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Taxation - mode by which the government makes exactions for

revenue to support their existence and carry out their legitimate


1. Levy or Imposition - enactment of tax laws or statutes.

This is exclusively legislative in nature.
Taxes - enforced on proportional contributions from persons and
property, levied by the State by virtue of its sovereignty, for the
support of the government and all its public needs. 2. Assessment and Collection - administrative in character
and, therefore, can be delegated.

Characteristics of Taxes: EPP-LL-PP  The tax law must designate which agency will collect
the taxes.
1. Enforced contributions;
 Regulations must be in accordance with the tax
2. Payable in money generally; measures imposed by Congress.

3. Proportional in character;

4. Levied on persons, property or privilege; 3. Payment - act of compliance by the taxpayer.

5. Levied by the legislature;

6. For Public purpose; PURPOSES OF TAXATION

7. Paid at regular periods or intervals. 1. Primary Purpose - to raise revenue for the support of the
government and for all public needs.

2. Secondary and Non-revenue Purposes: RIPE
1. Lifeblood Doctrine - taxes are the lifeblood of the
government. The government can neither exist nor endure a. Reduction of social inequity;
without it; their prompt and certain availability is an
imperious need. b. An Implement of the police power of the State.

 Taxation is the indispensible and inevitable price for c. Protect our local industry against unfair competition;
civilized society; without taxes, the government would d. Encourage growth of local industry.
be paralyzed.

 Upon taxation depends the government’s ability to

serve the people for whose benefit it is collected. Principles of a Sound Tax System: FAT

1. Fiscal Adequacy - the sources or proceeds of tax revenues

must coincide with and approximate the needs of
2. Necessity Theory - taxes are necessary burden to protect government expenditures and expenses.
the state and give the citizens facilities and protection.

2. Administrative Feasibility - tax system should be

3. Benefits Protection Theory/Doctrine of Symbolic capable of being properly and efficiently administered by
Relationship - reciprocal duties of the government and the government and enforced with least inconvenience to
the people. the taxpayer.

NATURE OF TAXING POWER 3. Theoretical Justice - It must be fair to the average

 The nature of the taxing power is two-fold. It is both taxpayer and based on one’s ability to pay.
inherent and legislative in character.

Will a violation of the above-mentioned principles render

1. Inherent - inherent in the state, being an attribute of a tax law unconstitutional?
sovereignty, belonging as a matter of right to every  It depends. A tax law will retain its validity even if it is not in
independent state. consonance with the principles of fiscal adequacy and
 It does not need any constitutional conferment. administrative feasibility because the Constitution does not
expressly require so, as these principles are designed only
to make our tax system sound.

2. Legislative - exclusively vested in the legislature. It is the

strongest of all powers.
Amago, Jann Claudine M. 1
 However, if a tax law runs contrary to the principle of  A tax statute does not cease to be valid merely
theoretical justice, such violation will render the law because it regulates, discourages or even deters the
unconstitutional, considering that under the Constitution, activities taxed.
taxes must be uniform and equitable.
 Tax may legally exist even if the motive which impelled
the legislature to impose the tax was to favor one
industry over the other.
Is the power to tax the power to destroy?

 The power to tax involves the power to destroy. Taxation is

a destructive power which interferes with the personal and 2. INHERENTLY LEGISLATIVE - the legislative department
proprietary rights of the people and takes form them a has the power:
portion of their property for the support of the government.
a. To determine the coverage, object, nature, extent,
 Therefore, it should be exercised with caution to and situs cones of the law;
minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally and b. To grant tax exemptions and condonations; and
uniformly. c. Provide administrative and judicial remedies.

May the power of taxation be used as an implement of  General Rule: Taxation is legislative in character.
the power of eminent domain?
 Exceptions - Delegation is allowed in the
 Yes. The Supreme Court ruled in one case that tax following cases:
measures are but enforced contributions exacted on pain of
penal sanctions. Failure to pay taxes may result in the 1) LGU
forfeiture of the taxpayer’s property in favor of the
government. 2) President - flexible tariff clause

3) Administrative agencies - assessment

and collection.
Delegation must be provided for in the
 The power to tax is the strongest of all powers of the Constitution.
government. It is, of course, to be admitted that for all its
plenitude, the power to tax is not confined, there are
3. TERRITORIALITY - taxation may be exercised only within
the territorial jurisdiction of the taxing authority.

 2 LIMITATIONS:  In fixing the tax situs, the following criteria are

1. Inherent limitations
1. Poll tax - residence of taxpayer;
2. Constitutional limitations.
2. Property tax - where property is situated;

3. Excise tax - (1) where privilege is exercised; or

INHERENT LIMITATIONS (2) where the taxpayer is a national of; or (3)
where he has his residence.
1. PUBLIC PURPOSE - the proceeds of taxes must be used

a. Support of the government; 4. INTERNATIONAL COMITY - The Philippines adopt the

general principles of international law as part of the law of
b. Recognized objects of the government or directly to the land.
promote the welfare of the community.
 The principle of equality of states limits the
authority of the government to impose taxes on
 Direct object rather than magnitude - It is another sovereign state or instrumentality.
essential character of the direct object of the
expenditure which determines the validity as
justifying a tax and not the magnitude of the interests 5. EXEMPTIONS GRANTED TO GOVERNMENT
affected nor the degree of general advantage to the INSTRUMENTALITIES

 Direct and not merely incidental.

 Semblance of legality does not cure the basic defect.

Amago, Jann Claudine M. 2

1. Non-imprisonment for non-payment of poll tax (Art. a motor vehicle for hire and one which is
3, Sec. 20) purely for private use.

 Poll tax - one levied on persons who are residents  Neither does it distinguish between a motor
within the territory of a taxing authority without regard vehicle registered in the City of Manila and
to their property, business or occupation. one registered in another place but
occasionally comes to Manila.
 Basic community tax.

 Imposition of fines or even imprisonment for any

violation other than non-payment would not be 3. Flexible tariff clause
 This is inconsideration of national economy, general
welfare and national security.

2. The rule on taxation must be uniform and equitable  Taxation power is delegated to the president to modify
(Art. 4, Sec. 28, Par. 1) import duties.

 Uniformity - requires all subjects and objects of

taxation, similarly situated, are to be treated alike or
put on equal footing, both in privileges and liabilities. 4. Tax exemption of properties actually, directly and
exclusively used for religious, charitable and
 A tax is considered uniform when it operates with educational institutions
the same force and effect in every place where
the subject may be found.  Tax exemption granted: PROPERTY TAX.

 Equitable - just, fair, reasonable and proportionate to  The term exclusively means primarily, and not solely.
one’s ability to pay.

 Classification is permitted if: GASE  Relevant cases:

a. Germane to the purpose of the law; a. Herrera v. QC Board - The admission of paying
b. Applies to both present and future conditions; patients does not detract from the charitable
character of a hospital if all its funds are derived
c. Based on Substantial distinctions; devoted exclusively to the maintenance of the
institution as a public charity.
d. Equally applies to all those belonging to the same

b. Abra Valley College - Part of the school was

used as residence of directors and other parts
 Relevant cases: were leased for commercial purposes.
a. Eastern Theatrical Co. v. Alfonso - Tax was  Court held that the exemption extends to
imposed on theatrical shows and other facilities which are incidental to and
exhibitions but not on other kinds of amusement. reasonably necessary for the
 The court held that all taxable articles or accomplishment of the main purpose.
kinds of property of the same class must be  The use of the school building or lot for
taxed at the same rate. commercial purposes is neither
 The taxing power has the authority to make contemplated by law, nor by jurisprudence.
reasonable natural classifications for  While the use of the second floor of the
purposes of taxation. main building for residential purposes of the
 Appellants cannot point out what places of Director and his family, may find
amusement taxed by the ordinance do not justification under the concept of incidental
constitute a class by themselves and which use, which is complimentary to the main or
can be confused with those not included in primary purpose - educational, the lease of
the ordinance. the first floor cannot be considered
incidental to the purposes of education.

b. Association of Customs Broker v. Manila -

An ordinance was passed that exacts a tax upon c. Bishop of Nueva Segovia v. Provincial
all motor vehicles operating within Manila which Board - The exemption includes not only the
neither distinguishes between a motor vehicle for land actually occupied by the Church, but also
hire and private vehicles. the adjacent ground destined to the ordinary
incidental uses of man. A vegetable garden, thus,
 The ordinance infringes upon the rule of which belongs to a convent, where its use is
uniformity. It does not distinguish between limited to the necessity of the priest, comes
Amago, Jann Claudine M. 3
under the exemption. Further, land used as a  Income derived by the school from trade, business, or
lodging house by the people who participate in other proprietary activities are not covered by the
religious festivities, which constitutes an exemption, since such activities are not related to the
incidental use in religious functions, likewise performance of its purposes under the Constitution.
comes within the exemption. It cannot be taxed
according to its former use, a cemetery.

d. Province of Abra v. Hernando - Properties 1. Due process

belonging to the Church in this case were not tax  Taxes must not be harsh, oppressive and confiscatory.
exempt. There is no proof that these properties
were actually, directly and exclusively used
for religious or charitable purposes. The
exemption from taxation is not favored and is 2. Equal protection clause
never presumed, so that if granted, it must be
 Lutz v. Araneta - the legislature may determine
strictly construed against the taxpayer.
within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the
legislative discretion must be allowed full play, subject
5. Veto power of the president only to the test of reasonableness.

