Taxation Law

San Beda College of Law
MEMORY AID IN TAXATION LAW
TAXATION LAW
I. GENERAL PRINCIPLES 6. levied for a public purpose.
REQUISITES OF A VALID TAX

1. should be for a public purpose
POWER OF TAXATION
2. the rule of taxation shall be uniform
TAXATION – power by which the
3. that either the person or property
sovereign through its law-making body
taxed be within the jurisdiction of
raises revenue to defray the necessary
the taxing authority
expenses of government from among
4. that the assessment and collection
those who in some measure are
of certain kinds of taxes guarantees
privileged to enjoy its benefits and must
against injustice to individuals,
bear its burdens.
especially by way of notice and
Two Fold Nature of the Power of opportunity for hearing be provided
Taxation 5. the tax must not impinge on the
1. It is an inherent attribute of inherent and Constitutional
sovereignty limitations on the power of taxation
2. It is legislative in character
THEORIES AND BASES OF TAXATION
Extent of Taxing Power 1. Lifeblood Theory
Subject to constitutional and Taxes are what we pay for civilized
inherent restrictions, the power of society. Without taxes, the government
taxation is regarded as comprehensive, would be paralyzed for lack of the
unlimited, plenary and supreme. motive power to activate and operate it.
Hence, despite the natural reluctance to
SCOPE OF LEGISLATIVE TAXING POWER surrender part of one's hard-earned
1. Amount or rate of tax income to the taxing authorities, every
2. Apportionment of the tax person who is able to must contribute
3. Kind of tax his share in the running of the
4. Method of collection government. (CIR v. Algue, Inc.)
5. Purpose/s of its levy, provided it is
for public purpose 2. Necessity Theory
6. Subject to be taxed, provided it is The power to tax is an attribute of
within its jurisdiction sovereignty emanating from necessity. It
7. Situs of taxation is a necessary burden to preserve the
State's sovereignty and a means to give
TAXES – enforced proportional the citizenry an army to resist an
contributions from the persons and aggression, a navy to defend its shores
property levied by the law-making body from invasion, a corps of civil servants to
of the State by virtue of its sovereignty serve, public improvements designed for
in support of government and for public the enjoyment of the citizenry and those
needs. which come within the State's territory,
and facilities and protection which a
CHARACTERISTICS OF TAXES government is supposed to provide.
1. forced charge; (Phil. Guaranty Co., Inc. v. CIR)
2. pecuniary burden payable in money;
3. levied by the legislature; 3. Benefits-Protection / Reciprocity
4. assessed with some reasonable rule Theory
of apportionment; (see theoretical Taxation is described as a symbiotic
justice) relationship whereby in exchange of the
5. imposed by the State within its benefits and protection that the citizens
jurisdiction; get from the Government, taxes are
paid. (CIR v. Algue, Inc.)
TAXATION LAW COMMITTEE

 CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro  EDP: Rachelle Saya  SUBJECT HEADS:
Jemina Sy, Casiano Ilagan, Jr., Ryan Co, Edwin Torres  :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian
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Note: While taxes are intended for persons, property or other privileges to
general benefits, special benefits to be taxed.
taxpayers are not required. The The court’s power in taxation is
Government renders no special or limited only to the application and
commensurate benefit to any particular interpretation of the law.
person or property.
Note: The principle of judicial non-
IS THE POWER TO TAX THE POWER TO interference extends to the
DESTROY? administrative realm.
1. “Power to tax is the power to
destroy” (Marshall Dictum) – refers to ASPECTS OF TAXATION
the unlimitedness and the degree or 1. Levy or imposition of the tax (tax
vigor with which the taxing power may legislation)
be employed to raise revenue. 2. Enforcement or tax administration
- the financial needs of the State may (tax administration)
outrun any human calculation, so the
power to meet those needs by taxation BASIC PRINCIPLES OF A SOUND TAX SYSTEM
must not be limited even though taxes (KEY: FAT)
become burdensome or confiscatory. 1. Fiscal Adequacy – sufficiency to
meet government expenditures and
2. “Power to tax is not the power to other public needs.
destroy while the Supreme Court sits” 2. Administrative Feasibility/
(Holmes Dictum) – the power to tax Convenience – capability of being
knows no limit except those expressly effectively enforced.
stated in the Constitution. 3. Theoretical Justice – based on the
taxpayer’s ability to pay; must be
Marshall and Holmes Dictum Reconciled progressive. (Ability to Pay Theory)
Although the power to tax is almost
unlimited, it must not be exercised in an POLICE EMINENT
TAXATION
arbitrary manner. If the abuse is so POWER DOMAIN
great so as to destroy the natural and 1. Purpose
fundamental rights of people, it is the To raise To promote To facilitate
duty of the judiciary to hold such an act revenue public the State’s
purpose need of
unconstitutional. through property for
regulations public use
PURPOSES AND OBJECTIVES OF TAXATION 2. Amount of Exaction
1. Revenue – basically, the purpose of No limit Limited to No exaction;
taxation is to provide funds or the cost of but private
property with which the State regulation, property is
promotes the general welfare and issuance of taken by the
the license or State for
protection of its citizens. surveillance public
2. Non-Revenue (Key: PR2EP) purpose
a. Promotion of general welfare
b. Regulation
c. Reduction of social inequality
d. Encourage economic growth
3. Benefits Received
e. Protectionism
No special No direct A direct
or direct benefit is benefit results
POWER OF JUDICIAL REVIEW IN TAXATION benefit is received; a in the form of
As long as the legislature, in received by healthy just
imposing a tax, does not violate the economic compensation
applicable constitutional limitations or taxpayer; standard of to the
merely society is property
restrictions, it is not within the province
general attained owner
of the courts to inquire into the wisdom benefit of
or policy of the exaction, the motives protection
behind it, the amount to be raised or the

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4. Non-impairment of Contracts registration fees are regulatory

Contracts Contracts Contracts may exactions and not revenue measures.
may not be may be be impaired
impaired impaired
b. The tax imposed on videogram
5. Transfer of Property Rights establishments is not only regulatory but
Taxes paid No transfer Transfer is
a revenue measure because the earnings
become part but only effected in
of public restraint in favor of the of such establishments have not been
funds its exercise State subject to tax depriving the government
6. Scope
of an additional source of income. (Tio
All persons, All persons, Only upon a v. Videogram Regulatory Board, 151
property and property, particular SCRA 208)
excises rights and property
privileges c. The “coconut levy funds” were
all raised under the state’s taxing and
Systems of Taxation police powers.
Global System Schedular System The state’s concern to make it a
strong and secure source not only in the
A system A system employed livelihood of the significant segment of
employed where where the income tax the population, but also of export
the tax system treatment varies and
earnings, the sustained growth of which
views is made to depend on
indifferently the the kind or category
is one of the imperatives of the
tax base and of taxable income of economic growth.” Philippine Coconut
generally treats in the taxpayer. Producers Federation, Inc. Cocofed v.
common all Presidential Commission on Good
categories of Government (178 SCRA 236, 252)
taxable income of
the individual. CONSTRUCTION OF TAX LAWS
A system which A system which 1. Public purpose is always presumed.
taxes all itemizes the different 2. If the law is clear, apply the law in
categories of incomes and provides
accordance to its plain and simple
income except for varied percentages
certain passive of taxes, to be tenor.
incomes and applied thereto. 3. A statute will not be construed as
capital gains. It imposing a tax unless it does so
prescribes a clearly, expressly and
unitary but unambiguously.
progressive rate 4. In case of doubt, it is construed most
for the taxable strongly against the Government,
aggregate incomes and liberally in favor of the
and flat rates for
taxpayer.
certain passive
incomes derived 5. Provisions of a taxing act are not to
by individuals. be extended by implication.
6. Tax laws operate prospectively
EXAMPLES OF TAXES LEVIED WITH A unless the purpose of the legislature
REGULATORY PURPOSE, OR COMBINED to give retrospective effect is
EXERCISE OF POLICE POWER AND THE POWER expressly declared or may be
OF TAXATION. implied from the language used.
7. Tax laws are special laws and
a. Motor vehicle registration fees prevail over a general law.
are now considered revenue or tax
measures.(Pal v. Edu, G.R No. L-41383, NATURE OF TAX LAWS
August 15,1988) 1. Not political in character
This case reversed the doctrine 2. Civil in nature, not subject to ex
previously held in Republic v. Philippine post facto law prohibitions
Rabbit Bus Lines, Inc., 32 SCRA 211, to 3. Not penal in character
the effect that motor vehicle

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TAXES ARE PERSONAL TO THE TAXPAYER the tax falls on one person but
1. A corporation’s tax delinquency the burden thereof can be
cannot be enforced against its shifted or passed on to another.
stockholders. (Corporate Entity 3. As to purpose:
Doctrine) a. General Tax – levied for the
Exception: Stockholders may be general or ordinary purposes of
held liable for unpaid taxes of a the Government
dissolved corporation: b. Special Tax – levied for special
a. if it appears that the corporate purposes
assets have passed into their 4. As to manner of computation:
hands or a. Specific Tax – the computation
b. when the stockholders have of the tax or the rates of the tax
unpaid subscriptions to the is already provided for by law.
capital of the corporation b. Ad Valorem Tax – tax upon the
value of the article or thing
2. Estate taxes are obligations that subject to taxation; the
must be paid by the executor or intervention of another party is
administrator out of the net assets needed for the computation of
and cannot be assessed against the the tax.
heirs. 5. As to taxing authority:
Exception: If prior to the payment a. National Tax – levied by the
of the estate tax due, the properties National Government
of the deceased are distributed to b. Local Tax – levied by the local
the heirs, then the latter is government
subsidiary liable for the payment of 6. As to rate:
such portion of the estate tax as his a. Progressive Tax – rate or
distributive share bears to the total amount of tax increases as the
value of the net estate. (Sec. 9, amount of the income or earning
Rev. Regs. No. 2-2003; see CIR vs. to be taxed increases.
Pineda G.R. No. L-22734. b. Regressive Tax – tax rate
September 15, 1967)) decreases as the amount of
income to be taxed increases.
CLASSIFICATION OF TAXES c. Proportionate Tax – based on a
1. As to subject matter: fixed proportion of the value of
a. Personal Tax – taxes are of fixed the property assessed.
amount upon all persons of a
certain class within the IMPOSITIONS NOT STRICTLY CONSIDERED AS
jurisdiction without regard to TAXES
property, occupation or business 1. Toll – amount charged for the cost
in which they may be engaged. and maintenance of the property
b. Property Tax – assessed on used.
property of a certain class 2. Penalty – punishment for the
c. Excise Tax – imposed on the commission of a crime.
exercise of a privilege 3. Compromise Penalty – amount
d. Customs Duties – duties charged collected in lieu of criminal
upon the commodities on their prosecution in cases of tax
being imported into or exported violations.
from a country. 4. Special Assessment – levied only on
2. As to burden: land based wholly on benefit
a. Direct Tax – both the incidence accruing thereon as a result of
of or liability for the payment of improvements or public works
the tax as well as the impact or undertaken by government within
burden of the tax falls on the the vicinity.
same person. 5. License or Fee – regulatory
b. Indirect Tax - The incidence of imposition in the exercise of the
or liability for the payment of police power.

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6. Margin Fee – exaction designed to

stabilize the currency. Normally paid after Normally paid
7. Debt – a sum of money due upon the start of a before
contract or one which is evidenced business commencement of
business
by judgment.
8. Subsidy – a legislative grant of Taxes, being the License fee may be
money in aid of a private enterprise lifeblood of the with or without
deemed to promote the public State, cannot be consideration
welfare. surrendered except
9. Customs duties and fees – duties for lawful
charged upon commodities on their consideration
being transported into or exported
from a country. Non-payment does Non-payment
10. Revenue – a broad term that not make the makes the business
business illegal but illegal
includes taxes and income from
maybe a ground for
other sources as well. criminal
11. Impost – in its general sense, it prosecution
signifies any tax, tribute or duty. In
its limited sense, it means a duty on TEST IN DETERMINING IF THE IMPOSITION IS A
imported goods and merchandise. TAX OR A LICENSE FEE
If the purpose is primarily revenue
Tax Special or if revenue is, at least, one of the real
Assessment and substantial purposes, then the
exaction is a tax. If the purpose is
Imposed on persons, Levied only on land
property and excises
regulatory in nature, it is a license.
(PAL v. Edu)
Personal liability Cannot be made a
attaches on the personal liability of Tax Debt
person assessed in the person assessed
case of non-payment An obligation Created by contract
imposed by law
Not based on any Based wholly on
special or direct benefit Due to the May be due to the
benefit
government in its government but in
sovereign capacity its corporate
Levied and paid Exceptional both as
capacity
annually to time and locality
Payable in money Payable in money,
Exemption granted Exemption does not
property or services
is applicable (Art. apply.
VI, Sec. 28(3) 1987 N.B. If property is
Constitution) exempt from Real Does not draw Draws interest if
Property Tax, it is interest except in stipulated or
also exempt from case of delinquency delayed
Special Assessment.
Not assignable Assignable
Tax License Fee Not subject to Subject to
compensation or compensation or
Based on the power Emanates from set-off set-off
of taxation police power
Non-payment is No imprisonment in
To generate Regulatory punished by case of non-payment
revenue imprisonment (Art. III, Sec. 20
except in poll tax 1987 Constitution)
Amount is unlimited Amount is limited
to the cost of (1) Imposed only by Can be imposed by
issuing the license, public authority private individual
and (2) inspection
and surveillance

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TEST IN DETERMINING IF THE IMPOSITION IS A compensation takes place by operation

TAX OR A LICENSE FEE of law. (Domingo v. Garlitos)
If the purpose is primarily revenue or
if revenue is, at least, one of the real DOCTRINE OF EQUITABLE RECOUPMENT NOT
and substantial purposes, then the FOLLOWED IN THE PHILIPPINES
exaction is a tax. If the purpose is A tax presently being assessed
regulatory in nature, it is a license. against a taxpayer which has prescribed
(PAL v. Edu) may not be recouped or set-off against
an overpaid tax the refund of which is
Tax Debt also barred by prescription. It is against
public policy since both parties are
An obligation Created by contract guilty of negligence.
imposed by law
Tax Toll
Due to the May be due to the
government in its government but in Enforced A sum of money for
sovereign capacity its corporate proportional the use of
capacity contributions from something, a
persons and property consideration which
Payable in money Payable in money, is paid for the use of
property or services a property which is
of a public nature;
Does not draw Draws interest if e.g. road, bridge
interest except in stipulated or
case of delinquency delayed A demand of A demand of
sovereignty proprietorship
Not assignable Assignable
No limit as to the Amount of toll
amount of tax depends upon the
Not subject to Subject to
cost of construction
compensation or compensation or or maintenance of
set-off set-off the public
improvement used
Non-payment is No imprisonment in
punished by case of non- Imposed only by the May be imposed by:
imprisonment payment (Art. III, State (1) Government
except in poll tax Sec. 20 1987 (2) Private
Constitution) individuals or
entities
Imposed only by Can be imposed by
public authority private individual Tax Penalty
COMPENSATION OR SET-OFF Enforced Sanction imposed as

General Rule: Taxes cannot be the proportional a punishment for
subject of compensation or set-off. contributions from violation of a law
persons and or acts deemed
Reasons:
property injurious; violation
1. lifeblood theory of tax laws may give
2. taxes are not contractual rise to imposition of
obligation but arise out of duty penalty
to the government
3. the government and the Intended to raise Designed to regulate
taxpayer are not mutually revenue conduct
creditors and debtors of each
other. (Francia v. IAC) May be imposed May be imposed by:
Exception: When both obligations are only by the (1) Government
government (2) Private
due and demandable as well as fully
individuals or
liquidated and all the requisites for a entities
valid compensation are present,

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Tax Tariff (2) NON-DELEGABILITY OF THE TAXING

POWER
All embracing term A kind of tax General Rule: The power of taxation is
to include various imposed on articles peculiarly and exclusively exercised by
kinds of enforced which are traded the legislature. (See Scope of
contributions upon internationally Legislative Taxing Power, supra)
persons for the
attainment of
- refers to tax legislation
public purposes Exceptions to Non-delegability:
1. Flexible Tariff Clause: Authority of
TAXPAYERS’ SUIT the President to fix tariff rates,
A case where the act complained of import and export quotas, tonnage
directly involves the illegal disbursement and wharfage dues, and other duties
of public funds derive from taxation or imposts. (Art. VI, Sec.28(2), 1987
(Justice Melo, dissenting in Kilosbayan, Constitution)
Inc vs Guingona, Jr.) 2. Power of local government units to
levy taxes, fees, and charges. (Art.
TAXPAYERS AND PUBLIC OFFCIALS HAVE X, Sec. 5, 1987 Constitution)
LOCUS STANDI 3. Delegation to administrative
REQUISITES FOR TAXPAYERS’ SUIT agencies for implementation and
a. The tax money is being collection.
extracted and spent in violation of - merely refers to tax administration
specific constitutional protections or implementation
against abuses of legislative power.
b. That public money is being (3) SITUS OR TERRITORIALITY OF TAXATION
deflected to any improper purpose The power to tax is limited only to
(Pascual vs Secretary of Public persons, property or businesses within
Works) the jurisdiction or territory of the taxing
c. That the petitioner seeks to power.
restrain respondents from wasting
public funds through the enforcement FACTORS THAT DETERMINE THE SITUS:
of an invalid or unconstitutional law a. Kind or classification of the tax
being levied
LIMITATIONS ON THE TAXING b. Situs of the thing or property
taxed
POWER
c. Citizenship of the taxpayer
d. Residence of the taxpayer
A. INHERENT LIMITATIONS (KEY: SPINE) e. Source of the income taxed
1. Territoriality or Situs of taxation f. Situs of the excise, privilege,
2. Public purpose of taxes business or occupation being taxed
3. International comity
4. Non-delegability of the taxing power APPLICATION OF SITUS OF TAXATION
5. Tax Exemption of the government Kind of Tax Situs
(1) TESTS IN DETERMINING PUBLIC PURPOSE Personal or Residence or
a. Duty Test – whether the thing to be Community tax domicile of the
furthered by the appropriation of taxpayer
public revenue is something, which
is the duty of the State, as a Real property tax Location of property
government, to provide. (Lex rei sitae)
Personal property -tangible: where it

b. Promotion of General Welfare Test
tax is physically located
– whether the proceeds of the tax or permanently kept
will directly promote the welfare of (Lex rei sitae)
the community in equal measure. -intangible: subject
to Sec. 104 of the
NIRC and the

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principle of mobilia bonds have acquired a business

sequuntur personam situs in the Philippines; and
(5) shares or rights in any
partnership, business or industry
Business tax Place of business established in the Philippines.
(Sec. 104, 1997 NIRC).
Excise or Privilege Where the act is
tax performed or where
occupation is (4) EXEMPTION OF THE GOVERNMENT
pursued As a matter of public policy,
property of the State and of its
Sales tax Where the sale is municipal subdivisions devoted to
consummated government uses and purposes is
deemed to be exempt from taxation
Income Tax Consider although no express provision in the law
(1) citizenship, is made therefor.
(2) residence, and
(3) source of income
(Sec. 42, 1997 NIRC) General Rule: The Government is tax
exempt.
Transfer tax Residence or - However, it can also tax itself.
citizenship of the
taxpayer or location RULES:
of property 1. Administrative Agencies
a. Governmental function - tax
Franchise Tax State which granted exempt unless when the law
the franchise expressly provides for tax. (Sec.
32 B7)
SITUS OF TAXATION OF INTANGIBLE PERSONAL b. Proprietary function – taxable
PROPERTY unless exempted by law. (Sec.
General Rule: Domicile of the owner 27C)
pursuant to the principle of the mobilia 2. GOCCs
sequuntur personam or movables follow General Rule: Income is taxable at
the person. the rate imposed upon corporations
Exceptions: or associations engaged in a similar
1. When the property has acquired a business, industry, or activity.
business situs in another jurisdiction; Exception: GSIS, SSS, PHIC, PCSO
2. When an express provision of the and PAGCOR. (Sec. 27(C), NIRC)
statute provide for another rule. 3. Government Educational Institutions
Illustration: For purposes of estate a. Property or real estate tax –
and donor’s taxes, the following property actually, directly and
intangible properties are deemed exclusively used for educational
with a situs in the Philippines: purposes – exempt but income
(1) franchise which must be of whatever kind and character
exercised in the Philippines; from any of their properties,
(2) shares, obligations or bonds real or personal, regardless of
issued by any corporation the disposition, is taxable. (Sec.
organized or constituted in the 30, last par., NIRC)
Philippines in accordance with b. Income received by them as
its laws; such are exempt from taxes.
(3) shares, obligations or bonds by However, their income from any
any foreign corporation eighty- of their activities conducted for
five percent (85%) of the profit regardless of the
business of which is located in disposition, is taxable. (Sec. 30,
the Philippines; last par., NIRC)
(4) shares, obligations or bonds 4. Income derived from any public
issued by any foreign corporation utility or from the exercise of any
if such shares, obligations or essential governmental function

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accruing to the Government of the instrumentalities, as well as on its

Philippines or to any political property held and activities undertaken
subdivision thereof is not included in in that capacity. Even where one enters
gross income and exempt from the territory of another, there is an
taxation. (Sec. 32(B)(7)(b), NIRC) implied understanding that the former
5. Donations in favor of governmental does not thereby submit itself to the
institutions are considered as income authority and jurisdiction of the other.
on the part of the donee. However,
it is not considered as taxable B. CONSTITUTIONAL LIMITATIONS
income because it is an exclusion A. GENERAL OR INDIRECT
from the computation of gross CONSTITUTIONAL LIMITATIONS
income. (Sec.32 (B)(3), NIRC)
6. The amount of all bequests, 1. Due Process Clause (Art. III, Sec. 1,
legacies, devises or transfers to or 1987 Constitution)
for the use of the Government or Requisites:
any political subdivision for a. The interests of the public as
exclusively public purposes is distinguished from those of a
deductible from the gross estate. particular class require the
(Sec.86 (A)(3), NIRC) intervention of the State.
7. Gifts made to or for the use of the (Substantive limitation)
National Government or any entity b. The means employed must be
created by any of its agencies which reasonably necessary to the
is not conducted for profit, or to any accomplishment of the purpose
political subdivision of the said and not unduly oppressive.
Government are exempt from (Procedural limitation)
donor’s tax. (Sec. 101(A)(2), NIRC) The constitutionality of a legislative
8. Local government units are taxing act questioned on the ground of
expressly prohibited by the LGC denial of due process requires the
from levying tax upon National existence of an actual case or
Government, its agencies, and controversy.
instrumentalities, and local
government units. [Sec. 133 (o), 2. Equal Protection Clause (Art. III,
LGC] Sec. 1, 1987 Constitution
9. Unless otherwise provided in the Requisites of a Valid Classification:
Local Government Code (LGC), tax a. based upon substantial
exemptions granted to all persons, distinctions
whether natural or juridical, b. germane to the purposes of the
including GOCC, except local water law
districts, cooperatives duly c. not limited to existing conditions
registered under RA No. 6938, non- only
stock and non-profit institutions, are d. apply equally to all members of
withdrawn upon effectivity of the the class
LGC. (Sec. 193, LGC)
10. Real property owned by the 3. Freedom Of Speech And Of The
Republic of the Philippines or any of Press (Art. III, Sec. 4, 1987
its political subdivisions except when Constitution)
the beneficial use thereof has been There is curtailment of press
granted, for consideration or freedom and freedom of thought and
otherwise, to a taxable person shall expression if a tax is levied in order
be exempt from payment of real to suppress this basic right and
property tax. (Sec. 234, LGC) impose a prior restraint. (Tolentino
vs. Secretary of Finance, GR No.
(5) INTERNATIONAL COMITY 115455, August 25, 1994)
These principles limit the authority
of the government to effectively impose
taxes on a sovereign state and its

