GENERAL PRINCIPLES OF

TAXATION
A. DEFINITION AND CONCEPT OF TAXATION
Taxation is the power by which the sovereign raises revenue to defray the necessary
expenses of the government. It is a way of apportioning the cost of government among those
who in some way are privileged to enjoy its benefits and must bear its burden.
The term refers to both the power to tax and the act or process by which the taxing power is
exercised.
B. NATURE OF TAXATION
1. Taxation as an Inherent Attribute of Sovereignty
The power of taxation is based upon necessity. Without this power, no sovereign State can
exist nor endure without the means to pay its expenses. Its basis is the Lifeblood Doctrine.
2. Taxation as Legislative in Character
It is the Legislature which determines the coverage, object, nature, extent, and situs of the tax
to be imposed. The power of taxation is based upon the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the immediate representative of
the people. And where the people have loaned the power, there it must remain and be
exercised.
Scope of Legislative Power to Tax
1. The determination of purposes for which taxes shall be levied provided it is for the benefit of
the public.
2. The determination of subjects of taxation such as the person, property or occupation within
its jurisdiction.
3. The determination as to the amount or rate of tax unless constitutionally prohibited.
4. The determination as to the kind of tax to be collected (i.e. property tax, income tax,
inheritance tax, etc).
5. The determination of agencies to collect the taxes.
6. The power to specify or provide for administrative and judicial remedies
7. The power to grant tax exemptions and condonations.
Doctrine of Unjust Enrichment applies to Government
Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens (BPI
Family Savings Bank vs. CA, et al, L-122480, 12 April 2000).

The power to tax is the power to destroy

The taxing power may impose government requirements to the extent that it may prohibit,
discourage, or even destroy a certain business provided that it is exercised within the
constitutional limitations. It refers to a valid tax.
The power to tax is not the power to destroy while this Court sits
If so great an abuse is manifested as to destroy the natural and fundamental rights, it is the duty
of the judiciary to hold such an act unconstitutional. It refers to an invalid tax.

CHARACTERISTICS OF TAXATION

1. Comprehensive It reaches to every trade or occupation; to every object of industry, use, or

enjoyment; to every species of possession; and it imposes a burden which, in case of failure
to discharge it, may be followed by seizure and sale or confiscation of property.
2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to
declare that it is subject to any restrictions, except those that such rests into the discretion of
the authority which exercises it (Tio v. Videogram Regulatory Board, G.R. No. L-75697, June 18,
1987).

3. Plenary Operates on all persons and property belonging to the body politic. This is an
original principle, which has its foundation in society itself. It is granted by all for the benefit of
all.
1. Supreme No attribute of sovereignty is more pervading, and at no point does the power of
the Government affect more constantly and intimately all the relations of life than through the
exactions made under it.
A

POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation, Police Power & Eminent Domain, Distinguished

TAXATION

Purpose

Amount of
Exaction

Benefits
Received.
Non-Impairment
of Contracts

Transfer of
Property Rights

POLICE POWER

EMINENT DOMAIN

Levied for the purpose

of raising revenue.

Exercised to promote public welfare

through regulations.

Taking of private property for

public use.

There is no limit.

Limited to cover the cost of regulation,

issuance of the license or surveillance.

No exaction; compensation is paid

by the government.

No special or direct
benefit is received.

No direct benefits are received,

damnum absque injuria.

Direct benefit results in the form of

just compensation.

The non- impairment

rule subsists.

Contracts may be impaired.

Contracts may be impaired.

Taxes paid become

part of the public
funds

No transfer but only restraint on the

exercise of property rights exist.

Property is taken by the

government upon payment of just
compensation.

Scope

Affects all persons,

property and excises

Affects all persons, property, privileges,

and even rights.

Affects only the particular property

comprehended

Public necessity.

Public necessity and the right of the

State and the public to self protection
and self preservation.

Necessity of the public for private

property.

Basis

PURPOSE OF TAXATION

1. Revenue-Raising
To provide funds with which the state delivers the basic services to the people.
2. Non- Revenue / Special or Regulatory
a. Regulation Taxation has a regulatory purpose as in the case of taxes levied on excises or
priviliges like those imposed on tobacco and alcoholic products, or amusement places like
night clubs, cabarets, cockpits, etc.
b. Promotion of General Welfare Taxation can be used to implement police power in order to
promote the general welfare of the people.

The SC upheld the validity of the Sugar Adjustment Act, which imposed a taxed on milled
sugar since the purpose of the law was to strengthen an industry that is undeniably vital to
the economy- the sugar industry (Lutz vs. Araneta, 98 Phil 148).
While the funds collected under the OPSF are referred to as taxes, they are extracted in the
exercise of the police power of the State. From such fund, amounts are drawn to reimburse
oil companies when appropriate situations arise for increases in, as well as under recovery of,
the cost of crude oil importation (Osmena vs. Orbos, March 31, 1993).