 The president may veto items in an appropriation  If objective and methods are alike constitutionally valid,
revenue or tariff bill but such veto shall not affect no reason is seen why the sate may not levy to raise
items which he does not object. funds for their prosecution and attainment. Taxation
may be made the implement of the State’s police
6. No law granting tax exemptions shall be passed
without the concurrence of the majority of all
members of the Congress 3. Non-impairment of contracts

 Majority of ALL THE MEMBERS of the Congress.  Applies only to contractual exemptions granted to

 When the government enters into a contract, descends

7. All money collected for special purpose shall be to the level of an ordinary citizen and sheds its cloak of
treated as a special fund and paid out for such immunity.
purpose only.

4. Freedom of Religion
8. Power of review of the Supreme Court
 Taxation must not operate as a prior restraint to the
 In all cases involving the legality of taxes, impost, exercise of religion.
assessment, toll and penalty relating thereto.

 American Bible Society v. City of Manila - The

9. Power of LGU to tax Constitutional guaranty of free exercise and enjoyment
 Each Local Government Unit shall have the power to of religious profession and worship carries with it the
create its own source of revenue and levy fees, right to disseminate religious information.
charges and taxes, subject to such guidelines and  The price asked for the bibles and other religious
limitations as the Congress may provide. Such taxes pamphlets was a little bit higher than the actual
must exclusively accrue to the LGU. cost of the same, but this cannot mean that
American Bible was engaged in the business or
occupation of selling said merchandise for profit.
10. Tax exemptions granted to all revenue and assets of
non-stock, non-profit educational institutions  The ordinance cannot be applied for n doing so, it
actually, directly and exclusively used for would impair American Bible’s free exercise and
EDUCATIONAL purposes enjoyment of its religious profession and worship,
as well as its rights of dissemination of religious
 Tax exemption granted: All income tax and all revenue information.

 The law frowns on exemption from taxation, hence, an

exempting provision should be construed strictissimi MANDATORY CHARACTER - constitutional provisions are to be
juris. considered mandatory, unless by express provision or by
necessary implication a different intention manifests.

Amago, Jann Claudine M. 4

 This rule, however, does not extend to cases involving
the issue of validity of the tax law itself which, in
CLASSIFICATION OF TAXES every case, is presumed to be valid.
 According to SUBJECT MATTER:

1. Personal Interpretations of Tax Exemptions and Tax Amnesties

2. Property  Strictly construed against the person claiming the
3. Excise exemption. Such person must always justify the claim for

 Tax exemptions must be clear and express; it cannot be

 According to BURDEN or INCIDENCE: presumed.

1. Direct - demanded from persons primarily burdened to  Exemptions are generally disfavored.
pay them, or those directly liable for transactions they
engage in.  In favor of taxability - in consonance with the lifeblood
2. Indirect - burden may ultimately be charged or shifted.

 CIR v. CTA and ATENEO - The CIR erred in applying the

 According to DETERMINATION of AMOUNT: doctrine of tax exemptions without first applying the
well-settled doctrine of strict interpretation in the imposition
1. Specific - physical measurement. of taxes.
2. Ad valorem - value imposed.  It is illogical to determine who are exempted without
first determining who are covered by the provisions.

 Statutes will not be construed as imposing a tax unless

 According to PURPOSE:
it does so clearly, expressly and unambiguously.
1. General

2. Special
Kinds of Tax Exemptions:

1. Express - constitution, treaties, statutes, etc.

 According to SCOPE:

1. National
2. Implied/By Omission - no tax by silence but, where the
2. Local law levies a tax, so also must the tax exemption be explicit
in the law.

 The government, however, unless otherwise

 According to GRADUATION: expressed, is deemed not subject to a law imposing
taxes, but there is no prohibition against the
1. Progressive
government taxing itself.
2. Regressive

3. Mixed
3. Contractual - those agreed to by the taxing authority in
contracts entered into by them under enabling laws.

 These exemptions should not be confused with the tax

exemptions granted under franchises which are not
contracts within the purview of the non-impairment
clause of the Constitution.
Interpretation and Construction of Tax Statutes

 Generally, all laws are presumed to be valid.

Principles Governing Exemptions: HHH-TCP
 The primordial consideration is the intent of the
legislature. 1. Highly disfavored and not presumed.
 But where doubts exist in determining that intent, the doubt 2. He who claims exemption must be able to justify his claim.
must be resolved liberally in favor of taxpayers and strictly
against the taxing authority. 3. He who claims exemption must prove by convincing proof
that he is exempted.

4. Taxation is the rule, exemption is the exception.

Amago, Jann Claudine M. 5

5. Constitutional grants of exemption are self-executing.

6. Tax exemptions are Personal waiver of immunity.  Types:

a. Strict sense - in order to constitute double

taxation in a strict sense, the following
When are exemptions construed liberally in favor of the requisites must be present: SPS-TTK
Grantee? LGST
1) Both taxes must be imposed on the
1. When the Law so provides for such liberal construction. same property or Subject matter;
2. Exemptions in favor of the Government. 2) For the same Purpose;
3. Exemptions under Special circumstances to special classes 3) By the same State, government, or
of persons. taxing authority;
4. Exemptions to Traditional exemptees. 4) Same Territory, jurisdiction or taxing

DOCTRINES IN TAXATION 5) Same Taxing period;

1. PROSPECTIVITY OF TAX LAWS 6) Same Kind and character of tax.

 General Rule: Tax laws shall have prospective

application. b. Broad sense - indirect duplicate taxation;
 Exception: Tax statutes may be applied retoactively any of the elements for direct duplicate
provided that it will not amount to a denial of due taxation is absent.

 Modes of eliminating double taxation:


 General Rule: Tax laws are imprescriptible. 1) Reciprocal exemption;

 Exception: The law may provide otherwise. 2) Tax credit for foreign taxes paid;

 Assessment - 5 years from filing of return; 10 3) Reduction of Philippine tax rate;

years if no ITR was filed or from the discovery of 4) Deduction for foreign taxes paid.

 Collection - 5 years from assessment.


 The power to tax must be exercised with caution to

 Prescriptive period may be suspended: minimize injury to the proprietary rights of taxpayer.
a. When the taxpayer is Outside of the  If tax is lawful and not violative of any limitations, the
country; fact alone that it may destroy an activity or object of
b. Treasurer is legally prevented to make taxation will not entirely permit the courts to afford
assessment; any relief.

c. Reinvestigation was requested by taxpayer  A subject or object that may not be destroyed by the
- request must be granted first before the taxing authority may not be taxed.
prescriptive period is interrupted.  An illegal tax could be judicially declared invalid and
should not prejudice property.

3. DOUBLE TAXATION  This doctrine refers to a valid tax, while the “court
sits doctrine” refers to an invalid tax.
 Means taxing for the same tax period the
same thing or activity TWICE, when it should 5. ESCAPE FROM TAXATION
be taxed but once, for the same purpose and  Tax avoidance - tax saving device within the means
with the same kind of character of tax. sanctioned by law. This method should be used by the
 Double taxation, standing alone and not being taxpayer in good faith and at arms length. A tax
forbidden by our fundamental law, is not a valid avoider sidesteps the law.
defense against the legality of a tax measure. But  Tax evasion - scheme outside of lawful means and,
from it might emanate such defenses against when availed of, it usually subjects the taxpayer to
taxation as oppressiveness and inequity of tax.

Amago, Jann Claudine M. 6

further additional or civil or criminal liabilities. A tax
evader breaks the law.
 A taxpayer is allowed to sue in the following instances:

a. There is a claim that public funds are illegally

 RP v. Gonzales - Failure of taxpayer to declare actual disbursed.
income for 2 consecutive years is tantamount to tax
evasion. b. Public money is deflected for improper purpose.

c. Wastage of funds.

 Perez v. CTA - Substantial underdeclaration of ITR

with overstatement of deductions is tax evasion. 9. COMPROMISE

 Reciprocal concessions entered by parties to avoid

 RP v. Heirs of Jalandoni - If the heirs paid deficient litigation or put an end to one already commenced.
inheritance tax without intent to defraud the collecting
authority and out of honest mistake, there is no tax
evasion.  When allowed? NOA

a. Not prohibited by law;

 Aznar v. CTA - False return is not necessarily a b. Officer is authorized;

fraudulent return.
c. Subject to Approval by Secretary of Finance

RECOUPMENT  Commissioner may compromise the payment of any
internal revenue tax in the following cases: RF
The reduction of a claim Offsetting claim arising out of
because of an offseting claim completely independent and a. Reasonable doubt exists as to the validity of a claim
arising out of exactly the same unrelated transactions. against the taxpayer; or
transaction. b. Financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
Applies when transactions are Does not apply in taxation.

This doctrine finds no Taxes are not subject to set-off  Limits of Commissioner’s power to compromise:
application to cases where the because they are not ordinary
taxes involved are totally obligations.  For cases of financial incapacity - a minimum
unrelated. compromise rate equivalent to 10% of the basic assessed
Taxpayer and government are  For other cases: a minimum compromise rate equivalent
not debtors and creditors of to 40% of the basic assessed tax.
each other.

