NOTES IN TAXATION FOR FINALS
discretion one way to another. In case of
II. NATIONAL TAXATION (National Internal Revenue
Code of 1997, as amended by R.A. 10963 or the Tax
Reform for Acceleration and Inclusion Law)
Taxing Authority
Power and Duties of BIR (Section 2)
The Bureau of Internal Revenue shall be under the supervision and
control of the Department and Finance and its powers and duties
shall:
a. comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and
b. the enforcement of all forfeitures, penalties, and fines
connected therewith,
c. including the execution of judgements in all cases decided
in its favor by the Court of Tax Appeals and the ordinary
courts.
d. The Bureau shall give effect to and administer the
supervisory and police powers conferred to its by this code
or other laws.
Composition of BIR (Section 3)
The BIR shall have
1. A Chief to be known as Commissioner of Internal
Revenue
2. 4 assistant chief to be knows as Deputy Commissioner.
Power of the Commissioner (Section 4)
1. Power to interpret the provisions of this code and other tax
laws (exclusive and original jurisdiction of the
commissioner, subject to the review by the Secretary of
Finance)
2. Power to decide
a. disputed assessments,
b. refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or
c. other matters arising under this code or other laws or
portions thereof administered by the BIR
Subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals (DOF order No. 07-2002)
Note:
Other Matters arising under the NIRC
Other matters includes cases which can be considered
within the scope of the function of the BIR and BOC by
applying the ejusdim generis rule
 As a general rule, the Court of Appeals does not
have the power to review compromise
agreements made between the Commissioner of
Internal Revenue and the taxpayer. Such
authority should be exercised in accordance with
the CIR discretion and courts have no power, as
a general rule, to compel him exercise such
arbitrary or capricious exercise by the CIR of the
power to compromise, the compromised can be
attacked and reversed through judicial process. It
must be noted however, that a compromise is
considered as other matters arising under the
NIRC which vest the CTA with jurisdiction
which decision is appealable to the Supreme
Court.
 The issue of whether or not the BIR’s right to
collect taxes had already prescribed is subject
matter falling under the NIRC. In connection
therewith, the NIRC also states that the
collection of taxes is one of the duties of the
BIR. Thus, from the foregoing the issue of
prescription of the BIR’s right to collect taxes
may be considered as covered by the term
“others matters” over which the CTA has
jurisdiction.
3. Power to Obtain information and to summon , examine
and take testimony (section 5)
4. Power to make assessments, and prescribed additional
requirements for Tax Administration an Enforcement.
(section 6)
 Failure to file return shall not prevent the
commissioner from authorizing the examination
of any taxpayers.
 Any return file shall not be withdrawn. Within 3
years from filling the same may be modified,
changed or amended, provided no notice for
audit or investigation for such return been
actually served upon the taxpayer.
 When the a report required by law as a basis for
the assessment of any national revenue tax shall
not be forthcoming within the time fixed by laws
or rules and regulations or when there is reason
to believe that any such report is false,
incomplete or erroneous, the commissioner shall
assess the proper tax on the best evidence
obtainable.
 In case the person fails to file return or files a
false or fraudulent return, the commissioner
shall make or amend a return from:
a. From his own knowledge
b. From information obtain through testimony
 Commissioner may order inventory taking or place the
business operations under observation and surveillance if
there is reason to believe that such person is not declaring
his correct income, sales or receipts for internal revenue
tax purposes.
Instances when commissioner terminate taxable period
Page 1 of 33
 1. Taxpayer is retiring from business subject to tax
2. Intending to leave the Philippines
3. Remove his property therefrom
4. Hide or conceal his property
5. Performing any act tending to obstruct the proceedings for
the collection of the tax
For purposes of computing any internal revenue tax, the value of the
property shall be valued, whichever is the higher of:
1. Fair market value as determined by the Commissioner
2. Fair market value as shown in the schedule of values of
the Provincial and City Assessors
The commissioner is hereby authorized to inquire into the bank
deposits and other related information held by financial institutions
of :
1. A decedent to determine his gross estate; and
2. Any taxpayer who has filed an application for compromise
of his tax liability under section 204(A)(2) of this code by
reason of financial incapacity to pay tax liability.
3. A specific taxpayer or taxpayers subject of a request for
the supply of tax information from a foreign authority
pursuant to an international convention or agreement on
tax matters to which the Philippines is a signatory or a
party
Powers of the Commissioner which cannot be delegated
1. The power to recommend the promulgation of rules and
regulations by the Secretary of Finance
2. The power to issue rulings of first impression or to
reverse, revoke or modify any existing ruling of the
Bureau.
3. The power to compromise and abate
4. Power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are
produced or kept.
Non-retroactivity of Rulings- (Section 246)
any revocation, modification or reversal of any of the rules and
regulations promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayers, except in the following cases:
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the Bureau of Internal Revenue.
2. Where the facts subsequently gathered by the Bureau of
internal revenue are materially different from the facts on
which the ruling is based; or
3. Where the taxpayer acted in bad faith.
RULE MARING AUTHORITY OF SECRETARY OF
FINANCE
The Secretary of Finance, upon the recommendation of the
Commissioner, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of NIRC (Section 244,
NIRC)
General Principles on the Rule Making Power
1. Rules and regulations as well as administrative opinions
and rulings, ordinarily should deserve weight and respect
by the court.
2. All such issuances must not override, but must remain
consistent and in harmony with the law they seek to apply
and implement.
3. Administrative rules and regulations are intended to carry
out, neither to supplant nor to modify, the law.
Specific Provisions that must be contained in Rules and
Regulations (10 enumerations)
1. The time and manner in which Revenue Regional
Directors shall canvass their respective Revenue Regions
for the purpose of discovering persons and property liable
to national internal revenue taxes, and manner in which
their lists and records of taxable persons and taxable
objects shall be made and kept.
2. The forms and labels, brands or marks to be required on
goods subject to an excise tax, and manner in which the
labelling, branding or marking shall be effected.
3. The conditions under which and the manner in which
goods intended for export, which if not reported would be
subject to an excise tax, shall be labeled, branded or
marked
4. The conditions to be observed by revenue officers
respecting the institutions and conduct of legal actions and
preceedings
5. The manner under which goods intended for storage in
bonded warehouse shall be conveyed thither, their manner
of storage and the method of keeping the entries and
records in connection therewith
6. The conditions under which denatured alcohol may be
removed and dealt in
7. The manner in which revenue shall be collected and paid
8. The conditions to be observed by the revenue officers
respecting the enforcement imposing a tax on estate of a
decedent and other transfers mortis causa
9. The manner in which tax returns, information and reports
shall be prepared and reported and the tax collected and
paid, as well as the conditions under which evidence of
payment shall be furnished the taxpayer, and the
preparation and publication of tax statistics
10. The manner in which internal revenue taxes shall be paid
through the collection officers of the BIR
Criteria for a taxpayer who will satisfy as large taxpayer are:
(section 245)
1. VAT- Business establishment with VAT paid or payable
of at least 100,000 for any quarter of the preceding taxable
year.
2. Excise Tax- Business establishment with excise tax paid
or payable of at least 1,000,000 for the preceding taxable
year.
3. Corporate Income Tax- Business establishment with
annual income tax paid or payable of at least 1,000,000 for
the preceding taxable year.
Page 2 of 33
 4. Withholding Tax- Business establishments with Instances when calendar year as basis for computing
withholding tax payment or remittance of at least income
1,000,000 for the preceding taxable year. 1.1. When the taxpayer is an individual
1.2. When the taxpayer does not keep books of account.
1.3. When the taxpayer has no annual accounting period
1.4. When the taxpayer is an estate or trust
Various Kinds of Revenue Issuances by the CIR
Filing- on or before the 15th of April
1. Revenue Regulations
2. Revenue Memorandum Orders 2. Fiscal Period- it is a period of 12 months ending on the
3. Revenue Memorandum Circulars last day of any month other than December
4. Revenue Administrative Orders
5. Revenue Delagation of Authority Orders Filling- on or before the 15th of the 4th month following the
6. Revenue Special Orders close of the fiscal year.
7. BIR Rullings
8. Revenue Audit Memorandum Orders 3. Short Period
9. Revenue Memorandum Rullings
10. Revenue Bulletins Instances when the taxpayer may have a taxable period
11. Revenue Travel Assignments Orders less than 12 months.
Cases Rulings
3.1. When the corporation is newly organized and
commenced operations on any day within the year.
3.2. When the corporation changes its accounting period
INCOME TAXATION 3.3. When a corporation is dissolved
3.4. When the CIR terminates the taxable period of a
Income Taxation is in the nature of an excise taxation system, or
taxpayer.
taxation on the exercise of privilege, the privilege to earn yearly
3.5. In case of final return of the decedent and such period
profits from various sources. It is a system that does not provide for
ends at the time of his death.
the taxation of property.

Income Tax- is a tax on yearly profits arising from property,

profession, trade or business, or a tax on person’s, emoluments, Kinds of taxpayers
profits and the like (Fisher vs Trinidad GR.L-19030 October 20,
1922) 1. Individuals
1.1. Citizen
Types of Philippine Income Tax 1.1.1. Resident
1.1.2. Non-resident
1. Minimum Corporate Income Tax (MCIT)
1.2. Aliens
2. Capital gain tax on the sale or exchange of unlisted shares
1.2.1. Resident Alien
of stock of a domestic corporation classified as capital
1.2.2. Non-resident Alien
assets
1.2.2.1. Engage in Trade or
3. Capital gain tax on the sale or exchange of real property
Business
located in the Philippines classified as capital assets.
1.2.2.2. Not-engage in trade or
4. Final withholding tax on certain passive investment
business
income
1.2.3. Special Alien
5. Final withholding tax on income payments made to non-
1.3. Special Class of individual employees
resident individuals or corporations
1.3.1. Minimum wage earner
6. Fringe Benefit Tax (FBIT)
7. Branch Profit Remittance Tax
2. Corporations
8. Improperly Accumulated Earnings Tax (IAET)
2.1. Domestic
9. Normal Corporate Income Tax on corporation
2.2. Foreign
10. Graduated Income Tax on individuals
2.2.1. Resident foreign corporation
11. Optional Income Tax of 8% for individuals
2.2.2. Non-resident foreign corporation
12. Special income tax in certain corporations
2.3. Joint Venture and consortium
Taxable Period- is a period within which the net income is 2.4. Partnership
computed as a whole for income tax purposes. 3. Estates
4. Trust
Kinds of Taxable Period

1. Calendar Year- the 12 consecutive months starting from

January and ending December 31. Income Tax System

Page 3 of 33
 1. Global System- system employed where the tax system 4. Methods of accounting
views indifferently the tax based and generally treats in
common all categories of taxable income of the individual
Existence of Income
2. Schedular System- system employed where the income tax
treatment varies and is made to depend on the kind and Receipts not considered as income
category of the taxable income of the taxpayer.
1. Advance payment or deposits for payments
3. Semi-Schedular or semi-global tax system- all 2. Property received as compensation but subject to forfeiture
compensation income, business and professional income, 3. Assessments for additional corporate contributions
capital gains, passive income, and other income not 4. Increments resulting from revaluation of property
subject to final tax are added together to arrive at the gross 5. Parents share in the accumulated and current equity on
income. After deducting the allowable deductions and subsidiaries’ net earnings prior to distributions
exemptions, the taxable income is subjected to one set of 6. Money earmarked for some other persons not included in
graduated tax rate for individual or normal corporate the gross income
income tax for corporation. 7. Money or property borrowed
8. Increase in the net worth resulting from adjusting entries.

When is income considered received for Philippine Income tax

INCOME purposes:

 refers to all wealth which follows into the taxpayer other 1. If actually or physically received by the taxpayer
than as mere return of capital. It includes the forms of 2. If constructively received by the taxpayer
income specifically described as gains and profits,
Constructive receipt- occurs when money consideration or its
including gains derived from the sale or other disposition
equivalent is placed at the control of the person who rendered the
of capital assets.
service without restriction by payor.
 Is a flow of service rendered by capital by payment of Examples of income constructively received”
money from it or any benefit rendered by a fund of capital
in relation to such fund through a period of time 1. Deposits in the bank which are made available to the seller
of services without restriction.
Income vs Capital 2. Issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment
Capital Income
of services rendered.
Constitutes the investment Any wealth which flows into
which is the source of Income the taxpayer other than a mere 3. Transfer of the amount retained by the payor to the
return of capital account of the contractor
Is the wealth Is the service of wealth 4. Interest coupon that have been matured and are payable
Is the tree Is the fruit but have not been encashed.
Fund Flow 5. Undistributed share of a partner in the profits of a general
Return or recovery of capital is Income is subject Income Tax professional partnership.
not subject to income tax

Methods of Accounting

When income is taxable
The following are important considerations to discover whether or
not there is income for tax purposes:
1. Existence of income- there must be income before there
could be income taxation.
2. Realization of income- revenue is generally recognized
when both of the following conditions are met:
2.1. The earning process is complete or virtually
complete.
2.2. An exchange has taken place
Note: Mere increase in the value of the property is
not considered as income for tax purposes since it is
an unrealized increase in capital
3. Recognition of income
GR: The law does not provide for a specific method of accounting to
be employed by the taxpayer.
Exception: Instances that authorizes the CIR to employ a particular
method of accounting of income where:
1. The taxpayer does not employ a method for computing
income
2. The taxpayer’s method for accounting does not clearly
reflect the income.
Test in determining whether income is earned for tax purposes
1. Realization Test- there is no taxable income unless
income is deemed realized. Revenue is recognize when
both conditions are met:

