tax, final withholding tax, VAT on assessment
collections as well as local taxes.
Agricultural multi-purpose cooperative registered with the CDA is exempt from ordinary income
tax on transactions with members and non-members for 10 years from registration. Thereafter
exemption applies only to transaction with members only.
Barangay Micro Business Enterprises BMBE are exempt from income tax from income arising
from operation of the enterprise.