 When the basic assessed tax involved (1) exceeds

8. TAXPAYER SUIT P1,000,000, or where the (2) settlement offered
is less than the prescribed minimum rates, the
 Pascual v. Sec. Of Public Works - It is only when
compromise must be approved by the Evaluation
an act complaint of, which may include a legislative
Board composed of the Commissioner and 4 deputy
enactment, directly involves the illegal
disbursement of public funds from taxation that
the taxpayer suit may be allowed.

 Generally, all criminal violations may be compromised.

 As long as the taxes are involved, the people have the  Exceptions: FF
right to question the government’s use of the
taxpayers’ money. a. cases Filed in court;

 Gonzales v. Marcos - There was finding to the b. Cases involving Fraud.

effect that the funds came from donations and
contributions, not by taxation. Accordingly, there
was that absence of the requisite pecuniary or Additional Points:
monetary interest. Taxpayer has no legal
personality to assail the Executive Order.
Amago, Jann Claudine M. 7
1. The government cannot be estopped from the errors and
mistakes committed by its agents.
 Requisites of a valid assessment: BID-CS
2. Taxes must be collected without unnecessary hindrance,
provided that it is not contrary to law. 1. It must be Based on actual facts and/or law;

3. No injunction lies against the government, unless the act is 2. It must be Issued by the BIR;
prejudicial to the interest of the government and the 3. It must contain a Demand for payment within the
taxpayer. prescribed period;

4. It must contain a Computation of tax liabilities;

BUREAU OF INTERNAL REVENUE 5. It must be Sent to the taxpayer. An assessment is
 The BIR shall be under the supervision and control of the deemed made when the notice to that effect is
Department of Finance and its powers and duties shall released, mailed or sent to the taxpayer.
comprehend the assessment and collection of all
national internal revenue taxes, fees and charges.
 General Rule: Taxes are self-assessing and, thus, do not
require the issuance of an assessment notice in order to
POWERS AND DUTIES: AI-EGO establish the liability of a taxpayer.

1. Assessment and collection of all internal revenue taxes, fees  Exceptions: TDTD
and charges; 1. Tax period of taxpayer is terminated;
2. Interpret the NIRC and other tax laws, subject to review by 2. Deficiency tax arising from a tax audit conducted
the Secretary of Finance; by the BIR;
3. Enforcement of all forfeitures, penalties, and fines 3. Tax lien;
connected therewith, including the execution of judgments
in all cases decided in its favor by the CTA and ordinary 4. Dissolving corporation.

4. Giving effect and administering the supervisory and police

power conferred to the Bureau;  Kinds of Assessment:

5. Obtaining information summoning, examining, and taking 1. Self-assessment - tax is assessed by taxpayer himself.
testimony of persons for purposes of ascertaining the
correctness of any return or determining the liability of any
person. 2. Deficiency assessment - made by tax assessor. Correct
amount of tax is determined after examination or
investigation is conducted.
ASSESSMENT - a finding by the taxing authority that the
 Proper when:(1) taxpayer did not file a return
taxpayer has not paid the correct taxes.
at all; (2) no amount is shown in the income tax
 It is a written notice and demand made by the Bureau on return; or (3) if in the ITR filed, tax due is higher
the taxpayer for the settlement of a due tax liability that is than the declared amount in the ITR.
there definitely set and fixed.

 A written communication containing a computation by a

3. Illegal and void assessment - assessment wherein tax
revenue officer of the tax liability, giving the taxpayer an
assessor has no power to assess at all.
opportunity to contest or disprove the BIR examiner’s
finding, is not an assessment since it is yet indefinite.

4. Erroneous assessment - assessor has power to assess

but errs in the exercise thereof.
Principles governing assessment:

1. They are prima facie correct and made in good faith.

 General Rule: Income tax returns are confidential.
2. Failure to present proof of error in the assessment will
justify judicial affirmance of said assessment.  Exceptions: Inquiry into ITR may be authorized when:
3. It is discretionary on the part of the Commissioner.
1. President authorizes inspection by written order;
4. It should be based on actual facts, not mere presumptions.
2. Secretary of Finance authorizes inspection under
5. The authority of the Commissioner may be delegated, but
Finance Regulations No. 33;
not the power to make final assessments.
3. Taxpayer authorizes the inspection;
Amago, Jann Claudine M. 8
4. The same is Material evidence in a criminal case  Commissioner may prescribe minimum amount of
where the government is interested in the result gross receipts, sales and taxable base when:
a. Person has Failed to issue receipts;

b. Books of accounts or records do not correctly

POWERS AND DUTIES OF THE COMMISSIONER reflect the declarations made or required to be
made in a return.
LAWS subject to review by SOF (quasi-legislative - such minimum amount shall be considered correct.


2. DECIDE: (quasi-judicial power) DR. PO
 Commissioner shall declare tax period of a taxpayer
a. Disputed assessments; terminated and send notice to the taxpayer of such
decision with a request for immediate payment
b. Refunds of internal revenue taxes, fees and charges; when it has come to the knowledge of the
c. Penalties imposed in relation thereto; Commissioner: PLR-RH

d. Other matters arising from the code or other laws. 1. Is Performing any act tending to obstruct the
proceedings for the collection of tax.

2. Is intending to Leave Philippines;

TESTIMONY 3. That a taxpayer is Retiring from business subject
to tax;
OF TAX DUE 4. Intending to Remove his property therefrom;

 After a return has been filed, the Commissioner or his 5. Intending to Hide or conceal his property;
representative may authorize (1) examination of
any taxpayer and (2) assessment of the correct

 Failure to file a return shall not prevent the  Commissioner is authorized to:
commissioner from authorizing the examination of any
taxpayer. 1. Divide Philippines into different zones or areas;

2. Determine fair market value of real

5. MAKE OR AMEND RETURN properties located in each zone.

 Applies when a person: FW

a. Fails to file a required return or report at the time  FMV is that which is (1) determined by the
prescribed; or Commissioner or that which is (2) shown in the
schedule of values of the provincial and city assessors,
b. Willfully files a false or fraudulent return. whichever is higher.


 Notwithstanding Bank Secrecy Law, the Commissioner
 Commissioner may at any time during the taxable year: is authorized to inquire into the bank deposits of:
a. Decedents to determine gross estate;
a. Order the inventory taking of goods of any
taxpayer; or b. Taxpayer who filed an application to compromise
payment of tax liability by reason of financial
b. Place business operations under observation or incapacity. (such taxpayer must make a waiver in
surveillance - if there is reason to believe that writing of his privilege under RA 1405 and other
such is not declaring his correct income, sales or general or special laws.)

- findings may be used as basis for assessing taxes and

are deemed prima facie correct. 10. REGISTER TAX AGENTS

 Accredit and register individuals and general

professional partnerships who prepare and file tax
Amago, Jann Claudine M. 9
returns and other papers or who appear before the  BIR Rulings shall not be given retroactive effect, except:

 Commissioner shall create national and regional 1. Deliberate misstating or omission of material facts by
accreditation boards. taxpayer;

 Those denied accreditation may appeal to the 2. Facts subsequently gathered by BOR are materially
SOF who shall rule on the appeal within 60 days different from facts on which the ruling is based;
from receipt. Failure to do so within the required
period shall be deemed as approval for 3. Bad faith on the part of taxpayer.
accreditation.  Administrative decisions do not enjoy the same level or
recognition with judicial decisions.


 Commissioner may prescribe the manner of SOURCES OF REVENUE: VIDEOED-O

compliance with any documentary or procedural 1. Value-added tax
requirement for the submission or preparation of
financial statements accompanying tax returns. 2. Income tax

3. Donors tax


 Commissioner may delegate powers to subordinate 5. Other percentage taxes

officials with rank equivalent to DIVISION
CHIEF or higher. 6. Excise tax

 The following powers cannot be delegated: 7. Documentary stamp tax

8. Other taxes as are or hereafter may be imposed and
1. Recommend the promulgation of rules and collected by the BIR.
regulations by the SOF;

2. Issue rulings of first impression;

3. Reverse or modify any existing rule of BIR;

4. Compromise or abate tax liability.

 Regional evaluation board may compromise:

Income - all wealth that flows into the taxpayer, other than as a
mere return of capital.
a. Assessments issued by regional offices,
 It includes all forms of income specifically described as gains
involving deficiency taxes of P500,000
and profits, including gains derived from the sale or
or less;
disposition of capital assets.
b. Minor criminal violations discovered by
regional and district officials.
Capital - resource of a person, which can be used in producing
goods and services.
Additional Notes:

 Taxpayer cannot assert that the government can no longer

tax. Although there is no estoppel on the part of the
government, there is estoppel on the part of the taxpayer. All wealth which flows into the Fund or property which can be
taxpayer other than as a mere used in producing goods or
 Police power can only be exercised in the enforcement of
return of capital. services.
its tax collection duties and not for any other purpose.
Flow of wealth. Fund or property.
 BIR rules and regulations must be:
Source of wealth. Wealth itself.
1. Consistent and in harmony with law;

2. Reasonable;

3. Useful and necessary; Sources of Income: PLS

4. Published in the Official Gazette. 1. Property

- IRRs have the force and effect of law. 2. Labor

Amago, Jann Claudine M. 10

3. Sale or exchange of capital asset and activity  Mere increase in the value of property - not income; the
same is not received by the taxpayer.