Page 4 of 33
 1.1. The earning process is complete or virtually
completed; and
1.2. An exchange has taken place
2. Claim of right doctrine/ Doctrine of Ownership,
Command, or control- a taxable gain is conditioned
upon the presence of a claim of right to the alleged gain
and the absence of a definite unconditional obligation.
3. Economic Benefit Test/ Doctrine of Propriety Interest-
taking into consideration the pertinent provision of law,
income realized is taxable only to the extent that the
taxpayer is economically benefited.
4. Severance Test- income is recognized when there is
separation of something which is of exchangeable value.
5. All events Tests
Requisites:
1. Fixing of a right to income or liability to pay
2. Availability of the reasonable accurate determination
of such income or liability.
 The all events test requires the right to income or
liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.
However, the test does not demand that the amount of
income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary
to compute the amount with reasonable accuracy.
The failure to determine the exact amount of the
expense during the taxable year when they could
have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these
liabilities by the firm. For another it could have
reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
TAX FREE EXCHANGES
Situs of Income Taxation
Gross Income- means all income derived from whatever source.
Income from whatever source derived- includes all income not
expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in
producing the income. (Gutierrez vs CIR CTA case No. 65, August
31, 1995). Therefore, the source is immaterial, whether derived
from illegal, legal, or immoral sources, it is taxable.
 It includes but not limited to the following:
1. Compensation Income in whatever form paid
2. Gross income derived from the conduct of trade
or business or the exercise of a profession.
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions, and
11. Partner’s distributive share from the net income
of the general professional partnership
Net income taxation- is a system of taxation where the income
subject to tax may be reduced by the allowable deductions.
Taxable income or net income- refers to pertinent items of gross
income specified in the NIRC, less the deductions and/or personal
and additional exemptions if any.
Classification of income subject to tax
1. Compensation Income
2. Fringe Benefits
3. Professional Income
4. Income from Business
5. Income from dealings in property
6. Passive investment income
7. Annuities, proceeds from life insurance or other types of
insurance
8. Prizes and awards
9. Pensions, retirement benefit or separation pay
10. Income from any source whatever
Compensation Income- includes all remuneration for services
rendered by an employee for his employer unless
specifically excluded under the NIRC.
Fringe Benefits- is any good, service or other benefit furnished or
granted by an employer, in cash or in kind, in
addition to basic salaries, to an individual
employee, except a rank and file employee.
Examples
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel
5. Interest on loan at less than market rate
6. Membership Fees, dues and other expenses
athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Education assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of that the law allows.
Professional Income- refers to fees received by a professional from
the practice of his profession, provided that there is
no employer-employee relationship between him
and his clients.
 Professional income shall be subject to creditable
withholding tax rates prescribed.
Income from business- refers to income derived from
merchandising, mining, manufacturing and
farming operation.
Page 5 of 33
Gross Income- equivalent to gross sales less sales return, discounts
and allowances, and cost of goods sold.
Income from dealings in property
Types of properties from which income may be derived (sec. 39)
2. Real property considered as capital asset, whether the
seller is an individual, trust, estate or a private
corporation
 Only individual taxpayers can avail of the holding
period rule. It is not allowed to corporations.

1. Ordinary Assets- properties held by the taxpayer used in

connection with his trade or business. Which includes: No gain or loss shall be recognized- means that if there is gain
1.1. Stocks in trade or other property of kind which would it shall not be subject to tax and if there is a loss it shall not be
be included in the inventory if on hand at the close allowed as deductions.
the taxable year.
1.2. Property held for sale to customer in the ordinary When is gain or loss not recognized in cases of transfers of
course of trade or business shares of stock of corporation in exchange of property?
1.3. Property used in trade or business subject to
allowance for depreciation. Answer: The requisites for the non-recognition of gain or loss
1.4. Real property used in trade or business of the as follows:
taxpayer
1. The transferee is a corporation
2. The transferee exhanges its shares of stock for properties
2. Capital Assets- property held by the taxpayer, whether or
of the transferor.
not connected with his trade or business other than the
3. The transfer is made by the person, acting alone or
above.
together with others, not exceeding four person;
What is the significance of determining whether the capital 4. As a result of the exchange, the transferor, alone or
assets is ordinary or capital? together with others, not exceeding four gains control of
the transferee
Answer: Because they are subjected to different rules. There
are special rules that apply only to capital asset transactions to Merger or consolidation- the acquisition by one corporation of all
wit: or substantially all the properties of another corporation solely for
stock.
1. Holding period
2. Capital loss limitation Capital Loss Limitation Rule- under this rule, capital loss is
3. Net capital loss carry-over (NCLCO) deductible only up to the extent of capital gain. The taxpayer can
only deduct capital loss from capital gain. If there is no capital gain,
What are the treatment of Income realize from sale of a) capital then no deduction is allowed because you cannot deduct capital loss
assets, b) ordinary assets in the preparation of annual income from ordinary gain.
tax returns?
Note: Ordinary loss may be deducted from ordinary gain while only
Answer: from certain types of capital gain may ordinary loss be deducted.

a. Income realized from the sale of capital assets are not
reported in the income tax return as they are already
subjected to final taxes (capital gain tax). What are to be
reported in the annual income tax return are the capital
gains derived from the disposition of capital assets other
than real property or shares of stocks in Domestic
Corporation, which are not subject to final tax.
b. Income realized from sale of ordinary asset is part of
Gross Income, included in the Income Tax Return (NIRC
sec.32 A)
Rule on matching cost- under this rule, only ordinary expenses and
necessary expenses are deductible from gross income or ordinary
income. Capital loss is a non-business connected expenses as it can
be sustained only from capital transactions. To allow the capital loss
as a deduction from ordinary income would counter to the rule on
matching cost against revenue.
Net Capital Loss Carry Over- if any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss shall be
treated in the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than 12 months

NCLCO vs NOLCO
Holding Period Rule
Basis NCLC NOLCO
Where the taxpayer held the capital asset sold for more As to source Arises from capital Arises from
than 12 months, the gain derived therefrom is taxable only to the transactions ordinary
extent of 50%. Consequently, if the taxpayer held the capital asset meaning involving transactions
sold for a year or less, the whole gain shall be taxable. The same capital assets. meaning involving
also applies to capital loss. It is a form of tax avoidance since the ordinary assets
taxpayer can exploit it in order to reduce his tax due (NIRC, Sec. 39) As to who can Can be availed of Can be availed of
avail by individual by individual and
 Holding period does not find application in the case of taxpayer only corporate taxpayers
disposition of: As to period of May be carried Allows carryover
1. Shares of stocks carry over over only in the of operating loss in
next succeeding 3 succeeding years
Page 6 of 33
 taxable year or 5 years, in the 2. The gain from the sale of shares of stock in a domestic
case of mining corporation shall be treated as derived entirely from
companies sources within the Philippines regardless of where the said
shares are sold. ( NIRC Sec. 42 E)
3. Gains realized from the sale, exchange or other disposition
Treatment of capital gains and losses
of real property not located in the Philippines by
1. Sale of Stocks of Coporation resident citizens or domestic corporation shall be subject
a. Stocks traded in the Stock Exchange- subject to stock to ordinary income taxation but subjected to foreign
transactions tax of ½ of 1% on its gross selling price credits. Such income may be exempt in the case if non-
b. Stocks not traded in the stock exchange- subject to resident citizen alien individuals and foreign
capital gain tax (CGT) 15% corporations(RR 7-2003, Sec 4, F)
2. Sale of Real Properties/Land and or Buildings in the 4. In a foreclosure of real estate mortgage, the capital gain
Philippines- subject to capital gain tax but no loss is tax accrues only after the lapse of the redemption period
recognized because gain is presumed. because it is only then that there exists a transfer of
property. Thus, if the right to redeem the foreclosed
Sale to government of real property classified as capital property was exercised by the mortgagor before the
asstes expiration of the redemption period, the foreclosure is not
a taxable event. (Supreme Transliner, Inc vs BPI Family
The taxpayers has two option: Bank Inc.)
a. Include as part of the gross income subject to 5. While conveyance of property was pursuant to a Deed of
allowable deductions and personal exemptions, then Assignment, the assignment was made without monetary
subject to scheduler tax (Note: not available to a consideration. Hence it is not subject to CGT. Neither it is
corporate taxpayer) subject to the regular corporate income tax since DA and
b. Subject to final tax of 6% on capital gains BFAR, which are both government agencies exercising
3. Sale of other capital assets- included in the gross income purely governmental functions when the Deed was
subject to the graduated rates of 5-32% for individual and executed, are exempt from such regular corporate income
the normal corporate income tax of 30% for corporation, tax. (BIR Ruling No. 229-2017 dated May 15, 2017)
and not subject to capital gain tax 6. A buyer is subject to capital gain tax on the exchange of
lots on the basis of prevailing fair market value of the
The appraised value of real properties shall be the highest of the property transferred at the time of the exchange or the fair
three: market value of the property received, whichever is
higher.
1. FMV determined by the Commissioner 7. Real property transactions subject to capital gains tax are
2. FMV as shown in the schedule of values fixed by the not limited to sales. It also includes exchanges of property
provincial and city assessors unless exempted by a specific provisions.
3. FMV as determined by independent appraiser 8. Actual gain is not required for the imposition of the tax
(CGT) but is the gain by fiction of law which is taxable.
Distinguish shares of stocks not listed and traded through stock
Thus, capital gains tax is imposed even though the sale
exchange from those listed and traded through stock exchange
results in net loss.
Not listed Listed
Nature Income Business
Kind of tax Capital Gain Tax Percentage Tax Sale or Disposition of Real Property located in the Philippines-
As to rates Not over 100,000= ½ of 1% if before treated as capital assets subject to 6% final tax imposed based on the
5% TRAIN Law higher amount between the: (NIRC sec 24 D)
In excess of
100,000= 10% if 1. Gross selling price or
before TRAIN Law 2. Fair market value= whichever is higher between
a. Zonal Value- determined by the CIR
15% Final Tax, if
b. Assessed Value- as shown in the schedule of values
covered by the 6/10 of 1% if
of the Provincial and City Assessors
TRAIN Law covered by TRAIN
Law Note:
As to base Net Capital Gain Gross selling price
 Actual gain or loss is immaterial since there is a
conclusive presumption of gain
Note:
 The NIRC speaks of real property with respect to
1. Gains, profits and income derived from the purchase of individual taxpayers, estate and trust, but also speaks of
personal property within and its sale without the land and/or building with respect to domestic
Philippines, or from the purchase of personal property corporations.
without and its sale within the Philippines shall be treated  It is settled that the transfer of property through
as derived entirely from sources within the country in expropriation proceedings is a sale or exchange within the
which sold meaning of Section 24D and 56 (A)(3) of the NIRC, and

Page 7 of 33
 profit from the transaction constitutes capital gain, it is the
seller, or respondents in this case, who are liable to
shoulder the tax. As far as the government is concerned,
the capital gain tax in expropriation proceedings remains
the liability if the seller, as it is a tax on the seller’s gain
for the sale of the real property (Republic of the
Philippines represented by DPWH vs Sps Salvador GR
205428)
Principal Residence- refers to dwelling house, including the land
on which it is situated, where the individual and members if his
family reside and whenever absent, the said individual intends to
return.
 The address shown in the ITR is conclusively presumed as
the principal residence
Sale of Principal residence by individual is exempt from capital
gain tax provided the following requisites are present:
1. Sale or disposition of old actual principal residence by a
citizen or resident alien
2. Proceeds is fully utilized in acquiring or constructing a
new principal residence within 18 calendar months from
the date of sale or disposition.
3. Notify the CIR within 30 days from date of sale or
disposition of his intention to avail the tax exemptions.
4. Can be availed once every 10 years
5. The historical cost or adjusted basis of his old principal
residence shall be carried over the cost basis of his new
principal residence.
6. If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject to CGT.
7. The 6% CGT due shall be deposited with the authorized
agent bank subject to release upon certification by the
RDO that the proceeds of the sale shall have been utilized.
Note:
 If a taxpayer constructed a new residence and then sold his
old house, then the transaction is subject to capital gain
tax, because the law is clear that the proceeds should be
used in acquiring or constructing a new principal
residence. Thus, the old residence should first be sold
before acquiring or constructing the new residence.
Passive Investment Income-
Passive Income- refers to income derived from any activity in
which the taxpayer has no active participation or involvement.
Income subject to final tax- refers to income wherein the tax due is
fully collected through the withholding tax system. Under this
procedure, the payor of the income withholds the tax and remits it to
the government as a final settlement of the income tax due on said
income. The recipient is no longer required to include the item of
income subjected to final tax as part of the gross income in his
income tax return.
Interest Income- is the amount of compensation paid for the use of
money or forbearance from such use.
Deposit Substitutes- This is an alternative form of obtaining funds
from the public other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s
own account for the purpose of re-lending or purchasing of
receivables and other obligations, or financing their own needs or
the needs of their agent or dealer.
 In order to qualify as a deposit substitutes, the borrowing
must be made from twenty (20) individual or corporate
lenders at any one time
Foreign currency deposit system- refers to the conduct of banking
transactions whereby any person whether natural or judicial may
deposit foreign currencies forming part of the Philippine
international reserves.
 15% final tax- if the interest is received by an individual
taxpayer from a depository bank under the expanded
foreign currency deposit system.
Note: Non-resident citizen and nonresident alien are
exempt.
 7.5% final tax- income derived by a domestic corporation
and resident foreign corporation under the expanded
foreign deposit system. (Received by NRFC shall be
exempt)
 10% Final Tax- interest derived from foreign currency
loans granted by depositary banks to residents (Domestic
Corporation or RFC) other than offshore banking units in
the Philippines.
Note: If granted to nonresidents, OBUs or local
commercial banks, it shall be exempt.
Note:
 The obligation to deduct or withhold tax arises at the time
an income is paid or payable, whichever comes first, and
considering further that under the RR 02-98 the term
“payable” refers to the date the obligation becomes due,
demandable or legally enforceable. (EBCC vs CIR G.R
No. 201665 and 201668)
 Cooperatives are not required to withhold taxes on interest
from savings and time deposits of their members
(Dumaguete Cathedral Credit Cooperative vs CIR G.R.
No. 182722 January 22, 2010)
Dividend Income
Dividend- is any distribution made by a corporation to its
shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property.
Kinds of Dividends
1. Cash dividend
2. Property Dividend- ( bonds, securities or stock
investment held by the corporation, not its own stock
3. Stock Dividend- one paid by a corporation with its own
stock
 Stock dividend represents capital and do not
constitute income to its recipient. So that the mere
issuance thereof is not subject to income tax as they
are nothing but enrichment through increase in value
of capital investment. In loose sense, are considered
unrealized gain, and cannot be subjected to income
Page 8 of 33
 tax until that gain has been realized. Before  If derived within the Philippines- subject to 30%
realization, stock dividends are nothing but a NCIT
representation of an interest in the corporate  If derived without the Philippines- exempt from
properties (Commissioner vs ANSCOR G.R. No. tax
108576)
 Stock dividend does not constitute taxable income if Note: In determining the whether income is derived from sources
1. the new shares did not confer new rights nor within or without the Philippines, the ratio of the foreign
interest than those previously existing, and corporation’s Philippine income to the world gross income within 3
2. that the recipient owns the same proportionate years period preceding the declaration of such dividend shall be
interest in the net assets of the corporation. (RR considered as follows
No. 2 Sec. 252)
Less than 50 entirely without
Instances when stock dividend are taxable 50% - 85% Proportionate
More than 85% entirely within
1. Change in the stockholder’s equity,
right/interest in the net assets of the
Summary of tax treatment of dividend received from Domestic
corporation.
Corporation
2. Recipient is other than the shareholder
3. Cancellation or redemption of shares of stock Recipient Rate
4. Distribution of treasury shares DC/ RFC Exempt
5. Dividend declared in the guise of treasury stock RC/ NRC, RA 10%
dividend to avoid the effects of taxation NRA- ETB 20%
6. Different classes of stock were issued NRA- NETB 25%
30% subject to preferential
4. Scrip Dividend- one that is paid in the form or promissory treaty tax rate
notes NRFC
5. Indirect Dividend- one made through the exercise of right 15% under the Tax Sparing
of other means of payment (eg. Cancellation or Rule
condonation of indebtedness)
 On the part of the stockholder whose indebtedness is
Tax Treatment of Royalty Income
condoned is subject to 10% final tax
 On the part of the corporation, said amount cannot be 10% Royalties on books, other
claimed as deduction. It can be considered as interest literary works and musical
on capital therefore not deductible. composition from sources
6. Liquidating dividend- distribution by a corporation of all within the Philippines
its property or assets in complete liquidation or resolution. 20% Other than the royalties subject
It is generally a return of capital, hence it is not taxable. to 10%
Subject to basic tax Royalties derived by RC and
Inter-corporate Dividends- when a dividend is declared by DC from sources without the
one corporation and received by another corporation which is a Philippines
stockholder to the former.