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4. Non-Infringement Of Religious process of liabilities should

Freedom And Worship (Art. III, Sec. law. imposed. therefore,
5, 1987 Constitution) Notice be no direct
A license tax or fee constitutes a must, double
therefore taxation
curtailment of religious freedom if
, be given
imposed as a condition for its in case of
exercise. (American Bible Society failure to
vs. City of Manila, GR No. L-9637, pay taxes
April 30, 1957)
B. SPECIFIC OR DIRECT
5. Non-Impairment Of Contracts (Art. CONSTITUTIONAL LIMITATIONS
III, Sec. 10, 1987 Constitution)
No law impairing the obligation 1. Non-Imprisonment For Debt Or Non-
of contract shall be passed. (Sec. Payment Of Poll Tax (Art. III, Sec.
10, Art. III, 1987 Constitution) 20, 1987 Constitution)
The rule, however, does not
apply to public utility franchises or 2. Rule Requiring That Appropriations,
right since they are subject to Revenue And Tariff Bills Shall
amendment, alteration or repeal by Originate Exclusively From The
the Congress when the public House Of Representatives (Art. VI,
interest so requires. (Cagayan Sec. 24, 1987 Constitution)
Electric & Light Co., Inc. v.
Commissioner, GR No. 60216, 3. Uniformity, Equitability And
September 25, 1985) Progressivity Of Taxation (Art. VI,
Sec. 28(1), 1987 Constitution)
RULES: Uniformity – all taxable articles or
a. When the exemption is bilaterally kinds of property of the same class
agreed upon between the are taxed at the same rate.
government and the taxpayer – it Equitability – the burden falls to
cannot be withdrawn without those who are more capable to pay.
violating the non-impairment Progressivity – rate increases as the
clause. tax base increases.
b. When it is unilaterally granted by
law, and the same is withdrawn by Q: Is a tax law adopting a regressive
virtue of another law – no violation. system of taxation valid?
c. When the exemption is granted A: Yes. The Constitution does not
under a franchise – it may be really prohibit the imposition of indirect
withdrawn at any time thus, not a taxes which, like the VAT, are
violation of the non-impairment of regressive. The Constitutional provision
contracts means simply that indirect taxes shall be
minimized. The mandate to Congress is
6. Presidential power to grant not to prescribe, but to evolve, a
reprieves, commutations and progressive tax system. (EVAT En Banc
pardons and remit fines and Resolution, Tolentino, et al vs Secretary
forfeitures after conviction (ART. of Finance, October 30, 1995)
VII, SEC. 19, 1987 CONSTITUTION)
Due Equal 4. Limitations On The Congressional
Uniformity
Process Protection Power To Delegate To The
Taxpayer Taxpayers Taxable President The Authority To Fix
may not shall be articles, or
be treated alike kinds of
Tariff Rates, Import And Export
deprived under like property of Quotas, Etc. (Art. VI, Sec. 28(2),
of life, circumstances the same 1987 Constitution)
liberty or and conditions class, shall
property both in the be taxed at 5. Tax Exemption Of Properties
without privileges the same Actually, Directly And Exclusively
due conferred and rate. There Used For Religious, Charitable And

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1
Educational Purposes. (Art. VI, Exemption (Art. VI, Sec. 28(4),

Sec. 28(3) 7, 1987 Constitution) 1987 Constitution)
The constitutional provision 7. Non-Impairment Of The
(above cited) which grants tax Jurisdiction Of The Supreme Court
exemption applies only to property In Tax Cases (Art. VIII, Sec. 2 And
or realty taxes assessed on such 5(2)(B), 1987 Constitution)
properties used actually, directly
exclusively for religious, charitable 8. Exemption From Taxes Of The
and educational purposes. (Lladoc Revenues And Assets Of
vs. Commissioner, GR No. L-19201, Educational Institutions, Including
June 16, 1965) Grants, Endowments, Donations
The present Constitution And Contributions. (Art. XIV, Sec.
required that for the exemption of 4(3) And (4), 1987 Constitution)
“lands, buildings and
improvements”, they should not only OTHER SPECIFIC TAX PROVISIONS IN
be “exclusively” but also “actually” THE CONSTITUTION
and “directly” used for religious and 1. Power of the President to veto any
charitable purposes. (Province of particular item or items in an
Abra vs. Hernando, GR No. L-49336, appropriation, revenue, or tariff bill.
August 31, 1981) (Art VI, Sec. 27(2), 1987
The test of exemption from Constitution)
taxation is the use of the property 2. Necessity of an appropriation before
for the purposes mentioned in the money may be paid out of the public
Constitution. (Abra Valley College treasury. (Art. VI, Sec. 29 (1), 1987
Inc. vs. Aquino, GR No. L-39086, Constitution)
June 15, 1988) 3. Non-appropriation of public money
or property for the use, benefit, or
EXCLUSIVE BUT NOT ABSOLUTE USE support of any sect, church, or
The term “ exclusively used” does system of religion. (Art. VI, Sec. 29
not necessarily mean total or absolute (2), 1987 Constitution)
use for religious, charitable and 4. Treatment of taxes levied for a
educational purposes. If the property is special purpose. (Art. VI, Sec. 29
incidentally used for said purposes, the (3), 1987 Constitution)
tax exemption may still subsist. (Abra 5. Internal revenue allotments to local
Valley College Inc. vs. Aquino, Gr No. L- government units. (Art. X, Sec. 6,
39086, June 15, 1988) 1987 Constitution)
Corollarily, if a property, although
actually owned by a religious, charitable
and educational institution is used for a DOUBLE TAXATION
non- exempt purpose, the exemption
from tax shall not attach DOUBLE TAXATION – taxing the same
property twice when it should be taxed
ART. XIV, ART. VI, but once.
SEC 4(3) SEC 28(3)
Grantee Non- stock, Religious, IS DOUBLE TAXATION PROHIBITED IN THE
non profit educational,
PHILIPPINES?
educational charitable
institution institutions
No. There is no constitutional
Taxes Income tax Property tax prohibition against double taxation. It is
covered Custom not favored but permissible. (Pepsi Cola
Duties Bottling Co. v. City of Butuan, 1968).
Property tax
(DECS Order KINDS OF DOUBLE TAXATION
No. 137-187) (1) Direct Duplicate Taxation /
Obnoxious – double taxation in the
6. Voting Requirement In Connection objectionable or prohibited sense.
With The Legislative Grant Of Tax

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1
This constitutes a violation of the output tax or tax on the finished

substantive due process. product.
 Foreign income taxes may be
Elements: credited against the Phil. Income
a. the same property or subject tax, subject to certain limitations,
matter is taxed twice when it should by citizens, including members of
be taxed only once. general professional partnerships or
b. both taxes are levied for the beneficiaries of estates or trusts
same purpose (pro rata), as well as domestic
c. imposed by the same taxing corporations.
authority  A tax credit is granted for estate
d. within the same jurisdiction taxes paid to a foreign country on
e. during the same taxing period the estate of citizens and resident
f. covering the same kind or aliens subject to certain limitations.
character of tax.  The donor’s tax imposed upon a
(Villanueva vs. City of Iloilo) citizen or a resident shall be
credited with the amount of any
(2) Indirect Duplicate Taxation – not donor’s tax imposed by the authority
legally objectionable. The absence of a foreign country, subject to
of one or more of the above- certain limitations.
mentioned elements makes the 4. Tax Exemptions
double taxation indirect. 5. Principle of Reciprocity
6. Treaties with other states
(3) Domestic- this arises when the taxes
are imposed by the local or national METHODS RESORTED TO BY A TAX TREATY IN
government (within the same state) ORDER TO ELIMINATE DOUBLE TAXATION
(4) International- refers to the
imposition of comparable taxes in FIRST METHOD: The tax treaty sets out
two or more states on the same the respective rights to tax by the state
taxpayer in respect of the same of source or situs and by the state of
subject matter and for identical residence with regard to certain classes
periods. of income or capital. In some cases, an
exclusive right to tax is conferred in one
REMEDIES OF DOUBLE TAXATION of the contracting states; however, for
1. Tax Sparing Rule – same dividend other items of income or capital, both
earned by a NRFC within the Phil. is states are given the right to tax although
reduced by imposing a lower rate of the amount of tax that may be imposed
15% (in lieu of the 35%), on the by the state of source is limited.
condition that the country to which SECOND METHOD: The state of source is
the NRFC is domiliced shall allow a given a full or limited right to tax
credit against the tax due from the together with the state of residence. In
NRFC, taxes deemed to have been this case, the treaty makes it incumbent
paid in the Phil. (Sec.28 B 5b) (CIR upon the state of residence to allow
vs Procter & Gamble) (GR No. relief in order to avoid double taxation.
66838, Dec. 2, 1991)
2. Tax deductions TWO METHODS OF RELIEF ARE USED UNDER THE
Example: vanishing deduction under SECOND METHOD:
Section 86(A)(2), NIRC
3. Tax credits 1. The exemption method- the income
Instances under the NIRC: or capital which is taxable in the state
 For VAT purposes, the tax on of source or situs is exempted in the
inputs or items that go into the state of residence, although in some
manufacture of finished products instances it may be taken into account
(which are eventually sold) may be in determining the rate of tax applicable
credited against or deducted from to the tax payer’s remaining income or
capital.(This may be done using the tax

Cabrera, Jhundee
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1
deduction method which allows foreign INCIDENCE OF TAXATION – point on which

income taxes to be deducted from gross the tax burden finally rests or settles
income, in effect exempting the down.
payment from being further taxed.) Illustration: Value added tax. The
2. The credit method- although the seller is required by law to pay tax, but
income or capital which is taxed in the the burden is actually shifted or passed
state of source is still taxable in the on to the buyer.
state of residence. The tax paid in the
former is credited against the tax, levied KINDS OF SHIFTING
in the latter.(Commissioner of Internal a. Forward shifting- when burden of
Revenue v. S.C Johnson and Son, Inc. et tax is transferred from a factor of
al., G.R No. 127105, June 25, 1999) production through the factors of
distribution until it finally settles on
Exemption the ultimate purchaser or consumer
Credit Method b. Backward shifting- when burden is
Method
Focus is on the Focus is on the tax transferred from consumer through
income or capital factors of distribution to the factors
itself of production
c. Onward shifting- when the tax is
NOTE: Computational illustration shifted 2 or more times either
between a tax deduction and a tax forward or backward
credit:
(2) CAPITALIZATION – a mere increase in
Tax deduction method the value of the property is not income
Gross income but merely an unrealized increase in
Less: allowable deductions capital. No income until after the
including actual sale or other disposition of the
foreign taxes paid property in excess of its original cost.
Income subject to tax EXCEPT: if by reason of appraisal, the
Multiplied by rate cost basis of property increased and the
Income tax due resultant basis is used as the new tax
base for purposes of computing the
Tax credit method allowable depreciation expense, the net
Gross income difference between the original cost
Less: allowable deductions basis and new basis is taxable under the
excluding economic benefit principle. (BIR Ruling
foreign taxes paid No. 029, March 19, 1998)
Income subject to tax
Multiplied by rate (3) TRANSFORMATION – the manufacturer
Income tax due or producer upon whom the tax has been
Less: foreign taxes paid imposed, fearing the loss of his market if
Net income tax due he should add the tax to the price, pays
the tax and endeavors to recoup himself
by improving his process of production,
FORMS OF ESCAPE thereby turning out his units at a lower
FROM TAXATION cost.
(4) TAX AVOIDANCE – the exploitation by

(1) SHIFTING – the process by which the
the taxpayer of legally permissible
tax burden is transferred from the
alternative tax rates or methods of
statutory taxpayer (impact of taxation)
assessing taxable property or income, in
to another (incident of taxation) without
order to avoid or reduce tax liability.
violating the law.
Example: “estate planning”
(conveyance of property to a family
IMPACT OF TAXATION – point on which tax
corporation for shares) (Delpher Trades
is originally imposed.
Corp. vs. IAC, 157 SCRA 349)

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1
(5) TAX EVASION – use by the taxpayer of b. Statutory – those which emanate
illegal or fraudulent means to defeat or from legislation
lessen the payment of the tax. Examples of Statutory Exemptions
Sec. 27, NIRC
FACTORS IN TAX EVASION Sec. 105 Tariff and Customs
1. the end to be achieved, i.e. payment Code
of less than that known by the taxpayer Sec. 234 Local Government Code
to be legally due, or paying no tax when Special Laws, such as the
it is shown that the tax is due; Omnibus Investment Code of 1987
2. an accompanying state of mind (EO 226), Philippine Overseas
which is described as being evil, in bad Shipping Act (RA 1407 as amended),
faith, willful, or deliberate and not Fertilizer Industry Act (RA 3050, as
coincidental; and amended), Mineral Resources
3. a course of action which is unlawful. Development Decree of 1974 (PD 463
as amended), Cottage Industry Act
INDICIA OF FRAUD IN TAX EVASION (RA 318, as amended) and
1. Failure to declare for taxation exemptions in “Housing for Low
purposes true and actual income derived Income Group” (PD 1205, as
from business for 2 consecutive years amended)
(Republic vs Gonzales, L-17962) c. Contractual- agreed to by the
2. Substantial under-declaration of taxing authority in contracts
income tax returns of the taxpayer for 4 lawfully entered into by them
consecutive years coupled with under enabling laws
intentional overstatement of deductions d. Treaty
(CIR vs Reyes, 104 PHIL 1061) e. Licensing Ordinance
2. As to form
TAX TAX (1) Express – expressly granted by
AVOIDANCE EVASION organic or statute law
(2) Implied – when particular
Validity Legal and not Illegal and persons, property or excises are
subject to subject to deemed exempt as they fall
criminal penalty criminal outside the scope of the taxing
penalty
provision itself.
Effect Minimization of Almost 3. As to extent
taxes always (1) Total – absolute immunity
results in (2) Partial – one where a collection
absence of of a part of the tax is dispensed
tax payments with
4. As to object
(6) TAX EXEMPTION – a grant of (1) Personal – granted directly in
immunity to particular persons or favor of certain persons
corporations from the obligation to pay (2) Impersonal – granted directly in
taxes. favor of a certain class of
property
LEGAL BASIS: No law granting any tax
exemption shall be passed without the PRINCIPLES GOVERNING TAX EXEMPTION
concurrence of a majority of all the a. Exemptions from taxation are
members of Congress (ART VI. SEC 28(4) highly disfavored in law and are
OF THE 1987 CONSTITUTION) not presumed.
b. He who claims as exemption must
KINDS OF TAX EXEMPTION be able to justify his claim by the
1. As to source clearest grant of organic or statute
a. Constitutional – immunities from law by words too plain to be
taxation that originate from the mistaken. If ambiguous, there is no
constitution. exemption.

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1
c. He who claims exemption should which then becomes contractual and

prove by convincing proof that he is covered by the non-impairment
is exempted. clause of the Constitution.
d. Taxation is the rule; tax exemption b. Adherence to form- if the tax
is the exception. exemption is granted by the
e. Tax exemption must be strictly Constitution, its revocation may be
construed against the taxpayer and effected through Constitutional
liberally in favor of the taxing amendment only
authority. c. Where the tax exemption grant is in
f. Tax exemptions are not presumed. the form of a special law and not by
g. Constitutional grants of tax a general law even if the terms of
exemption are self-executing. the general act are broad enough to
h. Tax exemptions are personal. include the codes in the general law
unless there is manifest intent to
THE FOLLOWING PARTAKE THE NATURE OF repeal or alter the special law
TAX EXEMPTION (Province of Misamis Oriental vs
1. Deductions for income tax purposes Cagayan Electric Power and Light
2. Claims for refund Co. Inc)
3. Tax amnesty
4. Condonation of unpaid tax liabilities NATURE OF TAX AMNESTY
NOTE: must be strictly construed 1. General or intentional overlooking by
against the taxpayer the state of its authority to impose
penalties on persons otherwise guilty
WHEN EXEMPTIONS ARE CONSTRUED of evasion or violation of a revenue
LIBERALLY IN FAVOR OF GRANTEE or tax law.
1. When the law so provides for such 2. Partakes of an absolute forgiveness of
liberal construction. waiver of the government of its right
2. Exemptions from certain taxes, to collect.
granted under special circumstances 3. To give tax evaders, who wish to
to special classes of persons. relent and are willing to reform a
3. Exemptions in favor of the chance to do so.
government, its political subdivisions
or instrumentalities. RULES ON TAX AMNESTY
4. Exemptions to traditional 1. Tax amnesty
exemptees, such as those in favor of a) like tax exemption, it is never
religious and charitable institutions. favored nor presumed
5. If exemptions refer to the public b) construed strictly against the
property taxpayer (must show complete
compliance with the law)
Q: May a tax exemption be revoked?
A: Yes. It is an act of liberality which 2.Government not estopped from
could be taken back by the government questioning the tax liability even if
unless there are restrictions. Since amnesty tax payments were already
taxation is the rule and exemption received.
therefrom is the exception, the Reason: Erroneous application and
exemption may be withdrawn by the enforcement of the law by public
taxing authority. (Mactan Cebu officers do not block subsequent
International Airport Authority vs. correct application of the statute. The
Marcos, 261 SCRA 667) government is never estopped by
mistakes or errors of its agents.
RESTRICTIONS ON REVOCATION OF TAX Basis: Lifeblood Theory
EXEMPTIONS
a. Non impairment clause. Where the 3.Defense of tax amnesty, like insanity,
exemption was granted to private is a personal defense.
parties based on material Reason: Relates to the circumstances
consideration of a mutual nature, of a particular accused and not the

Cabrera, Jhundee
Guillermo
1
character of the acts charged in the of import entry was merely tentative.”
information. (Sec 1603,TCC)
Tax amnesty Tax exemption c.) Local Government Code

Local Taxes, fees, or charges shall
Immunity from all Immunity from civil be assessed within five (5) years from
criminal, civil and liability only the date they became due. In case of
administrative fraud or intent to evade the payment of
liabilities arising taxes, fees or charges the same may be
from non payment
of taxes
assessed within ten (10) years from
discovery of the fraud or intent to
Applies only to past Prospective evade payment. They shall also be
tax periods, hence application collected either by administrative or
retroactive judicial action within five (5) years
application from date of assessment (Sec. 194. LGC)
DOCTRINE OF IMPRESCRIPTIBILTY TAX ENFORCEMENT AND

As a rule, taxes are imprescriptible ADMINISTRATION
as they are the lifeblood of the
government. However, tax statutes may SOURCES OF TAX LAWS (Key: SPEC2TRA
provide for statute of limitations. BLT)
The rules that have been adopted 1. Statutes
are as follows: 2. Presidential Decrees
a.) National Internal Revenue Code 3. Executive Orders
The statute of limitation for 4. Constitution
assessment of tax if a return is filed is 5. Court Decisions
within three (3) years from the last day 6. Tax Codes
prescribed by law for the filling of the 7. Revenue Regulations
return or if filed after the last day, 8. Administrative Issuances
within three years from date of actual 9. BIR Rulings
filling. If no return is filed or the return 10. Local Tax Ordinance
filed is false or fraudulent, the period to 11. Tax Treaties and Conventions
assess is within ten years from discovery
of the omission, fraud or falsity. REQUISITES OF TAX REGULATIONS
The period to collect tax is within 1. Reasonable
three years from date of assessment. In 2. Within the authority conferred
the case, however, of omission to file or 3. Not contrary to law
if the return filed is false or fraudulent, 4. Must be published
the period to collect is within ten years
from discovery without need of an NOTE: Administrative regulations must
assessment. always be in harmony with the
provisions of the law. In case of
b.) Tariff and customs code discrepancy between the basic law and
It does not express any general the implementing rule or regulation, the
statute of limitation; it provided, former prevails.
however, that ‘’ when articles have
entered and passed free of duty or final NON-RETROACTIVITY OF BIR RULINGS
adjustment of duties made, with General Rule: Rulings are not
subsequent delivery, such entry and retroactive if they are prejudicial to the
passage free of duty or settlement of taxpayer. (Sec. 246, NIRC)
duties will, after the expiration of one Exceptions:
(1) year, from the date of the final 1. Where the taxpayer deliberately
payment of duties, in the absence of misstates or omits material facts
fraud or protest, be final and conclusive from his return or any document
upon all parties, unless the liquidation required of him by the BIR.