Other sources under the Tax Code: TAC-PIT-B

 Is mere increase in net worth taxable?
4. Treasure found
 It depends.
5. Amount received by mistake
 If there is an increase in total assets - the increase
6. Cancellation of indebtedness is taxable because it is realized income.
7. Payment of usurious interest  If the increase in networth is due to decrease in
8. Illegal gains total liabilities - increase is not taxable since no
income was realized. It is a mere adjustment of
9. Tax refund liabilities.

10. Bad debt recovery


which is credited to the account of and set apart for a
Income tax - tax on all yearly profits arising from property, taxpayer and which may be drawn by him at anytime is
profession, offices or trade ppot, or as a tax on a person’s subject to tax for the year during which it was credited or so
income, emoluments, profits iep and the like. set apart, although not yet then actually received or
reduced to his possession.

 It is the right to receive income and not the actual

receipt which determines when to tax income.
1. PARTNERSHIP THEORY - the basis of the right of the
 This is designed to prevent the taxpayer from using
government to tax income emanates from its partnership
cash bass from deferring or postponing the actual
in the production of income by providing protection,
receipt of taxable income.
resources, incentives and proper climate for such
production.  Without this rule, the tax payer can conveniently select
the year in which he will report the income.

2. PROTECTION THEORY - it dictates that when the flow of

wealth proceeded and occurred within the Philippine TESTS ON TAXABILITY OF INCOME:
territory, enjoying the protection of the Philippine
government, the same, in consideration for such protection, 1. FLOW OF WEALTH TEST - determining factor for the
should share the burden of supporting the government. imposition of income tax is whether any gain was derived
from the transaction.
 BOAC Doctrine - SC laid down the rule that for the
source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activities in the Philippines. 2. REALIZATION TEST - unless the income is deemed
realized or when there is a separation from capital
something of exchangeable value, there is no taxable
corporations owe their corporate existence and privilege to
do business to the government They also benefit from the
efforts of the government to improve their financial market 3. ECONOMIC-BENEFIT PRINCIPLE TEST - flow of wealth
and ensure a favorable business climate. It is, therefore, fair realized is taxable only to the extent that the taxpayer is
for the government to make a reasonable contribution to economically benefited.
public expenses.

4. SEVERANCE TEST - as capital or investment is not income

REQUISITES FOR INCOME TO BE TAXABLE: GRE subject to tax, the gain or profit derived from the
exchange or transaction of said capital by the taxpayer for
1. Gain or profit, whether in cash or its equivalent - not mere his separate use, benefit, and disposal is subject to
return of capital; income tax.

2. Gain must be Realized or received;

3. It must not be Excluded by law or treaty from taxation. KINDS OF INCOME TAXES UNDER THE NIRC

1. Net income tax

2. Optional corporate income tax

Amago, Jann Claudine M. 11
3. Minimum corporate income tax 4. Compensation for injury or sickness

4. Improperly accumulated earnings tax 5. Treaty income exemptions

5. Preferential rates or special rates of income tax 6. Retirement benefits, pensions, gratuities

6. Gross income tax 7. Miscellaneous items

7. Final income tax

8. Fringe benefits tax I. PROCEEDS OF LIFE INSURANCE

9. Capital gains tax  Reason: Indemnity rather than gain or profit.

 Exception: Interest payments shall be included

in gross income if such amount is held by the
Computation of Net Income Tax insurer under the agreement to pay interest
Entire income thereon.

Less: Exclusions and income subject to final tax

 Proceeds of life insurance where the beneficiary is
Gross Income
revocable is subject to estate tax.
Less: Deductions (and/or additional exemptions, if applicable)

Net taxable income  Other tax implications of insurance proceeds:

Multiply by: Tax rate a. Included in the gross estate if:
Net income tax due  3rd person is revocably designated as
beneficiary; or
Less: Tax credit if any
 Estate, executor or administrator is
Tax still due, if any
designated as beneficiary, whether
revocable or not.

GROSS INCOME b. Excluded from gross estate if:

 It is all income derived from whatever source, including, but  3rd person is irrevocably designated; or
not limited to, the following: CGG-IRR-DAPPP
 Proceeds of group insurance.
1. Compensation for services;

2. Gross income derived from the conduct of trade or

 In case of transfer of insurance contract - the
business or the exercise of a profession;
amount excludible should only be the amount or value
3. Gains derived from dealings in property; of actual consideration paid and the premiums paid
later by the transferee.
4. Interests;

5. Rents;
6. Royalties;
 Reason: Return of premium means a repayment of a
7. Dividends; part or the whole of the premiums paid. Only a return
of capital.
8. Annuities;

9. Prizes and winning;

 Excess of amounts received over the aggregate
10. Pensions;
premiums or consideration paid is taxable.
11. Partner’s share from net income of general
 Example: Taxpayer took out a P100,000 policy
professional partnership.
where he paid P80,000 as aggregate premiums
and upon maturity, he received P100,000. Only
P20,000 is taxable.

1. Proceeds of life insurance

2. Amount received as return of premium
 Reason: Not a product of capital or industry.
3. Gifts , bequests and devises
Amago, Jann Claudine M. 12
to the private member over and above his
personal contributions shall be taxable.
 Gifts are subject to DONOR’S TAX. Bequests and
devises are subject to ESTATE TAX.

 Separation benefits due to death, sickness or

other physical disability for any cause BEYOND
 The income from such property, however, is THE CONTROL of said official or employee
 If due to sickness - exempt from all taxes.

 If what is inherited are securities, they do not

constitute income, except its dividends and interests  If due to sale of entire business to another
which are taxable. corporation or cessation of employer’s
business - exempt from income tax.


 Benefits received voluntary resignation -
 Reason: Compensatory; not gain or profit; adds TAXABLE. Reason: Cause is within the control of
nothing to the individual. employee.
 Examples:

1. Accident and health insurance  Exemption holds regardless of age and length of
2. Workmen’s compensation service. Exclusion may be enjoyed more than
3. Damages received on account of such
injuries or sickness

4. Damages representing a return of capital or  Compulsory retirement is cause beyond the

investment. control of employee.

 Taxable as ordinary income if

amount represents loss of anticipated  Social security benefits, retirement gratuities
profits. received by resident or non-resident citizens or
resident aliens from foreign government
agencies and other private or public institutions
 Benefits received from US veteran
 Reason: Adherence to the generally accepted administration by veterans in the Philippines
principles of international law.
 GSIS benefits

 SSS benefits

 Retirement benefits received by officials and VII. MISCALLANEOUS ITEMS

employees of private firms, individuals or  Income received by foreign governments from
corporations, REQUISITES FOR EXCLUSION: investments in the Philippines - Reason: To
ROFT lessen the burden of foreign loans inasmuch as the
1. Reasonable private plan maintained by the interest of these loans are, by contractual agreement,
employer duly approved by BIR for exclusive borne by the domestic borrowers
benefit of member-employees;

2. Benefit of exclusion shall be availed of only Once;  To be exempt, the CREDITOR must be the
3. At least Fifty years of age at the time of FOREIGN government or financing
retirement; institutions owned, controlled and
established by such GOVERNMENT. Foreign
4. At least Ten years of service rendered by retiring private corporations not included.
official or employee.

 Income of foreign government from operation in

 Even if these requisites are present, but the the Philippines of vessels owned or chartered by
employer is still on active employment with it is taxable.
the company, amounts distributed from the fund
Amago, Jann Claudine M. 13
b. Establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite
 Income derived by government of Philippines intention to reside therein;
from public utility or from the exercise of
essential government function. c. Works or derives income abroad and whose
employment requires him to be physically present
 Prizes and awards d. Non-resident and who arrives in the Philippines at
 Conditions for exclusion: RRN anytime during the taxable year.

1. Received in recognition of religious,

educational, charitable, civic, artistic, 3. Resident Aliens - non-citizens who reside in the
literary or scientific reccals achievement; Philippines.
2. Recipient was selected without any action
on his part to enter the contest or
proceeding; 4. Non-Resident Aliens Engaged in Trade or Business -
comes and stays in the Philippines for an aggregate period
3. He is Not required to render substantial of more than 180 days during the calendar year.
future services as a condition to receiving
the price or award.

5. Non-Resident Aliens Not Engaged in Trade or

Business -
 Prizes and awards in SPORTS COMPETITION
granted to ATHLETES whether held in the  25% based on gross income
Philippines or abroad and SANCTIONED by their
national sports associations.  15 % if employed in the following: MOP

1. Multinational corporations regional or area

 13th month pay and other benefits
2. Offshore banking units in the Philippines;
 Other benefits cover productivity incentives and
Christmas bonus. 3. Petroleum contractors and subcontractors.

 Total exclusion shall not exceed P90,000.  The 15% preferential tax treatment shall not be
applicable to RHQs, OBUs, or PSCs registering with the
SEC after January 1, 2018.

 GSIS, SSS, Medicare and other contributions.  Existing RHQs, OBUs and PSCs presently availing of
preferential tax rates for qualified employees shall
 Gains from sale or exchange of retirement continue to be entitled to avail of the preferential tax
bonds, debentures, or other certificate of rate for present and future qualified employees.
indebtedness with a maturity of more than 5

 Gains from redemption of shares in Mutual  Only RESIDENT CITIZENS are taxable for income derived
Fund Companies. within and without the Philippines.

 All other individual taxpayers are taxable only for income

derived within the Philippines.