Rules on Intercorporate Dividend Rent

1. From Domestic Corporation Rental income on the lease of personal property located in the
a. Received by Domestic Corporation and Resident Philippines and paid to a non-resident taxpayer shall be taxed as
Foreign Corporation - not subject to tax follows:
b. Received by Nonresident foreign corporation from
Domestic Corporation shall be subject to 15% FWT. NRC NRA
This is known as the tax sparing rule. Vessel 4.5% 25%
Aircraft,
Sparing Rule apply if the country in which the NRFC machineries, and 7.5% 25%
domiciled: other equipment
a. Allows tax credit of 15% against the taxes due Other Assets 30% 30%
from the foreign corporation for taxes deem
paid; or Items considered as additional income
b. Does not imposed income tax on such dividents
1. Obligations of Lessors to 3rd parties assumed by the lessee
2. From Foreign Corporation 2. Value of permanent improvement made by the lessee in
a. Received by a Domestic Corporation- subject to 30% leased property of the lessor upon expiration of the lease.
NCIT.
b. Received by RFC and NRFC Methods in reporting the value of the permanent improvement

Page 9 of 33
 1. Outright Method- the FMV of the improvement shall be
reported as additional rent income at the time such
building or improvements are completed.
2. Spread Out Method- allocated over the life of the lease
the estimated BV of Building or Improvements at the
termination of the lease and report as additional rent for
each year of the lease an aliquot part thereof in addition to
the regular income.
Tax treatment for prizes and winnings
Prizes exceeding 10,000 and other winnings from sources within the
Philippines
RECIPIENTS TAX RATES
Citizens, Resident Alien, or
non-resident alien engaged in 20% final withholding tax
trade or business
Non-resident alien not engage
25% final withholding tax
in trade or business
Corporation (domestic or
30% corporate income tax
foreign)
Prizes and awards exempt from income tax
1. Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic,
literary or civic achievement provided:
a. The recipient was selected without any action on his
part to enter the contest or preceding.
b. The recipient is not required to render substantial
services as a condition to receiving the prize or award
2. All prizes and awards granted to athletes in local and
international competition sanctioned by the national sports
association.
 Sanctioned by Philippine Olympic Committee
3. Prizes that winning inventors receive from the nationwide
contest for the most innovative New and Renewable
Energy System jointly sponsored by the PNOC.
Annuity- refers to the periodic installment payments of income or
pension by insurance companies during the life of a person or for a
guaranteed fixed period of time, whichever is longer, in
consideration of the capital paid by him.
 The portion representing return of premium is not taxable
while that portion that represents interest is taxable.
Proceeds of the life insurance
 Amounts received under a life insurance, paid to
the beneficiaries upon the death of the insured,
and
 Excluded from the gross income of the
beneficiary, (section 32 (B) (1) except
1. If such amount, exceed the aggregate
premiums or consideration.
2. Interest payment thereon
Note: The proceeds from life insurance policy are excluded as part
of the gross estate. For estate tax purposes, the determining factor on
whether the proceeds of insurance shall be excluded in the gross
estate is when the designation of the beneficiary is made irrevocable.
In the event the insured does not change the beneficiary during his
lifetime, the designation shall be deemed irrevocable.
Income from whatever source derived
1. Gains arising from expropriation of property which would
be considered as income from dealings in property.
2. Gains from gambling
3. Gains from embezzlement or stealing money
4. Gains, money or otherwise derived from extortion, illegal
gambling, bribery, graft, and corruption, kidnapping,
racketing, etc.
5. In stock option, the difference between the FMV of the
shares at the time of option is exercised and the option
price.
6. Money received under solutio indebiti
7. Condonation of indebtedness for a consideration
Tax treatment of condonation of indebtedness
1. If an individual performs services for a creditor who in
consideration thereof, cancels the debt, it is income to the
extent of the amount realized by the debtor as
compensation for his services
2. If the creditor merely desires to benefit debtor and without
any consideration cancels the amount of debt, it is a gift,
and need not be included in the latter’s income. The
creditor is subject to donor’s tax
3. If a corporation which a stockholder forgives the debt, the
transaction has the effect of payment of a dividend.
4. An insolvent debtor does not realize taxable income from
the cancellation or forgiveness.
5. The insolvent debtor realizes income resulting from the
cancellation or forgiveness when he becomes solvent.
Tax Benefit Rule or Equitable Doctrine of Tax Benefit- is a
principle that if a taxpayer recovers a loss or expense that was
deducted in a previous year, the recovery must be included in the
current year’s gross income up to the extent that it was previously
deducted.
James Doctrine- this doctrine provides that even though the law
imposes legal obligation upon an embezzler or thief to repay the
funds, the embezzled or stolen money still forms part of the gross
income since the embezzler or thief has no intention of repaying the
money.
Rules on determining income within
Item Determinant
Residence of the debtor/
Interest
obligor
Residence of the corporation
Dividends
paying the dividends
Place of performance of the
Services
service
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 Location or use of the property
Rentals and Royalties
or interest in such property
Sale of real property Location of real property Retirement Benefits, Pensions, Gratuities, etc.
Sale of personal property
1. Retirement benefits received under RA 7641 and;
Produced within and sold Partly from sources within and
without or produced without partly sources without the
and sold within Philippines Salient Features of 7641 (amending labor code with regard to
Purchased within and sale retirement pay of qualified employees in the absence of any
Entirely from sources within retirement plan.
without, or purchased without
the country in which sold
and sale within
Entirely from sources within a. Where the retirement plan is established in the CBA or
Shares of stock of domestic
the Philippines, regardless of other applicable employment contract- any employee may
corporation
where said shares are sold be retired upon reaching the retirement age established in
the CBA or other applicable employment contract.
b. In the absence of reasonable private benefit plan
Exclusion from Gross Income- items which shall not be included
in the Gross Income for purposes of computing the taxpayer’s Optional
taxable income. 1. An employee upon reaching the age of 60 or more
Exclusion Under the NIRC but not beyond 65
2. Served at least 5 years in the establishments
1. Life Insurance 3. Entitle to ½ month salary for every year of service, a
2. Amounts received by insured as return of premium fraction of at least 6 months being considered as one
3. Gifts, bequest and devises year.
Note:
1. Income from such property shall be included in gross Mandatory
income. 1. Employee reaching the age of beyond 65 years
2. Gift, bequest, devise, or descent of income from any 2. Served at least 5 years in the establishments
property, in cases of transfers of divided interest are 3. Entitle to ½ month salary for every year of service, a
included in gross income fraction of at least 6 months being considered as one
4. Compensation for injuries or sickness year.
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Miscellaneous income 2. Those received by officials and employees of private firms,
1. Income derived by foreign government whether individual or corporate, in accordance with a
2. Income derived by the government or its political reasonable private benefit plan maintained by the employer
subdivisions (RA 4917). Provided:
3. Prizes and awards a. The retiring officials or employee has been in the service
4. Prizes and awards in sports competition of the same employer for at least ten (10) years, and
5. 13th month pay and other benefits b. Not less than fifty (50) years of age at the time of his
Note: The total exclusion shall not exceed 90,000 retirement.
which shall cover: c. RPBP must be approved by the BIR
a. Benefit received by officials and employees of d. Must have been availed only once
the national and local government pursuant to 3. Social security benefits, retirement gratuities, pensions and
RA 6686 (An act authorizing annual Christmas other similar benefits received by resident or nonresident
bonus) citizens in the Philippines or aliens who come to reside
b. Benefit received by employees pursuant to PD permanently in the Philippines from foreign government
851 as amended by MO 28 dated August 13, agencies or other institutions, private or public.
1986 4. Benefits due or become due to any person residing in the
c. Benefits received by employees not covered by Philippines under the laws of the United States administered by
PD 851 the United States Veterans Administration.
d. Other benefits such as productivity incentives 5. Benefits received from or enjoyed under the Social Security
and Christmas bonus System (RA 8282)
6. Benefits received from the GSIS (RA 8291).
6. GSIS, SSS, Medicare, and other contributions
7. Gains from Sale of Bonds, Debentures or other
certificate of indebtedness. (with a maturity of more Note:
than 5 years)
8. Gains from redemption of shares in mutual fund 1. Retirement benefits paid by an employer which does not
have a private benefit plan but has an existing CBA
Note: providing for retirement benefits of employees are
excluded from income tax.
1. Informer’s rewards is now subject to a 10% final
withholding tax.
Page 11 of 33
 2. The recipient of separation pay if the cause of separation These are items or amounts authorized by law to be subtracted from
is: pertinent items of gross income to arrive at the taxable income.
death - is the estate unless there is a designated
beneficiary, Taxable Income subject to income allowed deductions from gross
Physical disability or sickness- the employee income
3. Separation pay is not taxable irrespective of the age of
1. Section 24 (A)
the employee, length of service, number of benefits
2. Section 25 (A)
receive or the recipient thereof. (What is excluded from
3. Section 26
gross income is any amount received by an official or
4. Section 27 (A)(B)(C)
employee as a consequence of separation for any cause
5. Section 28 (A)1
beyond the control of the said official or employee. Ex.
Retrenchment, cessation of business, redundancy)
 Deductions represent the expenses of the taxpayer in earning
4. Terminal Leave pay is applied for by an officer or
the income subject to tax as well as the reasonable living
eemployee who has already severed his connection with
expenses
his employer or who is no longer working, it necessary
 There must be specific provision of law allowing the
follows that the terminal leave pay or its equivalent is no
deductions, since deductions do not exit by implication.
longer compensation for services rendered. Therefore it
 There must be proof of entitlement to the deductions. The
cannot be received by the said employee as salary.
burden of proof to establish the validity of claimed is on the
Therefore not subject to tax.
taxpayer. This is consistent with the rule that tax exemptions
5. Terminal leave pay when it is given annually, wherein the
must be strictly construed against the taxpayer and liberally in
vacation or sick leave may be converted into cash
favor of the state.
Treatment:
 Any income payment which is otherwise deductible shall be
a. Private employees
allowed as deduction from gross income only if it is shown
Vacation leave- exempt from tax up to 10 days
that the income tax required to be withheld has been paid to
Sick Leave- always taxable
the BIR
(This applies if the sick leave or vacation leave do
 Domestic Corporation and RFC may opt between OSD and
not form part of the compulsory retirement benefits)
Itemized deductions.
b. Government Employees- both vacation and sick
 The difference between corporations and that of individual
leaves are tax exempt irrespective of the number of
taxpayers when it comes to OSD lies on the basis. For
days.
individual taxpayers it is the Gross Sales, while for
6. Consequential damages representing loss of the
corporations is the Gross Income.
victim’s earning capacity are not excluded (meaning
included) from gross income. Such consequential damages Persons NOT ALLOWED to claim deduction from gross income:
are mere replacements of income which would have been
subjected to tax, if earned. Thus consequential damages is  NRA-NETB and NRFC are subject to final tax on their gross
subject to tax. income derived from sources within the Philippines, hence no
deductions allowed to them.
 RC, NRC and RA whose income is PURELY
COMPENSATION are not entitled to deductions.
MISCELANEOUS INCOME

Income derived by government and its political subdivision-

KINDS OF DEDUCTIONS
exempt from gross income.
Itemized Deductions
GOCC performing:
 The taxpayer has to substantiate his claim for deduction.
a. Governmental Function- tax exempt, unless expressly Without the necessary required receipts as proof of the
taxed existence of his claim, the taxpayer will not be allowed to claim
b. Proprietary Functions- subject to tax, unless expressly a deduction
exempted. 1. Expenses
2. Interest
Note: Rural banks created and organized under the provision of RA 3. Taxes
7353 are exempt from the payment of all taxes, fees and charges 4. Losses
(except corporate income tax and local taxes) for a period of 5 years 5. Bad Debts
from the date of commencement of operations. Rural Banks 6. Depreciation
formed through consolidation may still enjoy the tax exemption for 7. Depletion of oil and gas wells and mines
the entire period of five years from the date of commencement of 8. Charitable and other contributions
operations in case any or both of the constituents banks did not avail 9. Research and development
this exemption, or for the remaining period in case the tax 10. Contributions to pension trusts
exemption was availed.
Expenses

DEDUCTIONS FROM GROSS INCOME

Page 12 of 33
Substantiation Rule- this rule provides that the taxpayer shall 3. Local government taxes
substantiate the expenses being deducted with sufficient evidence
such as official receipt or other adequate records showing: Examples of non-deductible taxes