Cabrera, Jhundee
Guillermo
1
2. Where the facts subsequently BIR shall be under the supervision

gathered by the BIR is materially and control of the Dept. of Finance (Sec.
different from the facts on which 2, NIRC)
the ruling is based.
3. Where the taxpayer acted in bad POWERS AND DUTIES OF THE BIR
faith. Assessment and collection of all
national internal revenue taxes, fees,
PRINCIPLE OF LEGISLATIVE APPROVAL OF AN and charges
ADMINISTRATIVE INTERPRETATION THROUGH 1. Enforcement of all forfeitures,
REENACTMENT penalties, and fines connected
Where a statute is susceptible of the therewith
meaning placed upon it by a ruling of 2. Execution of judgments in all cases
the government agency charged with its decided in its favor by the Court of
enforcement and the legislature Tax Appeals (CTA) and the ordinary
thereafter reenacts the provision courts
without substantial change, such action 3. Give effect to and administer the
is to some extent confirmatory that the supervisory and police powers
ruling carries out the legislative conferred to it by the Code or other
purpose. laws
RULE OF NO ESTOPPEL AGAINST THE ASSESSMENT – a finding by the taxing

GOVERNMENT authority that the taxpayer has not paid
General Rule: The Government is not the correct taxes. It is also a written
estopped by the mistakes or errors of its notice to a taxpayer to the effect that
agents; erroneous application and the amount stated therein is due as a
enforcement of law by public officers do tax and containing a demand for the
not bar the subsequent correct payment thereof.
application of statutes. (E. Rodriguez, General rule: Taxes are self-assessing
Inc. vs. Collector, L-23041, July 31, and thus, do not require the issuance of
1969) an assessment notice in order to
Exception: In the interest of justice and establish the tax liability of a taxpayer.
fair play, as where injustice will result
Exceptions:
to the taxpayer. (see CIR vs. CA, GR No.
117982, Feb. 6, 1997; CIR vs. CA, GR No. 1. Tax period of a taxpayer is
107135, Feb. 3, 1999) terminated [Sec. 6(D), NIRC]
2. Deficiency tax liability arising from a
AGENCIES INVOLVED IN TAX ADMINISTRATION tax audit conducted by the BIR [Sec.
1. Bureau of Internal Revenue 56(B), NIRC]
– internal revenue taxes 3. Tax lien [Sec. 219, NIRC]
Agents of the CIR 4. Dissolving corporation [Sec. 52(c),
a. Commissioner of Customs with NIRC]
respect to taxes on imported goods
b. head of the appropriate SIGNIFICANCE OF ASSESSMENT
government office with respect to a. In the proper pursuit of judicial and
energy tax extrajudicial remedies to enforce
c. banks duly accredited by the CIR taxpayer liabilities and certain
(Sec. 12, 1997 NIRC) matters that relate to it, such as the
2. Bureau of Customs – customs law imposition of surcharges and
enforcement interests,
3. Provincial, city and municipal b. In the application of statute of
assessors and treasurers – local and limitations,
real property taxes c. In the establishment of tax liens,
and
ORGANIZATION AND FUNCTION OF THE d. In estimating the revenues that may
BUREAU OF INTERNAL REVENUE (BIR) be collected by government in the
coming year. (Mamalateo,

Cabrera, Jhundee
Guillermo
1
Victorino. Reviewer on Taxation,

2004)
KINDS 4. The authority of the Commissioner

1. SELF- ASSESSMENT- one in which the to assess taxes may be delegated,
tax is assessed by the taxpayer except the power to make final
himself assessments.
2. DEFICIENCY ASSESSMENT- made by the 5. It must be directed to the right
tax assessor himself whereby the party.
correct amount of the tax is
determined after an examination or Authority of a Revenue Officer -
investigation is conducted. The pursuant to a Letter of Authority issued
liability is determined and assessed by the Regional Director
for the following reason: a. To examine taxpayers within
a. amount ascertained exceeds that the jurisdiction of the district in
which is shown as the tax by the order to collect the correct
taxpayer in his return amount of tax;
b. no amount of tax is shown in the b. To recommend the assessment of
return any deficiency tax due in the
c. taxpayer did not file any return same manner that the said acts
at all could have been performed by the
3. ILLEGAL AND VOID ASSESSMENT- Revenue Regional Director.
assessment wherein tax assessor has General Rule: income tax returns are
no power to assess at all confidential.
4. ERRONEOUS ASSESSMENT- assessor has Exception: inquiry into income tax
power to assess but errs in the returns may be authorized-
exercise thereof
1. inspection is authorized upon
BURDEN OF PROOF IN PRE-ASSESSMENT written order of the President of the
PROCEEDINGS Philippines;
There is a presumption of 2. inspection is authorized under
correctness and good faith on the part of Finance Regulations No. 33 of the
the CIR; thus, the burden lies on the Secretary of Finance;
taxpayer. Otherwise, the finding of the 3. production of the tax return is
CIR will be conclusive and he will assess material evidence in a criminal case
the taxpayer. The same is true even if wherein the government is
the CIR is wrong, if the taxpayer does interested in the result; or
not controvert. (Cagayan Robina Sugar 4. production or inspection thereof is
Milling Co. vs. Court of Appeals, GR. authorized by the taxpayer himself.
No. 122451, October 12, 2000)
Reasons: a. lifeblood theory Networth Method- inventory method of
b. presumption of regularity in income tax verification.
performance of public
functions  Applies the accounting principle:
NOTE: Assessments by the BIR must have assets – liabilities = networth
on its face the law and facts upon which Condition for its use:
the presumption is made. 1. taxpayer’s books do not clearly
reflect his income or the taxpayer
PRINCIPLES GOVERNING TAX ASSESSMENTS has no books, or if he has books, he
1. Assessments are prima facie refuses to produce them;
presumed correct and made in good 2. there is evidence of possible source
faith. or sources of income to account for
2. It should be based on actual facts. increases in networth;
3. It is discretionary on the part of the 3. there is a fixed starting point or
Commissioner. opening networth; and

Cabrera, Jhundee
Guillermo
1
4. there must be proper adjustments to ii. any officer or employee of such

conform with the income tax laws. person or
iii. any person having in his
possession/custody/care
POWERS AND DUTIES OF THE COMMISSIONER -- the books of accounts,
I. SECTION 4 (power to interpret tax law -- accounting records of entries
and decide tax cases) relating to the business of the
person liable for tax or any other
1. Interpret provisions of this Code and person
other tax laws subject to review of the -- to produce such books,
Secretary of Finance papers, records, and other data
(Quasi-legislative) and to give testimony
2. Decide: (Quasi-judicial) 4. to take the Testimony of the person
a) disputed assessment concerned, under oath as may be
b) refunds of internal relevant to the inquiry
revenue taxes, fees and charges 5. to cause revenue officers and
c) penalties imposed in employees to make a Canvass of any
relation thereto revenue district or region
d) other matters arising
from this Code or other laws or Nothing in Section 5 shall be
portions thereof administered by construed as granting the Commissioner
the BIR subject to the exclusive the authority to inquire into bank
appellate jurisdiction of the CTA deposits other than as provided for
(Sec. 4) under sec. 6 (F) of the Code.
II. SECTION 5 (power to obtain III. SECTION 6 (power to make

information, summon, examine and take assessments, prescribe additional
testimony of persons) requirements for tax administration
and enforcement)
3. For the Commissioner to ascertain:
(a) correctness of any return or in 4. Examination of returns and
making a return where none has determination of tax due
been made A. After a return has been filed the
(b) liability of any person for any Commissioner or his
internal revenue tax or in representative may authorize
correcting such liability i.
(c) tax compliance the Examination of any taxpayer
and
The Commissioner is authorized: ii.
1. to Examine any relevant Book, paper, the Assessment of the correct
record or other data amount of tax;
2. to Obtain any information (costs, B. F
volume of production, receipts, sales, ailure to file a return shall not
gross income, etc), on a regular basis prevent the commissioner from
from: authorizing the examination of
i. any person other than the person any taxpayer;
under investigation or * Any tax or deficiency tax so
ii. any office or officer of the assessed shall be paid upon
national/local government, gov’t notice and demand from the
agencies and instrumentalities Commissioner or his
(Bangko Sentral, gov’t owned and representative
controlled corporations) (e.g. LTO, * Any return, statement or
Register of Deeds) declaration filed in any
3. to Summon authorized office shall not be
i. the person liable for tax or withdrawn; but within three
required to file a return or years from date of filing, the

Cabrera, Jhundee
Guillermo
1
same may be modified, Receipts or Commercial

changed or amended; Invoices) or
provided that no notice for ii. When the books of accounts
audit or investigation of such or records do not correctly
return, has in the meantime, reflect the declarations made
been actually served upon the or required to be made in a
taxpayer. return,
Such minimum amount shall
5.Failure to submit required returns and be considered correct.
other documents 7. Terminate taxable period
If a person Commissioner shall declare the tax
i. fails to file a required return or period of a taxpayer Terminated and
report at the time prescribed or send notice to the taxpayer of such
ii. willfully or otherwise files a decision with a request for immediate
false or fraudulent return, payment of the tax when it has come to
The Commissioner shall Make or the knowledge of the Commissioner:
Amend the return from a) that a taxpayer is retiring from
i. his own knowledge or business subject to tax or
ii. from such b) is intending to leave the Phils.
information as he can obtain or
through testimony or otherwise c) to remove his property
which shall be prima facie therefrom or
correct and sufficient for all d) to hide or conceal his property
legal purposes or
e) is performing any act tending to
6.Inventory-taking, Surveillance, obstruct the proceedings for
Presumptive Gross Sales the collection of tax
A. Commissioner may, at any time
during the taxable year 8. Prescribe Real Property Values
(a) order the inventory taking of The Commissioner is authorized to:
goods of any taxpayer or a. Divide the Phils. into different
(b) may place the business zones or areas and
operations of any person b. Determine the fair market value
(natural/juridical) under of real properties located in each
observation or Surveillance, zone or area
if there is reason to
believe that such is not For tax purposes, the value of
declaring his correct income, the property shall be whichever is
sales or receipts for tax higher of:
purposes. a) Fair market value as
The findings may be used determined by the
as basis for assessing the Commissioner; or
taxes and shall be deemed b) Fair market value as shown in
prima facie correct. the schedule of values of the
provincial and city assessors.
B. Commissioner may prescribe a
Minimum amount of gross 9. Authority to Inquire into Bank
receipts, sales and taxable base Deposit
(taking into account the sales and Notwithstanding R.A. 1405 (Bank
income of other persons engaged Secrecy Law) the Commissioner is
in similar business): authorized to inquire into the Bank
i. When a person has failed to deposits of:
issue receipts as required by (a) a decedent to determine his gross
sec.113 (Invoice requirements estate
for VAT-registered persons) (b) a taxpayer who has filed an
and Sec. 237 (Issuance of application to compromise

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payment of tax liability by reason modify any existing rule of the

of financial incapacity BIR
c) power to Compromise or Abate
The taxpayer’s application for any tax liability
compromise shall not be considered
unless he waives in writing his
privilege under RA 1405 and other
general or special laws. Such waiver
shall authorize the Commissioner to
inquire into his bank deposits.
10. Authority to Register tax agents provided however that the
(a) The Commissioner shall accredit regional evaluation board may
and Register, individuals and compromise:
general professional partnerships 1. assessments issued by
and their rep. who prepare and regional offices involving
file tax returns and other papers deficiency taxes of P500,000
or who appear before the BIR or less and
(b) The Commissioner shall create 2. minor criminal violations as
national and regional may be determined by the
accreditation boards. rules and regulations
3. discovered by regional and
Those who are denied district officials
accreditation may appeal the same
to the Sec. Of Finance who shall Regional Evaluation Board is
rule on the appeal within 60 days composed of:
from receipt of such appeal. Failure i. Regional Director as Chairman
to do so within the prescribed ii. Asst. Regional Director
period shall be deemed as approval iii. Heads of the Legal, Assessment
for accreditation. and Collection Div.
iv. Revenue District Officer having
11. Authority to Prescribe Additional jurisdiction over the taxpayer
Requirements
The Commissioner may prescribe d) power to Assign or reassign
the manner of compliance with any internal revenue officers to
documentary or procedural establishments where
Requirement for the submission or articles subject to excise tax
preparation of financial statements are kept.
accompanying tax returns.
V. SECTIONS 8, 14, 15, 16, 17 (Other
IV. SECTION 7 (Authority to Delegate Powers)
Power ) 13. Duty to ensure the provision and
12. The Commissioner may delegate the distribution of forms, receipts,
powers vested in him to certificates, and appliances, and
- subordinate officials with rank the acknowledgment of payment of
equivalent to Division Chief or taxes (Sec. 8)
higher, subject to
limitations/restrictions imposed 14. Authority to administer oaths and to
under the rules and regulations take testimony (Sec. 14)
EXCEPT, (the following powers
shall NOT be delegated) 15. Authority to make arrests and
a) power to Recommend the seizures (Sec. 15)
promulgation of rules and
regulations by the Sec. of 16. Authority to employ, assign or
Finance reassign internal revenue officers
b) power to Issue rulings of first involved in excise tax functions to
impression or to Reverse, revoke establishments where articles

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subject to excise tax are produced – tax on income,

or kept (Sec. 16) whether gross or net. (27 Am. Jur.
308)
17. Authority to assign or reassign
internal revenue officers and INCOME – all wealth, which flows into the
employees of the BIR to other or taxpayer other than as a mere
special duties connected with the return of capital.
enforcement or administration of
the revenue laws (Sec. 17) CAPITAL – resource of person, which
can be used in producing goods
ARE LEGAL OFFICERS OF THE BIR AUTHORIZED
TO INSTITUTE APPEAL PROCEEDINGS WITHOUT
and services.
THE PARTICIPATION OF THE SOLICITOR Income Capital
GENERAL?
NO. The institution or All wealth, which Fund or property
flows into the which can be used
commencement before a proper court of
taxpayer other than in producing goods
civil and criminal actions and as a mere return of or services
proceedings arising under the Tax capital.
Reform Act which shall be conducted by
legal officers of the BIR is not in dispute. Flow of Wealth Fund or property
An appeal from such court, however, is
not a matter of right. It is still the Source of wealth Wealth
Solicitor General who has the primary
responsibility to appear for the REQUISITES FOR INCOME TO BE TAXABLE
government in appellate proceedings. 1. There must be a gain or profit.
(Commissioner vs. La Suerte Cigar and 2. The gain must be realized or
Cigarette Factory, GR No. 144942, July received.
4, 2002) 3. The gain must not be excluded by
law or treaty from taxation.
SOURCES OF REVENUE
The following taxes, fees and TESTS ON TAXABILITY OF INCOME
charges are deemed to be national 1. Flow of Wealth Test – The
internal revenue taxes. (Sec. 21, NIRC) determining factor for the
1. Income tax imposition of income tax is
2. Estate and donor's taxes whether any gain was derived
3. Value-added tax from the transaction.
4. Other percentage taxes 1. Realization Test - unless the
5. Excise taxes income is deemed "realized,"
6. Documentary stamp taxes there is no taxable income.
7. Such other taxes as are or hereafter 2. Economic-Benefit Principle
may be imposed and collected by Test
the Bureau of Internal Revenue. -flow of wealth realized is
taxable only to the extent that
the taxpayer is economically
II. NATIONAL TAXATION benefited.
A. INCOME TAXATION CRITERIA IN IMPOSING INCOME TAX

1. Citizenship Principle – A citizen of
DEFINITIONS the Philippines is subject to Philippine
INCOME TAX – tax on all yearly profits income tax (a.) on his worldwide
arising from property, possessions, income, if he resides in the Philippines,
trade or business, or as a tax on a or (b.) only on his income from sources
person’s income, emoluments, within the Philippines, if he qualifies as
profits and the like (61 CJS 1559) nonresident citizen.
2. Residence Principle – resident alien
is liable to pay income tax on his income

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from sources within the Philippines but or for employment on a

exempt from tax on his income from permanent basis;
sources outside the Philippines. c. who works and derives income
3. Source Principle – An alien is subject from abroad and whose
to Philippine income tax because he employment thereat requires
derives income from sources within the him to be physically present
Philippines. Thus, a nonresident alien is abroad most of the time during
liable to pay Philippine income tax on the taxable year;
his income from sources within the d. who is previously considered as a
Philippines such as dividend, interest, non-resident and who arrives in
rent, or royalty, despite the fact that he the Philippines at anytime during
has not set foot in the Philippines. the taxable year to reside
CLASSIFICATION OF TAXPAYERS thereat permanently shall be
considered non-resident for the
Individuals taxable year in which he arrives
a. citizens in the Philippines with respect to
(1) resident citizens (RC) his income derived from sources
(2) non-resident citizens (NRC) abroad until the date of his
b. aliens arrival [Sec.22 (E), NIRC]
(1) resident aliens (RA)
(2) non-resident aliens (NRA) NOTE: An overseas contract worker
(a) engaged in trade or (OCW) is taxable only on income
business within the derived from sources within the
Phils. (NRAETB) Philippines. [Sec. 23 (B)(C)]
(b) not engaged in trade or A seaman is considered as an
business within the OCW provided the following
Philippines (NRANETB) requirements are met:
1. receives compensation for services
Corporations rendered abroad as a member of
a. Domestic (DC) the complement of a vessel; and
b. Foreign 2. such vessel is engaged exclusively
(1) resident foreign corporation in international trade.
(RFC)
(2) non-resident foreign Based on the above provisions,
corporation (NRFC) there are three (3) types of
Estates nonresident citizens, namely: (1)
Trusts immigrants; (2) employees of a foreign
Partnerships entity on a permanent basis; and
(3) overseas contract workers.
Immigrants and employees of a foreign
A. INDIVIDUALS entity on a permanent basis are
treated as nonresident citizens from
WHO ARE TAXABLE? the time they depart from the
1. Resident Citizen Philippines. However, overseas
2. Non-resident Citizen contract workers must be physically
A non-resident citizen means, a present abroad most of the time
Filipino citizen: during the calendar year to qualify as
a. who establishes to the nonresident citizens.
satisfaction of the Commissioner 3. Resident alien - means an individual
the fact of his physical presence whose residence is within the
abroad with a definite intention Philippines and who is not a citizen
to reside therein; thereof. [Sec.22 (F, NIRC)]
b. who leaves the Philippines 4. Non-resident alien engaged in
during the taxable year to reside trade or business within the
abroad, either as an immigrant Philippines. (NRAETB)

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A non-resident alien means an

individual whose residence is not Excludes:
within the Philippines and who is not 1. General professional
a citizen thereof. [Sec.22 (G)] partnerships;
The term trade or business 2. Joint venture or consortium
includes the performance of the formed for the purpose of
functions of a public office. [Sec. 22 undertaking construction projects or
(S)] engaging in petroleum, coal,
The term trade, business or geothermal and other energy
profession shall not include operations pursuant to an operating
performance of services by the or consortium agreement under a
taxpayer as an employee. [Sec. 22 service contract with the
(CC)] Government.
A non-resident alien individual
who shall come to the Philippines CORPORATIONS EXEMPT FROM INCOME
and stay therein for an aggregate TAXATION (FOR INCOME REALIZED AS SUCH)
period of more than 180 days during UNDER NIRC
any calendar year shall be deemed a 1. Those enumerated under Sec.
non-resident alien doing business in 30.
the Philippines Section 22(G) Exempt corporations are subject
notwithstanding [Sec. 25(A)(1)] to income tax on their income from
5. Non-resident alien not engaged in any of their properties, real or
trade or business within the personal, or from any other activities
Philippines. (NRANETB) conducted for profit, regardless of
the disposition made of such income.
ONLY RESIDENT CITIZENS are taxable 2. With respect to GOCCs, the
for income derived from sources within general rule is that these
and without the Philippines. All other corporations are taxable as any
individual income taxpayers are taxable other corporation except:
only for income derived from sources a. GSIS
within the Philippines. b. SSS
c. PHIC
 Tax Rates: Please refer to Annex A. d. PCSO
e. PAGCOR [Sec. 27 (C)]
B. CORPORATIONS 3. Regional or Area Headquarters
under Sec. 22 (DD) – not subject to
WHO ARE TAXABLE? income tax
1. Domestic Corporation – created or
organized in the Phils. or under its Regional operating headquarters
law [Sec. 22(C), NIRC] under Sec. 22(EE) shall pay a tax of
2. Resident Foreign Corporation – 10% of their taxable income.
engaged in trade or business within
the Philippines [Sec. 22(H), NIRC] ONLY DOMESTIC CORPORATIONS are
3. Non-resident Foreign Corporation – taxable for income derived from sources
not engaged in trade or business within and without the Philippines. All
within the Philippines [Sec. 22(I), other corporate income taxpayers are
NIRC] taxable only for income derived from
A Corporation Includes: sources within the Philippines.
1. Partnerships, no matter how
created or organized;  Tax Rates: Please refer to Annex B.
2. Joint-stock companies;
3. Joint accounts (cuentas en C. ESTATES AND TRUSTS
participacion)
4. Associations; or ESTATE – refers to the mass of properties
5. Insurance companies [Sec. 22(B), left by a deceased person.
NIRC].

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RULES ON TAXABILITY OF ESTATE estate becomes liable for the

When a person who owns property payment of corporate income
dies, the following taxes are payable tax. (Evangelista vs. Collector,
under the provisions of the income tax GR No. L-9996, October 15,
law: 1957; Oña vs. Commissioner, GR
1. Income tax for individual under Sec. No. L-19342, May 25, 1972)
24 and 25 (to cover the period 2. If the heirs, without contributing
beginning January to the time of money, property or industry to
death); improve the estate, simply
2. Estate income tax under Sec. 60 if divide the fruits thereof
the estate is under administration or between/among themselves, a
judicial settlement. co-ownership is created, and
individual income tax is imposed
on the income received by each
of the heirs, payable in their
ESTATES UNDER JUDICIAL SETTLEMENT separate and individual
A. During the Pendency of the capacity. (Pascual vs.
Settlement Commissioner, GR No. L-78133,
General Rule: An estate under October 18, 1988; Obillos vs.
judicial settlement is subject to Commissioner, GR No. L-68118,
income tax in the same manner as October 29, 1985)
individuals. Its status is the same as
the status of the decedent prior to ESTATES NOT UNDER JUDICIAL SETTLEMENT
his death. Pending the extrajudicial
Exceptions: settlement, either of the following
1. The entitlement to personal situations may arise:
exemption is limited only to 1. If the heirs contribute money,
P20,000. property, or industry to the estate
2. No additional exemption is with the intention of dividing the
allowed. profits between/among themselves,
3. The distribution to the heirs an unregistered partnership is
during the taxable year of estate created and the estate becomes
income is deductible from the liable for the payment of corporate
taxable income of the estate. income tax; or
Such distributed income shall 2. If the heirs, without contributing
form part of the respective money, property or industry to the
heirs’ taxable income. estate, simply divide the fruits
Where no such thereof between/among themselves,
distribution to the heirs is made a co-ownership is created and
during the taxable year that the income tax is imposed on the income
income is earned, and such received by each of the heirs,
income is subjected to income payable in their separate and
tax payment by the estate, the individual capacity.
subsequent distribution thereof
is no longer taxable on the part TRUST – A right to the property, whether
of the recipient. real or personal, held by one person for
the benefit of another.
B. TERMINATION OF THE JUDICIAL
SETTLEMENT (WHERE THE HEIRS STILL WHEN TRUSTS ARE TAXABLE ENTITIES
DO NOT DIVIDE THE PROPERTY) 1. A trust, the income of which is to be
1. If the heirs contribute to the accumulated
estate money, property, or 2. A trust in which the fiduciary may, at
industry with intention to divide his discretion, either distribute or
the profits between/among accumulate the income.
themselves, an unregistered
partnership is created and the

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RULES ON TAXABILITY OF THE INCOME OF A benefit of some or all of his