Classification of Individual Taxpayers:
1. Compensation income
1. Resident Citizens - citizens of Philippines, residing
therein. 2. Business income derived by self-employed

3. Professional income derived by professionals

2. Non-Resident Citizens - a Filipino citizen who: LEWN 4. Passive investment income

a. Leaves the Philippines during the taxable year to 5. Gains derived from dealings in property
reside abroad, either as an immigrant or for
employment on a permanent basis;

Amago, Jann Claudine M. 14

COMPENSATION INCOME 5. Cancellation or forgiveness of indebtedness made in
consideration of debtor’s services rendered - amount
of debt cancelled
What is Compensation Income?  If given as donation or no consideration is given -
 All remunerations for services rendered and performed by subject to donor’s tax.
an employee for his employer under an employer-employee
relationship unless specifically excluded by the Tax Code.
6. Premiums paid by employer on life insurance policy
of employee whose family, executor, administrator
 Inclusions: Wages, allowances, salaries, honoraria, fringe or estate is the beneficiary - amount of the premium
benefits, emoluments, bonuses. wash-feb paid

 Premiums are not taxable if beneficiary is the employer,

whether directly or indirectly designated.
 Basis/Test: What is important is that it is derived from
employer-employee relationship.  Other implications:

 Compensation for services rendered by independent a. Employer may claim premiums as deductible
contractor not included in gross compensation gross income if beneficiary designated is the
income. family, executor, administrator or estate of
 Amounts paid as advances or reimbursement for
transportation, representation, and other bona fide b. Employer not allowed to claim premiums paid as
ordinary and necessary expenses incurred in the deductible if he is designated as beneficiary.
performance of duty is not taxable compensation 7. Income tax paid by employer in consideration of
income. The excess, if any, over actual expenses is employee’s services rendered - amount of such tax paid

 Income derived by partner from professional

partnership - not part of gross compensation income. 8. Personal services performed partly within and partly

 Requisites for Taxability of Compensation Income:

APR 9. Tax exempt compensation income

1. Actually rendered personal services; a. Convenience of the employer rule - benefits

which are given to the employee for the exclusive
2. Payment is for such services rendered; benefit or convenience of the employer is exempt from
3. Reasonableness of payment. tax.

 Point to remember: Determine if it ultimately

benefits the employer.
Forms of Compensation ---- Measure of Income
 Collector v. Henderson - Generally, living
1. Cash or money - amount of money received allowances should be treated as income of the
recipient. However, if any amount is paid directly
to the employee but for the convenience of the
employer, it is not taxable. In this case, the rental
2. Property or kind - fair market value
and travel allowances were incidental to his
position and social standing.

3. Price stipulated - fair market value of the compensation

in the absence of contrary evidence.
b. De minimis benefits - these are facilities and
privileges furnished or offered by an employer to his
employees that are relatively of small value,
4. Promissory notes or other evidence of indebtedness- offered and furnished by the employer as a means of
promoting heg-c (health, efficiency, goodwill and
 If not discounted: Fair market value
contentment) of his employees.
 If discounted:
 It includes the following: MMM-BAD-GRUEL
(1) year of receipt - discounted value;
1. Monetized unused vacation leave credits of
(2) maturity date - difference between face value private employees not exceeding 10 days
and fair market value. during the year;

Amago, Jann Claudine M. 15

2. Monetized value of vacation and sick leave 2. Expense account;
credits paid to government officials and
employees; 3. Vehicle of any kind;

3. Medical cash allowance to dependents not 4. Household personnel;

exceeding P750 per employee per semester, 5. Interest on loan;
or P125 per month;
6. Membership fees, dues, and other expenses borne by
4. Benefits received under CBA and the employer for the employee in clubs;
productivity incentive scheme not
exceeding P10,000 combined per employee 7. Foreign travel expenses;
per taxable year;
8. Holiday and vacation expenses;
5. Actual medical assistance not exceeding
P10,000 per annum; 9. Educational assistance to employee or dependents;

6. Daily meal allowance for overtime work and 10. Insurance premiums in excess of what the law allows.
night shift not exceeding 25% of basic
minimum wage;
 Housing privileges are not taxable if primarily for the
7. Gifts given during Christmas and major
employer’s benefit (i.e., employee’s quarterhouse).
anniversary celebrations not exceeding
P5,000 per employee per annum;

8. Rice subsidy of P1,500 or 50kg rice per  In Interest loans, if the employer lends money to his
month amounting to not more than P1,500; employee, free of interest or at a rate lower than 12%,
interest foregone by the employer shall be treated as
9. Uniform and clothing allowance not
taxable fringe benefit.
exceeding P5,000 per annum;
 If foreign travel is for the purpose of attending business
10. Employee achievement awards in the form
meetings and conventions, it is not taxable fringe benefits.
of tangible personal property other than
But in the absence of documentary evidence that the travel
cash or gift certificate, with annual
was related to business, taxable.
monetary value not exceeding P10,000
received by employee under an established
written plan which does not discriminate in
favor of highly paid employees;  Educational assistance is not taxable as fringe benefits if:
11. Laundry allowance not exceeding P300 per
month. 1. Directly connected with employer’s trade or business;

2. With Written contract that employee shall remain

employed with employer for a period mutually agreed
FRINGE BENEFITS by the parties;

 They refer to goods, services, or other benefits furnished or 3. Assistance was provided thru a Competitive scheme
granted by an employer, in cash or in kind, in addition to under a scholarship program, in case of dependents.
basic salaries, to managerial and supervisory

 Managerial employee - one vested with the power The following FRINGE BENEFITS are NOT SUBJECT TO
and prerogatives to lay down and execute FRINGE BENEFIT TAX: ABCD-CR
management policies, and/or to hire, transfer,
1. Those Authorized and exempted from income tax by the
suspend, lay-off, recall, discharge, assign, or discipline
Code or special law;
2. Benefits granted to employee as required by nature of, or
necessary to trade, business or profession of employer;
 Supervisory employee - those who, in the interest
3. Convenience of the employer benefits;
of the employer, effectively recommend such
managerial actions, if the exercise of such authority is 4. De minimis benefits;
not merely routinary or clerical in nature, but requires
the use of independent judgment. 5. Contributions of employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;

6. Rank and file employee benefits, whether granted under a

 It includes, but is not limited to, the following: CBA or not.

1. Housing;

Amago, Jann Claudine M. 16

Fringe benefits not subject to FBT because they are given Conditions for exemption: PWH-CON
for the convenience of the employer: THE-BAMM
1. The Proceeds of which is fully utilized in acquiring
1. Temporary housing for an employee 3 months or less; or constructing a new principal residence;

2. Housing unit situated inside or at most 50m from perimeter 2. Within 18 months from the date of sale or
of business premises; disposition;

3. Employee expenses reimbursed by employer supported by 3. Historical cost or adjusted basis of real property
receipts in the name of employer, and do not partake the sold or disposed shall be carried over to the new
nature of a personal expense of employee; principal residence built or acquired;

4. Business expenses for foreign travel supported by 4. Commissioner shall have been duly notified by
documents; taxpayer within 30 days from date of sale or
disposition of his intention to avail of tax
5. Aircraft used which is owned and maintained by employer; exemption;
6. Military officials of AFP housing privilege located inside or 5. Said exemption can be availed of Once every 10
near military camps; years;
7. Motor vehicles used for sales, delivery, etc. 6. If there is No full utilization of the proceeds of
sale or disposition, the portion of the gain shall
be subject to capital gains tax.
Who should pay FRINGE BENEFIT TAX?

 It is the employer who pays, in behalf of the employee. The

FBT is collected from the employer even if the employer is a  If sale is made in favor of the government, its political
tax-exempt corporation, or an instrumentality of the subdivisions or GOCCs, taxpayer has the option to be
Philippine Government. subjected to either:

 Reason: Valuation of benefits is easier at the a. 6% capital gains tax; or

level of the firm. The problem of allocating the b. Include as part of its gross income the gains subject to
benefits among individual employees is avoided. FBT is income tax under 24(a).
withheld at the source and does not depend on the
self-declaration of the individual.

Interests, Royalties, Prizes and Other winnings - final tax

rate of 20% if it exceeds P10,000.
How much is the Fringe Benefit Tax?

 35% imposed upon the grossed up monetary value of the

fringe benefit furnished or granted to the employee, except Cash and/or Property Dividends - final tax rate of 10% on
for rank and file employees. the share of an individual:

a. in the distributable net income after tax of a partnership of

which he is a partner; or
 Actual value of FB / 65% = grossed up monetary value x
35% = FBT due. b. In the net income after tax of an association, joint account
or joint venture or consortium taxable as a corporation of
which he is a member or co-venturer.

 Tax: Final Tax of 6% based on the gross selling price or Capital Gains from Sale of Shares of Stock NOT TRADED
current fair value, whichever is higher. in the Stock Exchange - final tax rate of 15% imposed on the
 If disposition of property is to the government or to net capital gains realized during the taxable year from sale,
GOCCs, the tax liability on gains from such sale or barter, exchange or other disposition of stock in a domestic
disposition shall be determined either under Sec. 24(A) corporation, except shares sold or disposed of thru the stock
or under this subsection, at the option of the taxpayer. exchange.