1. The amount of the expense being deducted 1.
2. The direct connection or relation of the expense being 2.
deducted to the development, management, operation and/
or conduct of the trade, business or profession of the
taxpayer. 3.
4.
Cohan Rule-it is the used of estimates and approximation of the
amount of cash and other assets where the taxpayer lacks adequate 5.
records. 6.
7.
Ordinary Expenses vs. Capital Expenditures 8.
Ordinary Expenses- are those which are common to incur in trade
 Taxes paid and subsequently refunded are taxable only if the
or business. It is usually incurred during a taxable year and benefits
such taxable year.
 It is normal or usual in relation to the taxpayer’s business
Capital Expenditures- are those incurred to improve assets and
benefits for more than one taxable year
Losses
Note:
1.
 The protection of taxpayer’s brand franchise is analogous to the 2.
maintenance of goodwill or title to one’s property which in the
nature of a capital expenditures. An advertising expense of such
nature does not qualify as an ordinary business expense, Types of losses
because the benefit to be enjoyed by the taxpayer goes beyond
1.
one taxable year. (CIR vs General Foods Inc. 401 SCRA 545)
2.
 Expenses must not be against public policy, public moral or law
such as bribes, kickbacks, for immoral purposes.
 Premium of insurance policy are allowed as deduction from
gross income so long as the employer is not the direct or
indirect beneficiary under the policy insurance.
Income tax provided under the NIRC
Income taxes imposed by authority of foreign country,
except when the taxpayer does not signify in his return his
desire to avail of the tax credit
Estate and donor’s tax
Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed
Stock transaction tax
Final taxes
Presumed capital gain tax
VAT
taxes were paid and claimed as deduction and which are
subsequently refunded or credited. It shall include as part of
the gross income in the year of the receipt to the extent of the
income tax benefit of said deduction. It is not taxable if the
taxes refunded were not originally claimed as deductions.
Actually sustained during the year; and
Not compensated for by insurance or other forms of
indemnity.
Ordinary losses- incurred in trade, profession or business
Casualty losses- the loss is of property connected with trade,
business, or profession arising from fire, storm, shipwreck or
other casualty, or from robbery, theft or embezzlement.
 A declaration of loss must be filed with the BIR
within 45 days after the date of event.
Measurement of Casualty Loss

1. Total Loss- Actual loss is the book value of the

Interest- the amount paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s
profession, trade or business.
 The payment for use or forbearance or detention of
money.
Interest paid in advance- paid in advance through discount or
otherwise in case of cash basis taxpayer is allowed as deduction in
the year the debt is paid.
Interest periodically amortized- deducted in proportion to the
amount of the principal paid.
Interest incurred to acquire property used in trade, business or
exercise of profession- at the option of the taxpayer may be allowed
as a deduction or treated as a capital expenditure.
Taxes
Examples of deductible Taxes
1. Import duties
2. Business licenses, excise and stamp tax
asset
2. Partial loss- book value or cost to restore
whichever is lower.
 Any excess of cost to restore over the BV
shall be capitalized.
Net Operating Loss Carry-over (NOLCO)-the excess of allowable
deduction over the gross income of the business in a taxable year.
The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
been previously offset as deduction from gross income shall be
carried over as deduction from gross income for the next 3
consecutive taxable years immediately following the year of such
loss provided:
1. The taxpayer was not exempt from income tax in the year
of such loss
2. There was no substantial change in the ownership of the
business or enterprise
In case of mine other than oil and gas wells, a net operating loss
during the first 10 years of operation shall be allowed as NOLCO for
the next 5 years.

Page 13 of 33
 The running of the 3-year period for the expiry of NOLCO is a. Individual- not exceeding 40% of gross sales or
not interrupted by the fact that such corporation is subject to gross receipts.
MCIT in any taxable year during such 3 year period. However
such corporation cannot enjoy the benefit of NOLCO for as  Shall not be required to submit financial
long as it is subject to MCIT in any taxable period. statements, provided such individual shall keep
 An individual who claims the 40% OSD cannot claim such records pertaining to his gross sales and
deduction of NOLCO simultaneously. Even if NOLCO was not gross receipts
claimed, the 3 year period shall continue to run.
b. Corporation- not exceeding 40% of gross income
Marcelo Doctrine- A loss in one line of business is not permitted as  Unless the taxpayer signifies in his return his intention to
a deduction from gain in another line of business. elect the optional standard deduction, he shall be
considered as having availed itself of the itemized
deductions.
 Such election when made shall be irrevocable for the
taxable year in which the return is made.
 A taxpayer who is required but fails to file the quarterly
income tax return for the first quarter shall be deemed to
have elected to avail of itemized deductions
Depreciation
Person who may avail of the OSD
Depreciation- is the gradual diminution in the useful value of
1. Individual
tangible property resulting from exhaustion, wear and tear and
a. Resident Citizens
obsolescence.
b. Non-resident Citizens
 The person entitle to claim depreciation is the person who c. Resident Alien
sustains an economic loss from the decrease in property 2. Corporations
value due to depreciation which is usually the owner. a. Domestic Corporation
 Nonresident aliens and foreign corporation are allowed to b. Resident Foreign Corporation
deduct only when the property is located within the 3. Partnership
Philippines 4. Estate and Trusts
 The starting point for the computation of the deductions
for depreciation is the reasonable cos of acquiring the asset
and its economic life. The fact that the machineries were INCOME TAX ON INDIVIDUALS
already depreciated by its original owner does not matter. Classes of Individual Tax Payers

1. Citizen
a. Resident Citizen ((taxable on all income derived
Charitable and Other Contributions
from sources within and without the Philippines)
Donations deductible in full b. Non-resident Citizen (taxable only for income
derived within the Philippines)
1. Donations to the Government of the Philippines or to any i. Overseas Contract worker
of its agencies or political subdivision ii. Seaman (vessel engage exclusively in
2. Donations to foreign institutions or international international trade)
organizations pursuance of or in compliance with 2. Aliens (taxable only for income derived within the
agreements, treaties or commitments into by the Philippines)
Government. a. Resident Alien
3. Donations to accredited nongovernment organization b. Non-resident Alien
i. Engage in trade or business
Valuation ii. Not engage in trade or business
 The amount of any charitable contribution of property c. Special Aliens
other the money shall be based on the acquisition cost of 3. Special class of individual employees
the property.  Minimum wage earners

Optional Standard Deductions Taxation on compensation income

 In lieu of the itemized deductions
 It requires no proof of expenses incurred because the
allowable deductions is a percentage not exceeding 40%
of gross sales or receipts or gross income as the case may
be.
Base
 Includes all remuneration for services rendered by an employee
for his employer unless specifically excluded under the NIRC
 The test is whether such income is received by virtue of an
employee-employer relationship
Inclusions in Compensation Income
1. Monetary compensation

Page 14 of 33
 a. Regular salary/wage the employer merely as a means of promoting the health, goodwill,
b. Separation pay/retirement pay not otherwise exempt contentment and efficiency of his employees.
c. Bonuses, 13th month pay, and other benefits not
exempt Examples of De Minimis Benefits and its respective ceiling amounts
d. Directors Fee
De Minimis Ceiling
2. Non-monetary compensation
1. Monetized unused vacation 1. Private Employee
 Fringe benefit not subject to tax leave credits of employees a. Vacation Leave-
exempt up to 10 days
b. Sick Leave- always
Exclusion from Compensation Income taxable
2. Government Employee
1. Fringe benefit subject to tax Vacation and Sick Leave
2. De minimis benefit are always tax exempt
3. 13th month pay and other benefits and payments regardless of the number
specifically excluded from taxable compensation income of days.
2. Medical cash allowance to Not exceeding 750 per
Tax treatment of Fringe Benefit dependents of employees semester or 125 per month
3. Rice Subsidy 1500 or 1 sack of 50 kg rice
If the benefit is not tax-exempt and the recipient is: per month amounting to not
more than 1,500.00
1. Rank and file employee- the benefit shall be part of the 4. Uniforms and clothing Not exceeding 5,000 per
compensation income subject to tax payable by the allowances annum
employee. 5. Actual medical assistance Not exceeding 10,000 per
2. Managerial or supervisory employee- the value shall not annum
be included in the compensation income. The FBT is 6. Laundry allowances Not exceeding 300 per month
payable by the employer on behalf of the employee 7. Employee Achievement In the form of tangible
(section 33 of NIRC) Award under established personal property other than
written plan which does not cash or gift certificate with an
Who is required to pay the FBT? discriminate in favor of annual monetary value not
highly paid employees (ex. exceeding 10,000.00
 It is the employer who is legally required to pay an income tax Lengh of service or safety
on the fringe benefit. The fringe benefit tax is imposed as final achievement
withholding tax placing the legal obligation to remit the tax on 8. Cash given during Not exceeding 5,000 per
the employer, such that if the tax is not paid, the legal recourse Christmas Bonus and major employee per annum
of the BIR is to go after the employer. Any amount or value anniversary celebration
received by the employee as a fringe benefit is considered tax 9. Daily meal allowance for Not exceeding 25% of the
paid hence, net of the income tax due thereon. The person who overtime work basic minimum wage on a pe
is legally required to pay is that person who, in case of non- region basis
payment, can be legally demanded to pay the tax. 10. Benefits received by virtue Not exceeding 10,000 per
of CBA and productivity employee per annum
 The employer can claim the fringe benefit and the FBT as a incentive scheme
deductible expense from his gross income. The deduction for
the employer is the Grossed-up monetary value of the fringe
benefit.
 The amount of benefits exceeding their respective ceilings
 Although the fringe benefit may be exempted from the FBT, it shall be considered as part of 13th month pay and other
may still fall under a different tax under another law, such as benefits which are excluded from gross income provided
compensation income. that they do not exceed 90,000.00.

 The use of aircraft (including helicopter) owned and maintained  Flowers, fruits, books, similar items given to employees
by the employer shall be treated as business use and not be under special circumstances (eg. On account of illness,
subject to the fringe benefit tax. marriage, birth of baby, etc) are now TAXABLE

 Fringe benefits granted for the convenience of the employer is

exempt from Fringe Benefit Tax (FBT). Such shall not be
considered as part of the employees gross income.
De Minimis Benefits
13th Month Pay and Other benefits
Excluded from gross income, provided that they do not exceed
90,000. Any excess thereof is considered part of the compensation
income of an individual, hence, subject to income tax.

These are facilities or privileges furnished or offered by an

employer to his employees (managerial, supervisory or rank and Taxation on Passive Income- see previous notes
file) that are of relatively small value and are offered or furnished by
Page 15 of 33
Taxation on Capital Gains- see above previous notes XPNs- If the returnable income is in the nature of compensation
income but he qualifies a minimum wage earner
Capital vs ordinary assets- see above notes
Requirements in order for senior citizen to avail tax exemption

1. He must be qualified a such by the CIR of RDO for the

Income Tax on Non-resident Aliens engage in trade or
business in the Philippines (Section 25 A)
A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as
an individual citizen and a resident alien individual, on taxable
income from all sources within the Philippines.
place of his residence.
2. File a sworn statement on or before January 31 of every
year that his annual taxable income for the previous year
does not exceed the poverty level as determined by the
NEDA.
3. His name must be included by the RDO in the Master List
of Tax-Exempt Senior Citizens for that particular year.

A nonresident alien individual who shall come to the Philippines

and stay therein for an aggregate period of more than one
hundred eighty (180) days during any calendar year shall be
deemed a nonresident alien doing business in the Philippines Minimum Wage Earners

 Worker in the private sector paid the statutory minimum

Income tax on non-resident aliens not engaged in trade or
business
NRA-NETB shall be taxed on their entire income received from all
sources within the Philippines equal to 25% of such income.
wage, or to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where she/he
is assigned
 Exempt from the payment of income tax on their taxable
income
 Holiday pay, overtime pay, night shift differential pay,
hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.
 However, minimum wage earners receiving other benefits
exceeding 90,000 limit shall be taxable on the excess.

 A NRA-NOT engage in trade or business in the

Philippines shall be taxed based in the gross income, or INCOME TAX ON CORPORATION
whatever is received from sources within the Philippines Section 22 B
(Judge Lamoste)
Includes:
Capital gain realized by NRA-NETB
1. Partnership
1. from the sale of shares of stock not traded in the Stock 2. Joint Stock companies
Exchange in any domestic corporation shall be subject 3. Joint Accounts (cuentas en participacion)
to 15% final tax imposed upon the net capital gains, and 4. Association
2. Sale of real property shall be subject to a final tax of 6% 5. Insurance Companies
based on the gross selling price or current market value
whichever is higher. Not Include

1. General Professional Partnership

2. Joint venture or consortium formed for purposes of
Individual Taxpayers Exempt from Income Tax undertaking construction projects, or
1. Senior Citizen 3. Or engaging pertroleum, coal, geothermal and other
2. Minimum Wage Earners energy operation pursuant to an operating or consortium
3. Persons exempt under international agreement agreement under a service contract with the government.
Senior Citizens- is any Filipino citizen who is a resident of the Kind of Tax
Philippines, and who is sixty (60) years old or above. It may apply to Within Without Rate
Corporation Base
senior citizens with dual citizenship status provided they prove their Net
Filipino Citizenship and have at least six (6) months residency in the DC √ √ Taxable 30%
Philippines. Income
Net
GR: Qualified senior citizens deriving returnable income during the RFC √ x Taxable 30%
taxable year, are subject to income tax and required to file Income
their income tax returns and pay the tax as they file the return. NRFC √ x Gross 30%

Page 16 of 33
 Income 3. Gross Income Tax- 15% of gross income, if qualified,
Special Domestic Corporation when?)
Proprietary Net 4. Final tax on passive income
Eductional √ √ Taxable 10% 5. Interest from deposits and yields and royalties
Institutions Income 6. Capital gains from the sale of shares not traded in stock
Net exchange
Non Profit
√ √ Taxable 10% 7. Income derived under the Expanded Foreign Currency
hospitals
Income Deposit System
Net 8. Inter-corporate dividends
GOCC √ √ Taxable 30%
9. Branch profit remittance tax
Income
Net
Exempt Gov. Inst √ √ Taxable Exempt
Income Conditions for availability of Optional Gross income tax of 15%.
Special Resident Foreign Corporation
2.5% of 1. Available only to firms whose ration of Cost of
International Gross Philippine Sales/Services to Gross Sales/Receipt does not exceed
√ x
Carrier Income Gross 55%
Billing 2. The election shall be irrevocable for 3 consecutive taxable
Offshore Gross 10% Gross years during which the corporation is qualified.
√ X
Banking Units Income Billing 3. Recommendation from the Secretary of Finance
Branch Profit Gross 15% of 4. Approval of the office of the President.
√ X
Remittances Income remittances
Regional area Gross Tax Minimum Corporate Income Tax
√ X
HQ Income Exempt
Regional Gross  The imposition of MCIT is to design to forestall the
√ X 10% practice of corporations such as under-declaration of
Operating HQ Income
Special Non Resident Foreign Corp income or over claiming of deductions in order to reduce
25% of income tax payments.
Cinematographic Gross
√ X Gross  Equal to 2% of gross income.
Fil Income
Income  Being a minimum income tax, a corporation should pay
Lessor of the MCIT whenever its NCIT is lower than the MCIT, or
7.5% of
machinery, Gross when the firm reports a net loss in its tax return.
√ X Gross
equipment, Income Therefore the taxable due for the taxable year will be
Income
aircraft and other NCIT or MCIT, whichever is higher.
Lesser of vessels 4.5% of  The MCIT covers domestic and resident foreign
Gross
chartered by Phil. √ X Gross
Income corporations which are subjected to 30% NCIT; hence
Nationals Income
corporations which are subject to special corporate taxes
do not fall within the coverage of MCIT
Tax rate for NCIT  It is imposed beginning on the 4th taxable year
immediately following the year in which the corporation
32%- Prior to November 1, 2005 commenced its business operation.
 The MCIT shall likewise apply to the quarterly corporate
35%- November 1, 2005 to 2018 income tax but the final comparison between the NCIT
30%- January 1, 2009 until present and MCIT payable shall be made at the end of the taxable
year.