TRUST employees;
1. The income of the trust for the 2. contributions are made to the trust
taxable year which is to be by such employer, or such
distributed to the beneficiaries – employees, or both;
filing and payment of tax lie on the 3. such contributions are made for the
beneficiaries. purpose of distributing to such
2. The income of the trust which is to employees both the earnings and
be accumulated or held for future principal of the fund accumulated by
distribution whether consisting of the trust, and
ordinary income or gain from the 4. that the trust instrument makes it
sale of assets included in the impossible for any part of the trust
"corpus" of the estate – filing of corpus or income to be used for, or
return and payment of tax become diverted to, purposes other than the
the burden of the trustee or exclusive benefit of such employees.
fiduciary. (Sec. 60B, NIRC)
Exceptions:
a. In the case of a revocable trust, Tax exemption is likewise to be
the income of the trust will be enjoyed by the income of the pension
returned by the grantor. trust; otherwise, taxation of those
b. In a trust where the income is earnings would result in a diminution of
held for the benefit of the accumulated income and reduce
grantor, the income of the trust whatever the trust beneficiaries would
becomes income to the grantor. receive out of the trust fund.
c. In the case of trust (Commissioner vs. Court of Appeals,
administered in a foreign Court of Tax Appeals and GCL
country, the income of the trust; Retirement Plans, GR No. 95022, March
undiminished by any amount 23, 1992)
distributed to the beneficiaries
shall be taxed to the trustee. D. PARTNERSHIPS
IRREVOCABLE TRUSTS (irrevocable both as KINDS OF PARTNERSHIP FOR TAX PURPOSES
to corpus and as to income) – UNDER THE NIRC
1. General Professional Partnerships
Trust itself, through the trustee or (GPP) - formed by persons for:
fiduciary, is liable for the payment of a. the sole purpose of exercising a
income tax. Taxed exactly in the same common profession and
way as estates under judicial settlement b. no part of the income of which is
and its status as an individual is that of derived from engaging in any
the trustor. It is entitled to the trade or business. [Sec. 22(B),
minimum personal exemption (P20,000) NIRC].
and distribution of trust income during 2. Taxable or Business Partnership –
the taxable year to the beneficiaries is All other partnerships except
deductible from the trust’s taxable general professional partnerships no
income. matter, how created or organized.
It includes unregistered joint
REVOCABLE TRUSTS – the trustor, not the ventures and business partnerships.
trust itself, is subject to the payment of However, joint ventures are not
income tax on the trust income. taxables as corporations when it is;
(a) undertaking construction projects
EXEMPTION OF EMPLOYEES’ TRUST (b) engaged in petroleum, coal and
Provided: other energy operation under a
1. the employee’s trust must be part of service contract with the
a pension, stock bonus or profit government
sharing plan of the employer for the General co-partnerships (GCP)
are partnerships, which are by law

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assimilated to be within the context net income of the partnership.

of, and so legally contemplated as, (Sec. 26, NIRC) [The same share
corporations. The partnership itself shall be subject to creditable
is subject to corporate taxation. The withholding tax of 10%.] They
individual partners are considered are liable in their separate and
stockholders and, therefore, profits individual capacity.
distributed to them by the
partnership are taxable as dividends. b. Share of a partner in the loss
The taxable income for a taxable of a general professional
year, after deducting the corporate partnership may be taken by the
income tax imposed therein, shall be individual partner in his return
deemed to have been actually or of income.
constructively received by the
partners in the same taxable year
and shall be taxed to them in their c. Each partner in a general
individual capacity whether actually professional partnership shall,
distributed or not. [Sec. 73(D), report as gross income his
NIRC] distributed share in the net
income of the GPP, based on his
LIABILITY OF A PARTNERSHIP agreed ratio, whether he, avails
1. General Professional Partnership .- of itemized or optional standard
They are not subject to income tax, deduction.
but are required to file returns of
their income for the purpose of d. Payments made to a partner of
furnishing information as to the a GPP for services rendered shall
share of each partner in the net gain be considered as ordinary
or profit, which each partner shall business income subject to Sec.
include in his individual return. The 24A (Effective January 1, 1982)
partnership shall act as the
withholding agent. 2. Share of a partner in Taxable or
The net income (income for Business partnership
distribution) shall be computed in a. Share of a partner in the net
the same manner as a corporation. income of a taxable or business
Date of filing of the return is April partnership (dividend) shall be
15 of each year. subject to a final tax as follows.
2. Taxable or Business Partnership -  Resident Citizen, Non-
The income tax of this type of resident Citizen and
Partnership is computed and taxed Resident Alien (2000 and
like that of a corporation. This kind onward) – 10% (Sec. 24B2)
of partnership, like a regular  Non-resident Alien engaged
corporation, is also required to file a in trade or business – 20%
quarterly corporate income tax (Sec. 25 A2)
return. Filing and payment of  Non-resident alien not
quarterly return is within 60 days engaged in trade or business
after the end of each quarter while – 25% (Sec. 25B)
the annual return is on or before b. Share of a partner in the loss
April 15 of the following year. of a taxable or business
partnership maybe taken by the
LIABILITY OF A PARTNER individual partner in his return
Rules: of income.
1. Share of a partner in general c. Payments made to a partner of
professional Partnership a business or taxable partnership
a. Each partner shall report as for services rendered shall be
gross income (business income) considered as compensation
his distributed share actually or income subject to sec. 24A.
constructively received in the

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KINDS OF INCOME TAXES  See Annex D for detailed discussion

UNDER THE NIRC of items.
KINDS OF DIVIDENDS
1. Net Income Tax 1. Cash and Property Dividends
2. Optional Corporate Income tax Individual Taxpayer
3. Minimum Corporate Income Tax a. From Domestic Corporations
4. Improperly Accumulated Earnings
 RC, NRC, RA – 10% (Sec.
Tax
24A)
5. Preferential Rates or Special Rates
 NRAETB – 20% (Sec. 25A2)
of Income Tax
 NRANETB – 25% on gross
6. Gross Income Tax
income (Sec. 25B)
7. Final Income Tax
b. From Foreign Corporations
8. Fringe Benefits Tax
9. Capital Gains Tax  RC, NRC, RA, NRAETB – 5-
32% (Sec. 24, 25A1)
(1) NET INCOME TAX
 NRANETB – 25% on gross
income (Sec. 25B)
DEFINITION: Means gross income less
deductions and/or personal and
Corporate Taxpayer
additional exemptions (Sec. 31, NIRC)
a. Foreign to Domestic Corp. – 32%
(Sec. 32A)
NET INCOME TAX FORMULA
b. Domestic to Domestic Corp. –
Entire Income
Exempt; intercorporate
Less: Exclusions and Income subject
dividends (Sec. 27D)
to Final Tax (e.g. Passive
c. Domestic to Foreign Corp. -
Income)
 Resident Foreign Corp. –
Gross Income
Exempt (Sec. 28 [A] 7d)
Less: Deductions (and/or additional
exemptions, if applicable)  Nonresident Foreign Corp. –
Net Taxable Income 15% subject to the condition
Multiply by: Tax Rate (%) stated in Sec. 28 [B] 5.
Otherwise, it shall be taxed
Net Income Tax Due at 32%. (See Commissioner
Less: Tax Credit, if any vs. Procter and Gamble, GR
Tax Still due, if any No. 66838, December 2,
1991)
GROSS INCOME
2. Stock Dividends
DEFINITION: Means all income derived General rule: Not subject to tax
from whatever source, including but not because it does not constitute
limited to the following (Sec. 32) income; it represents transfer of
a. Compensation; surplus to capital account. (Sec.
b. Gross income from profession, trade 73B, 1997 NIRC)
or business; Exceptions:
c. Gains form dealings in property; a. Sec. 73B, 1997 NIRC
d. Interests; (1) there is redemption or
e. Rents; cancellation
f. Royalties; (2) the transaction involves
g. Dividends; stock dividends, and
h. Annuities; (3) the “time and manner” of
i. Prizes and winnings; the transaction makes it
j. Pensions; “essentially equivalent to a
k. Partner’s share in the net income of distribution of taxable
the general professional partnership dividends”. (see
Commissioner vs. Court of
Appeals, Court of Tax

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Appeals & ANSCOR, GR No. premiums or considerations paid

108576, Jan. 30, 1999) (whether or not paid during the
b. the recipient is other than the taxable year), then the excess shall
shareholder (Bachrach vs. be included in the gross income.
Seifert, GR No. L-2659, October However, in the case of a transfer for
12, 1950) a valuable consideration, by
c. change in the stockholder’s assignment or otherwise, of a life
equity results by virtue of the insurance, endowment or annuity
stock dividend issuance. contract, or any interest therein,
only the actual value of such
3. Liquidating Dividends – When a consideration and the amount of the
corporation distributes all of its premiums and other sums
assets in complete liquidation or subsequently paid by the transferee
dissolution, the gain realized or are exempt from taxation. No loss is
loss sustained by the realized on surrender of a life
stockholder, whether individual insurance policy for its surrender
or corporation, is taxable value.
income or deductible loss, as the
case may be. (Sec. 73A) 3. Gift, bequest or devise
A liquidating dividend is not Gifts, bequests, and devises
a dividend income. The (which are subject to estate or gift
transaction is considered a sale taxes) are excluded, but not the
or exchange of property income from such property. If the
between the corporation and the amount received is on account of
stockholder. services rendered, whether
constituting a demandable debt or
EXCLUSIONS FROM GROSS INCOME not, or the use of the opportunity to
NOTE: Under the 1997 Tax Code, the use of capital, the receipt is income
term “exclusions” refers to items that (Pirovano vs. Commissioner, 14
are not included in the determination of SCRA 832)
gross income either because:
(a) they represent return of capital 4. Compensation for personal injuries
or are not income, gain or profit; or or sickness, whether by suit or
(b) they are subject to another kind agreement
of internal revenue tax; or NOTE: The phrase “personal
(c) they are income, gain or profit injuries” should be given a
that are expressly exempt form income restrictive meaning to refer only to
tax under the constitution, tax treaty, physical injuries. The theory for this
Tax Code, or a general or special law. is that recoupment on account of
such losses is not income, since it is
1. Proceeds of life insurance paid by not derived from capital, from labor
reason of the death of the insured to or from both combined. And the
his estate or to any beneficiary fact that the payment of
(individual, partnership, or compensation for such loss was
corporation, but not a transferee for voluntary does not change its
a valuable consideration), directly or exempt status. It was in fact
in trust. compensation for a loss, which
NOTE: if the proceeds are impaired petitioner’s capital.
retained by the insurer, the interest
thereon is taxable; 5. Income exempt under Treaty;
2. Return of insurance premium; 6. Retirement benefits, pension,

NOTE: if such amounts (when added gratuities, etc.
to amounts already received before a. those derived under R.A. 7641
the taxable year under such (pertains to private firms
contracts) exceed the aggregate without retirement trust fund);

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b. those received by officials and exercise of any governmental

employees of private employers function;
in accordance with a reasonable c. Prizes and awards made
private benefit plan; primarily in recognition of
Requisites: religious, charitable, scientific,
(1) in the service of the same educational, artistic, literary, or
employer for at least 10 civic achievement
years; Requisites:
(2) at least 50 years old; (1) recipient was selected
(3) must be availed of only once without any action on his
(4) plan approved by the BIR part; and
(R.R.2-98); (2) recipient is not required to
c. separation pay because of render substantial future
death, sickness, or other services.
physical disability or for any d. Prizes and awards granted to
cause beyond the control of the athletes in sports competitions
official or employee (e.g. and sanctioned by their national
retrenchment, redundancy or sports association ;
cessation of business); e. 13th month pay and other
“for any cause beyond the benefits up to P30,000.00;
control of said official or f. GSIS,SSS, Medicare and union
employee” – connotes dues of individuals;
involuntariness on the part of g. Gains derived from debt
the official or employee; securities with a maturity of
separation must not be asked or more than 5 years;
initiated by the official or h. Gains from redemption of shares
employee. in Mutual Fund.
d. social security benefits,
retirement gratuities, pensions EXCLUSIONS VS. DEDUCTIONS
and other similar benefits
received by citizens and aliens Exclusions Deductions
who come to reside permanently [Sec. 32(B)] [Sec. 34]
here from foreign sources
private or public; Refer to flow of Refer to the
e. benefits due to residents under wealth which are not amounts which the
the laws of the U.S. treated as part of law allows to be
administered by the U.S. gross income subtracted from
Veterans Administration because: gross income in
(1) exempted by the order to arrive at
f. SSS benefits; and
fundamental law; (2) net income
g. GSIS benefits. exempted by statute;
(3) do not come
7. Miscellaneous items within the definition
a. Passive income derived in the of income
Philippines by:
(1) Foreign governments; Pertain to the Pertain to the
(2) Financing institutions computation of gross computation of the
owned, controlled or income net income
enjoying refinancing from
Something earned or Something spent or
foreign governments received by the paid in earning of
(3) International or regional taxpayer which do gross income
financial institutions not form part of gross
established by foreign income
governments
b. Income derived from any
public utility or from the DEDUCTIONS

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1
(2) personal additional

DEFINITION: Items or amounts which the exemptions
law allows to be deducted from gross b. gross income from business or
income in order to arrive at the taxable practice of profession
income. (1) Optional Standard Deduction
(OSD)
BASIC PRINCIPLES GOVERNING DEDUCTIONS (2) Itemized deductions
a. The taxpayer seeking a deduction (3) premium payments on health
must point to some specific and/or hospitalization
provisions of the statute authorizing insurance
the deduction; and (4) personal additional
b. He must be able to prove that he is exemptions
entitled to the deduction authorized 2. Corporations
or allowed. (Atlas Consolidated  Itemized Deductions
Mining & Dev. Corp. vs.
Commissioner, GR No. L-26911,
January 21, 1981) KINDS OF DEDUCTIONS
c. Any amount paid or payable which is a. Optional standard deductions (OSD)
otherwise deductible from, or taken –10% of the gross income.
into account in computing gross The OSD may be availed of
income or for which depreciation or only by individuals (except
amortization may be allowed, shall nonresident alien) who are not
be allowed as deduction only if it is purely compensation income
shown that the tax required to be earners.
deducted and withheld therefrom b. Personal and additional exemptions
has been paid to the BIR. [Sec. Available only to individuals
34(K), NIRC] (business income and compensation
income earners).
NOTE: Deductions for income tax
purposes partake of the nature of tax NRAETB may be entitled to
exemptions; hence, if tax exemptions personal exemptions (only) subject
are to be strictly construed, then it to reciprocity, i.e.,
follows that deductions must also be a. the country of which he is a
strictly construed. subject or citizen has an income
tax law; and
TAXPAYERS WHO CANNOT AVAIL OF b. the income tax law of his
DEDUCTIONS FROM GROSS INCOME country allows personal
1. Citizens and resident aliens whose exemption to citizens of the
income is purely compensation Philippines not residing therein,
income (except for premium but deriving income therefrom
payments on health and/or and not to exceed the amount
hospitalization insurance); allowed in NIRC.
2. Non-resident aliens not engaged in
trade or business in the Philippines; The personal exemption shall be
and equal to that allowed by the income
3. Non-resident foreign corporation tax law of his country to a citizen of
the Philippines not residing therein,
CLASSES OF DEDUCTIONS or the amount provided in the NIRC,
1. Individuals whichever is lower.
a. with gross compensation income
from employer-employee Individuals not entitled to these
relationship only exemptions:
(1) premium payments on health a. Non-resident Alien not engaged
and/or hospitalization in trade or business
insurance

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1
b. Alien individual employed by 1. Unmarried or legally separated

Regional or Area Headquarters person with one or both parents,
of Multinational Companies or one or more brothers or
c. Alien individual employed by sisters, or one or more
Offshore Banking Units legitimate, recognized natural or
d. Alien individual employed by legally adopted children living
Petroleum Service Contractor with and dependent upon the
and Subcontractor taxpayer for their chief support;
and
c. Itemized deductions “Chief support” means more
a. ordinary and necessary than one-half of the
expenses requirements for support.
b. interests 2. Where such brother / sister or
c. taxes children are not more than 21
d. losses years of age, unmarried and not
e. bad debts gainfully employed, or where
f. depreciation of property; such dependents regardless of
g. depletion of oil and gas wells age, are incapable of self –
and mines; support because of mental or
h. charitable and other physical defect.
contributions;
i. research and development; Parents, brothers, sisters and senior
j. pension trust contributions of citizen with the tax payer, whether
employees; and relative or not, may qualify the
k. premium payments on health taxpayer, to the personal exemption of
and/or hospitalization insurance. P25,000 as head of the family but not to
(This is the only deduction which the additional exemption of P8,000.
a compensation income earner
may claim as a deduction.) B. Additional Exemption for
Dependents [Sec. 35, NIRC]
d. Special deductions P 8,000 – For each of the qualified
a. private proprietary educational dependent children not
institutions and hospitals that exceeding four (4) in
are non-profit (Sec. 34 A, 2) number.
b. insurance companies (Sec. 37) The additional exemption refers
c. estates and trusts (Sec. 61) only to qualified dependent children
such as legitimate, recognized natural,
PERSONAL EXEMPTIONS illegitimate and legally adopted.
The proper claimant of the
A. Amounts of Personal Exemptions additional exemption is the husband
[Sec. 35, NIRC] being the head of the family except
1. P 20,000 – Single individual or under the following cases:
married individual judicially 1. Husband is unemployed
decreed legally separated 2. Husband is working abroad like
without qualified dependent an OFW or a seaman
children. 3. Husband explicitly waived his
2. P 25,000 – Head of the family or right of the exemption in favor
married individual judicially of his wife in the withholding
decreed legally separated exemption certificate.
with qualified dependent
children. A Senior Citizen is:
3. P 32,000 – For each legally 1. any
married individual. resident citizen of the
Philippines
Head of the Family 2. at least
sixty 60 years old, including

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those who have retired from shall determine his exemptions.

both government offices and (strictly construed against the
private enterprises, and taxpayer)
3. has an Examples:
income of not more than Sixty  became legally separated –
thousand pesos (60,000) per can only claim P 20,000
annum subject to the review of  25 years old child became
the National Economic incapacitated – cannot claim
Development Authority (NEDA) additional exemption
every three years.
ITEMIZED DEDUCTIONS
Parents and dependents qualify
the taxpayer, to the personal A. ORDINARY AND NECESSARY
exemption of P25,000 as head of the
EXPENSES
family but not to the additional
exemption of P8,000.
NECESSARY EXPENSE – appropriate and
helpful in the development of taxpayer's
NOTE: NRAETB may deduct personal
business and are intended to minimize
exemption (not additional
losses or to increase profits. These are
exemption), but only to the extent
the day-to-day expenses.
allowed by his country to Filipinos
ORDINARY EXPENSE – normal or usual in
not residing therein, and shall not
relation to the taxpayer’s business and
exceed the aforementioned
the surrounding circumstance.
amounts. NRANETB cannot claim
any personal or additional
REQUISITES OF BUSINESS EXPENSE TO BE
exemptions.
DEDUCTIBLE
1. ordinary and necessary;
C. Change of Status [Sec. 35, NIRC]
2. paid or incurred w/in the taxable
1. If the taxpayer should marry or
year;
should have additional
3. paid or incurred in carrying on a
dependents during the taxable
trade or business;
year, he may claim the
4. substantiated with official receipts
corresponding exemptions in full
or other adequate records.
for such year.
5. if subject to withholding taxes proof
2. If the taxpayer should die during
of payment to the Bureau of Internal
the taxable year, his estate may
Revenue must be shown.
claim the corresponding
6. must be reasonable (when the
exemptions as if he died at the
expense is not lavish, extravagant or
close of such year.
excessive under the circumstances)
3. If the spouse or any dependent
7. must not be contrary to law, public
should die or any dependent
policy or morals.
should marry or become twenty-
one years old during the year, or
NOTE: While illegal income will form
should become gainfully
part of income of the taxpayer,
employed, the taxpayer may
expenses which constitute bribe,
claim the exemptions as if the
kickback and other similar payment,
spouse or dependent died or as
being against law and public policy are
if such dependent married,
not deductible from gross income.
became twenty one years old or
(Subsec. A, 1, c)
became gainfully employed at
the close of such year.
CAPITAL EXPENDITURE – An expenditure
4. For any other event and for
that benefits not only the current period
which there are no specific rules
but also future periods. It is not
applicable from the above-
deductible but depreciable, except, if
mentioned, the status of the
the taxpayer is a non-profit proprietary
taxpayer at the end of the year

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educational institution which may elect connection with the taxpayer's trade
either to deduct the capital expense or business or exercise of profession, shall
depreciate it. be allowed as a deduction from the
taxpayer's gross income.
 See Annex E – Business Expenses
Limitation - The amount of interest
 See Annex F – Ceiling on expense paid incurred by a taxpayer in
“Entertainment, Amusement and connection with his trade, business or
Recreational Expenses” exercise of a profession from an existing
indebtedness shall be reduced by an
B. INTEREST amount equal the following percentages
of interest income earned which had
INTEREST – shall refer to the payment for been subjected to final withholding
the use or forbearance or detention of depending on the year when the interest
money, regardless of the name it is income earned, viz:
called or denominated. It includes the 38% - beginning January 1, 2000 and
amount paid for the borrower's use of, thereafter
money during the term of the loan, as
well as for his detention of money after Aim of Limitation: To discourage so-
the due date for its repayment. called “back-to-back” loans where a
taxpayer secures a loan from a bank,
REQUISITES FOR DEDUCTIBILITY (REV. REG. turns around and invests the loan
NO. 13-2000) proceeds in money market placements.
1. There must be an indebtedness; By imposing a limit as to the amount of
2. There should be an interest interest expense that can be deducted
expense paid or incurred upon from gross income, the previous practice
such indebtedness; of tax arbitrage was absolutely nullified.
3. The indebtedness must be that of
the taxpayer; Tax Arbitrage – is a method of
4. The indebtedness must be connected borrowing without entering into a
with the taxpayer's trade, business debtor/creditor relationship, often to
or exercise of profession; resolve financing and exchange control
5. The interest expense must have been problems. In tax cases, back-to-back
paid or incurred during the taxable loan is used to take advantage of the
year; lower of tax on interest income and a
6. The interest must have been higher rate of tax on interest expense
stipulated in writing; deduction.
7. The interest must be legally due;
8. The interest arrangement must not Illustration:
be between related taxpayers; On June 1, 2000 Company X has:
9. The interest must not be incurred to 1. Obtained a loan from ABC Financing
finance petroleum operations; and Corporation in connection with the
10. In case of interest incurred to operation of its business and its
acquire property used in trade, interest expense on the loan
business or exercise of profession, amounted to P 120,000.
the same, was not treated as a 2. Deposit account in DEF Bank and
capital expenditure. derived interest income thereof
11. The interest is not expressly amounting to P200,000 on which the
disallowed by law to be deducted final tax of P40,000 has been
from gross income of the taxpayer. withheld.
Assume that Company X’s net
RULES ON DEDUCTIBILITY OF INTEREST income before the deduction of
EXPENSE interest expense is P500,000.
General Rule - In general, the amount of
interest expense paid or incurred within The deductible expense shall be
a taxable year of indebtedness in computed as follows:

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2. Interest paid on indebtedness