 Property taxed: Capital gains presumed to have been Tax Schedule Effective Jan. 1, 2018 until Dec. 31, 2022
realized from the sale, exchange, or other disposition of Over But not Tax shall Plus Of the
real property located in the Philippines, classified as over be excess over
capital assets.
250,000 exempt
 Exceptions: Sale or disposition of their PRINCIPAL
RESIDENCE by natural persons. 250,000 400,000 20% - 250,000

Amago, Jann Claudine M. 17

400,000 800,000 30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000 b. If total gross sales and/or gross receipts and
other non-operating income exceeds the VAT
2,000,000 8,000,000 490,000 32% 2,000,000 threshold of P3,000,000 - the rates prescribed
under Subsection (A)(2)(a).
8,000,000 - 2,410,000 35% 8,000,000

Tax Schedule Effective Jan. 1, 2023 and onwards
 Expenses are allowed as deductions when the taxpayer is
Over But not Tax shall Plus Of the engaged in business or in the exercise of his
over be excess over profession.
250,000 exempt  These deductions to not apply to income derived from
employer-employee relationship.
250,000 400,000 15% - 250,000

400,000 800,000 22,500 20% 400,000

Kinds of Itemized Deductions: BIT-LBD-DC-RP
800,000 2,000,000 102,500 25% 800,000
1. Business expenses;
2,000,000 8,000,000 402,500 30% 2,000,000
2. Interest;
8,000,000 - 2,202,500 35% 8,000,000
3. Taxes;

4. Losses;
Under the TRAIN LAW:
5. Bad debts;
 Self-employed individuals and/or Professionals shall
have the OPTION to avail of: 6. Depreciation;

 An 8% tax on gross sales or gross receipts and other 7. Depletion of oil and gas wells and mines;
non-operating income in excess of P250,000
8. Charitable and other contributions;
 in lieu of the graduated income tax rates under
Subsection (A)(2)(a) of Sec. 24 and the 9. Research and development;
percentage tax under Sec. 116 of the NIRC.
10. Pension trusts;

 Gross Sales - basis for 8%

 Taxpayer may avail of Itemized Deduction or Optional
Less: Cost of Sales Standard Deduction.

Gross Income  If he chooses the former, he must be able to substantiate

the deductions.

 If he elects for the latter, there is no need to substantiate;

 Taxpayers earning both Compensation Income and such election, when made in the return, shall be
Income from business or practice of profession shall irrevocable for the taxable year for which the return
be subject to the following taxes: is made.

1. All income from compensation - subject to  If he does not signify his intention to elect for OSD, he is
(A)(2)(a) of Sec. 24. deemed as having availed himself of ID.


2. All income from Business or Practice of
Profession -  OSD for CORPORATIONS = 40% Gross Income

a. If total gross sales and/or gross receipts and

other non-operating income does not exceed the
VAT Threshold of P3,000,000 - the rates  Entitled:
prescribed under Subsection (A)(2)(a) of this 1. RC
Section on taxable income, or 8% income tax
based on gross sales or gross receipts and other 2. NRC
non-operating income, in lieu of the graduated
income tax rates under Subsection (A)(2)(a) of 3. RA
this section and the percentage tax under Section 4. DC
116 of this Code;
Amago, Jann Claudine M. 18
5. RFC

 Not entitiled: 4. Travelling expenses - requisites: PCR

1. NRA-ETB a. Paid or incurred while away from home;

2. NRA-NETB b. In the Conduct of trade or business;

c. Reasonable and necessary.

I. BUSINESS EXPENSES  While away from home - away from the

principal or main office or place of business.
 Requisites for Deductibility: OW-SIRIN

1. Must be Ordinary and necessary;

5. Cost of materials and supplies - materials
2. If subject to Withholding tax, proof of payment and supplies used in or consumed in the
to BIR; operation during the taxable year and has not
3. Substantiated by proof; been deducted.

4. Must be Incurred in the trade or business of the  Actual comsumption method/

taxpayer; inventory method - if taxpayer keeps a
record of consumption of materials and
5. Reasonable; supplies or takes physical inventories at the
beginning and end of the year, include as
6. Incurred during taxable year; expenses the cost of materials and supplies
actually consumed during the year.
7. Not against law, morals, public policy.
 Total purchase method - if taxpayer
carries incidental materials and supplies on
 Cohan Principle - when there is a showing that hand for which no record of consumption is
expenses have been incurred, but the exact amount kept or no record of consumption or no
thereof cannot be ascertained due to the absence of physical inventories taken, it may be
documentary evidence, it is the duty of the BIR to deducted provided that the net income is
make an estimate deduction that may be allowed in clearly reflected.
computing the income.

6. Rents expenses - requisites: MUN5%

 Kinds of Business Expenses: CART-CRR
a. Made as condition for continued use of
1. Compensation for personal services - property;
requisites: PCR
b. Use of property in trade or business;
a. Personal services actually rendered;
c. Taxpayer has No title except as lessee or
b. Compensation is for such services; possessor;

c. Reasonable. d. Subject to 5% withholding tax.

2. Advertising and promotional expenses - 7. Repairs - requisites: OIT

requisites: SR
a. Incurred during taxable year;
a. Substantiated;
b. Trade or business purposes;
b. Receipted properly.
c. Ordinary and necessary.

 Ordinary and necessary - keeps the

3. Representation and entertainment asset in ordinarily efficient, operating
expenses - requisites: PT-SRN condition.

a. Paind or incurred in the taxable year;  Extraordinary expenses - not deductible;

partakes the nature of capita expenditure.
b. Trade or business purposes; It (a) adds value or (b) prolongs the life of
the asset.
c. Substantiated;

d. Reasonable;
e. Not contrary to law, morals, public policy.
Amago, Jann Claudine M. 19
 Interest on business debts ONLY. d. Between Grantor and fiduciary of any tust;

e. Between Fiduciary of a trust and the

fiduciary of another trust if the same person
 Compensation allowed by law or fixed by the parties is a grantor with respect to each trust;
for the loan or forebearance of money, goods or
credits. f. Between Fiduciary and the beneficiary.

 Requisites for Deductibility: ITIIS III. TAXES

1. Indebtedness exists;  Includes all taxes, whether national or local, paid or

accrued, within the taxable year, in connection with
2. Taxpayer owes the indebtedness; the taxpayer’s trade or business, EXCEPT: SPICE-F
3. Incurred in connection with the taxpayer’s a. Foreign income tax;
b. Special assessment tax;
4. Incurred during the taxable year;
c. Philippine income tax;
5. Interest must be Stipulated in writing.
d. Income, war profit, excess profit taxes imposed
 It must not be incurred between related tax payers. by the authority of any foreign country.

e. Commodity taxes paid not connected with

 Deductible interest expenses: taxpayer’s business;

1. Interest for tax delinquency; f. Estate and donor’s tax.

2. Interest paid by corporation on scrip dividends;

3. Interest on bank deposits;  Some deductible taxes:

4. Interest paid by legal or equitable oner on a. Import dutiesl

mortgage of real property. b. Business taxes;

c. License taxes;
 Some non-deductible expenses: d. Privilege taxes;
1. Interest on preferred stock which is considered e. Documentary stamp taxes.
interest on capital;

2. Interest on undrawn salaries and bonuses;

3. Interest on capital for cost keeping;

Tax Deduction Tax Credit
4. Interest paid where parties provide no stipulation
to pay interest in writing; Deductible from gross income. Deductible from Philippine
income tax.
5. Interest on indebtedness if incrred to finance
petroleum exploration; Reduces taxable income. Reduces taxpayer’s liability.

6. Interest on indebtedness paid in advance thry

discount or otherwise - deductible in the year the
indebtedness was paid, not when interest was  Tax Credit - amount allowed by law to reduce the
paid in advance; Philippine Income Tax Due on account of income,
war profit tax, excise profit tax, paid or accrued to a
7. INTEREST/LOSSES between related foreign country.
taxpayers: - discussed by Judge L MIC-GFF
 Purpose: To lessen the harshness of taxation in
a. Members of a family; cases where an income is subject to both foreign
tax and Philippine income tax.
b. Individual and corporation - when the
individual owns directly or indirectly more
than 50% of the OCS, except in the case of
distributions in liquidation;  The taxpayer has the OPTION either to claim foreign
income taxes paid as deduction from gross income or
c. Between 2 Corporations more than 50% in tax credit. Only the following are allowed to avail of tax
value of the OCS of which is owned by or for credit: ReDo-GeBe
the same individual;
1. Resident citizens;
Amago, Jann Claudine M. 20
2. Domestic corporations;

3. General professional partnership members;  Capital Losses - loss from sales or exchanges of
capital assets shall be allowed only to the extent of
4. Beneficiaries of estate and trust. capital gain.

 Conditions for allowance of credit for foreign  Losses from Wash Sales
 Wash sale - sale or disposition of stock or
1. Taxpayer must signify in his income tax return securities to claim a capital loss, only to
his desire to claim tax credit; repurchase it for a bargain.
2. Return must be accompanied by the  Substantially identical stock or securities are
appropriate form prescribed by the acquired within a period beginning 30 days
Commissioner, signed and sworn. before the date of sale and ending 30 days after
such date.

IV. LOSSES  They are not deductible as losses.

 Includes all losses which are not general or natural to  Wagering losses - losses from wagering transactions
the ordinary course of business and not covered under shall be allowed only to the extent of the gains from
the other kinds of losses. such transactions.