A. Income Tax on Domestic Corporation and RFC Constitutionality of the MCIT

Taxes imposed on FC 1. Imposed on the Gross Income and not on the Capital, thus
it is not arbitrary or confiscatory.
1. NCIT- 30% of taxable Income 2. It is not an additional tax imposition but is imposed in lieu
2. MCIT- 2% of Gross Income (if MCIT applied, when?) of normal net income tax.
3. Optional Gross Income Tax- 15% of gross income, if 3. There is no legal objection to a broader tax base or taxable
qualified, when?) not yet implemented income resulting from the elimination of all deductible
4. IAET- 10% of improperly accumulated earnings items.
5. Final tax on passive income
Suspension of the Imposition of MCIT
Taxes imposed on RFC
If the corporation suffers losses due to the following:
1. NCIT- 30% of taxable Income
2. MCIT- 2% of Gross Income (if MCIT applied, when?) 1. Prolong labor dispute (strike lasted for 6 months)
2. Force Majeure (act of God)

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 3. Legitimate Business Reverses (substantial looses due to
fire, theft or embezzlement)
Branch Profit Remittance
 Profit remitted by branch office of a multinational
corporation to its head office is subject to 15% final tax
based on total profits applied or earmarked for
remittance without deduction for the tax component.
 A branch in classified as a resident foreign corporation.
 Income items not effectively connected with the conduct
of its trade and business in the Philippines are not
considered branch profits
Allowable Deduction of Corporation
 DM and RFC are allowed to claim deductions either the
OSD or itemized deductions. The election to claim OSD
or itemized must be signified in the income tax return filed
for the first quarter of the taxable year. Once the election
is made, it shall be irrevocable for the taxable year for
which the return is made.
Taxation of passive income- see previous discussion
Taxation of capital gains- see previous discussion
B. Income tax on Non-resident Foreign Corporation
 Corporation not engage in trade or business in the
Philippines shall pay a tax of 30% of the gross income
received during the taxable year from all sources within
the Philippines.
 Gross income includes
1. Interst
2. Dividends
3. Rents
4. Royalties
5. Salaries
6. Premiums (except reinsurance premiums)
7. Annuities
8. Emoluments and other fixed or determinable annual,
periodic or casual gains
9. Profits and income
10. Capital gains (except capital gain from sale of shares
of stock not traded in the stock exchange subject to
final tax of 5% and 10%; and dividends received
from a domestic corporation shall be subject to 15%
final withholding tax provided the national law of
foreign corporations allows a taxpayer clause.
Otherwise it will be subject to the normal domestic
rate)
Taxes imposed on Non-resident foreign corporation
1. NCIT- 30% of gross income from all sources within
2. Nonresident cinematographic film owner, lessor of
distributor- 25% of its gross income from all sources
within the Philippines
3. Non-resident owner or lessor of vessels chartered by
Philippine National- 4.5% of gross rentals, lease or charter
fee
4. Non-resident owner or lessor of aircraft, machineries and
other equipment- 7.5% of gross rentals or fees
5. Interests on foreign loans- 20% of interest
6. Intercorporate dividends- 15% of dividends
7. Capital Gains from sale of shares of stock not traded in
stock exchange- 5%- 10% capital gains
 For such a foreign corporation to be considered engage
in trade or business, the business transactions must be
continuous.
C. Income tax on special Corporations
Special Corporation under the NIRC
1. Domestic Corporation
a. Proprietary educational institutions and hospitals
b. Non-profit hospital
c. GOCC, agencies or instrumentalities
d. Depository banks (foreign currency deposits unit)
2. Resident Foreign Corporation
1. International Carrier doing business in the Philippines
2. Off-shore banking units
3. Resident depository banks (foreign currency deposit unit)
4. Regional or area headquarters and Regional Operating
Headquarters of Multinational Companies
Proprietary Educational Institution (sec 27 B)
 Private school maintained and administered by private
individual or groups with issued permit to operate from the
DECS, CHED and TESDA as the case may be.
 Taxed at preferential rate of 10% on their taxable income,
except certain passive income which are subject to final tax.
Qualification for Hospitals to be allowed 10% preferential rate
1. Proprietary
2. Non-profit- means no net income or assets accrues to or
benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and
all its activities conducted not for profit
 If the gross income from unrelated trade/business/other
activity exceeds 50% of the total gross income derived from all
sources, the entire taxable income shall be subject to the
regular corporate tax rate of 30%.
Non stock, non-profit educational institutions- is exempt from tax
in its revenues, and assets actually, directly and exclusively
used for educational purposes
Non-stock non-profit hospitals- is operated for charitable and
social welfare purposes is exempt from income tax. To be
exempt it must be:
1. Nonstock corporation
Page 18 of 33
 2. Operated exclusively for charitable purposes
3. No part of its net income or assets inure to the benefit of
any member, organizer or any specific person.
Government Owned or Controlled Corporations
GR: All GOCC are taxed in the same manner that of domestic
private corporation
Exemptions:
1. GSIS
2. SSS
3. PHIC
4. PCSO
5. LWD
 Even if the GOCC is not one of those enumerated, it E.
may still exempt if it is performing governmental
function
 PAGCOR is no longer exempt from corporate
income tax. Its gaming operation is subject to 5%
franchise tax, while its income from other related
services is subject to corporate income tax.
Gross Philippine Billing- the amount of gross revenue realized
from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight
irrespective of the place of sale or issue and the place of payment of
the ticket or passage.
Off-shore banking units-
 Branch, subsidiary or affiliate or a foreign banking
corporation authorized by BSP to transact offshore
banking business in the Philippines.
 Provide traditional banking services to non residents in
any currency other than Philippine Peso
 Forbidden to make any transactions in Philippine Peso
 Interest income derived from foreign currency loan to
residents other than OBUs or local commercial banks is
subject to 10% final tax
D. Improperly Accumulated Earnings Tax (IAET)
 Tax on profits of corporation that are accumulated, instead
of distributing them to its shareholders, for the purpose of
avoiding the income tax with respect to its shareholders or
the shareholders of another corporation.
Immediacy Test- it is a test to determine the reasonableness to
justify the accumulation of earnings.
 if the corporation did not prove an immediate need for the
accumulation of the earnings and profits, the accumulation
was not for the reasonable needs of the business, and the
penalty tax would apply. GPP and Business Partnership
IAET is applicable to GPP
1. Domestic Corporation Formed by persons for the sole
2. Closely held corporation- at least 50% in value of the purpose of exercising their
outstanding capital stock or at least 50%d of the combined common profession, no part of
voting power of all classes of stock entitled to vote is income is derived from
owned directly or indirectly by or not more than 20
individual
IAET is not applicable to:
1. Publicly-held corporation
2. Bank and other non-bank financial intermediaries
3. Insurance companies
4. Taxable partnerships
5. GPP
6. Non-taxable joint venture
7. Enterprises duly registered with the Philippine Economic
Zone Authority
Exemption from tax on corporation (Sec. 30)
1. Labor, agricultural or horticultural organization not
organized principally for profit.
2. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposed
without profit.
3. A beneficiary society, order or association, operating for
the exclusive benefit of the member.
4. Cemetery company owned and operated exclusively for
the benefit of its members
5. Nonstock religious, charitable, scientific, athletic or
cultural corporations, no part of its net income or assets
shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
6. Business league, chamber of commerce, or board of trade,
not organized for profit and no part of the net income if
which inures to the benefit of any private stockholder or
individual
7. Civic league or organization not for profit but operated
exclusively for the promotion of social welfare.
8. Nonstock and nonprofit educational institution
9. Government education institution
10. Mutual Fire Insurance companies and like organizations
11. Farmers, fruit growers or like Associations
Note:
 Income from any of their properties, real or personal or
from any of their activities conducted for profit regardless
of the disposition made of such income shall be subject to
tax imposed under the NIRC.
 In case of Non stock non profit educational institutions as
long as the income is actually, directly and exclusively
used for educational purpose, such income is exempt as
provided for in Art. XIV, Sec 3 of the 1987 Constitution.
Business Partnership/
General Partnership
Formed by persons for the sole
purpose of engaging in any
trade or business
Page 19 of 33
 engaging in any trade or
business
Not taxable entity
The distributive share of the
partners in the net income is
reportable as part of the
partner’s gross income subject
to the scheduled rates
No need to file an income tax
return but an information
return
Not subject to double taxation
being taxed only one
Considered as a corporation
hence a taxable entity and its
income is taxable as such
The share of the an individual
in t he distributable net income
after tax is subject to a final tax
Must file an income tax return
Taxed once on its income and
again when the share in the
profits of the partners is
distributed; then taxed as
dividend
Capital Gains Tax
1. Shares of Stock
a. Ordinary Return- 30 days after each transactions
b. Final Consolidated Return- on or before April 15 of
the following year
2. Real Property- 30 days following each sale or other
disposition
Substituted Filling- Individual taxpayer receiving purely
compensation income, regardless of amount from only one employer
in the Philippines for the calendar year shall not be required to file
an income tax return, the income tax of which has been withheld
correctly by said employer.
Requirements of Substituted Filing

1. The employee received purely compensation income

 The income from the rental of the house, bought from the during the taxable year.
earnings of co-owned properties, shall be treated as the 2. Received the income from only one employer in the
income of an unregistered partnership to be taxable as a Philippines during the year.
corporation because of the clear intention of the co-owners 3. The amount of tax due from the employee at end of the
to join together in a venture for making money out of year equals the amount of tax withheld by the employer.
rental. 4. The employee’s spouse also complies with all 3 conditions
above
5. The employer files the annual information return (BIR
Filing of returns and payment of Income Tax Form No. 1604-CF)
6. The employer issues BIR Form No. 2316 to each
employee.
Income Tax Return- a report made by the taxpayer to the BIR of all
gross income received during the taxable year, the allowable Married Individuals
deductions including exemptions, the net taxable income, the
income tax rate, the income tax due, the income tax withheld, if any,  Married individuals, whether citizens, resident or non-
and the income tax still due to be paid or refundable. resident aliens, who do not derive income purely from
compensations, shall file a return for the taxable year to
Individual Taxpayers include the income of both spouses.
 The ITR shall be filled on or before April 15 of each year
covering the income for the preceding taxable year.
 For self-employed or in practice of a profession, the Withholding Taxes
taxpayer shall file and pay estimated income tax every
quarter
First Quarter April 15 Concept
Second Quarter August 15  Taxes imposed or prescribed by the NIRC are to be
Third quarter November 15 deducted and withheld by the payor-corporations and/ or
Final Adjusted (annual) return April 15 persons for the former to pay the same directly to the BIR.
Hence, the taxes are collected practically at the same time
the transaction is made or when the taxable transaction
For domestic Corporation and RFC occurs (taxation at source)
 It is embedded in the income tax system to ease the
1. 1st, 2nd & 3rd Quarter 60 days after the close of each administration and collection of taxes. It is not a separate
of the first 3 quarters of the kind of tax as withholding tax is simply a way of
taxable year collecting tax from the source
2. Final Adjusted (annual) On or before April 15
return following the taxable year

Kinds of withholding Taxes

Final Withholding Tax on Passive Income (Manual Filing)
1. Final Withholding Tax (FWT)
1. January to November- 10th day of the month following the - The amount is full and final
month the withholding was made. - The liability for payment of the tax rests primarily on
2. December- January 15 of the succeeding year the withholding agent as payor.