Year 2000 between related taxpayer
3. If the indebtedness is incurred to
Net Income before finance petroleum exploration
interest expense P500,000 4. Interest on preferred stock, which
Less: Interest Expense P120,000 in reality is dividend
Less: 38% of interest 5. Interest on unpaid salaries and
income from deposit bonuses
(38% x P200,000) 76,000 6. Interest calculated for cost keeping
Deductible Interest on account of capital or surplus
Expense 44,000 invested in business which does not
Taxable Income P456,000 represent charges arising under
interest-bearing obligation.
7. Interest paid when there is no
Deductible Interest Expense stipulation for the payment thereof.
1. Interest on taxes, such as those paid
for deficiency or delinquency, since OPTIONAL TREATMENT OF INTEREST EXPENSE
taxes are considered indebtedness At the option of the taxpayer,
(provided that the tax is a interest incurred to acquire property
deductible tax, except in the case of used in trade or business may be
income tax). However, fines, allowed as a deduction or treated as
penalties, and surcharges on account capital expenditure. [Sec 34 (B)(3),
of taxes are not deductible. The NIRC]
interest on unpaid business tax shall
not be subjected to the limitation C. TAXES
on deduction.
2. Interest paid by a corporation on Taxes mean TAXES PROPER, and
scrip dividends therefore no deductions are allowed for:
3. Interest-on deposits paid by 1. interest
authorized banks of the Bangko 2. surcharges
Sentral ng Pilipinas to depositors, 3. penalties or fines incident to
if it is shown that the tax on such delinquency (Sec. 80, Rev. Reg. 2)
interest was withheld.
4. Interest paid by a corporate taxpayer REQUISITES FOR DEDUCTIBILITY
who is liable on a mortgage upon real 1. must be in connection with
property of which the said taxpayer’s business;
corporation is the legal or equitable 2. tax must be imposed by law on, and
owner, even though it is not directly payable by taxpayer (direct tax);
liable for the indebtedness. and
3. paid or incurred during the taxable
NON-DEDUCTIBLE INTEREST EXPENSE year.
1. An individual taxpayer reporting
income on the cash basis incurs an TAXES NOT DEDUCTIBLE
indebtedness on which an interest is 1. income tax;
paid in advance through discount or 2. estate and donor’s tax;
otherwise: 3. special assessments;
 allowed as a deduction in the 4. excess electric consumption tax;
year the indebtedness is paid 5. foreign income tax, war profits and
 if the indebtedness is payable excess profits tax, if the taxpayer
periodic amortization on, the makes use of tax credit; and
amount of interest which 6. final taxes, being in the nature of
corresponds to the amount of income tax.
the principal amortized or paid
during the year shall be allowed NOTE: Taxes allowed as deductions,
as deduction in such taxable when refunded or credited, shall be
year. included as part of gross income in the

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year of receipt to the extent of the Taxable

income tax benefit of said deduction. income from
(Tax Benefit Rule) foreign country X Phil. = Tax Credit
Taxable income income tax Limit
For NRAETB and RFC, taxes paid or from all sources
incurred are allowed as deductions only
if and to the extent that they are 2. Over-all limitation
connected from income within the Taxable
income from
Philippines. outside sources X Phil. = Tax Credit
Taxable income income tax Limit
EXCEPTIONS to requirement that only from all sources
such persons on whom the tax is
imposed by law can claim deduction The allowable tax credit is the “lower
thereof: amount” between the tax credit
1. Taxes of shareholder upon his computed under No. 1 and No. 2.
interest as such and paid by the
corporation without reimbursement WHEN CREDIT FOR TAXES MAY BE TAKEN
from him, can be claimed by the The credit for taxes provided by
corporation as deduction. Section 30(C)(3) to (9) may ordinarily be
2. A corporation paying the tax for the taken either in the return for the year in
holder its bonds or other obligation which the taxes accrued or on which the
containing a tax-free covenant taxes were paid, dependent upon
clause cannot claim deduction for whether the accounts of the taxpayer
such taxes paid by it pursuant to are kept and his returns filed upon the
such covenant. accrual basis or upon cash receipts and
disbursements basis.
TAX CREDIT
LIMITATIONS ON CREDIT FOR FOREIGN TAXES
DEFINITION: right of an income taxpayer 1) The amount of credit in respect to
to deduct from income tax payable the the taxes paid or accrued to any
foreign income tax he has paid to his country shall not exceed the same
foreign country subject to limitation. proportion of the tax against which
such credit is taken, which the
WHO CAN CLAIM TAX CREDIT taxpayer’s net income from sources
1. resident citizens of the Philippines within such country taxable under
2. resident aliens under the principle of Title II (income Tax) bears to his
reciprocity entire net income for the same
3. domestic corporations which include taxable year; and
partnerships except general 2) The total amount of the credit shall
professional partnership not exceed the same proportion of
4. beneficiaries of estates and trusts the tax against which such credit is
5. members of beneficiaries of local taken, which the taxpayer’s net
partnerships income from sources without the
Philippines taxable under Title II
WHO ARE NOT ENTITLED TO TAX CREDIT (Income Tax) bears to his entire net
1. non-resident citizens income for the same taxable year.
2. resident aliens, if without
reciprocity D. LOSSES
3. resident aliens whose income is
derived solely from sources within LOSSES – refer to such losses which do
the Philippines not come under the category of bad
4. foreign corporations (resident and debts, inventory losses, depreciation,
non-resident) etc., and which arise in taxpayer's
profession, trade or business.
FORMULA FOR COMPUTING LIMITATION
1. Per country limitation REQUISITES FOR DEDUCTIBILITY

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1. Actually sustained during the taxable (3) There has been no

year substantial change in the
2. Connected with the trade, business ownership of the business or
or profession enterprise.
3. Evidenced by a close and completed There is no substantial
transaction change in the ownership of
4. Not compensated for by insurance or the business when:
other form of indemnity (a) not less than 75% in
5. Not claimed as a deduction for nominal value of the
estate tax purposes outstanding issued shares
6. Notice of loss must be filed with the is held by or on behalf of
Bureau of Internal Revenue within the same persons; or
45 days from the date of discovery (b) not less than 75% of the
of the casualty or robbery, theft or paid up capital is held by
embezzlement. or on behalf of the same
person.
NOTE: The taxpayer’s failure to record
in his books the alleged loss proves that NOTE: The 3 year period shall
the loss had not been suffered, hence, continue to run notwithstanding
not deductible. (City Lumber vs. that the corporation paid its taxes
Domingo and Court of Tax Appeals, GR under MCIT, or that the individual
No. L-18611, January 30, 1964) availed the 10% OSD.
CATEGORY AND TYPES OF LOSSES
See Annex S for illustration.
1. ORDINARY LOSSES
a. Incurred in trade or business, or
b. Of property connected, with the
practice of profession
trade, business or profession, if
 Net operating loss carry-over
the loss arises from fires,
(NOLCO)
 Refers to the excess of storms, shipwreck or other
allowable deductions over gross casualties, or from robbery,
income of the business for any theft, or embezzlement.
taxable year, which had not (1) Total destruction
been previously offset as The replacement cost to
deduction from gross income. restore the property to its
 Can be carried over as a normal operating condition,
deduction from gross income for but in no case shall the
the next 3 consecutive years deductible loss be more than
immediately following the year the net book value of the
of such loss. property as a whole,
 For mines, other that oil and immediately before
gas well, net operating loss casualty.
incurred in any of the first ten (2) Partial Destruction
years of operation may be The excess over the net
carried over for the next 5 book value immediately
years. before the casualty should
be capitalized, subject to
depreciation over the
 Requirements: remaining useful life of the
(1) The taxpayer was not property.
exempt from income tax in
the year of such net 2. CAPITAL LOSSES (LOSSES ARE DEDUCTIBLE
operating loss; ONLY TO THE EXTENT OF CAPITAL
(2) The loss was not incurred in GAINS)
a taxable year during the a. Losses from sale or exchange of
taxpayer was exempt from capital assets
income tax; and

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b. Losses resulting from securities expenditures pertaining thereto

becoming worthless and which shall be allowed as a deduction.
are capital assets. (2) In case a producing well is
c. Losses from short sales of abandoned, the unamortized cost
property. thereof, as well as the
d. Losses due to failure to exercise undepreciated cost of equipment
privilege or option to buy or sell directly used therein, shall be
property. allowed as deduction in the year
the well, equipment or facility is
3. SPECIAL KINDS OF LOSSES abandoned.
a. Wagering losses - deductible only to
the extent of gain or winnings. [Sec. d. Losses due to voluntary removal of
34 (D)(6)]; deemed to apply only to building incident to renewal or
individuals replacements - deductible expense
b. Losses on wash sales of stocks - not from gross income.
deductible because these are
considered to be artificial loss. e. Loss of useful value of capital
assets due to charges in business
Wash sales – a sale or other conditions - deductible expense only
disposition of stock or securities to the extent of actual loss sustained
where substantially identical (after adjustment for improvement,
securities are acquired or purchased depreciation and salvage value)
within 61-day period, beginning 30
days before the sale and ending 30
days after the sale. [Sec. 38]
General rule: Losses from wash sales f. Losses from sales or exchanges of
are not deductible. property between related
Exception: When the sale is made by taxpayers -losses of this nature is not
a dealer in stock or securities and deductible but gains are taxable.
with respect to a transaction made in
the ordinary course of the business of g. Losses of farmers - if incurred in the
such dealer, losses from such sale is operation of farm business, it is
deductible. deductible.
Elements of Wash Sales:
(1) The sale or other disposition of h. Loss in shrinkage in value of stock –
stock resulted to a loss; if the stock of the corporation becomes
(2) There was an acquisition or worthless, the cost or other basis may be
contract or option for acquisition deducted by the owner in the taxable
of stock or securities within 30 year in which the stock of its
days before the sale or 30 days worthlessness is made. Any amount
after the sale; and claimed as a loss on account of shrinkage
(3) The stock or securities sold were in value of the stock through fluctuation
substantially the same as those in the market or otherwise cannot be
acquired within the 61-day deducted from gross income.
period.
E. BAD DEBTS
c. Abandonment losses
in petroleum operation and producing BAD DEBTS – shall refer to those debts
well. resulting from the worthlessness or
(1) In case a contract area where uncollectibility, in whole or in part, of
petroleum operations are amounts due the taxpayer by others,
undertaken is partially or wholly arising from money lent or from
abandoned, all accumulated uncollectible amounts of income from
exploration and development goods sold or services rendered.

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REQUISITES FOR DEDUCTIBILITY International Rubber, GR No. L-

1. Existing indebtedness due to the 22265, Dec. 22, 1967)
taxpayer which must be valid and  Depends upon the particular facts and
legally demandable; the circumstances of the case.
2. Connected with the taxpayer's  Good faith does not require that the
trade, business or practice of taxpayer be an “incorrigible optimist”
profession; but on the other hand, he may not be
3. Must not be sustained in a unduly pessimistic.
transaction entered into between
related parties; F. DEPRECIATION
4. Actually ascertained to be worthless
and uncollectible as of the end of DEPRECIATION – the gradual diminution in
the taxable year.; and the service or useful value of tangible
5. Actually charged off in the books of property due from exhaustion, wear and
accounts of the taxpayer as of the tear and normal obsolescence.
end of the taxable year. The term also applies to
amortization of intangible assets, the
EQUITABLE DOCTRINE OF TAX BENEFIT use of which in trade or business i s of
A recovery of bad debts previously limited duration.
deducted from gross income constitutes
taxable income if in the year the REQUISITES FOR DEDUCTIBILITY
account was written off, the deduction 1. The allowance for depreciation
resulted in a tax benefit. (Tax Benefit must be reasonable.
Rule) 2. It must be for property use or
employment in trade or business or
out of its not being used
Illustration: temporarily during the year.
Case A Case B Case C 3. The allowance must be charged off
Net within the taxable, year.
income 4. Schedule on the allowance must be
(loss)
before attached to the return.
write off
for bad P10,000 (P 9,000) P 5,000 PROPERTY HELD BY ONE PERSON FOR LIFE
debts WITH THE REMAINDER TO ANOTHER PERSON
Less:
Accounts The deduction shall be computed as
written off if the life tenant was the absolute owner
as bad of the property and, as such the expense
debts 3,000 2,000 6,000 shall accrue to him.
Final Net
Income
(Loss) P 7,000 (P11,000) (P1,000) PROPERTY HELD IN TRUST
Bad debts Allowable deduction shall be
recovery apportioned between the income
in a subse-
quent year 3,000 2, 000 6, 000 beneficiaries, and the trustees in
TAXABLE accordance with the pertinent provisions
INCOME of the instrument creating or in the
upon the absence of such provisions, on the basis
bad debt
recovery P3,000 P -0- P5,000 of the trust income allowable to each.
ASCERTAINMENT OF WORTHLESSNESS METHODS OF DEPRECIATION

 Proof of Two Facts: The term "reasonable allowance"
1. taxpayer did in fact ascertain the shall include (but not limited to) an
debt to be worthless, in the year allowance computed in accordance,
for which deduction is sought, with the regulations prescribed by the
2. that in so doing, he acted in good Department of Finance, under any of the
faith. (Collector vs. Goodrich following methods.
1. Straight-line method

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2. Declining-balance method 1. Petroleum Operations

3. Sum of the years-digit method  Depreciation of all properties
4. Any other method which may be directly related to production of
prescribed by the Department of petroleum shall be allowed
Finance upon recommendation of under straight-line (SL) or
the Commissioner of Internal declining balance (DB) method
Revenue.  May shift from DB to SL method
 Useful life: 10 years or shorter
METHODS OF DEPRECIATION life as allowed by the
Kind Formula Commissioner
1)Straight-line cost- salvage value  Useful life of property not
estimated life
2)Declining cost – depreciation x Rate
directly related to production: 5
balance estimated life years under straight line method
3)Sum of the years nth period x cost- salvage 2. Mining Operations
digits (SYD) SYD  Depreciation on all properties in
mining operations other than
Illustration: A machine is used in the petroleum operations at the
manufacturing department of normal rate if expected life is
Corporation A, compute the depreciation less than 10 years.
per annum with the following facts:  If expected life is more than 10
Cost = P15,000 Salvage years, depreciation shall be any
Value= P5,000 number of years between 5
years and the expected life.
3. Depreciation deductible by non-

1. Straight Line Method with estimated resident aliens engaged in
life = 5 years trade/business or non-resident
15,000 – 5,000 = P2,000 corporation
5 years a. Only when such property is
located in the Philippines.
2. Declining balance with rate of 200%
Year 1: 15,000 – 0 x 200% = P6,000 G. DEPLETION OF OIL AND GAS
5 WELLS AND MINES
Year 2:15,000–6,000 x 200% =P3,600
5
DEPLETION - exhaustion of natural
resources as in mines, oil, and gas
3. Sum of the years digits
wells. The natural resources are called
SYD for 5 years = 5+4+3+2+1 or 15
“wasting assets”. As the physical units
Year 1: 5/15 x (15,000 – 5,000)
representing such resources are
= P3,333.33
extracted and sold, such assets move
Year 2: 4/15 x (15,000 – 5,000)
towards exhaustion.
= P2,666.67
Known as cost of depletion
allowance for mines, oil gas wells and
AGREEMENT AS TO USEFUL LIFE ON WHICH
other natural deposits starting calendar
DEPRECIATION RATE IS BASED
year 1976 and fiscal year beginning July
The Bureau of Internal Revenue and
1,1975
the taxpayer may agree in writing on the
useful life of the property to be
depreciated. The agreed rate may be
TO WHOM ALLOWED
modified if justified by facts or
Only mining entities owning
circumstances. The change shall not be
economic interest in mineral deposits.
effective before the taxable year on
Economic interest means interest in
which notice in writing by certified mail
minerals in place investment therein or
or registered mail is served by the party
secured by operating or contract
initiating.
agreement for which income is derived,
SPECIAL TYPES OF DEPRECIATION

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and return of capital expected, from the 2) Recipient is a 2) Non-government

extraction of mineral. foreign or organizations
Mere economic or pecuniary international
advantage to be derived by production organization with
an agreement
by one who has no capital investment in with the
the mineral deposit does not amount to Philippine
economic interest. Government on
deductibility, or
FEATURES in accordance
1. Intangible Exploration and with special law.
development drilling cost in
petroleum exploration shall be
treated either as: 3) Recipient is an 3) Recipient is an
accredited non- accredited domestic
a. revenue expenditures; or government corporation or
b. capital expenditures organization, association
2. The total amount deductible for organized/ operated organized/operated
exploration and development for (purposes): for (purposes):
expenditures shall not exceed 50% of
net income from mining operation.
The excess shall be carried forward
to the succeeding year until fully
deducted.
H. CHARITABLE AND OTHER

CONTRIBUTIONS
TAX TREATMENT
A. Deductible B. Deductible
In Full Subject To Limitation
1) Recipient is: 1) Recipient is:

(a) Government of (a) Government of
the the Philippines;
Philippines; (b) Any of its
(b) Any of its agencies or
agencies or political
political subdivisions
subdivisions;
or For a non-priority
(c) Any fully- activity in any of the
owned areas mentioned in A,
government and exclusively for a
corporation public purpose.
For priority
activity in:
1. Science;
2. Education
3. Culture
4. Health
5. Economic
Development
6. Human
Settlement
7. Youth and
Sports
Development

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1
TAX TREATMENT
(a) Scientific; (a) Scientific Either as:
(b) Educational; (b) Educational 1. Revenue Expenditures
(c) Cultural; ; Requisites:
(d) Character (c) Cultural;
a. Paid or incurred during
building/youth (d) Youth and
and sports sports the taxable year
development development b. Ordinary and necessary
(e) Charitable (e) Charitable expenses in connection with
(f) Social welfare (f) Social trade business or profession
(g) Health welfare c. Not chargeable to
(h) Research (g) Religious capital account
(h) Rehabilitati 2. Deferred Expenses
And satisfying the on of Veterans Requisites:
following
a. Paid or incurred in
conditions: If the conditions
1. The donation in Table A is not connection with trade, business,
must be utilized complied with: or profession
not later than b. Not treated as expense
the 15th day of Subject to c. Chargeable to capital
the 3rd month limitation: account but not chargeable to
following the (a) Individual - property subject to depreciation
close of its 10% taxable or depletion.
taxable year. income from
2. The trade Amount deductible:
administrative business or
Amount ratably distributed over
expense must not profession
exceed 30% of before a period of 60 months beginning with
total expenses. contribution the month taxpayer realized
3. Upon dissolution, (b) Corporation benefits from such expenditures.
assets must be - 5% taxable
distributed to income from EXCLUSION FROM RESEARCH AND
another non- trade DEVELOPMENT EXPENDITURES
profit domestic business or 1. Any expenditure for the acquisition
corporation or to profession or improvement of land or for the
the state. before
improvement of property to be used
contribution
in connection with research and
development subject to depreciation
and depletion.
2. Any expenditure paid or incurred for
the purpose of ascertaining the
existence, location, extent or
REQUISITES FOR DEDUCTIBILITY
quality of any deposit of ore or other
1. The contribution or gift must be
mineral including oil or gas.
actually paid.
2. It must be given to the organizations
specified in the code.
J. PENSION TRUST CONTRIBUTIONS
3. The net income of the institution
PENSION TRUST CONTRIBUTIONS – a
must not inure to the benefit of any
deduction applicable only to the
private stockholder or individual.
employer on account of its contribution
to a private pension plan for the benefit
VALUATION
of its employee. This deduction is purely
Charitable contribution of property
business in character.
other than money shall be based on the
acquisition cost of said property.
I. RESEARCH AND DEVELOPMENT REQUISITES FOR DEDUCTIBILITY

(R&D) 1. The employer must have established
a pension or retirement plan to

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1
provide for the payment of 2. The amount of premium deductible

reasonable pensions to his does not exceed P2,400 per family
employees; or P200 per month during the
2. The pension plan is reasonable and taxable ear.
actuarially sound; 3. That said family has a gross income
3. It must be funded by the employer; of not more than P250,000 for the
4. The amount contributed must be no taxable year.
longer subject to the control and 4. In case of married individual, only
disposition of the employer; the spouse claiming additional
5. The payment has not yet been exemption shall be entitled to this -
allowed as a deduction; and deduction.
6. The deduction is apportioned in
equal parts over a period of 10 WHO MAY AVAIL OF THE DEDUCTION
consecutive years beginning with the 1. Individual taxpayers earning purely
year in which the transfer or compensation income during the
payment is made. year.
2. Individual taxpayer earning business
SUMMARY OF RULES ON RETIREMENT BENEFITS income or in practice of his
PLAN / PENSION TRUST profession whether availing of
1. Exempt from Income Tax – itemized or optional standard
employees’ trust under Sec. 60(B) deductions during the year.
2. Exclusion from Gross Income – 3. Individual taxpayer earning both
amount received by the employee compensation, and business or
from the fund upon compliance of practice of profession during the
certain conditions under Sec. 32(B) year.
(6)
3. Deduction from Gross Income – NON-DEDUCTIBLE EXPENSES
a. Amounts contributed by the
employer during the taxable REASONS FOR NON-DEDUCTIBILITY
year into the pension plan to 1. Personal expenses
cover the pension liability 2. Capital expenditures
accruing during the year – 3. Items not normally subject to
considered as ordinary and income tax and therefore are not
necessary expenses under Sec. deductible.
34(A)(1) 4. Items taken advantage of by the
b. 1/10 of the reasonable amount taxpayer to avoid payment of
paid by the employer to cover income tax.
pension liability applicable to
the years prior to the taxable SPECIFIC ITEMS (SECTION 36)
year, or so paid to place the 1. Personal, living or family expenses;
trust in a sound financial basis – 2. Amount paid out for new buildings or
deductible under Sec. 34(J) for permanent improvements, or
betterment made to increase the
K. PREMIUM PAYMENTS value of any property or estate,
ON HEALTH AND/OR Except that intangible drilling
HOSPITALIZATION INSURANCE and development cost incurred in
petroleum operations are
DEFINITION: It is an amount of premium deductible;
on health and/or hospitalization paid by 3. Amount expended in restoring
an individual taxpayer (head of family or property or in making good the
married), for himself and members of his exhaustion thereof for which an
family during the taxable year. allowance has been made;
4. Premiums paid on any life insurance
REQUISITES FOR DEDUCTIBILITY policy covering the life of any officer
1. Insurance must have actually been or employee, or of any person
taken financially interested in any trade or