 Requisites for deductibility: CANTET March June August

1. In case of Casualty loss, a sworn declaration of Gains 200,000 300,000 500,000

the loss must be filed within 45 days;
Losses 150,000 280,000 700,000
2. Actually sustained or charged off during the
taxable year; 50,000 20,000 -200,000

3. Not be compensated by insurance or other forms In this example, the taxpayer can only claim a loss of P70,000,
of indemnity; the extent of the amount of his gains from such transactions.

4. Loss is that of the Taxpayer;

5. Evidenced by a closed and completed  NET OPERATING LOSS CARRY OVER (NOLCO) -
transaction; The net operating loss of the business or enterprise for
any taxable year immediately preceding the current
6. Connected with Trade or business or profession. taxable year, which had not been previously offset as
deduction shall be carried over as a deduction from
gross income for the next 3 consecutive taxable years
 Charged off during the taxable year - deducted immediately following the uear of such loss.
only in the taxable year they were sustained.  Any net loss incurred in a taxable year during
 In addition, it should be charged off in the books which the taxpayer was exempt from income tax
of the claimant within the taxable year. shall not be allowed as a deduction.

 City Lumber v. Commissioner - The conduct  NOLCO shall be allowed only if there has been no
of the taxpayer in not charging off in its books its substantial change in the ownership of the
loss proves that the alleged loss has not been business enterprise.
suffered.  When is there NO change in

 Closed and completed transaction - fixed and a. Not less than 75% in nominal value
identifiable event which justifies the loss. of outstanding issued shares, if
the business is in the name of a
corporation, is held by or on behalf of
the same persons; or
 Declaration and substantiation - the mere filing of
a declaration of loss does not automatically entitle the b. Not less than 75% of the paid-up
corporation to deduct the alleged loss for gross income. capital of the corporation, if the
The failure to submit proof of loss within the business is in the name of the
prescribed period results in the disallowance of the corporation, is held by or on behalf of
claim for deduction. the same persons.

Amago, Jann Claudine M. 21

2. Allowance must be reasonable;

IV. BAD DEBTS 3. Charged off during the taxable year;

 These are debts due to the taxpayer which are actually 4. A Statement of allowance must be attached to
ascertained to be worthless and charged off the return.
during the taxable year.

 Non-Depreciable Assets:
 Requisites for deductibility: VACANS
1. Inventories or stock
1. Valid and subsisting deb;
2. Land and improvements
2. Actually ascertained during the taxable year;
3. Bodies of minerals subject to depletion
3. Charged of from the books of accounts;
4. Automobiles or transportation equipment for
4. It Arises from trade, business, or practice of personal use
5. Buildings and furnitures for personal use
5. Must Not be between related taxpayers;
6. Intangibles where the use is unlimited
6. Taxpayer must Show that it is indeed
incollectible. 7. Personal effects and clothing

 Valid and subsisting debt - means that the debt

may still be enforced in the courts of law. Hence, a
prescribed debt is no longer considered subsisting.

 Debts must be charged off within the year of
worthlessness. The taxpayer cannot defer the  It is the exhaustion of natural resources like mines, oil
deduction to a later year of a bad debt. and gas wells, as a result of production or severance
from such mines or wells.

 Recovery of bad debt previously written off -

recovery of bad debts previously allowed as deduction  Who are entitled? Only persons having an economic
in the preceding years shall be included as part of the interest in a mineral land or oil or gas wells.
gross income in the year of recovery to the extent of
the income tax benefit of said deduction.  To acquire economic interest, the taxpayer must
have a capital investment in the property and
 Receipt of payment is considered as realized not mere economic disadvantage.
taxable income.

 Requisites for Deductibility: DAC

1. Depletible assets;
 Exhaustion, wear and tear, or reasonable
obsolescence of property used in the trade, business 2. Allowance for completion is computed in
or profession. accordance with the cost of depletion;

3. Charged off within the taxable year.

 Necessary Depreciation Allowance - certain

property used in the business gradually approaches a
point where its usefulness is exhausted. By using the
property, a gradual sale is made of it, and the VII. CHARITABLE AND OTHER CONTRIBUTIONS
depreciation change is the measure of the cost
which has been sold.  Kinds:

1. Ordinary - subject to limitation

 Requisite for deductibility: PACS 2. Special - deductible in full

1. Must be for Property sed in trade or business or

 Entitled:
Amago, Jann Claudine M. 22
1. Corporate taxpayer except NRFC - 5% of net  Research and development expenditures which
income before charitable contribution; are paid or incurred during the taxable year in
connection with his trade, business, or
2. Individual taxpayer except NRA-NETB - profession.
10% of the net income before charitable

 They are ordinary and necessary expenses not

chargeable to capital account.
 Requisites for Deductibility: ACNE-N

1. Must be Actually made to organization specified

by Tax Code or special law;  Limitation on Deduction:

2. Charged during the taxable year; 1. Expenditure for the acquisition and
improvement of land;
3. Not exceed 5%/10%;
2. Expenditure for ascertaining existence,
4. Evidenced by adequate records; location, extent or quality of natural
5. Must Not inure to the benefit of any member or resources.


 Attachments of receipts for contribution to the return  Applicable only to the employer on account of its
is merely an administrative device for the contribution to private pension plan for the
convenience and facility of the BIR in verifying the benefit of the employee. Purely business in
income tax return. The requirement cannot deprive character.
the taxpayer of his right to prove his contribution in
accordance with the rules of evidence.

 Requisites for Deductibility: FAPER

 Contributions to be deducted in full: GIA 1. Funded by the employer;

1. Donations to the Government or political 2. Amount contributed must no longer be

subdivisions thereof; subject to the control of employer;

2. Donations to International organizations; 3. Payment has not been allowed as a

3. Donations to Accredited NGOs.
4. Employer must have Established a pension
retirement plan for the payment of
 Under special laws: reasonable pension to its employees;

1. IBP 5. Reasonable and sound.

2. Development Academy of the Philippines

3. Agricultural Department of Southeast Asian ITEMS NOT DEDUCTIBLE: PARP-L

Fisheries Development Center 1. Personal, living or family expenses;
4. National Social Action Council 2. Amount paid out of new buidings, permeanent
5. Task Force on Human Settlement improvements or betterments made to increase the value of
any property or estate;
6. National Museum, Library and Archives
3. Restoration of property expenses or in making good the
7. Ministry of Youth and Sports Development exhaustion thereof for which allowance has been made;

8. Social Welfare, Cultural and Charitable 4. Premiums paid for insurance policy covering the life of any
Institution officer or employee, or any person financially interested in
any trade or business when the taxpayer is directly or
9. Museum of Philippine Costumes indirectly the beneficiary;
10. Intramuros Administration 5. Losses from sales or exchanges between related taxpayers
who are - MIC-GFF
11. Lungsod ng Kabataan
a. Members of a family;


Amago, Jann Claudine M. 23

b. Individual and corporation - when the individual owns
directly or indirectly more than 50% of the OCS,
except in the case of distributions in liquidation; PARTNERSHIPS

c. Between 2 Corporations more than 50% in value of  registered or unregistered.

the OCS of which is owned by or for the same  Taxable provided the following requisites concur:
a. There is an agreement, oral or in writing, to contribute
d. Between Grantor and fiduciary of any tust; money, property or industry to a common fund;
e. Between Fiduciary of a trust and the fiduciary of b. Intention to divide profits or gains among themselves.
another trust if the same person is a grantor with
respect to each trust;  Co-ownership is TAX EXEMPT. It becomes taxable if it is
converted into an unregistered partnership. It becomes a
f. Between Fiduciary and the beneficiary. partnership once the requisites are present.


CORPORATE INCOME TAXATION  Joint accounts - constituted when one interests himself in
the business of another by contributing capital thereto and
Domestic Corporation – sharing in the profits or losses in the proportion agreed
Gross Income within and outside the Philippines xx upon.
Deductions: Allowable Deductions/Expenses xx
Net taxable Income = xx  Not subject to formalities.
x Tax Rate 30%
 Joint venture - a commercial undertaking by 2 or more
Tax due = xx
persons, differing from a partnership in that it relates to a
disposition of a single lot of goods or the completion of a
single project.

 Business affairs of 2 companies as though they

constitute a single entity.

Foreign Resident Corporation

Gross income within the Philippines xx
Deductions: Allowable business expenses xx
Net taxable income = xx  Generally classified as a partnership possessing some of the
x Tax rate 30% characteristics of a corporation.
Tax Due = xx
 They appear to be like corporations to the extent that they
Foreign Non-Resident Corporation have capital stock, but when capital is divided or made
Gross Income within the Philippines xx transferable even without the consent of the other partners,
x Tax Rate 30% it partakes the nature of a partnership.
Tax Due = xx


 Includes all associations or organizations which have

substantially the salient features f a cororation to be
Under the NIRC, a CORPORATION includes partnerships, no
considered as a taxable corporation.
matter how created or organized, joint stock companies,
joint accounts, joint associations, or insurance

 Exceptions: JGJ
1. Joint construction venture;

2. General professional partnership

 Taxable for all sources of income derived within and without
 income is not derived from trade or business. the Philippines.
 Organized for the purpose of exercising a
common profession.
 Domestic Corporations have an OPTION to be taxed at
3. Joint venture for engaging in petroleum, coal, 15% of GROSS INCOME. The following are the
geothermal and other energy operations pursuant to a conditions: TV-RRR
consortium agreement with the government.
Amago, Jann Claudine M. 24
1. Tax effort ratio of 20% of GNP;  Capital Gains from Sale of Shares of Stock NOT
TRADED in the Stock Exchange - final tax rate of 15%
2. VAT Tax effort of 4% GNP; imposed on the net capital gains realized during the
3. Ratio of IT collection to total tax revenue of 40%; taxable year from sale, barter, exchange or other disposition
of stock in a domestic corporation, except shares sold or
4. Ratio of CPSFP to GNP - 0.9% disposed of thru the stock exchange.