Page 20 of 33
 - In case he fails to withhold, the withholding agent
will be liable for the deficiency
- The payee is not required to file any income tax
return for the particular income
- The finality of the withheld tax is limited in that
particular income and will not extend to the payee’s
other tax liability
2. Creditable Withholding Tax (CWT)
- Taxes are withheld on certain income payments are
intended to equal or at least approximate the tax due
of the payee on said income.
- Creditable tax must be withheld at source, bust
should still be included in the tax return of the
recipient
- The liability to withhold arises upon the accrual, not
upon the actual remittance. The purpose of the
withholding is to compel the agent to withhold under
all circumstances.
Types of Creditable Withholding Tax (CWT)
1. Expanded Withholding Tax- prescribed only for
certain payors and is creditable against the income
tax due of the payee for the taxable quarter / year
2. Withholding tax on compensation- applies to all
employed individuals whether citizens or aliens
deriving income from compensation for services
rendered in the Philippines
3. Withholding tax on government money payments-
withheld before making payments to private
individuals, corporations partnership and or
association.
a. Percentage Tax- taxes is withheld before making
any payments to non-VAT registered taxpayers/
suppliers/ payees.
b. Value Added Taxes - taxes is withheld before
making any payments to VAT registered
taxpayers/ suppliers/ payees on account of their
purchase of goods and services
2. Deduct and withhold- to deduct from all money payments
subject to withholding tax
3. Remit the tax withheld-
4. File Annual return
5. Issue withholding tax certificates
Consequences of failure to withhold
1. Liable for surcharges and penalties
2. Liable upon conviction to a penalty equal to the total
amount of tax not withheld or not accounted for and
remitted
3. Any income payment which is otherwise deductible from
the payer’s gross income will not be allowed as a
deduction.
TRANSFER TAXES
 This are taxes imposed upon the privilege of passing ownership
of property without any valuable consideration.
Kinds of transfer taxes under NIRC
1. Estate Tax
2. Donor Tax
Estate Tax
Estate Tax-in an excise tax imposed upon the privilege of
transmitting property at the time of death and the privilege that a
person is given in controlling to a certain extent the disposition of
his property to take effect upon death.
 Properties and rights are transferred to the successors at
the time of death.
 Estate tax accrues at the time of death of the decedent.
 The statute in force at the time of death of the decedent
governs the imposition of estate tax
 A tax rate of 6% based on the value of such net estate

Filing of Withholding Tax Return Inheritance tax- tax imposed on the legal right or privilege to
succeed to, receive or take property by or under a will, intestacy law,
 The taxes deducted and withheld by the withholding agent or deed, grant of gift becoming operative at or after the death.
shall be held as a special fund in trust for the government
until paid to the collecting officers.  Presently, there is no inheritance tax imposed by law.
 The return for final and creditable withholding taxes shall
be filed and the payment made not later than the last day
of the month following the close of the quarter which the Characteristic of Estate Tax
withholding was made. (section 58)
1. Transfer tax
2. Ad valorem tax
3. National tax
Withholding Agent- is a separate entity acting no more than an
4. General tax
agent of the government for the collection of tax in order to ensure
5. Direct tax
its payments.
6. Excise tax
Duties and obligations of withholding agent
Classification of Decedent
1. Register- to register within 10 days after acquiring such
1. Resident citizens
status with the RDO having jurisdiction over the place
2. Non-resident citizens
where the business is located.
3. Resident alien

Page 21 of 33
 4. Non-resident alien b. Vanishing Deductions
c. Transfer for public use
Note: Only natural persons can be held liable for estate tax. d. Net share of surviving spouse in the community or
conjugal property
Determination of Gross Estate
2. Special Deductions
 The value of the gross estate shall be determined by the a. Family Home
including the value at the time of his death all the b. Standard Deductions
property, real or personal, tangible or intangible, wherever c. Amount Received by heir under RA 4917
situated.
Note: NRA cannot avail of the special deductions
 In case of non-resident decedent who at the time of his
death was not a citizen of the Philippines, only part of the
entire gross estate which is situated in the Philippines shall
be included in his taxable estate. Exclusions from Estate

Items to be included in the gross estate (sec. 85) 1. Exclusion under Sec .85 and 86 of NIRC
1. Exclusive property (capital or paraphernal) of
1. Decedent’s interest surviving spouse
2. Transfer in contemplation of death 2. Property outside Philippines of NRA decedent
3. Revocable transfers 3. Intangible personal property in the Philippines of
4. Property under general power of appointment NRA decedent provided there is reciprocity
 Donee has the power to appoint any person he 2. Exclusion under sec 87 of NIRC
chooses or enjoy the property without 1. The merger or usufruct in the owner of the naked tile
restriction. 2. The transmission or the delivery of the inheritance or
5. Proceeds of life insurance legacy by the fiduciary heir or legatee to the
6. Prior interest fideicommissary
7. Transfer for insufficient consideration- only the amount in 3. The transmission from the first heir, legatee or donee
excess of the FMV at the time of death over the in favor of another beneficiary, in accordance to the
consideration received at the time of transfer. desire of the predecessor.
8. Capital of the surviving spouse. 4. All the bequest, devises, legacies or transfers to social
welfare, cultural and charitable institutions, provided
Note:
no part of the net income of which inures to the
1. Nos. 2, 3, 4 and 7 are properties not physically in the benefit of any individual and that not more than 30%
estate (these have already been transferred during the of the value given is used for administrative pruposes.
lifetime of the decedent but are still subject to payment of 3. Exclusion from estate under special laws
estate tax. Although these properties are inter vivos in 1. Benefits received by members from GSIS and SSS
form, they are treated as mortis causa in substance. 2. Amount received from the Philippine and United
2. A bona fide sale for an adequate and full consideration on States governments for damages suffered during the
money’s worth is a transfer not considered in last war.
contemplation of death and not part of the gross estate. 3. Benefits received by beneficiaries residing in the
3. Revocable transfer is part of the gross estate of the Philippines under laws administered by the US
decedent because the transferor can revoke the transfer Veterans Administration
anytime, such person wield tremendous amount of power 4. Grants and donations to the Intramuros
such that he can revoke the transfer as if non was actually Administration
happened.

Transmission exempted from payment of estate tax

Determination of Net Estate
1. The merger of usufruct in the owner of the naked title
 Determined first the value of the gross estate and 2. The transmission or delivery of the inheritance or legacy
afterwards subtract the allowable deductions. by the fiduciary heir or legatee to the fideicommissary
3. The transmission from the first heir, legatee or donee in
favor of another beneficiary, in accordance with the desire
of the predecessor.
Deductions from Estate
4. All bequest, devises, legacies or transfers to social welfare,
1. Ordinary Deductions cultural and charitable institutions, provided that no part to
a. Expenses, losses, indebtedness, taxes, etc. the benefit of any individual and not more than 30% of the
i. Claims against the estae said bequests, devises, legacies or transfers shall be used
ii. Claims against insolvent person for administration purposes.
iii. Unpaid mortgage or indebtedness
Estate Tax Return
iv. Taxes
v. Losses When it is filed?

Page 22 of 33
  It is filled within 1 year from the decedent’s death.
Extension to file an estate tax return is allowed in
meritorious cases but not to exceed 30 days.
Who files the return?
 Executor
 Administrator
 Any legal heir
Where it is filed?
1. If resident decedent- to an authorized agent bank, RDO,
Collection Officer, or duly authorized Treasurer in the
City or municipality where the decedent was domiciled at
the time of his death, or to the Office of the CIR
2. If nonresident decedent- to the RDO or to the Office of the
CIR
When is the estate tax paid?
 The taxpayer must pay the tax upon filling, under the “Pay
as you file system”. Extension to pay estate tax may be
granted if the Commissioner finds that such payment
would impose undue hardships upon the estate or any heir
and shall
1. Not exceed 5 years in case of judicial settlement
2. Not exceed 2 years in case of extra judicial settlement
3. Payment by installment if and only if the available
cash of the estate is insufficient.
Requisites for granting extension to pay estate tax
1. The request for extension must be filed before
the expiration of the original period to pay
which is 6 months from death.
2. There must be a finding that the payment on the
due date of the estate tax would impose undue
hardship upon the estate or any of the heirs.
3. The extension must be for a period not
exceeding 5 years if the estate is settled
judicially or 2 years if settle extra-judicially.
4. The commissioner may require the posting of a
bond in an amount not exceeding double the
amount of tax to secure the payment thereof.
DONOR’s TAX
Donation- is an act of liberality whereby a person (donor) disposes
gratuitously a thing or right in favor of another (donee) who accepts
it.
Donor’s Tax- is an excise tax imposed on the privilege of
transferring property by way of a gift inter vivos based on pure act
of liberality without any or less than adequate consideration and
without any legal compulsion to give.
Note: The law in force at the time of the perfection/completion of
the donation governs the imposition of donor’s tax.
Kinds of Donations
1. Donation inter vivos- a donation made between living
persons. Its perfection is at the moment when the donor
knows the acceptance of the done. It is subject to donor’s
tax.
2. Donation mortis causa- a donation which takes effect
upon the death of the donor. It is subject to estate tax.
Two fold purpose of Donor’s Tax
1. To supplement estate tax
2. To prevent avoidance of income tax through the device of
splitting income among numerous donees who are usually
members of a family or into many trust, with the donor
thereby escaping the effect of the progressive rates of
income taxation.
Requisites of a valid donation
1. Capacity of the donor to donate
 Shall be determined as of the time of the making of
the donation.
2. Donative Intent
3. Actual or constructive delivery of gift
4. Acceptance by the done
5. Form prescribed by law
 In case of Real Property, donation must be in a
public instrument.
 If Personal Property, it may be made
a. Orally
b. If the value exceeds 5,000, donation must be
made and accepted in writing
.
Note:
1. The amount given by the corporation to the heirs of the
deceased officer of the corporation as gratitude for the past
services rendered by the officer is subject to donor’s tax.
2. Onerous donation is not subject to donor tax because there
is no gratuitous disposal, except
a. where the transfer is for less than an adequate and full
consideration in money or money’s worth;
b. the gift imposes upon the done a burden which is less
than the value of the thing given
3. Renunciation by the surviving spouse of his/ her share in
the conjugal partnership or absolute community after
dissolution of marriage is subject to donor’s tax
4. General renunciation by an heir, including the surviving
spouse, of his/ her share in the hereditary estate left by
the decedent is not subject to donor’s tax because there is
no donation, since the renouncer has never become owner
of the property/share renounced unless specifically and
categorically done in favor of identified heirs to the
exclusion or disadvantage of the other co-heirs in the
hereditary estate.
Transfers which may be considered as donation
1. Sale/ exchange/ transfer of property for insufficient
consideration
2. Condonation/ remission of debt
3. Transfer for less than adequate and full consideration
Rule regarding condonation/ remission of debt
Page 23 of 33
If the creditor condones the indebtedness of the debtor the following wherever located
rules apply NRA All real properties, tangible or
intangible properties located in
1. On account of debtor’s services to the creditor the same is the Philippines unless the
taxable income of the debtor. reciprocity applies
2. If no services were rendered but the creditor simply
condones the debt, it is taxable gift and not a taxable
income. Valuation of gift

Rule for less than adequate and full consideration
GR: the amount by which the FMV exceeds the consideration shall
be deemed a gift and be included in computing the amount of gifts
made during the year.
1. Personal Property- FMV at the time of the gift
2. Real property- FMV determined by the commissioner
(zonal value) or the value fixed by the assessors whichever
is higher. If no zonal value, the basis is the FMV that
appear in the latest tax declaration.

Exceptions:

1. Made in the ordinary course of business Transactions exempt form Donor’s Tax
2. Where the property transferred is Real Property located in
the Philippines considered as capital assets, the transfer is 1. Donation for political campaign purposes
not subject to donor’s tax but to a capital gain tax, a final 2. Certain gifts made by residents
income tax of 6% of the FMV or gross selling price 3. Certain gifts made by non-residents aliens
whichever is higher. 4. Donation of intangibles subject to reciprocity
5. Donation for athlete’s prizes and awards
6. Donation under the “Adopt-a-school program
Determination of Gross Gift 7. Exemption under other special laws

Gross Gift- all property, real or personal, tangible or intangible, that

was given by the donor to the done by way of gift, without the
benefit of any deduction. Gift made by RC, NRC and RA considered exempt from
donor’s tax
Net Gift- is the economic benefit from the transfer that accrues to
the done. 1. Net gifts of the amount of 250,000 or less are exempt
2. Gift made to or for the use of National Government, its
agencies or any of its political subdivision
3. Gift in favor to (CARTERCuPS)
 In valuing a real property for gift tax purposes the property 1. Charitable
should be appraised at the higher of two values as of the time of 2. Accredited NGO
donation which are: 3. Religious
1. The FMV as determined by the commissioner (which is 4. Trust Foundations
the zonal value fixed pursuant to section 16 E of NIRC) 5. Educational Institutions
2. FMV as shown in the schedule of values fixed by the 6. Research Institutions
Provincial or City assessors 7. Cultural Foundation
8. Philanthropic organizations
 The gain from sale or other disposition of property shall be the 9. Social welfare corporations
excess of the amount realized therefrom over the basis or
adjusted basis for determining gain.
1. If the property was acquired by gift, the basis for
determining gain shall be the same as if it would be in the Time of Filing Tax Return
hands of the donor or the last preceding owner by whom
Donor’s Tax return is filed within 30 days after the date the donation
the property was not acquired by gift.
or gift is made.
2. If the property was received by inheritance, the basis in
determining the gain is the fair market value as of the date Contents of the Donor’s Tax Return
of acquisition.
Be made under oath and shall set forth the following:

1. Each gift made during the calendar year which is to be

included in computing net gifts.
2. The deductions claimed and allowable
3. Any previous net gifts during the same calendar year
Composition of Gross grift 4. The name of the done
5. Relationship of the donor to the done
Donor Gross Gift 6. Such other information as the commissioner may requrie
RC, NC, and RA All real properties, tangible or
intangible personal properties