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1
business carried on by the taxpayer, APPLIES TO:

individual or corporate, when the 1. Domestic corporations (DC)
taxpayer is directly or indirectly a 2. Resident foreign corporations (RFC)
beneficiary under such policy. [Sec.
36] RATE OF TAX AND DATE OF EFFECTIVITY
5. Losses from sales or exchanges of 15% of the Gross Income effective
property between related January 1, 2000
taxpayers. [S ec. 36]
CONDITIONS OR REQUIREMENTS
TRANSACTIONS BETWEEN RELATED PARTIES 1. A tax effort ratio of 20% of Gross
1. Between members of the family; National Product
“Family” includes only the 2. A ratio of 40% income tax collection
brothers, sisters (whether by the to total tax revenues
whole or half blood), spouse, 3. A VAT tax effort of 4% of GNP
ancestors, and lineal 4. A 0.9% ratio of Consolidated Public
descendants of the taxpayer. Sector Financial Position (CPSFP) to
2. Except in the case of distributions in GNP
liquidation:
a. between an individual and a OTHER FEATURES
corporation more than 50% in 1. Available only to firms whose
value of the outstanding stock of ratio of:
which is owned, directly or
indirectly, by or for such Cost of sales
individual; <=55%
b. between two corporations more Gross sales or receipts from all
than 50% in value of the sources
outstanding stock of each of
2. The election shall be irrevocable
which is owned, directly or
for three (3) consecutive years
indirectly, by or for the same
individual, if either one of such
MEANING OF GROSS INCOME
corporations, with respect to the
General concept –
taxable year of the corporation
Gross sales
preceding the date of the sale of
Less:
exchange was a personal holding
(1) Sales Return;
company or a foreign personal
(2) Discount and allowances
holding company; or
(3) Cost of goods sold - means
3. Between the grantor and a fiduciary
all business expenses
of any trust;
directly incurred to produce
4. Between the fiduciary of a trust and
the merchandise to bring
the fiduciary of another trust if the
them to their present
same person is a grantor with
location and use.
respect to each trust;
5. Between a fiduciary of a trust and a
beneficiary of such trust. (3) MINIMUM CORPORATE
INCOME TAX (MCIT)
TAX CONSEQUENCES SECTION 27 (E)
The following are not deductible:
1. Interest expense [Sec. 34 (B)(2)] WHO ARE COVERED?
2. Bad debts [Sec. 34 (E)(1)] MCIT is imposed on domestic and
3. Losses from sales or exchanges of resident foreign corporations
property [Sec 36 (B)] 1. Whenever such corporation has zero
or negative taxable income; or
(2) OPTIONAL CORPORATE 2. Whenever the amount of
INCOME TAX MCIT is greater than the normal
SECTION 27 (A) income tax due from such

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1
corporation determined under the MCIT on any corporation which

Section 27[A]. suffers losses because of:
a. prolonged labor dispute;
LIMITATIONS b. force majeure; or
c. legitimate business reverses.
1. The MCIT shall apply only to
domestic and resident foreign “Substantial losses from a prolonged
corporations subject to the normal labor dispute" means losses arising from a
corporate income tax (income tax strike staged by the employees which
rates under Sec 27[A] of the CTRP). lasted for more than six (6) months
2. In the case of a domestic within a taxable period and which has
corporation whose operations or caused the temporary shutdown of
activities are partly covered by the business operations.
regular income tax system and partly “Force majeure" means a cause due
covered under a special income tax to an irresistible force as by "Act of God"
system, the MCIT shall apply on like lightning, earthquake, storm, flood
operations covered by the regular and the like. This term shall also
corporate income tax system. include armed conflicts like war and
3. In computing for the MCIT due from insurgency.
a resident foreign corporation, only “Legitimate business reverses" shall
the gross income from sources within include substantial losses sustained due
the Philippines shall be considered to fire, robbery, theft, or
for such purpose. embezzlement, or for other economic
reason as determined by the Secretary
WHEN DOES A CORPORATION BECOME of Finance.
LIABLE UNDER THE MCIT?
TAX RATE: 2% of gross income or
MCIT is imposed beginning on taxable base pertinent to a
the fourth taxable year immediately trading/merchandising concern or a
following the year in which such service entity
corporation commenced its business.
The taxable year in which the business TAX BASE: Gross Income
operations commenced shall be the year MEANING OF GROSS INOME
when the corporation registers with the
BIR. General concept - gross income means:
Gross sales
CARRY FORWARD OF THE EXCESS Less:
MINIMUM TAX (1) Sales Return;
(2) Discount and allowances
 Any excess of MCIT over the normal (3) Cost of goods sold - means
income tax can be carried forward all business expenses
on an annual basis. directly incurred to produce
 The excess can be credited against the merchandise to bring
the normal income tax due in the them to their present
next 3 immediately succeeding location and use.
taxable years.
 Any amount of the excess MCIT KINDS OF BUSINESS
which cannot be credited against the
normal income tax due in the next A. Trading or Merchandising Concern
3-year period shall be forfeited. Gross Income = Cost of Sales =
gross sales/ 1.Invoice cost of the
receipts less sales goods sold;
RELIEF FROM MCIT returns, discounts 2.import duties;
and allowances and 3.freight in
The Secretary of Finance is cost of goods sold transporting the
authorized to suspend the imposition of goods to the place

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1
where the goods  See Annex T for interplay of normal

are actually sold; tax, optional corporate income tax
4.insurance while and MCIT.
the goods are in
transit.
B. Manufacturing Cost of Sales = All (4) IMPROPERLY ACCUMULATED
Gross Income cost of production of EARNINGS (IAE) TAX
(Same) finished goods, such
SECTION 29
as
1.raw materials
used; (REVENUE REGULATIONS NO. 2 – 2001)
2.direct labor;
3.manufacturing DEFINITION: “Improperly accumulated
overhead; earnings (IAE)” are the profits of a
4.freight cost; corporation that are permitted to
5.insurance accumulate instead of being distributed
premiums; by a corporation to its shareholders for
6.other costs the purpose of avoiding the income tax
incurred to bring with respect to its shareholders or the
the raw materials shareholders of another corporation.
to the factory or
warehouse. TAX RATE: 10% of the Improperly
C. Services Cost of Services = All Accumulated Taxable Income (in
Gross Income = direct costs and addition to other taxes).
Gross receipts less expenses necessarily Rationale behind IAET
sales returns, incurred to provide If the earnings and profits were
allowances, the services required distributed, the shareholders would then
discounts and costs by the customers and be liable to income tax thereon,
of services clients including: whereas if the distribution were not
a. Salaries and made to them, they would incur no tax
employee benefits in respect to the undistributed earnings
of personnel, and profits of the corporation. Thus, a
consultants and tax is being imposed;
specialists directly a. in the nature of a penalty to the
rendering the corporation for the improper
service; accumulation of its earnings, and
b. Cost of facilities b. as a form of deterrent to the
directly utilized in avoidance of tax upon
providing the shareholders who are supposed
service. to pay dividends tax on the
It shall not earnings distributed to them by
include interest the corporation.
expense except for
banks and other “IMPROPERLY ACCUMULATED TAXABLE
financial INCOME”
institutions.
Taxable income for the year
 Gross income excludes passive Add:
income subject to final tax. Income exempt from tax;
 Other income and Extraordinary Income excluded from gross income;
Income are included since RR 9-98 Income subject to final tax;
provides that gross sales include Net operating loss carry-over (NOLCO)
sales contributory to income taxable Total
under the regular corporate tax. Less:
Income tax paid/payable for the taxable
year

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1
Dividends actually or constructively 1. Publicly held corporations (Sec. 29)

paid/issued from the applicable year’s 2. Banks and other non-banks Financial
taxable income intermediaries (Sec. 29)
Amount reserved for the reasonable 3. Insurance companies (Sec. 29)
needs of the business as defined in the 4. Taxable partnerships (deemed to
Regulations have actually or constructively
Tax base of improperly accumulated received the taxable income under
earnings tax Sec. 73D)
5. General professional partnerships
EXCLUSIONS (exempt; taxable against the
partners)
 For corporations using the calendar 6. Non- taxable joint ventures and
basis the accumulated earnings tax 7. Enterprises duly registered with the
shall not apply on IAE as of Dec. 31, Philippine Economic Zone Authority
1997. (PEZA) under R.A. 7916, and
 For fiscal year basis, the tax shall enterprises registered pursuant to
not apply to the 12-month period of the Bases Conversion and
fiscal year 1997-1998. Development Act of 1992 under R.A.
7227, as well as other enterprises
IAE as of the end of a calendar duly registered under special
or fiscal year period on or after Dec. economic zones declared by law
31, 1998 shall be subject to the 10% which enjoy payment of special tax
tax. rate on their registered operations
or activities in lieu of other taxes,
WHO ARE COVERED? national or local.
8. Foreign corporations [RR No. 02-
General Rule: The IAE tax shall apply to 2001]
every corporation formed or availed
for the purpose of avoiding the EVIDENCE OF PURPOSE TO AVOID
income tax with respect to its INCOME TAX
shareholders or the shareholders of
any other corporation, by permitting 1. The fact that any corporation is a
earnings and profits to accumulate mere holding company or investment
instead of being divided or company shall be prima facie
distributed. These are: evidence of a purpose to avoid the
1. Domestic corporations as tax upon its shareholders or
defined under the Tax Code; members.
2. Corporations which are classified
as closely-held corporations. Instances indicative of purpose to
• those corporations at least avoid income tax upon
fifty percent (50%) in value shareholders:
of the outstanding capital 1. Investment of substantial
stock or at least fifty earnings and profits of the
percent (50%) of the total corporation in unrelated
combined voting power of all business or in stock or
classes of stock entitled to securities of unrelated
vote is owned directly or business;
indirectly by or for not more 2. Investment in bonds and other
than twenty (20) individuals. long-term securities;
 Domestic corporations not 3. Accumulation of earnings in
falling under the aforesaid excess of 100% of paid-up
definition are, therefore, capital, not otherwise
publicly-held corporations. intended for the reasonable
needs of the business as
Exception: The said tax shall not apply defined in these Regulations.
to:

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1
2. The fact that the earnings or profits A speculative and indefinite purpose will
of a corporation are permitted to not suffice.
accumulate beyond the reasonable Definiteness of plan/s coupled with
needs of the business shall be action/s taken towards its
determinative of the purpose to consummation is essential.
avoid the tax upon its shareholders
or members unless the corporation, PERIOD FOR PAYMENT OF DIVIDEND/
by the clear preponderance of PAYMENT OF IAET
evidence, shall prove the contrary. Dividends must be declared and paid
or issued not later than one year
“Reasonable needs of the following the close of the taxable year,
business” includes the reasonably otherwise, the IAET, if any, should be
anticipated needs of the business paid within fifteen (15) days thereafter.
such as:
a. Allowance for the increase in the
accumulation of earnings up to (5) INCOME SUBJECT TO
100% of the paid-up capital of
PREFERENTIAL OR SPECIAL
the corporation as of Balance
Sheet date, inclusive of RATES
accumulations taken from other
years; Pertains to income derived by a
b. Earnings reserved for definite particular individual or corporation
corporate expansion projects or belonging to a class of income taxpayer
programs as approved by the that is subject to either a preferential or
Board of Directors or equivalent special rate.
body;
c. Reserved for building, plants or  Tax Rates: Please refer to Annex C.
equipment acquisition as
approved by the Board of (6) GROSS INCOME TAX (GIT)
Directors or equivalent body;
d. Reserved for compliance with GROSS INCOME TAX (GIT) FORMULA
any loan covenant or pre-
existing obligation established Entire Income
under a legitimate business Less: Exclusions and Income subject
agreement; to Final Tax (e.g. Passive
e. Earnings required by law or Income)
applicable regulations to be Gross Income
retained by the corporation or in Multiply by: Tax Rates (%)
respect of which there is legal
prohibition against its Net Income Tax Due
distribution;
f. In the case of subsidiaries of GIT APPLIES TO
foreign corporations in the
Philippines, all undistributed 1. Non-resident alien not engaged in
earnings intended or reserved trade or business (25%); and
for investments within the 2. Non-resident foreign corporation.
Philippines as can be proven by (32%)
corporate records and/or
relevant documentary evidence.  Tax Rates: Please refer to Annex A
and B.
The controlling intention of the
taxpayer is that which is manifested at (7) FINAL INCOME TAX
the time of accumulation, not
subsequently declared intentions, which GENERAL PRINCIPLES
are merely the product of afterthought.

Cabrera, Jhundee
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1
1. It is constituted as a full and final 7. Expenses for foreign travel

payment of the income tax due from 8. Holiday and vacation expenses
the payee on a particular type of 9. Educational assistance to the
income subject to final withholding employee or his dependents; and
tax (FWT). 10. Life or health insurance and other
The finality of the withholding non-lire insurance premiums or
tax is limited only to the payee’s similar amounts on excess of what
income tax liability and does not the law allows.
extend to other taxes that may be
imposed on said income. PERSONS LIABLE
2. The income subjected to final
income tax is no longer subject to The EMPLOYER (as a withholding
the net income tax; otherwise, there agent), whether individual, professional
would be a violation of prohibited partnership or a corporation, regardless
double taxation. of whether the corporation is taxable or
3. The liability for the payment of the not, or the government and its
tax rests primarily on the payor as instrumentalities
withholding agent.
4. The payee is not required to file an TAX RATE: 32% (from January 1, 2000
income tax return for the particular onwards) of the Grossed up Monetary
income subjected to FWT. It is the Value (GMV) of fringe benefits.
withholding agent who files the In the case of aliens, the tax rates to
return. be applied on fringe benefit shall be as
5. The rate of the final tax is follows:
multiplied to the gross income. 1. NRANEBT 25%
Thus, deductions and/or personal 2. Aliens employed by regional HO
and additional exemptions are not 15 %
allowed. 3. Aliens employed by OBU 15%
4. Aliens employed by Petroleum
(8) FRINGE BENEFIT TAX (FBT) Service Contractors and
Subcontractors 15%
FRINGE BENEFIT TAX is a final income
tax on the employee which shall be “GMV” OF THE FRINGE BENEFIT
withheld and paid by the employer on a REPRESENTS
quarterly basis.
1. The whole amount of income
FRINGE BENEFIT means any good, realized by the employee which
service, or other benefit furnished or includes the net amount of money or
granted by an employer, in cash or in net monetary value of property
kind, in addition to basic salaries, to an which has been received; plus
individual employee (except rank and 2. The amount of fringe benefit tax
file employees) such as, but not limited thereon otherwise due from the
to the following: employee but paid by the employer
1. Housing for and in behalf of the employee.
2. Expense Account
3. Vehicle of any kind “GMV” of the fringe benefit
4. Household personnel, such as maid, shall be determined by dividing the
driver and others monetary value of the fringe benefit by
5. Interest on loan at less than market the Grossed up divisor. The Grossed up
rate to the extent of the difference divisor is the difference between 100%
between the market rate and actual and the applicable rates.
rate granted.
6. Membership fees, dues and other GROSSED UP
YEAR RATE
expenses borne by the employer for DIVISOR
the employee in social and athletic 1998 66% 34% FWT
clubs and similar organizations 1999 67% 33% FWT

Cabrera, Jhundee
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1
2000 Exception:
68% 32% FWT
onwards If the basis for computation of the
fringe benefits tax is the depreciation
FRINGE BENEFITS NOT SUBJECT TO FBT value, the zonal value or the fair market
value, only the actual fringe benefits tax
1. Fringe benefits not considered as paid shall constitute a deductible
gross income – expense for the employer. The value of
a. if it is required or necessary to the fringe benefit shall not be
the business of employer deductible and shall be presumed to
b. if it is for the convenience or have been tacked on or actually claimed
advantage of employer as depreciation expense by the
2. Fringe Benefit that is not taxable employer. Provided, however, that if the
under Sec. 32 (B) – Exclusions from aforesaid zonal value or fair market
Gross Income value of the said property is greater
3. Fringe benefits not taxable under than its cost subject to depreciation, the
Sec. 33 Fringe Benefit Tax: excess amount shall be allowed as a
a. Fringe Benefits which are deduction from the employer's gross
authorized and exempted under income as fringe benefit expense. (Sec.
special laws, such as the 13th 2.33[D], Rev. Reg. No. 3-98)
month Pay and Other Benefits
with the ceiling of P30,000. EXAMPLE OF DE MINIMIS BENEFITS NOT
b. Contributions of the employer SUBJECT TO FBT (RR NO. 8-2000 AND
for the benefit of the employee 10-2000)
to retirement, insurance and
hospitalization benefit plans; 1. Monetized unused vacation leave
c. Benefits given to the Rank and credits of PRIVATE employees not
File Employees, whether granted exceeding (10) days during the year
under a collective bargaining and the monetized value of leave
agreement or not; and credits paid to government officials
d. The De minimis benefits – and employees
benefits which are relatively 2. Medical cash allowance to
small in value offered by the dependents of employees not
employer as a means of exceeding P750.00 per employee per
promoting goodwill, semester or P125 per month;
contentment, efficiency of 3. Rice subsidy of P1,000.00 or one (1)
Employees sack of 50kg. rice per month
The term “Rank and File amounting to not more than
Employees” shall mean all P1,000:00,
employees who are holding 4. Uniform and clothing allowance not
neither managerial nor exceeding P3,000 per annum;
supervisory position as defined 5. Actual yearly medical benefits not
in the Labor Code exceeding P10,000 per annum;
In the case of rank and file 6. Laundry allowance not exceeding
employees, fringe benefits other P300 per month;
than those excluded from gross 7. Employees achievement awards e. g.
income under the Tax Code and for length of service or safety
other special laws, are taxable achievement, which must be in the
under the individual normal tax form of a tangible personal property
rate. other than cash or gift certificate,
DEDUCTIBILITY TO THE TAXABLE with an annual monetary value of
INCOME OF THE EMPLOYER not exceeding P10,000 received by
the employee under an established
General Rule: The amount of taxable written plan which does not
fringe benefit and the fringe benefits tax discriminate in favor paid
shall constitute allowable deductions employees;
from gross income of the employer.

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1
8. Gifts given during Christmas and b. On sale of land/building held as

major anniversary celebrations not capital asset
exceeding P3, 000 per employee per On the gross selling price, or the
annum; current fair market value at the
9. Flowers, fruits, books or similar time of sale, whichever is higher
items given to employees under – FT of 6%
special circumstances (Reyes, Virgilio. Income Tax Law and
10. Daily meal allowance for overtime Accounting – A New Approach, 2002)
work not exceeding 25% of the basic
minimum wage. CAPITAL GAINS AND LOSSES –
IN GENERAL
Time for filing of quarterly remittance
return of final income taxes withheld CONCEPT OF CAPITAL ASSETS
The tax imposed under Sec. 33 shall
be treated as a final income tax on the Under the tax code, there is no
employee that shall be withheld and definition for the term "capital assets".
paid by the employer, whether a large What it gives is the meaning of ordinary
taxpayer or non-large taxpayer, on or assets:
before the 10th day of the month a. Ordinary assets (Sec. 39, NIRC)
following the calendar quarter in which a. Stock in trade of the taxpayer or
the fringe benefits were granted (RR 04- other properties of a kind which
2002). would properly be included in
the inventory of the taxpayer;
 For Additional Rules on Fringe
Benefits, refer to Annex H. b. Property held by the taxpayer
primarily for sale to customers in
(9) CAPITAL GAINS TAX the ordinary course of business;
SUMMARY OF TAX RATES c. Property used in trade or

business and subject to
1. Individuals depreciation; and
a. On sale of shares of stock of a
domestic corporation not listed d. Real property used in trade or
and traded thru a local stock business.
exchange, held as capital asset
On the Net Capital Gain b. Capital Assets include all property
Not over P100,000 – FT
held by the taxpayer whether or not
of 5%
Amount in excess of P100,000 – FT
connected in trade or business but
of 10% not including those enumerated
b. On sale of real property in the above (#1) as ordinary assets.
Philippines held as capital asset
On the gross selling price, or the
current fair market value at the CAPITAL GAIN CAPITAL LOSS
time of sale, whichever is higher –
FT of 6% The gain derived The loss incurred
2. Corporations from the sale or from the sale or
a. On sale of shares of stock of a exchange of capital exchange of capital
domestic corporation not listed assets. assets.
and traded thru a local stock
exchange, held as capital asset
On the Net Capital Gain –
Not over P100,000 – FT of
5% NET CAPITAL NET CAPITAL
Amount in excess GAIN LOSS
of P100,000 – FT of 10%

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1
deductibility of are allowed only

The excess of the The excess of the Net Capital to extent of the
gains from sales/ losses from sales or losses capital gains;
exchanges of capital exchanges of capital  Capital losses hence, the net
assets over the assets over the gains are allowed only capital loss is
gains from such from such sales or to extent of the not deductible.
sales/ exchanges. exchanges. capital gains; Exception: If any
hence, the net domestic bank or
capital loss is trust company, a
not deductible. substantial part of
 TRANSACTION RESULTING IN TAXABLE whose business is
GAINS BUT NON-RECOGNITION OF LOSSES the receipt of
a. Sale or exchange between deposits, sells any
related parties; bond, debenture,
b. Wash sales by non-dealers of note or certificate
securities and when not subject or other evidence
to the stock transfer tax; of indebtedness
issued by any
c. Exchanges not solely in kind in
corporation
merger and consolidation; and (including one
d. Sales or exchanges that are not issued by a
at arms length. government or
political
REQUISITES FOR RECOGNITION OF subdivision)
CAPITAL GAIN/LOSS
 Net Capital Loss  Not allowed
1. The transaction must involve Carry –Over
property classified as capital  Allowed
asset; and The net capital loss
(in an amount not in
excess of the taxable
2. The transaction must be a sale income before
or exchange or one considered as personal exemption for
equivalent to a sale or exchange. such year) shall be
treated in the
RULES ON THE RECOGNITION OF succeeding year (but
CAPITAL GAINS OR LOSSES not beyond 12 months)
as a deduction as
short-term capital loss
(at 100%) from the net
INDIVIDUAL CORPORATION capital gains.