5. Ratio of Corporation’s Cost of Sales to Gross Sales -

does not exceed 55%.

 The election of the gross income tax option by the

corporation shall be irrevocable for 3 consecutive RESIDENT FOREIGN CORPORATIONS
taxable years during which the corporation is
qualified under the scheme.
 Those organized nder the laws of a foreign country, which is
engaged in trade or business in the Philippines.
 Special Domestic Corporations:

 Private Educational Corporation - any private  Special Resident Foreign Corporations:

school maintained and administered by any private
individual or groups issued a permit to operate by the 1. International Carriers - 10% on gross Philippine
Secretary of DepEd. billings.

 subject to 10% on their taxable income  Gross Philippine billings - amount of gross
provided that its gross ncome from unrelated revenye realized from the carriage of persons,
trade, business or other activities does not excess baggage, cargo, and mail originating
exceed 50% of the total gross income; from the Philippines in a continuous and
otherwise, entire taxable income is subject to uninterrupted flight.
30% regular income tax.

2. Offshore Banking Unit - foreign banks with

 Unrelated trade, business or activity - the branches authorized by the BSP.
conduct of which is not substantially related to
the exercise or performance by such educational  10% for gross onshore income.
institution of its educational purpose or function.  Coverage - only income derived by OBUs from
foreign currency transactions with:

 Related activities include income derived from a. Non-residents;

auxiliary activities, such as school owned canteen, b. Other offshore banking units;
cafeteria, dormitory and bookstore within the
school premises. c. Local commercial banks;

d. Branches of foreign banks within the

 Non-Profit Hospital - same rule above.

3. Foreign Currency Deposit Unit - 10% of gross

 Tax on GOCCs, agencies or instrumentalites - general onshore income.
rule is that GOCCs are TAXABLE as any other corporations,

1. GSIS;


3. PhilHealth;

4. Local Water Districts.  30% of the gross income received from all sources within
the Philippines, except capital gains resulting from the sale
 General Rule: Government is exempt from tax. of shares of stock of a domestic corporation not listed and
Exception: When it chooses to tax itself. Nothing can traded thru a local stock exchange, held as a capital asset.
prevent Congress from decreeing that even the
instrumentalities of the government performing
governmental functions may be subject to tax.  Special Non-Resident Foreign Corporations:

 Lessor of Cinematic Films - 25% final tax within

Amago, Jann Claudine M. 25

 Owner or Lessors of Vessels Chartered by  “Reasonable needs of the business” – immediate
Philippine Nationals - 4.5% gross rental within needs of the business, including reasonably
anticipated needs.
 Owner or Lessor of Aircraft, Machinery and
Equipment - 7.5% final tax gross renal within  IMMEDIACY TEST – if the corporation did not prove
an immediate need for the accumulation of earnings
and profits, the accumulation was not for the
reasonable needs of the business, and the penalty tax
would apply.
 The following constitutes accumulation of earnings
 Designed to forestall the prevailing practice of corporations for the reasonable needs of the business: ABCD-RU
of over claiming deductions in order to reduce their income. 1. Allowance for the increase in the accumulation of
earnings up to 100% of the paid-up capital of the
 It is the estimate of the income tax that is due from a firm. corporation;
It is equal to 2% of the gross income of the corporation 2. Earnings reserved for Building, plants or equipment
at the end of the taxable year. acquisition as approved by the BOD or equivalent
 Gross sales body;
Less: Returns 3. Earnings received for Compliance with any loan
Less: Discounts and allowances covenant or pre-existing obligation established under
Less: Cost of Sale a legitimate business agreement;
Gross Income 4. Earnings reserved for Definite corporation expansion
projects or programs requiring considerable
 Being a minimum income tax, a corporation should pay the capital expenditure;
MCIT whenever its regular income tax is lower than the 5. Earnings Required by law or applicable regulations to
MCIT, or when the firm reports a net loss in its tax return. be retained by the corporation or in respect of which
Conversely, the regular income tax is paid when it is higher there is legal prohibition against its distribution;
than the MCIT. 6. Undistributed earnings intended or reserved for
investments within the Philippines as can be proven by
 COVERAGE – covers Domestic and Resident Foreign corporate records and/or relevant documentary
Corporations which are subject to the regular income tax. evidence, in the case of subsidiaries of foreign
Corporations which are subject to a special corporate tax corporations in the Philippines.
system do not fall within the coverage of the MCIT.
 Closely-Held Corporations – corporations (1) at least
 When does a corporation start to be covered by the 50% in value of OCS or (2) at least 50% of the total
MCIT? A corporation starts to be covered by the MCIT on combined voting power of all classes of stock
the 4th year of its business operations. The period of entitled to vote is owned directly or indirectly by not more
reckoning the start of its business operations is the year than 20 individuals.
when the corporation was registered with the BIR.
 Coverage of IAET – 10% of the IAET is imposed on
 The Secretary of Finance, upon the recommendation of improperly accumulated taxable income earned starting Jan.
the BIR commissioner, may suspend the payment of the 1, 1998 by (1) domestic corporation and which are (2)
MCIT in the following cases: SFL classified as closely-held corporations.
1. Sustained losses from prolonged labor dispute;
2. Force Majeure;  Corporations not subject to IAET: BIG-TEN-P
3. Legitimate business reverses – e.g. substantial losses 1. Banks and other non-bank financial intermediaries;
due to fire, robbery, theft or embezzlement, etc. 2. Insurance companies;
3. General professional partnerships;
 Carry-Forward Provision (MCIT) – any excess of the 4. Taxable partnerships;
MCIT over the normal income tax may be carried forward on 5. Enterprises registered with the PEZA
an annual basis and be credited against the normal income 6. Non-taxable joint ventures;
tax for the 3 immediately succeeding taxable years. 7. Publicly-held corporations.
 REASON: They ought to retain a portion of their
earnings as required by the nature of their

 Tax as punishment/penalty on the corporation for  The corporation must be able to establish the
unreported unreasonable accumulated earnings. purpose of the accumulation of its earnings;
otherwise, they will be subjected to IEAT.
 10% of the IAET.

 An accumulation of earnings or profits is reasonable  Prima facie instances of ACCUMULATION: BIH

if it is necessary for the purpose of the business, considering
1. Corporation is a mere Holding company;
all the circumstances of the case.
2. Corporation is an Investment company;
Amago, Jann Claudine M. 26
3. Accumulation is Beyond the reasonable needs. 1. Stock in trade of taxpayer;

2. Property held primarily for sale to customers in the

ordinary course of trade or businessl

3. Property used in trade or business, of a character

TAX EXEMPT CORPORATIONS which is subject to the allowance for depreciation; or

4. Real property used in trade or business of taxpayer.

 Exemption from taxation is the grant of immunity to
particular persons or corporations or to persons or
corporations of a particular class, from a tax which persons  Net capital gain - excess of the gains from sales or
and corporations generally within the same district are exchanges of capital assets over the losses from such sale
obliged to pay. or exchanges.


1. Business, chamber of commerce, or board of trade;  Net capital loss - excess of the losses from sales or
exchange of capital assets over the gains from such sales or
2. Cemetery companies; exchanges.
3. Mutual savings bank and cooperatives bank;  In the case of a TAXPAYER, other than a CORPORATION,
4. Non-stock, non-profit educational institutions; only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall
5. Government educational institution; be taken into account in computing net capital gain, net
capital loss, and net income.
6. Mutual fire insurance companies and like
organizations; 1. 100% if capital asset has been held for not more
than 12 months;
7. Fraternal beneficiary society, order or association;
2. 50% if the capital asset has been held for more than
8. Civil league; 12 months.
9. Religious, charitable, scientific or cultural
 Losses from sales or exchange of capital assets shall be
10. Farmers, fruit growers or like association. allowed only to the extent of gain from such sales or
11. Labor, agricultural, or horticultural organization not
organized principally for profit.

 Net Capital Loss Carry-Over - If any taxpayer, other

than a corporation, sustains in any taxable year a net capital
 Common Requisites: COPE
loss, such loss (in an amount not in excess of the net income
1. No Capital represented by shares of stock; for such year) shall be treated in the succeeding taxable
year as a loss from the sale or exchange of a capital asset
2. Not Organized and operated principally for profit; held for not more than 12 mos (100%).
3. No Part of the net income inures to the benefit of
any member or individual;

4. Educational and instructive in character.


 Concept: Includes all gains or losses derived from the

disposition of property (real, personal or mixed) for money
in case of sale, or for property in case of exchange, or
from a combination of both sale and exchange.

 Capital Assets - property held by the taxpayer (whether or

not connected with trade or business), but does not
include: SPPR

Amago, Jann Claudine M. 27