Page 24 of 33

Value Added Tax
Percentage Taxes
 Is a tax imposed on sale, barter, exchange or importation
of goods, or sale of services based upon gross sales, value
in money of receipts derived by the manufacturer,
producer, importer or seller measured by certain
percentage or the gross selling price or receipts. If the
transaction is subject to OPT, it is no longer subject to
VAT. Nonetheless, OPT as well as VAT may be imposed
together with excise tax.
Tax on Persons Exempt from VAT (Sec. 116)- Any persons
1. whose sales or receipts are exempt under Section 109 (BB)
(sale or lease of goods or services, the annual
sales/receipts do not exceed 3 million) of this code from
the payment of value-added tax and
2. who is not a VAT-registered persons
Shall pay a tax equivalent to 3% of his gross quarterly sales or
receipts. Provided, Cooperatives shall be exempt from the 3%
gross receipt tax.
Tax on Franchises (sec. 119)
1. Radio and/or television broadcasting companies whose
annual gross receipts of the preceding year do not exceed
10 million shall pay 3% gross receipt tax (with option to
register as VAT taxpayers.
2. Gas and water utilities shall pay 2% on the gross receipts
derived from the business (without option to register as
VAT taxpayers)
Overseas Communication Tax
 10% tax collected upon every overseas dispatch, message
or conversation transmitted from the Philippines by
telephone, telegraph, telewriter exchange, wireless and
other communication equipment services, based on the
amount paid for such services.
 Collected by the person rendering the services who is
required to pay the tax within 20 days after the end of the
quarter
 Persons liable
- Shall be payable by the person paying for the services
rendered.
 Exemptions
The tax imposed shall not apply to:
1. Government
2. Diplomatic Services
3. International Organizations
4. News Services.
Gross receipts Tax on Banks and Non-Banks Financial
Intermediaries
 A tax on gross receipts derived from sources within the
Philippines in accordance within the following schedule
1. On Interest, commission, and discounts from lending
activities as well as income from financial leasing, on
the basis of remaining maturities of instruments from
which such receipts are derived.
Maturity period is 5 years or less 5%
Maturity period is more than 5 years 1%
2. Dividends and equity shares and net income of
subsidiaries 0%
3. Royalties, rentals of property, real or personal,
profits, from exchange and all other items treated as
gross income under Section32 of this code 7%
4. Trading gains within the taxable year on foreign
currency, debt securities, derivatives and other
similar financial instruments
7%
Amusement Taxes
 Collected from the proprietor, lessee or operator of:
1. Cockpits 18%
2. Cabarets, night or day clubs 18%
3. Boxing exhibitions 10%
Wherein World or Oriental Championships in any division
is at stake shall be exempt from amusement tax. Provided:
1. At least one contenders is a citizen of the Philippines
2. Promoted by a citizens of the Philippines or by a
corporation or association at least 60% the capital is
owned by the citizens
4. Professional Basketball Game 15%
5. Jai Alai and racetracks 30%
 Payable at the end of each quarter, within 20 days after the
end of each quarter.
Tax on sale, barter, or exchange of shares of stock listed and
traded through the Local Stock Exchange or Through IPO.
Through Local Stock Exchange
 A tax rate of 6/10 of 1% of the gross selling price or gross
value in money of the shares of stock sold, bartered or
exchange.
 Shall be paid by the seller or transferor
 Shall meet the minimum public ownership (MPO), if
not satisfied, the sale shall be subject to final tax of either
15% and or 5% or 10%
 Shall be the duty of the stock broker who effected the sale,
to collect and remit the same to the Bureau of Internal
Revenue within 5 banking days from the date of collection
thereof. Section 127 (C)(1)
Through Initial Public Offering (IPO)
 A tax on the disposition through IPO of shares of stock in
closed held corporations based on the selling price or gross
value in money of the shares of stock sold in accordance
with the proportion of shares of stock sold to the total
outstanding shares of stock after listing in the local stock
exchange.
Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Page 25 of 33
 Over 33 1/3% 1%
 It shall be paid by the issuing corporation (primary
offering) or by the seller (secondary offering)
 Return
For Primary Offering- the corporate issuer shall file the
return and pay the tax within 30 days from
the date of listing of the shares of stock in
the Local Stock Exchange.
For Secondary Offering- Shall be the duty of the stock
broker who effected the sale, to collect and
remit the same to the Bureau of Internal
Revenue within 5 banking days from the
date of collection thereof. Section 127 (C)
(1)
Filing and payment for returns
Returns and payment of Percentage Tax
 In General shall be filed within 25 days after the end of the
each taxable quarter
 Person retiring from business subject to percentage tax
shall file his return and pay the tax due within 20 days
after closing his business.
 Person whose VAT registration has been cancelled, the tax
accrue from the date of cancellation
 When it is found that a person failed to issue receipts or
invoices, or when no return is filed, or there is reason to
believe that the books or other records do not correctly
reflect the declaration, the commissioner, after taking into
account the sales, or after taking considerations of other
relevant information may prescribe a minimum amount of
Excise Tax on Imported Articles
such gross receipt, sales and taxable base and such amount
so prescribed shall be prima facie correct for purposes of
determining the internal revenue tax liabilities.
EXCISE TAX ON CERTAIN GOODS AND SERVICES
 A tax imposed on goods either as imported to the country,
manufactured or produced in the country for domestic
sale, or for consumption or any other disposition; and on
services performed in the country.
Kinds of Excise Taxes
Excise Tax on automobiles
1. Specific Taxes- imposed and based on the weight and
volume capacity or any other physical unit of
measurement.
2. Ad valorem Tax- imposed and based on the selling price
or other specified value of the goods.
Person liable to pay Excise Tax
1. Manufacturer or producer of goods
2. Importer of goods
3. In case of indigenous petroleum, natural gas or liquefied
natural gas, the excise tax is paid by the first buyer,
purchaser, or transferee
Products or articles subject to excise tax
1. Distilled spirits (liquor)
2. Wines
3. Fermented liquors (beer)
4. Tobacco products
5. Cigars
6. Cigarettes
7. Automobiles
8. Manufactured oil and other fuels (gasoline)
9. Mineral products (gold, silver, copper, etc)
10. Non-essential goods (accessories, decoration, perfumes,
jewelries etc)
11. Sweetened beverages
12. Cosmetics procedures
 A separate return is required for every place of production
 Is to be paid to any authorized agent bank, revenue
collection officer or duly authorized city or town treasurer
 General Rule: payable before removal of the products
from the place of production
 Exception:
1. Locally produced or extracted metallic mineral or
mineral products, the person liable shall file and pay
the tax within 15 days after the end of the calendar
quarter when such products were removed.
2. Imported mineral products, whether metallic or non-
metallic, shall be paid before their removal from the
customs custody.
 Paid by the owner or imported of goods before the release
of such articles from the custom house
 Tax free articles brought or imported into the
Philippines by person exempt from tax and subsequently
sold to non-exempt persons or entities, the purchases
shall be considered the importers thereof and shall be
liable for the duty and internal revenue tax due.
 Importation (goods) made directly by a government-
owned and operated duty-free-shop shall be exempt from
all applicable duties. Provided, shall be labelled ‘duty free’
and ‘not for resale’.
 An advalorem tax based on the manufacturer’s or
importer’s selling price, net of excise tax and value added
tax.
 Schedule
Manufacturer’s Price/
Rate
Importer’s Selling Price
Up to 600,000 4%
Over 600k to 1 million 10%
Over 1 million to 4 million 20%
Over 4 million 50%
Provided:
1. Hybrid vehicles are subject to 50% excise tax
2. Purely electric vehicles and pick-ups shall be exempt
from excise tax
Page 26 of 33
 Hybrid vehicles- is motor vehicle powered by electric part thereof, of the issue price
energy, with or without provision for off- of any such debt instruments.
vehicle charging, in combination with gasoline, 7. Bill of exchange or Draft 0.60 on each 200, or fractional
diesel or any other motive power. part thereof, of the face value
of any such bill of exchange or
Tax on non-essential Goods draft
8. Acceptance of bill of 0.60 on each 200, or fractional
 20% tax based on the wholesale price or the value of exchange part thereof, of the face value
importation used by the Bureau of Customs in determining of any such bill of exchange or
tariff and customs duties, net of excise tax and value- draft, or the Philippine
added tax equivalent of such value, if
expressed in foreign currency
Examples of non-essential goods 9. Foreign bill of exchange 0.60 on each 200, or fractional
and letter of credits part thereof, of the face value
1. Jewelry of any such bill of exchange or
2. Perfumes and toilet waters draft, or the Philippine
3. Yachts and other vessels intended for pleasure or sports equivalent of such value, if
expressed in foreign currency
Tax on non-essential services 10. Life insurance policies
 Tax equivalent to 5% based on the gross receipts derived 11. Policies on Insurance 0.50 on each 4.00, or fractional
Upon Property part thereof, of the amount of
from the performance of services, net of excise tax and
premium charged
value-added tax
12. Fidelity Bond and Other 0.50 on each 4.00, or fractional
Examples of non-essential services Insurance Policies part thereof, of the amount of
premium charged
1. Invasive cosmetic procedures 13. Policies on Annuities 1.00 one each 200 or fractional
2. Surgeries part thereof, of the premium or
3. Body enhancements directed solely towards improving, installment payment of the
altering, or enhancing the patient’s appearance and do not contract price collected
14. Pre-needs Plan 0.40
meaningfully promote the proper function of the body or
15. Indemnity Bonds 0.30 on each 4.00 or fractional
prevent or treat illness or disease.
part thereof, of the premium
Documentary Stamp Tax charged
16. Certificates 30.00
 Is a tax on documents, instruments, loan agreements and 17. Warehouse Receipts 30.00
paper evidencing the acceptance, assignment, sale, or 18. Jai-alai, Horse Race 0.20
transfer of an obligation, right or property incident thereto. Tickets, Lotto, or other If the cost of the ticket excees
Authorized Number 1.00, am additional tax of 0.20
Games on every 1.00 or fractional part
Documents subject to DST thereof
19. Bill of lading or receipts 2.00 if the value exceeds 100
1. Original Issue of Stock 2.00 on each 200, or fractional and does not exceed 1,000
part thereof, of the par value of
original issue of shares of 20 if the value exceeds 1,000
stocks 20. Proxies 30.00
2. Sales, agreement to sell, 1.50 one each 200, or 21. Powers of Attorney 10.00
Memoranda of Sales, fractional part thereof, of the 22. Leases and Other Hiring 6.00 for the first 2,000, and
Deliveries or transfer of par value. Agreements additional 2.00 for every 1,000
shares of stock or in excess to the first 2,000
certificates of stock In case of no par value, the 23. Mortgages, Pledges, and
DST shall be equivalent to Deeds of Trust
50% of the DST paid upon the 24. Deed of Sale, 15.00 for first 1,000 of the
original issuance of said stock Conveyances and value received
3. Bonds, Debentures, Donation of Real Property Additional 15.00 for every
Certificates of Stock or 1,000 in excess of the first
Indebtedness issued in 1,000
foreign countries 25. Charter Parties and
4. Certificate of Profits or 1.00 on each 200, or fractional Similar Instruments
interest in Property part thereof, of the face value 26. Assignment and Renewal
Accumulations off such certificate or of Certain Instruments
memorandum
5. Bank checks, Draft, 3.00
Certificates of Deposit not
bearing interest
6. Debt Instruments 1.50 on each 200, or fractional