Reduction of Social Inequity This is made possible through the progressive system of
taxation where the objective is to prevent the undue concentration of wealth in the hands of
few individuals. Progressivity is keystoned on the principle that those who are able to pay
should shoulder the bigger portion of the tax burden. Examples Income tax, Donors tax
and Estate tax.

c.

Encourage economic Growth In order to promote the countrys economic growth the law,
at times, grants incentives or tax exemptions to encourage investments.

d. Protectionism It protects local industries from foreign competition i.e. protective tariffs and
custom duties.
A

PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal Adequacy
It simply means that the sources of revenues must be adequate to meet government
expenditures and their variations (Abakada Guro vs. Ermita, G.R. No. 168056, September 1, 2005).
2. Administrative Feasibility
Tax laws must be capable of effective and efficient enforcement. They must not obstruct
business growth and economic development (Dimaampao on general principles of taxation, p. 28).

3. Theoretical Justice
Section 28 (1) of the 1987 Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation. Tax burden should be proportion to the taxpayers ability to pay.

Non-observance of Fiscal Adequacy and Administrative Feasibility will not render the tax
imposition invalid. It will be an unsound tax but legal. However, non-observance of the
Principle of Theoretical Justice is invalid because the Constitution itself requires that taxation
must be equitable.

THEORY AND BASIS OF TAXATION

1. Lifeblood Theory the government can neither exist nor endure without taxation. Taxes are
the lifeblood of the government and their prompt and certain availability is an imperious need
(Bull vs. United States, 295 U.S. 247).

1. Necessity Theory The State cannot continue without the means to pay its expenses; and
that for those means, it has the right to compel all citizens and property within its limit to
contribute.
2. Benefits-Protection Theory (Symbiotic Relationship) It is based on the power of the State to
demand and receive taxes on the reciprocal duties of support and protection. The state
demands and receives taxes from the subjects of taxation within its jurisdiction so that it may
be able to carry its mandate into effect and perform the functions of the government. The
citizen pays from his property the portion demanded in order that it may, by means thereof be
secured in the enjoyment of the benefits of organized society.
3. Jurisdiction Over Subject and Objects Taxation shall only be imposed on persons,
properties and excises within the territory of the taxing power.

H. DOCTRINES IN TAXATION

1. Prospectivity of Tax Laws

General Rule: Tax Laws are prospective in application.
Exceptions:
a. Where no vested right will be impaired;
b. Where the law allows retroactive application; and
c. If there is bad faith on the part of the taxpayer.

Section 246 of the NIRC says that tax rulings or any revocation, modification, or reversal of
any of the rules and regulations promulgated by the Commissioner or any rulings or circulars
promulgated by him shall not be given retroactive application if such revocation,
modifications, or reversal is prejudicial to the taxpayers EXCEPT:
1. When the taxpayer deliberately misstated or omitted from his return certain facts or
documents;
2. When the taxpayer or on the facts subsequently gathered are different from the facts on
which the tax ruling was based; and
3. When the taxpayer is in bad faith.

1 Imprescriptibility
General Rule: Taxes are imprescriptable.
Exceptions: When provided otherwise by the tax law itself.
Example: NIRC provides for statutes of limitation on the assessment and collection of taxes
therein imposed.

1. Double Taxation

It means taxing the same person for the same tax period and the same activity twice, by the
same jurisdiction.

a) Double taxation in strict sense same property is taxed twice when it should be taxed only
once; and that both taxes are imposed on the same property or subject matter for the same
purpose, by the same State, Government or taxing authority within the same jurisdiction or
taxing district during the same taxing period and covering the same kind of character of tax. It
violates the equal protection clause of the constitution.
Requisites:
1. Both taxes are imposed on the same property or subject matter for the same purpose;
2. Imposed by the same taxing authority;
3. Within the same jurisdiction;
4. During the same taxing period;
5. Covering the same kind or character of tax.
a

Double Taxation in Broad sense is the opposite of direct double taxation and is not legally
objectionable. The absence of one or more of the foregoing requisites of obnoxious direct tax
makes it indirect.

a) Constitutionality of double taxation

Double taxation in its stricter sense is unconstitutional but that in the broader sense is not
necessarily so.
General Rule: Our Constitution does not prohibit double taxation; in broad sense. Hence, it may
not be invoked as a defense against the validity of tax laws.
Exception: Double taxation will not be allowed if it results in a violation of the equal protection
clause.
b) Modes of eliminating double taxation
1) Tax Deduction a subtraction from gross income in arriving at the taxable income:

Section 4 (a) of the Expanded Senior Citizens Act of 2003, which provides that the 20%
discount given to senior citizens shall be considered a tax deduction, rather than a tax credit
on the part of the establishment granting the same, is not unconstitutional. While the
Constitution protects property rights, the State, in the exercise of the police power, can
intervene in the operations of a business which may result in an impairment of property rights
in the process (Carlos Super Drug Corp. vs. DSWD, G.R. No. 166494, June 29, 2007).