 Holding Capital gains and
Period losses are  See Annex U for illustration.
The percentages recognized to the
of gain or loss to be extent of 100%.
SALE OR EXCHANGE OF CAPITAL ASSETS
taken into account (There is no
shall be the holding period)
following: The following are considered as sale
a.100% - if the orexchange of capital assets:
capital assets has 1. Retirement of bonds
been held for 12 2. Short sales of property
mos. or less; and 3. Failure to exercise privilege or
b.50% - if the option to buy or sell property
capital asset has 4. Securities becoming worthless
been held for 5. Distribution in liquidation of
more than 12 corporations
mos. 6. Readjustment of interest in a
general professional partnership.
TAX FREE EXCHANGES
 Non-  Capital losses

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Sales or exchanges resulting in non- b. Transfer to a controlled

recognition of gains or losses: corporation [Sec. 40(C, 2)]
1. Exchange solely in kind in legitimate 1. Transactions where
mergers and consolidation; gain is recognized
includes: but not the loss –
a. Between the corporations which a. Transactions between related
are parties to the merger or taxpayers [Sec. 36]
consolidation (property for b. Illegal transactions [Sec. 96,
stocks); Rev. Reg. 2]
b. Between a stockholder of a c. Exchanges of property, not
corporation party to a merger or solely in kind, in pursuance of
consolidation and the other corporate mergers and
party corporation (stock for consolidations [Sec. 40, (C, 3)]
stock);
c. Between a security holder of a IMPORTANT DISTINCTION
corporation party to a merger or If it is an ordinary asset, the
consolidation and the other ordinary gains and losses are considered
party corporation (securities for in determining income or loss from
securities) trade, business or profession. (See Secs.
32A, 34D)
2. Transfer to a controlled corporation If it is a capital asset, determine
– exchange of property for stocks further whether or not it is a real
resulting in acquisition of corporate property located in the Philippines. If it
control by a person, alone or is, then it is subject to capital gains tax.
together with others not exceeding (See Secs. 24D, 27D5) (See also Sec s.
four. 24C, 27D2) If not, the capital gains and
“Control” means ownership of losses are considered in determining the
stocks in a corporation amounting to taxable income. (Sec. 39)
at least 51% of the total voting
power of all classes of stocks CAPITAL GAINS AND LOSSES –
entitled to vote. SHARES OF STOCK
SALE OR EXCHANGE OF ORDINARY ASSETS The taxation of shares of stock

whether or not listed and traded in the
General rules of income taxation stock exchange is subject to final tax.
apply to both gain and loss.
WHO ARE LIABLE TO THE TAX
 See Annex D (Gross Income – Gains 1. Individual taxpayer, citizen or alien
from dealings in property) 2. Corporate taxpayer, domestic or
foreign
SUMMARY OF TAX TREATMENT OF 3. Other taxpayers such as estate,
GAINS/LOSSES IN THE EXCHANGE OF trust, trust funds and pension among
PROPERTIES others.
General Rule: Upon the sale or RATES OF TAX

exchange of property, the entire gain or
loss, as the case may be, shall be 1. Shares of stock not traded through
recognized. [Sec. 40 (C, 1)] a local stock exchange – Net capital
gains derived during the taxable
Exceptions: year from sale, exchange, or
1. Transactions where gains and losses transfer shall be taxed as follows (on
are not recognized – a per transaction basis):
a. Exchange solely in kind in Not over P 100,000 - 5%
legitimate mergers and Over P 100,000 - 10%
consolidation

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2. Shares of stock listed through a 1. Listed and Traded in the Stock

local stock exchange – ½ of 1% of Exchange - The stockbroker shall
the gross selling price of the stock. turn over the tax collected to the
EXCEPTIONS TO THE TAX B.I.R. within five (5) banking days
1. Gains derived by dealers in from the date of collection.
securities.
2. All other gains which are specifically 2. Not traded through the stock exchange
exempt from income tax under - It shall be paid by the seller on a per
existing investment incentives and transaction basis upon filing of the
other special laws. required return within 30 days
following each sale or other
BASIS FOR COMPUTING GAIN OR LOSS (BIR disposition of shares of stock.
RULING 146-98)
CAPITAL GAINS AND LOSSES
 The fair market value (FMV) of the
sale of shares not traded but listed
(REAL PROPERTY)
in the stock exchange is the highest
PERSONS LIABLE AND TRANSACTIONS
closing price on the day the shares
AFFECTED
were sold, transferred or exchanged.
 When no sale is made in the stock
1. Individual taxpayers, estates and
exchange, the FMV shall be the
trusts
highest selling price on the day
Sale or exchange or other
nearest to the day of sale, transfer
disposition of real property
or exchange.
considered as capital assets.
 For shares not listed in the
The said sale shall include "pacto
exchange, the FMV shall be the book
de retro sale" and other conditional
value nearest the valuation date
sale.
2. Domestic Corporation
The above rules shall be used in
Sale or exchange or disposition
computing for the net capital gain/loss
of lands and/or building which are
for disposition of shares.
not actually used in business and are
treated as capital asset.
IMPORTANT FEATURES
 EXCEPTIONS TO THE TAX
1. Sale of shares of stock of a domestic
1. Gains derived by dealers in real
corporation listed and traded in a
estate
local stock exchange and that of
initial public offering shall be subject
RATE AND BASIS OF TAX
to Percentage tax (Business Tax)
A final tax of 6% is based on the
2. Capital losses sustained during the
gross selling price or fair market value
year (not listed and traded in a local
or zonal value whichever is higher.
stock exchange) shall be allowed as
Note: Gain or loss is immaterial,
a capital loss deductible on the same
there being a conclusive presumption of
taxable year only (no carry-over)
gain.
3. The entire amount of capital gain
and capital loss (not listed and
 See Annex G – Guidelines in
traded in a local stock exchange)
Determining Whether a Real
shall be considered without taking
Property is a Capital or an Ordinary
into account holding period
Asset.
irrespective of who is the taxpayer
(all 100%)
EXEMPTION OF CERTAIN INDIVIDUALS FROM THE
4. Non-deductibility of losses on wash
CAPITAL GAINS TAX ON THE SALE OR
sales.
DISPOSITION OF A PRINCIPAL RESIDENCE
FILING AND PAYMENT OF TAX

Conditions:

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a. Sale or disposition of the old 2. taxpayer has no accounting

principal residence; period
b. By natural persons - citizens or aliens 3. taxpayer does not keep
provided that they are residents books
taxable under Sec. 24 of the Code 4. taxpayer is an individual
(does not include an estate or a  Fiscal year: accounting period of
trust); 12 months ending on the last day
c. The proceeds of which is fully of any month other than
utilized in (a) acquiring or (b) December
constructing a new principal  Calendar year: accounting period
residence within eighteen (18) from January 1 to December 31
calendar months from date of sale or
disposition; B. Periods in which items of gross
d. Notify the Commissioner within income included (Sec. 44)
thirty (30) days from the date of sale  Amount of all items of gross
or disposition through a prescribed income shall be included in the
return of his intention to avail the gross income for the taxable
tax exemption; year in which received by the
e. Can only be availed of only once taxpayer, unless, any such
every ten (10) years; amounts are to be properly
f. The historical cost or adjusted basis accounted for in a different
of his old principal residence sold, period under methods of
exchanged or disposed shall be accounting permitted
carried over to the cost basis of his  In case of death of taxpayer:
new principal residence include for the taxable year in
g. If there is no full utilization, the which falls the date of his death,
portion of the gains presumed to all amounts which accrued up to
have been realized shall be subject the date of his death; if not
to capital gains tax. otherwise properly includible in
respect of such period or a prior
GROSS INCOME FROM DIFFERENT SOURCES period
(SEC. 42)
 Please refer to Annex I. C. Period for which deduction and
credits taken (Sec. 45)
ACCOUNTNG PERIODS AND METHODS OF  Deductions provided in this Title
ACCOUNTING shall be taken for the taxable
year in which ‘paid or incurred,
I. ACCOUNTING PERIODS dependent upon the method of
A. General rule (Sec. 43) accounting upon the basis of
Taxable income is computed which the net income is
upon the basis of taxpayer’s computed, unless, in order to
annual accounting period (fiscal or reflect the income, deductions
calendar year) in accordance with should be taken as of a different
the method of accounting period.
employed.  In case of death of taxpayer:
 If no method of accounting deductions allowed for the
employed or method does not taxable period in which falls the
clearly reflect the income, date of his death, amounts
computation shall be made in accrued up to the date of his
accordance w/ such method as death if not otherwise properly
the opinion of the Commissioner allowable in respect of such
clearly reflects the income. period or a prior period.
 Taxable income is computed
based on calendar year if: D. Change of accounting period
1. accounting period is other (Sec.46)
than a fiscal year  Kinds of changes:

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- from fiscal year to calendar require or permitted by

year R&R prescribed by Sec. of
- from calendar year to fiscal Finance. upon
year recommendation of
- from one fiscal year to Commissioner
another  Both shall be made for a
 Effect of change: Net income, fractional part of a year.
shall, with the approval of the  Then income is computed on the
Commissioner, be computed on basis of the short period for
the basis of the new accounting which separate final or
period, subject to Sec. 47. adjustment return is made.
E. Final or adjustment returns for a II. METHODS OF ACCOUNTING

period of less than 12 months
(1) Returns for short period A. Cash method
resulting from change of Recognition of income
accounting period and expense dependent on
 taxpayer is other than an inflow or outflow of cash.
individual
 with the approval of the 1. Accrual method
Commissioner Method under which
 If change is from fiscal year to income, gains and profits are
calendar year: included in gross income when
- separate final or adjustment earned whether received or not,
return be made for the and expenses are allowed as
period between the close of deductions when incurred:
the last fiscal year for which although not yet paid. It is the
return was made and the right to receive and not the
following December 31 actual receipt that determines
 If change is from calendar year the inclusion of the amount in
to fiscal year: gross income
- separate final or adjustment  Examples
return be made for the :
period between the close of 1. interest or rent income
the last calendar for which earned but not yet
return was made and the received
date designated as the close 2. rent expense accrued
of the fiscal year but not yet paid
 If change is from one fiscal year 3. wages due to workers
to another: but remaining unpaid
- separate final or adjustment
return be made for the 2. Accounting for
period between the close of long-term contracts
the former fiscal year and  Long-term contracts:
the date designated as the building, installation or
close of the new fiscal year construction contracts
(2) Income computed on basis of covering a period in excess
short period of 1 yr
 In what cases?  Persons whose gross income
a. Where a separate final or is derived in whole or in part
adjustment return is made from such contracts shall
on account of a change in report such income upon the
accounting period basis of percentage of
b. In all other cases where a completion
separate final or  The return is accompanied
adjustment return is by a return certificate of

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architects or engineers = 50,000/200,000 = 25%

showing the percentage of Collections in 2000=P100,000
completion during the Income for 2000
taxable year of the entire = P100,000 x 25% = P25,000
work performed under the
contract (2) Sales of realty and casual
 Deductions from gross sales of Personalty
income: all expenditures  In cases of:
made during the taxable a. casual sale or other
year on account of the casual disposition of
contract: account being personal property
taken of the material and (other than
supplies on hand at the inventory on hand of
beginning and end of the the taxpayer at the
taxable period for use in close of the taxable
connection with the work year) for a price >
under the contract but not P1,000, or
yet so applied. b. sale or other
 Amended return may be disposition of real
permitted /required by the property, if in either
Commissioner: if upon case the initial
completion of contract, payments do not
taxable income has not been exceed 25% of the
clearly reflected for any selling price
year(s).  How may income be
returned: same as in
3. Installment sales of dealer in
basis personal property above
(1) Sales of dealers in personal  Initial payments:
property payments received in
Under rules and cash or property other
regulations prescribed by than evidences of
the Sec. of Finance, a person indebtedness of the
who regularly sells or purchaser during the
otherwise disposes of taxable period in which
personal property on the the sale or other
installment plan may return disposition is made.
as income there from in any
taxable year that proportion (3) Sales of real
of the installment payments property considered as
actually received in that capital asset by individuals
year, which the gross profit  Individual who sells of
realized or to be realized disposes of real
when payment is completed, property, considered as
bears to the contract price. capital asset and is
otherwise qualified to
Example: Sale in 2000 report the gain under (2)
Contract price (CP) above may pay the
(installments capital gains tax in
receivable) P200, 000 installments under rules
Cost 150,000 and regulations to be
Gross profit (GP) 50,000 promulgated by the Sec.
of Finance.
Installments payable in 2
equal annual installments (4) Change from accrual to
GP/CP ratio installment basis

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PERSONS REQUIRED TO FILE INCOME TAX

 taxpayer must be RETURN
entitled to benefits
under (1) hereof sales of a. Individual
dealers in personal 1. Resident citizen;
property 2. Non-resident citizen on income
 in computing income for from within the Phil.;
the year of change or 3. Resident alien on income from
any subsequent year: within the Phil.;
amounts actually 4. NRAETB on income from within
received during any such the Phil.
year on account of sales 5. An individual (citizens / aliens)
or other dispositions of engaged in business or practice
property made in any of a profession within the Phil.
prior year shall not be regardless of the amount of
excluded. gross income;
6. Individual deriving compensation
4. Allocation of income concurrently from two or
income and deductions more employers at any time
 Applicable to: cases of 2 or during the taxable year;
more organizations, trades 7. Individual whose pure
or businesses (incorporated compensation income derived
and organized within the from sources within the Phil.
Philippines) owned or exceeds P60,000.
controlled directly b. Taxable Estate and Trust
/indirectly by the same c. General Professional Partnership
interest d. Corporation
 Commissioner is authorized 1. Not exempt from income tax;
to distribute, apportion or 2. Exempt from income tax under
allocate gross income or Sec. 30 of NIRC but has not
deductions between or shown proof of exemption.
among such organization,
trade or business, if he INDIVIDUALS EXEMPT FROM FILING INCOME TAX
determines that such RETURN
distribution, apportionment
or allocation is necessary in 1. Individual whose gross income does
order to prevent evasion of not exceed total personal and
taxes or to clearly reflect additional exemptions;
the income of any such 2. Individual with respect to pure
organization, trade or compensation income derived from
business. sources within the Philippines, the
income tax on which has been
FILING OF TAX RETURN AND PAYMENT OF TAX correctly withheld;
3. Individual whose sole income has
TAX RETURN – This is a report made by been subjected to final withholding
the taxpayer to the BIR of all gross income tax;
income received during the taxable 4. Individual who is exempt from
year, the allowable deductions including income tax.
exemptions, the net taxable income, the
income tax rate, the income tax due, SUBSTITUTED FILING – is when the
the income tax withheld, if any, and the employer’s annual return may be
income tax still to be paid or considered as the “substitute” Income
refundable. Tax Return (ITR) of employee inasmuch
as the information provided in his
income tax return would exactly be the

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same information contained in the 6. The employer issues BIR Form 2316
employer’s annual return. (Oct 2002 ENCS) version to each
employee
HOW IS “SUBSTITUTED FILING” DIFFERENT
FROM “NON-FILING”? INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED
FILING (STILL REQUIRED TO FILE)
 Substituted Filing – an individual
taxpayer although required 1. Individuals deriving compensation
under the law to file his income from two or more employers
tax return, will no longer have concurrently or successively during
to personally file his own income the taxable year.
tax return. 2. Employees deriving compensation
– but instead the income, regardless of the amount,
employer’s annual information whether from a single or several
return filed is the considered employers during the calendar year,
“substitute” income tax return the income tax of which has not
of the employee inasmuch as the been withheld correctly (i.e. tax due
information in the employer’s is not equal to the tax withheld)
return is exactly the same resulting to collectible or refundable
information contained in the return.
employee’s return. 3. Employees whose monthly gross
compensation income does not
 Non-filing – applicable to certain exceed P5,000 or the statutory
types of individual taxpayers minimum wage, whichever is higher,
who are not required under the and opted for non-withholding of tax
law to file an income tax return. on said income.
Example: employee whose 4. Individuals deriving other non-
pure compensation income does business, non-profession-related
not exceed P60,000 and has only income in addition to compensation
one employer for the taxable income not otherwise subject to
year and whose tax withheld is final tax.
equivalent to his tax due. 5. Individuals receiving purely
compensation income from a single
SUBSTITUTED FILING OF INCOME TAX RETURNS employer although the income tax of
BY EMPLOYEES RECEIVING PURELY which has been correctly withheld,
COMPENSATION INCOME. [SECTION 4, RR 3- but whose spouse falls under 1 to 4
2002; RMC 01-03] above.
6. Non-resident aliens engaged in trade
Requisites: or business in the Philippines
1. The employee receives purely deriving purely compensation
compensation income (regardless of income, or compensation income
amount) during the taxable year. and other non-business, non-
2. The employee receives the income profession-related income.
only from one employer during the
taxable year. NOTE: Non-filing of ITR, for employees
3. The amount of tax due from the who are qualified for the substituted
employee at the end of the year filing shall be OPTIONAL for the taxable
equals the amount of tax withheld year 2001, the returns for which shall be
by the employer. filed on or before April 15, 2002.
4. The employee's spouse also complies Thereafter, substituted filing where
with all three (3) conditions stated applicable shall be MANDATORY. [Sec 5
above. RR 3-2002)
5. The employer files the annual
information return (BIR Form No.
1604-CF)

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REQUIREMENT OF BANKS FOR SUBMISSION OF Time For Filing (Pay as you file system)
AN ITR FOR LOAN O R CREDIT CARD
APPLICATIONS April 15 – for those earning sole
compensation income or solely business,
Banks may require the submission of practice of profession or combination of
BIR Form No. 1700 (for employees not business and compensation.
entitled to substituted filing of ITR).
However, for employees entitled to RETURN AND PAYMENT OF ESTIMATED INCOME
substituted filing of ITR, the submission TAX BY INDIVIDUAL (SELF-EMPLOYED OR
of the Joint Certification will suffice. PRACTICE OF PROFESSION)
JOINT CERTIFICATION - It is a sworn 1. First quarter - April 15 of current year

statement made by the employer and 2. Second quarter -August 15 of current
employee, which serve the following year
purposes: 3. Third quarter – November 15 of current
1. It contains the employee's consent year
that BIR Form No. 1604CF may be 4. Final quarter - April 15 of the following
considered his substituted return, in year.
lieu of BIR Form No. 1700, which the
employee no longer filed. Note: When the tax due is in excess of P2,
2. It contains the employer's 000 - the taxpayer may elect to pay in two
certification that he has reported (2) equal installments:
the employee's income to the BIR 1st installment - April 15
and that he has remitted the taxes 2nd installment - on or before July 15
on the employee's income, as
indicated in BIR Form No. 1604-CF. EXTENSION OF TIME TO FILE RETURN
3. It serves as proof of financial
capacity in case the employee The Commissioner may on
decides to apply for a bank loan or a meritorious cases grant a reasonable
credit-card, or for any other extension of time for filing income tax
purpose, as if he had in fact filed a return and may subject the imposition of
BIR Form No. 1700. twenty (20) percent interest per annum
from the original due date.
INDIVIDUALS REQUIRED TO FILE AN
INFORMATION RETURN Return Of Husband And Wife
Individuals not required to file an  File one (1) return for the taxpayer
income tax return may nevertheless be year if following requisites
required to file an information return complied;
pursuant to rules and, regulations a. Married individuals (citizens,
prescribed by the Secretary of Finance resident or nonresident aliens)
upon recommendation of the b. Do not derived income purely
Commissioner. from compensation.
 If impracticable to file one return:
PLACE OF FILING each spouse file a separate return of
income but the return so filed shall
1. Legal residence - authorized agent be consolidated by the Bureau for
bank; Revenue District Officer; the purposes of verification for the
Collection agent or duly authorized year.
treasurer
2. Principal place of business UNMARRIED MINOR
3. With the Office of the Commissioner
 Income of unmarried minors derived
from property received by the living

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parent shall be included in the Quarterly returns for the first three
return of the parent, except: (3) quarters on a strictly sixty (60) day
a. when donor’s tax has been paid basis and the final or adjusted return on
on such property, or the 15th day of the fourth (4th) month
b. when transfer of such property is following the close of either a-fiscal on
exempt from donor’s tax calendar year.
PERSONS UNDER DISABILITY  See Annex V for Illustration.
If a taxpayer is unable to make his Who shall file?

own return, it may be made by his The return shall be filed by the
1. duly authorized agents; president, vice-president, or other
2. representative; principal officer, and shall be sworn to by
3. by guardian; such officer and by the treasurer or
4. other person charged with the care assistant treasurer.
of his person or property;
 who will assume the responsibility of WITHHOLDING TAXES
making the return and incurring
penalties provided for erroneous, Withholding Taxes
false or fraudulent return. Kinds:
1. Withholding Tax at Source:
RETURN OF ESTATE, TRUST AND PARTNESHIP a. Final Withholding Tax
b. Creditable Withholding Tax
Estate and Trust with gross income (Expanded withholding tax)
of P20,000 or more and partnership 2. Withholding Tax on Compensation
(whether professional or business) shall (Wages)
file their income tax return on or before 3. Withholding Tax on Creditable
April 15. Value-Added Tax
4. Withholding of Percentage Tax
TAX RETURNS OF GENERAL PROFESSIONAL
PARTNERSHIPS (GPP) FINAL CREDITABLE
 Each GPP shall file in duplicate, a WITHHOLDING WITHHOLDING
return of its income (except those TAX SYSTEM TAX SYSTEM
income exempt)
 Shall set forth: The amount of Taxes withheld on
a. items of gross income and income tax withheld certain income
deductions allowed by the withholding payments are
b. names of partners agent is constituted intended to equal or
as a full and final at least approximate
c. TIN
payment of the the tax due from the
d. address and share of each income due from the payee on the said
partner payee on the said income.
income. [Sec. 2.57
Tax Return of a Corporation (a), Rev. Reg. 2-98]
Those required to file:
1. Corporation subject to tax having The liability for The income
existed during the taxable year, payment of the tax recipient is still
whether with income or not. rests primarily on required to file an
the payor or the income tax return
2. Corporation in the process of
withholding agent. and/or pay the
liquidation or receivership. The payee is not difference between
3. Insurance company doing business in required to file an the tax withheld and
the Philippines or deriving income income tax return the tax due on the
therein for the particular income. [Sec.
4. Foreign corporation having income income. 2.57(B), Rev. Regs.
from within the Philippines 2-98]
Filing of return (Pay as you file system) Time to Withhold Tax at Source

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COMPENSATION EXEMPTED
- arises at the time an income is paid
or payable, whichever comes first. The 1. Remunerations received as an
term “payable” refers to the date the incident of employment
obligation becomes due, demandable or 2. Remunerations paid for agriculture
legally enforceable. (Sec. 2.54.4 Rev. labor
Regs. 2.98) 3. Remunerations paid for domestic
services
Nature of Withholding Agent’s Liability 4. Remunerations for casual not in the
The withholding agent is directly course of an employer's trade or
and independently liable for the correct business.
amount of the tax that should be 5. Compensation for services of a
withheld from the dividend remittance. citizen, resident of the Philippines,
(Commissioner vs. Procter and Gamble, for a foreign government or an
GR No. 66838, December 2, 1991) international organization
6. Damages
CONSEQUENCES FOR FAILURE TO WITHHOLD: 7. Life insurance
1. liable for surcharges and 8. Amount received by the insured as
penalties; return of premium
2. liable upon conviction to a penalty 9. Compensation for injuries and
equal to the total amount of the sickness
tax not withheld, or not accounted 10. Income exempt under treaty
for and remitted. (Sec. 251, 1997 11. Thirteenth (13th) month pay and
NIRC) other benefits
3. any income payment which is 12. GSIS; SSS; Philhealth and other
otherwise deductible from the contributions,
payor’s gross income will not be
allowed as a deduction if it is Tax-Free Covenant BOND [Sec. 57(C)]
shown that the income tax
required to be withheld is not paid COVENANT BONDS – bonds, mortgages,
to the BIR. (Sec. 2.58.5, Rev. Reg. deeds of trust and other similar
2-98) obligations of domestic/resident foreign
corporation, which contain a
Withholding Tax On Compensation contract/provision by which the obligor
Every employer must withhold agrees;
from compensation paid, an amount 1. to pay any portion of the tax
computed in accordance with the imposed upon the obligee;
regulations. 2. to reimburse the obligee for any
portion of the tax; or
Exception: 3. to pay the interest without
Where such compensation deduction for any tax which the
income of an individual: obligor may be required/permitted
1. Does not exceed the statutory to pay or to retain therefrom.
minimum wages; or
2. Five thousand (P5,000) monthly  Obligor shall deduct and withhold a
(P60,000 a year) tax = 30% of the interest and other
 whichever is higher. payments whether interest or other
payments are payable annually or at
ELEMENTS OF WITHHOLDING ON a shorter period; whether bonds,
COMPENSATION securities, obligations had been/will
1. There must be an employer- be issued/ marketed and the
employee relationship interest and other payments paid
2. There must be payment of within and without the Philippines if
compensation or wages for services the interest or other payment is
rendered payable to a non-resident alien or a
3. There must be a payroll period. citizen or resident of the Philippines