Page 27 of 33
Documents and Paper no subject to stamp Tax
1. Sale, barter or exchange of shares of stocks listed and
traded through the local stock exchange.
2. Fixed income and other securities traded in the secondary
market or through an exchange.
3. Derivatives
4. Interbranch or interdepartmental advances within the same
legal entity
5. All forbearance arising from sales or service contracts
including credit card and trade receivables
6. Bank Deposit account without a fixed term or maturity
7. All contracts, deeds, documents and transaction related to
the conduct of business, of the Bangko Sentral ng
Pilipinas
8. Transfer property pursuant to Section 40(C)(2) of the
NIRC of 1997 as amended
9. Interbank call loans with maturity of not more than 7 days
to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks
10. Remittances of overseas contract worker
Payment of Documentary Stamp Tax
 The tax return shall be filed within 10 days after the
close of the month when the taxable document was made,
signed, issue, accepted or transferred and the tax thereon
shall be paid at the same time the aforesaid return is fled
 Shall be paid through the authorized agent bank within the
territorial jurisdiction of the RDO which has jurisdiction
over the residence or principal place of business of the
taxpayer.
 The return shall be filed with the Revenue District Officer,
collection agent or his duly authorized treasurer or the city
or municipality in which the taxpayer has his legal
residence or principal place of business.
 In lieu of the above the tax may be paid either through:
1. Purchase and actual affixture, or
2. Imprinting the stamps through a documentary stamp
metering machine.
Effect of Failure to Stamp Taxable Document
An instrument document paper which is required by law to stamped
and which has been signed, issued, accepted or transferred without
being duly stamped, shall not be recorded, nor shall it or any copy
thereof or any record of transfer of the same be admitted or used in
evidence in any court until the requisites stamp or stamps shall have
been fixed thereto and cancelled.
No notary public or other officer authorized to administer oaths shall
add his jurat or acknowledgement to any document subject to
documentary stamp tax unless the proper documentary stamps are
affixed thereto and cancelled
GENERAL PRINCIPLES
Taxation- is an inherent power of the sovereign exercise through
legislature, to impose burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of government.
Purpose of taxation
1. Primary or revenue purpose- to raise funds or property to
enable the State to promote the general welfare and
protection of the people.
2. Secondary or non-revenue purpose
a. Promotion of general welfare- may be use as an
implement of police power to promote general
welfare of the people.
b. Regulation of activities/ industries
c. Reduction of social inequality- a progressive system
of taxation prevents the undue concentration of
wealth in the hands of few individuals. Progressivity
is based on the principle that those who are able to
pay more should shoulder the bigger portion of the
tax burden.
d. Encourage economic growth- grant of incentives or
exemptions encourage investment thereby stimulating
economic activity.
e. Protectionism
Nature of Taxation
1. Inherent attribute of sovereignty
 It is inherent in a sovereign state because it is a
necessary attribute of sovereignty. Without this
power no sovereign State can exist or endure.
The power to tax proceeds upon the theory that
the existence of a government is a necessity and
this power is an essential and inherent attribute
of sovereignty, belonging as a matter of right to
every independent state or government without
being expressly conferred by the people. No
sovereign state can continue to exist without the
means to pay its expenses; and that those means,
it has the right to compel all citizens and
property within its limits to contribute, hence the
emergence of taxation.
2. Legislative in Character
 Power of taxation can only be exercised through
the enactment of law. It is legislative in nature
since it involves the promulgation of laws. The
legislature determines the coverage, objects,
nature, extent and situs of the tax to be
imposed. Such power is exclusively vested in
the legislature except where the constitution
provides otherwise.
 It does not need constitutional conferment.
Constitutional provisions do not give rise to the
power to tax but merely impose limitations on
what would otherwise be an invincible power.
Scope of Legislative Power in taxation
1. Determination of (ASK-MAPS)
a) Amount and rate of tax
Page 28 of 33
 b) Subjects of taxation
c) Kind of tax to be collected
d) Method of collection
e) Apportionment of the tax
f) Purposes which the taxes will be levied, provided they are
public purpose
g) Situs of Taxation
2. Grant of Exemptions and condonation
3. Power to specify or provide for administrative as well as
judicial remedies.
Characteristics of Taxation (SPUC)
1. Supreme
2. Plenary
3. Unlimited
4. Comprehensive
Police power and taxation can co-exist in one act of the government
because taxation is no longer envisioned as a measure merely to
raise revenue to support the existence of the government. Taxes may
be levied with a regulatory purpose to provide a means for the
rehabilitation and stabilization of a threatened industry which is
affected with public interest as to be within the police power of the
state.
Underlying Theories and Basis of Taxation
1. Lifeblood theory- it expresses the underlying basis of
taxation which is governmental necessity, for indeed,
without taxation, a government can neither exist nor endure.
 The government chiefly relies on taxation to
obtain the means to carry on its operations.
Taxes are essential to its very existence.
2. Necessity Theory- the theory behind the existence of the
power to tax emanates from necessity. Without taxes, the
government cannot fulfill its mandate of promoting the
general welfare and wellbeing of the people (Gerochi vs.
Department of Enerty, 527 SCRA 696, 2007)
3. Benefits-protection theory/ Doctrine of Symbiotic
Relationship- the reciprocal relation of protection and
support between the state and the taxpayer. The state gives
protection and for it to continue giving protection it must
be supported by the taxpayers in the form of taxes.
 It is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary
method of exaction by those in the seat of
power.
4. Jurisdiction over subjects and objects- it is the country,
state or sovereign that gives protection and has right to
demand payment of taxes with which to finance activities
so it could continue to give protection. Taxation is
territorial because it is only within the confines of its
territory that a country, state or sovereign may give
protection.
Principles of a Sound Tax System
1. Fiscal Adequacy- revenue raised must be sufficient to
meet government/public expenditures and other public
needs.
2. Administrative Feasibility- the tax system should be
capable of being effectively administered and enforced
with the least inconvenience to the taxpayer.
3. Theoretical Justice- the tax should be collected on the
basis of ability to pay through a progressive system of
taxation. Thus, the incidence or burden of taxation should
fall more on those who could afford.
Doctrines in Taxation
1. Prospectively of Tax Laws
GR: Tax laws must be imposed prospectively
Exception: If the law EXPRESSLY provides for
retroactive application. Retroactive application of revenue
laws may be allowed if it will not amount to denial of due
process. There is violation od due process when the tax
law imposes harsh and oppressive tax.
 The prohibition against ex post facto laws
applies only to criminal matters and not to laws
which are civil in nature.
 When it comes to civil penalties like fines and
forfeitures (except interest), tax laws may be
applied retroactively, unless it produces harsh
and oppressive consequences which violate the
taxpayer’s constitutional rights regarding equity
and due process.
 Criminal penalties arising from tax violations
may not be given retroactive effect.
 The retroactive application of BIR regulation
that is prejudicial to the taxpayer is a violation of
due process. When there is clash between the
lifeblood doctrine and due process, the later
prevails (Commission vs CIR G.R No. 117982
Feb. 6, 1997)
 Retroactive application of revenue laws may be
allowed if it will not amount to denial of due
process. There is denial of due process when the
tax law imposes harsh and oppressive tax.
2. Imprescriptibility of taxes
GR: Taxes are imprescriptible by reason that it is the
lifeblood of the government.
Exception: The tax laws may provide for statute of
limitations. In the particular the NIRC and LGC provides
for the prescriptive periods for assessment and collection
 Tax laws provide for statute of limitations in the
collection of taxes for purposes of safeguarding
taxpayers from any unreasonable examination,
investigation or assessment. (CIR vs. B.F
Goodrich Phils, G.R No. 104171 Feb. 24, 1999)
3. Double Taxation- presupposes the existence of two tax
laws which impose dual burdens upon the taxpayer
 There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
Page 29 of 33
 provided some other constitutional requirement
is not hereby violated, such as the requirement
that taxes must be uniform.
Two types of
1. As to validity
a. Direct (strict sense)- it violates the equal
protection clause of the constitution.
Elements of direct double taxation
1. The same property is taxed twice when it should be tax
only once;
2. Both taxes are imposed on
a. The same subject matter
b. The same purpose
c. The same taxing authority
d. Within the same jurisdiction
e. During the same taxing period
f. The taxes must be of the same kind or character
b. Indirect (broad sense)- it is permissible
double taxation. It does not violate the
constitution.
 There is indirect double taxation when one of
the elements of direct double taxation is absent
2. As to scope
a. Domestic Double Taxation- imposed by the national and
local government within the same State
b. International Double Taxattion- imposition of comparable
taxes in two or more States on the same taxpayer in
respect of the subject matter and for identical period.
Construction and Interpretation of:
a. Tax Laws
GR: Tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer. The
imposition of tax cannot be presumed.
 Taxes, as burdens which must be endured by the
taxpayer, should not be presumed to go beyond
that the law expressly and clearly declares.
Exception: when there is strict interpretation of tax laws
against the taxpayer and liberally in favor of the government. If
provisions of the tax law is so clear that it brooks no other
interpretation than to apply the law as it is. (Domondon)
b. Tax exemptions and exclusions
GR: Statues granting tax exemptions are construed in
strictissimi juris against the taxpayers and liberally in favor of
the taxing authority. (MCIAA vs. Marcos G.R No. 120085 Sept.
11, 1996)
 The burden of proof rest upon the party claiming
the exemption of prove that it is in fact covered
by the exemption so claimed. (Quezon City et.
Al vs ABS-CBN Broadcasting Corporation G.R.
No. 166408 Oct. 6, 2008)
Exception: (Domondon Book)
1. When the statute granting exemption provides for liberal
construction thereof.
2. In case of special taxes relating to special cases and
affecting only special classes of persons.
3. If exemptions refer to the public property
4. In cases of exemptions granted to charitable and
educational institutions or their property
5. In cases of exemptions in favor of a government political
subdivision or instrumentality.
6. A tax refund based on solutio indebeti
c. Tax rules and regulations
 The construction placed by the office charged with
implementing and enforcing the provisions of a Code
should be given controlling weight unless such
interpretation is clearly erroneous.
 Revenue Memorandum Circulars must not override,
supplant, or modify the law, but must remain consistent
and in harmony with the law they seek to apply and
implement. (CIR vs SM Prime Holdings Inc. 613 SCRA
774.
 It is of course axiomatic that a rule or regulation must
bear upon, and be consistent with the provisions of the
enabling statute if such rule or regulation is to be valid.
In case of conflict between a statute and an
administrative order, the former must prevail. (Fort
Bonifacio Development Corporation vs. CIR G.R No.
175707 November 19, 2014)
 A reversal of a BIR ruling favorable to a taxpayer would
not necessarily create a perpetual exemption in his favor,
for after all the government is never estopped from
collecting taxes because of the mistake or errors on the
part of its agents. (Lincoln Philippine Life Insurance
Company, Inc vs CA 293 SCRA 92,99)
Scope and Limitations of Taxation
 As a general rule, the power to tax in an incident of
sovereignty and is unlimited in its range, acknowledging
in its very nature no limits so that security against its abuse
is to be found only in the responsibility of the legislature
which imposes the tax in the constituency who are to pay
it.
Limitations on the power of Taxation
1. Inherent Limitations- these are part and parcel of the
power of taxation and originate from the very nature of
taxation
2. Constitutional Limitations- These are the restrictions
imposed in the constitution
Inherent Limitations (PITIE)
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 1. Public Purpose
2. Inherently legislative- there should be no improper
delegation of the taxing power.
3. Territorial
4. International Comity (such that property of foreign
sovereign, not subject to tax)
5. Exemption of government entities, agencies and
instrumentalities
6. Double Taxation (Some authorities include this as
inherent limitations, but Domondon believe it is a
constitutional limitation)
Constitutional Limitations
a. Provision directly affecting taxation
1. Prohibition against imprisonment for nonpayment of
poll tax (Art. III Section 20)
2. Uniformity and equality of taxation (Art. VI, Section
28)
3. Grant by congress of authority to the President to
imposed tariff rates (Art. VI, Section 28)
4. Prohibition against taxation of religious, charitable
entities and educational entities. (Art VI, Section 28)
5. Prohibition against taxation of non-stock nonprofit
educational institutions. (Art. XIV Section 4 (3)
6. Majority vote of congress for grant of tax exemption
(Art. VI, Section 28)
7. Prohibition on used of tax levied for special purpose.
(Art. VI, Sec. 29)
8. President veto power on appropriation, revenue and
tariff bill (Art. VI, Sec. 27)
9. Non-impairment of jurisdiction of the Supreme Court
(Art. VIII, Sec. 5)
10. Grant of power to the LGU to create its own sources
of revenue (article x, section 5)
11. Origin of Revenue and Tariff Bill (Art. VI, Sec. 24)
12. No appropriation or use of public money for religious
purposes (Art. VI, Sect. 29)
b. Provisions indirectly affecting taxation
1. Due process (Sec 1)
2. Equal Protection (Sec 1)
3. Religious Freedom (Sec. 5)
4. Non-impairment of obligations of contracts (sec.10)
5. Freedom of the press (Sec. 4)
INHERENT LIMITATIONS
A. When a tax is for Public Purpose?
1. If it is for the welfare of the nation or greater portion of the
population.
2. If it affects the area as a community rather than as
individual
3. If it is designed to support the services of the government
for some of its recognized objects.
 It would be robbery for the State to tax its citizens and use
the funds generated for private purpose (Planters Product
Inc. vs. Fertiphi Corporation 548 SCRA 485 2008)
 It was held that, to lay with one hand the power of the
government on the property of the citizen and with the
other to bestow it to favored individuals, is nonetheless a
robbery though the it was done under the forms of law and
is called taxation.
 Public use is no longer confined to the traditional notion of
use by the public. It is held synonymous with public
interest, public benefit, public welfare, and public
convenience. (CIR vs. Central Luzon Drug Corporation
G.R No. 159647 April 16, 2005)
 Public purpose is no longer restricted to traditional
government functions like building roads and school
houses or safeguarding public health and safety. Public
purpose has been construed as including the promotion of
social justice. Thus, public funds may be used for
relocating illegal settlers, building low-cost housing for
them, and financing both urban and agrarian reforms that
benefit certain poor individuals. Still, these uses relieve
volatile iniquities in society and , therefore, impact on
public order and welfare as a whole. (PKSMMN vs
Executive Secretary GR. 147036-37)
B. Inherently Legislative
 There should be no improper delegation of legislative
authority to tax.
 Delegata potestas non potest delegari (a delegated power
cannot be further delegated). Since the power of taxation is a
power that is exercised by Congress as delegates of the people,
then as a general rule Congress could not re-delegate this
delegated power.
 Delegated power that cannot be delegated
The Legislative power to:
1. To define what tax shall be imposed (kind)
2. Why it should be imposed (object/purpose)
3. How much tax shall be imposed (extent/rate)
4. Against whom (or what) it shall be imposed (coverage/
subject)
5. Where it shall be imposed (situs)
Exception (can be delegated)
1. To LGU- power of the LGU to create its own sources of
revenue and to levy taxes, fees and charges.
2. To President-
a. Delegation of tariff powers- to fix tariff rates, import
and export qoutas, tonnage and wharfage dues or
other duties and imports.
b. Delegation of emergency power under section 23
arttcle VI of the Constiution
c. Delegation to enter into executive agreements and to
ratify treaties
3. Delegation to Administrative agencies- also known as
power of subordinate legislation.
 The delegation must comply with the
completeness test and the existence of
sufficiently determinate standards test. Both
test are intended to prevent a total transference
of legislative authority to the delegate, who are
not allowed to step into the shoes of the
legislature and exercise power essentially
legislative.
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 Completeness test- the law must be complete in
itself, setting forth therein the policy to be
executed, carried out or implemented by the
delegate. The only thing left for the delegate to
do is to implement the law.
Sufficiently determinate standard test- is one
which defines the legislative policy, marks its
limits, maps out its boundaries and specifies the
public agency to apply it. It indicates the
circumstance under which the legislative
command is to be effected.
4. Delegation made to the people (through initiative and
referendum
 The Philippine is a democratic and republican
state. Sovereignty resides in the people and all
the government authority emanates from them.
 The legislative power to tax does not include collection of the
tax which is none other than the execution of the tax laws that
the legislative department has promulgated. By constitutional
allocation collection of tax is part of the functions of the
executive department.
 LGUs power to tax is a direct power (Article 10, Sec. 5 of the
1987 Constitution)
It is a direct constitutional grant that may not be taken away
entirely by legislative enactment. Congress, though has the
right to limit the power as directed by the consttution
3. The concept that when a foreign sovereign enters into the
territorial jurisdiction of another, it does not subject itself
to the jurisdiction of the other.
 The provision of tax treaty must take precedence over and
above the provisions of the local taxing statute consonant with
the principle of international comity
 Pacta sunt servanda is a fundamental international law principle
that requires agreeing partiesf to comply with their treaty
obligations in good faith. Hence, the application of the
provisions of the NIRC must be subject to the provisions of tax
treaties entered into by the Philippines with foreign countries.
(Air Canada Vs CIR G.R No169507.
E. Exemption of Government Entities, Agencies and
Instrumentalities
GR: Government is exempt from tax
 This is premise on the concept that with respect to the
government, exemption is the rule and taxation is the
exception. The government is usually exempt from
taxation in order to reduce the amount of money that
the government is handling. (Maceda vs, Macaraeg
197 SCRA 771)

 For the government to tax itself is like getting money

from one pocket and placing it in another pocket
C. Territorial
Exception: When it chooses to tax itself
GR: The power of taxation could be exercised only within the
territorial boundaries of the taxing authority  While the exemption from taxation of the government
is one of the inherent limitations, sovereignty being
Exceptions: absolute and taxation is an act of high sovereignty, the
State if so minded could tax itself, including its
1. Instances where tax laws operate outside territorial
political subdivisions (Macaraig, G.R No. 88291)
jurisdiction
a. Taxation of resident citizens on their incomes derived
 Example: TCC section 1205 “All importations by the
from abroad.
Government for its own use or that of its subordinate
2. Where tax laws do not operate within the territorial
branches or instrumentalities, or owned or controlled
jurisdiction of the state.
by the government, shall be subject to the duties, taxes,
a. When exempted by treaty obligations
fees and other charges provided for in the Tariff and
b. When exempted by international comity
Customs Code.
D. International Comity
 Government owned and controlled corporations are
Comity- means the respect accorded by nations to each other subject to tax, unless specifically exempted by a
because they are sovereign equals. special law. (eg. SSS, GSIS, PHIC, PCSO)

The constitution expressly adopted the generally accepted principles

of international law as part of the law of the land. Thus, the State
must recognize such generally accepted tenets of international law
that limit the authority of the government to effectively imposed
taxes upon sovereign State. This based on (reason):

1. Par in parem non habet imperium (as between equals

there is no sovereign)
2. The rule of international law that a foreign government
may not be sued without its consent so that it is useless to
impose a tax which could not be collected.

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