2) Tax Credit - an amount subtracted from an individuals or entitys tax liability (tax due) to
arrive at the total tax liability.

A deduction differs from a tax credit, that a deduction reduces taxable income while a
credit reduces tax liability.

Under the Expanded Seniors Citizens Act of 2003, the 20% discount shall be considered
as a tax deduction not as a tax credit.

Treaties with other states

A tax treaty sets out the respective rights to tax of the state of source (situs) and the state of
residence with regard to certain cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the
right to tax, although the amount of tax that may be imposed by the state of source is limited.
It applies whenever the state of source is given full or limited right to tax. The treaty makes it
incumbent upon the state of residence to allow relief in order to avoid double taxation.

4. Escape From Taxation

a. Shifting of tax burden
The transfer of the burden of tax by the original payer or the one on whom the tax was
assessed or imposed to another.
(i) Ways of Shifting Tax Burden
a) Forward shifting- transfer of the tax burden from a factor of production through the factors of
distribution until finally rests on the consumer.
b) Backward shifting- transfer of the tax burden from the consumer through the factors of
distribution to the factor of production.
c) Onward shifting- transfer of the tax burden two or more times either forward or backward.
(ii) Taxes That Can Be Shifted - Indirect taxes i.e. Value Added Tax
(ii) Meaning of Impact and Incidence of Taxation
Impact of Taxation - The point on which a tax is originally imposed.
Incidence of Taxation the point on which a tax burden finally rest or settle down
Tax capitalization it means the reduction in the price of the taxed object equal to the
capitalized value of future taxes which the purchaser expects to be called upon to pay.
A special form of backward shifting except that while the latter involves the shifting back of a
single tax, the former involves the throwing back of a whole series of taxes and taxes place
before any of them, with the exemption of the first is paid.
Transformation it is the method whereby the manufacturer or producer upon whom the tax has
been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax
and endeavors to recoup himself by improving his process of product at a lower costs
a

Tax avoidance
It is the use by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability (E.g. termination
of deposits subjects to 20% final tax and re-investing it in tax-exempt government bonds).

a) Tax evasion

It is the use of taxpayer of illegal or fraudulent means to evade or lessen the payment of a tax
(E.g. Deliberate non-reporting or under-reporting of an income).
Indicia of Fraud in Tax Evasion
a. Failure to declare for taxation purposes true and actual income derived from business for 2
consecutive years; or
b. Substantial under declaration of income tax returns of the taxpayer for 4 consecutive years
coupled with intentional overstatement of deductions.
Connotes the integration of 3 Factors:
1. The end to be achieved, i.e. the payment of less than that known by the taxpayer to be legally
due;
2. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not merely accidental, and
3. A course of action or failure of action which is unlawful
Note: See also Section 248(B) of NIRC providing for prima facie evidence of filing a false or fraudulent
return.

Exemption From Taxation

a) Meaning of exemption from taxation

A grant of immunity, express or implied, to particular persons or corporations from the
obligation to pay taxes.
Basis of the Grant of Exemption: No law granting any tax exemption should be passed without
the concurrence of a majority of all the members of Congress (Sec. 28(4), Art. VI, Constitution).
a) Nature of tax exemption
i. It is a personal privilege of the grantee.
ii. It is generally revocable by the government unless the exemption is founded on a contract,
which is protected from impairment, but the contract must contain the other essential
elements of contracts.
It implied a waiver on the part of the government to collect what otherwise would be due,
and in this sense is prejudicial thereto.
iii. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or
rationale basis.
c) Kinds of tax exemption
As to Form:
(i) Express - Expressly granted by the Constitution, statutes, treaties, franchises or similar
legislative acts.
(ii) Implied - When particular persons, properties, or exercise are deemed exempt as they fall
outside the scope of the taxing provision itself.
(iii) Contractual - Are those agreed to by the taxing authority in contract lawfully entered into by
them under enabling laws.
As to Basis:
1. Constitutional Exemptions Immunities from taxation which originate from the Constitution.
1. Statutory Exemptions those which emanate from legislation.
As To Extent:
1. Total Exemption connotes absolute immunity.
2. Partial Exemption one where a collection of a part of the tax is dispensed with.

Rationale/grounds for exemption

Being a waiver from its power to tax, the government, in granting tax exemption, should justify
the grant that such exemption will benefit the body of people, which is sufficient to offset the
loss of revenue occasioned thereby.