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Income of Recipient [Sec. 58 (d)] Multiply by: Tax rate (Sec. 84)
Estate Tax due
 Income which any creditable tax is Less: Tax Credit [if any] (Sec. 86[E] or
required to be withheld at source 110[B]
shall be included in the return of its Estate Tax Due, if any
recipient.
 The excess of the amount of tax
withheld over the tax due on his
GROSS ESTATE
return shall be refunded to him,
subject to Section 204 (abatement,
A decedent’s gross estate includes
refund/credit taxes).
(Sec. 85)
 If amount withheld at source is less
than the tax due on his return, the RESIDENT & NON-
difference is paid in accordance with RESIDENT CITIZEN, NON-RESIDENT
Section 56 (payment and assessment RESIDENT ALIEN ALIEN DECEDENT
of income tax). DECEDENT
 All taxes withheld shall be
considered as trust funds and 1. Real property 1. Real property
maintained in a separate account wherever situated situated in the
and not commingled with any other Philippines.
funds of the withholding agent.
2. Personal property 2. Personal
wherever situated property
B. TRANSFER TAXES a) Tangible, and a) Tangible
b) Intangible property
situated in
TRANSFER TAX INCOME TAX the
Philippines
Tax on transfer of Tax on income b) Intangible
property. personal
property
Rates are lower Rates are higher with a situs
--5% to 20% - -- 5% to 32% in the
estate tax Philippines
-- 2% to 15 % or unless
30% - donor’s exempted
tax on the basis
of
Lesser exemptions More exemptions reciprocity.
The law that governs the imposition of

estate tax
(1) ESTATE TAXES
The statute in force at the time of
DEFINITION: an excise tax on the right of death of the decedent shall govern
transmitting property at the time of estate taxation.
death and on the privilege that a person
is given in controlling to a certain extent Intangible personal properties with a
the disposition of his property to take situs in the Phil. (Sec. 104, 1997
effect upon death. NIRC)
Estate Tax Formula 1. Franchise which must be exercised

in the Philippines;
Gross Estate (Sec. 85) 2. Shares, obligations or bonds issued
Less: (1) Deductions (Sec. 86) by any corporation or sociedad
(2)Net share of the SS in the CPP anonima organized or constituted in
Net Taxable Estate the Philippines in accordance with
its laws;

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1
3. Shares, obligations or bonds issued fixed by the

by any foreign corporation eighty- provincial and city
five per centum (85%) of the assessors
business of which is located in the WHICHEVER IS HIGHER
Philippines;
2) Shares of Stock
4. Shares, obligations or bonds issued
Unlisted
by any foreign corporation, if such Common Shares -book value
shares, obligations or bonds have Preferred -par value
acquired a business situs in the Shares -arithmetic mean
Philippines; between the highest and
5. Shares or rights in any partnership, Listed lowest quotation at a
business or industry established in date nearest the date of
the Philippines. death, if none is
available on the date of
death itself.
Intangible personal property, with a 3)Right to - shall be taken into
situs in the Philippines, of a decedent usufruct, use or account the probable
who is a non-resident alien shall not habitation, as life of the beneficiary in
form part of the gross estate if well as that of accordance with the
(reciprocity clause) (Sec. 104) annuity latest basic standard
mortality table, to be
1. the decedent at the time of his approved by the
death was a citizen and resident of a Secretary of Finance,
foreign country which at the time of upon recommendation of
the Insurance
his death
Commissioner.
a. did not impose a transfer tax or
death tax of any character 4) Personal - whether tangible or
1. in respect of intangible personal property intangible, appraised at
property of citizens of the FMV. “Sentimental
Philippines not residing in that value” is practically
foreign country; or disregarded.
2. the laws of the foreign country of
which the decedent was a citizen
and resident at the time of his death Inclusions in the Gross Estate (Sec. 85)
a. allow a similar exemption from
transfer taxes or death taxes of 1. DECEDENT’S INTEREST
every character To the extent of the interest in
b. in respect of intangible personal property of the decedent at the time of
property owned by citizens of his death.
the Philippines not residing in
that foreign country 2. TRANSFER IN CONTEMPLATION OF
(Reciprocity). DEATH
1. A transfer motivated by the thought
Valuation of the gross estate of impending death although death
may not be imminent; or
The properties comprising the gross
estate shall be valued based on their fair 2. A transfer by which the decedent
market value as of the time of death. retained for his life or for any period
which does not in fact end before his
PROPERTY VALUATION death:
a. the possession or enjoyment of,
1) Real Property - fair market value or the right to the income from
a) as determined by the the property, or
Commissioner or b. the right, either alone or in
b) as shown in the conjunction with any person, to
schedule of values
designate the person who shall

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1
possess or enjoy the property or included in the gross estate if the

the income therefrom. beneficiary is:
a. the estate of the decedent, his
Exception: bona fide sale for an executor or administrator
adequate and full consideration in (regardless whether the designation
money or money’s worth. is revocable or irrevocable); or
b. a third person other than the estate,
3. REVOCABLE TRANSFER executor or administrator where the
A transfer whereby the terms of designation of the beneficiary is
enjoyment of the property may be revocable.
altered, amended, revoked or
terminated by the decedent alone or in 6. TRANSFERS FOR INSUFFICIENT
conjunction with any other person, or CONSIDERATION
where any such power is relinquished in The value to be included in the gross
contemplation of the decedent’s death. estate is the excess of the fair market
It is enough that the decedent had the value of the property at the time of the
power to alter, amend or revoke though decedent’s death over the consideration
he did not exercise such power. received. This is applicable in cases of
transfer in contemplation of death,
Exception: bona fide sale for an revocable transfer and transfer under
adequate and full consideration in general power of appointment made for
money or money’s worth. a consideration but is not a bona fide
sale for an adequate and full
4. TRANSFER UNDER GENERAL POWER consideration in money or money’s
OF APPOINTMENT worth.
A power of appointment is the right
to designate the person or persons who 7. PRIOR INTERESTS
will succeed to the property of the prior All transfers, trusts, estates,
decedent. interests, rights, powers and
The general power of appointment relinquishment of powers made,
may be exercised by the decedent: created, arising, existing, exercised or
1. by will; or relinquished before or after the
2. by deed executed in contemplation effectivity of the NIRC.
of his death; or
3. by deed under which he has retained Property relations between Husband
for his life or for any period not and Wife
ascertainable without reference to The property relations between the
his death or for any period which spouses shall be governed by contract
does not in fact end before his (marriage settlement) executed before
death: the marriage.
a. the possession or enjoyment of,
or the right to the income from In the absence of such contract, or if
the property; or the contract is void:
b. the right, either alone or in On marriages contracted before August
conjunction with any person, to 3, 1988, the system of conjugal
designate the persons who shall partnership of gains shall govern;
possess or enjoy the property or On marriages contracted on or after
the income therefrom. August 3, 1988 (effectivity of the
Family Code of the Philippines), the
Exception: bona fide sale for an system of absolute community of
adequate and full consideration in property shall govern.
money or money’s worth.
Exempt Transmissions (Sec. 87)
5. PROCEEDS OF LIFE INSURANCE 1. The merger of usufruct in the owner
Proceeds of life insurance taken by of the naked title;
the decedent on his own life shall be 2. Fideicommisary substitution;

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1
3. The transmission from the first heir, 5. Cost of burial plot. Tombstone
legatee or donee in favor of another monument or mausoleum but not
beneficiary, in accordance with the their upkeep. In case deceased
will of the predecessor; and owns a family estate or several
All bequests, devices, legacies or burial lots, only the value
transfers to social welfare, cultural and corresponding to the plot where he
charitable institutions no part of the net is buried is deductible.
income of which inures to the benefit of 6. Interment fees and charges.
any individual; Provided, that not more 7. All other expenses incurred for the
than 30% of the said bequests, legacies performance of the ritual and
or transfers shall be used by such ceremonies incident to the
institutions for administration purposes. interment.
Expenses incurred after the
DEDUCTIONS ON GROSS ESTATE interment, such as for prayers, masses,
APPLICABLE TO entertainment, or the like are not
RESIDENT ALIENS AND CITIZENS deductible.
(REVENUE REGULATIONS 2-2003) Any portion of the funeral and burial
expenses borne or defrayed by relatives
and friends of the deceased are not
The following are deductible from
deductible.
the gross estate of citizens and resident
aliens:
B. JUDICIAL EXPENSES OF THE
1. Expenses, losses, indebtedness,
TESTAMENTARY OR INTESTATE
taxes, etc. (ordinary deductions)
PROCEEDINGS
2. Transfer for public use
Expenses allowed as deduction under
3. Vanishing deduction
this category are those:
4. Family home
1. incurred in the inventory-taking
5. Standard deduction equivalent to
of assets comprising the gross
one million pesos (P1,000,000)
estate,
6. Medical expenses
2. administration,
7. Amounts received by heirs under RA
3. payment of debts of the estate,
4917 (Retirement Benefits)
as well as the distribution of the
8. Net share of the surviving spouse in
estate among the heirs.
the conjugal or community property
In short, these deductible items are
expenses incurred during the settlement
1. ORDINARY DEDUCTIONS of the estate but not beyond the last day
prescribed by law, or the extension
A. Funeral Expenses thereof, for the filing of the estate tax
The amount deductible is the lowest return.
among the following:
1. actual funeral expenses C. CLAIMS AGAINST THE ESTATE
2. 5% of the gross estate The word "claims" is generally
3. P200,000. construed to mean debts or demands of
a pecuniary nature which could have
It includes the following: been enforced against the deceased in
1. Mourning apparel of the surviving his lifetime and could have been
spouse and unmarried minor children reduced to simple money judgments.
of the deceased, bought and used in
the occasion of the burial. Claims against the estate or
2. Expenses of the wake preceding the indebtedness in respect of property may
burial including food and drinks. arise out of:
3. Publication charges for death 1. Contract;
notices. 2. Tort; or
4. Telecommunication expenses in 3. Operation of Law.
informing relatives of the deceased.

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1
Requisites:  In all instances, the mortgaged

1. The liability represents a property, to the extent of the
personal obligation of the decedent's interest therein, should
deceased existing at the time of always form part of the gross
his death except unpaid taxable estate.
obligations incurred incident to
his death such as unpaid funeral F. TAXES
expenses (i.e., expenses Taxes which have accrued as of the
incurred up to the time of death of the decedent which were
interment) and unpaid medical unpaid as of the time of death.
expenses which are classified
under a different category of The following are not deductible:
deductions; 1. income tax on income received
2. The liability was contracted in after death
good faith and for adequate and 2. property taxes not accrued
full consideration in money or before death
money's worth; 3. estate tax
3. The claim must be a debt or
claim which is valid in law and G. LOSSES
enforceable in court; Requisites:
4. The indebtedness must not have 1. It should arise from fire, storm,
been condoned by the creditor shipwreck, or other casualty,
or the action to collect from the robbery, theft or embezzlement;
decedent must not have 2. Not compensated by insurance
prescribed. or otherwise;
3. Not claimed as deduction in an
D. CLAIMS AGAINST INSOLVENT PERSONS income tax return of the taxable
estate;
Requisites: 4. Occurring during the settlement
1. The amount thereof has been of the estate; and
initially included as part of his gross 5. Occurring before the last day for
estate (for otherwise they would the payment of the estate tax
constitute double deductions if they (last day to pay: six months after
were to be deducted) the decedent’s death).
2. The incapacity of the debtors to pay
their obligation is proven. 2. TRANSFER FOR PUBLIC USE
C. UNPAID MORTGAGE Requisites:

 In case unpaid mortgage payable is 1. The disposition is in a last will and
being claimed by the estate, testament
verification must be made as to who 2. To take effect after death
was the beneficiary of the loan 3. In favor of the government of the
proceeds. Phil., or any political subdivision
 If the loan is found to be merely an thereof
accommodation loan where the loan 4. For exclusive public purposes.
proceeds went to another person,
the value of the unpaid loan must be Note: This should also include bequests,
included as a receivable of the devices, or transfers to social welfare,
estate. cultural and charitable institutions.
 If there is a legal impediment to
recognize the same as receivable of 3. VANISHING DEDUCTION
the estate, said unpaid obligation/
mortgage payable shall not be DEFINITION: The deduction allowed from
allowed as a deduction from the the gross estate for properties that were
gross estate. subject to donor’s or estate taxes. It is
called vanishing deduction because the

Cabrera, Jhundee
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1
deduction allowed diminishes over a 5. STANDARD DEDUCTION

period of five years. The rate of
deduction depends on the period from A deduction in the amount of One
the date of transfer to the death of the Million Pesos (P1,000,000) shall be
decedent, as follows: allowed as an additional deduction
without need of substantiation.
PERIOD DEDUCTION The full amount of P1,000,000 shall
 1 year or less 100% be allowed as deduction for the benefit
 1 year – 2 years 80% of the decedent.
 2 years – 3 years 60%
 3 years – 4 years 40% 6. MEDICAL EXPENSES
 4 years – 5 years 20%
 Any amount of medical expenses
Requisites: incurred within one year from death
1. the present decedent died within 5 in excess of Five Hundred Thousand
years from transfer of the property Pesos (P500,000) shall no longer be
from a prior decedent or donor. allowed as a deduction under this
2. The property must be located in the subsection.
Phils.  Neither can any unpaid amount
3. The property formed part of the thereof in excess of the P500,000
taxable estate of the prior decedent, threshold nor any unpaid amount for
or of the taxable gift of the donor. medical expenses incurred prior to
4. The estate tax or donor’s tax on the the one-year period from date of
gift must have been finally death be allowed to be deducted
determined and paid. from the gross estate as claim
5. The property must be identified as against the estate.
the one received from the prior
decedent, or something acquired in 7. AMOUNT RECEIVED BY HEIRS
exchange therefor. UNDER REPUBLIC ACT NO.
6. No vanishing deduction on the 4917
property was allowable to the estate
of the prior decedent. Any amount received by the heirs
from the decedent's employer as a
4. FAMILY HOME consequence of the death of the
decedent-employee in accordance with
Conditions: Republic Act No. 4917 is allowed as a
1. The family home must be the actual deduction provided that the amount of
residential home of the decedent the separation benefit is included as
and his family at the time of his part of the gross estate of the decedent.
death, as certified by the Barangay
Captain of the locality where the 8. NET SHARE OF THE
family home is situated; SURVIVING SPOUSE IN THE
2. The total value of the family home
CONJUGAL PARTNERSHIP OR
must be included as part of the gross
estate of the decedent; and COMMUNITY PROPERTY
3. Allowable deduction must be in an
amount equivalent to After deducting the allowable
1. the current fair market value of deductions (only the ordinary
the family home as declared or deductions) appertaining to the conjugal
included in the gross estate, or or community properties included in the
2. the extent of the decedent's gross estate, the share of the surviving
interest (whether spouse must be removed to ensure that
conjugal/community or exclusive only the decedent's interest in the
property), whichever is lower, estate is taxed.
but not exceeding P1,000,000

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1
DEDUCTIONS ON GROSS Limit B. Whichever is lower

ESTATE APPLICABLE TO between:
 Total of estate taxes paid to all
NON-RESIDENT ALIENS foreign countries
 Tax Credit Limit =
The following are deductible from the gross
estate of non-resident aliens: NTE outside Phil. X Phil. estate
NTE, world Tax
1. Expenses, losses, indebtedness and
taxes (ELIT) (ordinary deductions)
SETTLEMENT OF THE
Formula:
Tax = Phil. Gross
ESTATE TAX
Credit Estate X World
Limit World Gross ELIT A. FILING
Estate
Notice Of Death To Be Filed
2. Transfer for public use In all cases of transfers subject to
tax, or where, though exempt from tax,
3. Vanishing deduction on property in the gross value of the estate exceeds
the Philippines. P20,000, the executor, administrator or
any of the legal heirs, within two
4. Conjugal share of the surviving months after the decedent’s death, or
spouse within a like period after qualifying as
such executor or administrator, shall
ESTATE TAX CREDIT give a written notice thereof to the
Commissioner. (Sec. 89)
A tax credit is granted for estate
taxes paid to a foreign country on the An Estate Tax Return Is Required To Be
estate of citizens and resident aliens Filed
subject to the following limitations 1. when the estate is subject to estate
tax; or
1. One foreign country only 2. when the estate is not subject to
The tax credit is whichever is estate tax but the gross estate
lower between: exceeds P 200,000; or
4. Estate tax paid to the foreign 3. regardless of the amount of the
country gross estate, where the gross estate
5. Tax Credit Limit = consists of registered or registrable
NTE, foreign country X Phil. estate property such as motor vehicle or
NTE, world Tax shares of stock or other similar
property for which clearance from
(NTE - Net Taxable Estate) the BIR is required as a condition
precedent for the transfer of
2. More than one foreign country ownership thereof in the name of
The credit shall be that which is the transferee.
the lower amount between Limit A
and Limit B. Time for Filing of the estate tax return
The estate tax return shall be filed
Limit A. Whichever is lower within six (6) months after the death of
between: the decedent.
 Estate tax paid to a foreign
country Extension: The BIR may, in meritorious
cases, grant an extension of not
 Tax Credit Limit =
exceeding thirty (30) days for the filing
NTE, foreign country X Phil. estate
of the estate tax return.
NTE, world Tax

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1
When The Gross Estate Exceeds there is a judicial settlement of

P2,000,000, The Estate Tax Return the estate; or
Shall Be Accompanied By A Statement b. the payment of the estate tax
Which Is Certified By An Independent may be extended for a period
Certified Public Accountant Stating not to exceed two (2) years if
1. the itemized assets of the decedent there is an extra-judicial
with its corresponding gross value at settlement of the estate.
the time of his death, or in the case NOTE: In case the available cash is not
of a non-resident, not citizen of the sufficient to pay its total estate tax
Philippines, that part of his gross liability, the estate may be allowed to
estate situated in the Philippines; pay tax by installment. (Sec. 9F, Rev.
2. the itemized deductions from the Reg. 2-2003)
gross estate;
3. the amount of tax due, whether paid Liability for Payment
or still due and outstanding. The estate tax shall be paid by the
executor or administrator before delivery
Place Where to File the Estate Tax to any beneficiary of his distributive share
Return of the estate.
Such beneficiary to the extent of his
1. Resident Citizen distributive share of the estate shall be
- with the Accredited Agent Bank subsidiarily liable for the payment of
(AAB), Revenue District Officer, such portion of the estate tax as his
Collection Officer or duly authorized distributive share bears to the value of
Treasurer of the city or municipality the total net estate. (Sec. 9G, Rev. Reg.
where the decedent was domiciled at 2-2003)
the time of his death. No judge shall authorize the
distribution of the estate unless a
2. Non-resident (citizen or alien) certification from the Commissioner that
a. has registered executor or tax has been paid is shown. (Sec. 94)
administrator No shares or other forms of securities
- with the Revenue District shall be transferred in the books of any
Office where such executor or corporation, partnership, business or
administrator is registered industry organized in the Philippines,
b. executor or administrator is not unless a similar certification by the
registered Commissioner is shown. (Sec. 97)
- with the Revenue District When a bank has knowledge of the
Office having jurisdiction over death of a person who maintained a
the executor’ or administrator’s joint account, it shall not allow any
residence withdrawal by the surviving depositor
c. no executor or administrator without the above certification. (Sec.
- with the Office of the 97)
Commissioner (Sec. 9C, Rev. Reg. Provided: that the administrator of
2-2003) the estate or any one (1) of the heirs of
the decedent may, upon authorization
B. PAYMENT by the Commissioner, withdraw an
amount not exceeding twenty thousand
Payment of the estate tax due pesos (P20,000) without the said
The estate tax due shall paid at the certification.
time when the estate tax return is filed.
When the Commissioner finds that
the payment of the estate tax on the
due date would impose undue hardships
upon the estate or any heir:
a. the payment of the estate tax
may be extended for a period
not to exceed five (5) years if

Cabrera, Jhundee
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1
There is nothing in the Tax Code and

in the pertinent remedial law that
implies the necessity of the probate
court or estate settlement of court’s
approval of the State’s claim for estate
taxes before the same can be enforced
and collected by the BIR. On the
contrary, under Section 94, it is the
probate or settlement court which is
bidden not to authorize the delivery of
the distributive share to any interested
party without a certification from the
CIR showing the payment of the estate
tax. (Marcos II vs. Court of Appeals, GR
No. 120880, June 5, 1997)
COLLECTION OF TAX FROM THE HEIRS

An estate or inheritance tax,
whether assessed before or after the
death of the deceased, can be collected
from the heirs even after the
distribution of the properties of the
decedent. (Palanca vs. Commissioner of
Internal Revenue, GR No. 16661,
January 31, 1962)
The Government has two ways of

collecting taxes due from the estate.
a. By going after all the heirs and
collecting from each one of
them the amount of the tax
proportionate to the inheritance
received, or
b. Pursuant to the lien created by
Section 219 of the Tax Code
upon all property and rights to
property belonging to the
taxpayer for unpaid income tax,
is by subjecting said property of
the estate which is in the hands
of an heir or transferee to the
payment of the tax due the
estate. (Commissioner of
Internal Revenue vs. Pineda, GR
No. L –22734, September 15,
1967)

Cabrera, Jhundee
Guillermo

Taxation Law

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San Beda College of Law

MEMORY AID IN TAXATION LAW

I. GENERAL PRINCIPLES 6. levied for a public purpose.

REQUISITES OF A VALID TAX

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

4. Non-impairment of Contracts registration fees are regulatory

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

6. Margin Fee – exaction designed to

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TEST IN DETERMINING IF THE IMPOSITION IS A compensation takes place by operation

COMPENSATION OR SET-OFF Enforced Sanction imposed as

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Tax Tariff (2) NON-DELEGABILITY OF THE TAXING

Personal property -tangible: where it

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

principle of mobilia bonds have acquired a business

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

accruing to the Government of the instrumentalities, as well as on its

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

4. Non-Infringement Of Religious process of liabilities should

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Educational Purposes. (Art. VI, Exemption (Art. VI, Sec. 28(4),

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

This constitutes a violation of the output tax or tax on the finished

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

deduction method which allows foreign INCIDENCE OF TAXATION – point on which

(4) TAX AVOIDANCE – the exploitation by

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

c. He who claims exemption should which then becomes contractual and

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Tax amnesty Tax exemption c.) Local Government Code

DOCTRINE OF IMPRESCRIPTIBILTY TAX ENFORCEMENT AND

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

2. Where the facts subsequently BIR shall be under the supervision

RULE OF NO ESTOPPEL AGAINST THE ASSESSMENT – a finding by the taxing

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Victorino. Reviewer on Taxation,

KINDS 4. The authority of the Commissioner

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

4. there must be proper adjustments to ii. any officer or employee of such

II. SECTION 5 (power to obtain III. SECTION 6 (power to make

TAXATION LAW COMMITTEE