Grounds for Tax Exemption

1. Contract the grant of tax exemption is usually contained in the charter of the corporation to
which the exemption is granted.
2. Public policy, to encourage new and necessary industries, or to foster charitable institutions.
3. Reciprocity to reduce the rigors of international double or multiple taxation, tax exemptions
maybe granted in treaties. A tax exemption is a personal privilege of the grantee and
therefore not assignable; it is generally revocable by the government, unless founded on
contract and must not be discriminatory.
e) Revocation of tax exemption
If the grant of an exemption does not constitute a contract, but merely a spontaneous
concession by the legislature, not connected with any service or duty imposed it is
REVOCABLE by the power which made the grant.
Thus, if the basis of the tax exemptions is by virtue of a franchise granted by Congress, the
exemption may be revoked.
However, if the tax exemption constitutes a binding contract and for a valuable consideration,
the government cannot unilaterally revoke the tax exemption.
1 Compensation and Set-off
General Rule: Taxes cannot be the subject of compensation or set-off.
Reasons:
1. Lifeblood Doctrine
2. Taxes are not contractual obligation but arise out of duty to the government.
3. The government and the taxpayer are not mutually creditors and debtors of each other
(Francia vs. IAC No. L-67649; June 28, 1988).

Exemption: Where both claims already became overdue and demandable as well as fully
liquidated, or where the government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, compensation takes place by operation of law.
Doctrine of Equitable Recoupment

Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is

barred by prescription, a tax being assessed against a taxpayer may be recouped or set-off
against the tax whose refund is now barred by prescription (Domondon, 11th ed, p. 46, citing
UST vs. Collector, 104 Phil 1062).

Not followed in the Philippines

Thus, a tax presently being assessed against a taxpayer may not be recouped or set-off
against an overpaid tax the refund of which is already barred by prescription (Domondon, 11th
ed, p. 46, citing UST vs. Collector, 104 Phil 1062).

A tax is not an obligation that is created by contracts express or implied. It is an obligation

imposed by law. Inasmuch as taxes are not debt, it follows that the two obligations are not
subject of set-off or compensation under Art. 1279 NCC (Domingo vs. Garlitos, 8 SCRA 443)

 Taxes could not be set-off against the taxpayers claim of refund for reforestation charges it
initially shouldered which should have been the obligation of the government (Republic vs.
Mambulao Lumber No. L-17725, February 28, 1962).

The obligation to pay real estate tax delinquency could not be set-off by the amount which the
government is indebted to the former by way of expropriation was effected by the national
government (Francia vs. IAC, Ibid).
There can be no offsetting of taxes against the claims that a taxpayer may have against the
government, such as reimbursement from the Oil Price Stabilization Fund (OPSF) (Caltex
Phils. vs. COA, G.R. No. 92585, May 8, 1992).

Philex cannot refuse the payment of its tax liabilities on the ground that it has pending claims
for VAT input credit/refund. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government (Philex Mining vs.
Commissioner, G.R. No. 125704, August 28, 1998).

Compromise
A contract whereby the parties, by making reciprocal concessions avoid litigation or put an
end to one already commenced (Article 2028, Civil Code).

Requisites:
1. The taxpayer must have a tax liability.
2. There must be an offer (by the taxpayer of an amount to be paid by the taxpayer)
3. There must be an acceptance (by the Commissioner or taxpayer as the case may be) of the
offer in the settlement of the original claim.
Persons allowed to enter into compromise of tax obligations:
1. BIR Commissioner as expressly authorized by the NIRC subject to the following
conditions.
a. When a reasonable doubt as to validity of the claim against the taxpayer exist; OR
b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax.
2. Collector of Customs - with respect to custom duties limited to cases where the legitimate
authority is specifically granted such in remission of duties.
3. Customs Commissioner - subject to the approval of the Secretary of Finance, in cases
involving the imposition of fines, surcharges, and forfeitures.
1 Tax Amnesty
a) Definition
General or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law. It partakes an absolute
forgiveness of waiver of the government of its right to collect. To give tax evaders, who wish
to relent and are willing to reform a chance to do so.
b) Distinguish from tax exemption
Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment
of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods,
hence of retroactive application (People vs. Castaeda, G.R. No. L-46881, September 15, 1988).
Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a
freedom from a charge or burden of which others are subjected (Florer vs. Sheridan, 137 Ind.
28, 36 NE 365). It is generally prospective in application.

Construction and Interpretation of:

Tax laws
Tax laws must be construed reasonably to carry out the purpose, the intent, and the objective
of the law.

(i) General Rule: If the tax law is clear and unambiguous, apply the law strictly against the
taxpayer and in favor of the government.
(ii) Exception: If the law is doubtful and ambiguous, then the law must be construed strictly
against the Government and liberally in favor of the taxpayer.

Tax exemption and exclusion

(i) General Rule

Must be construed strictly against the grantee and liberally in favor of the taxing authority.
(ii) Exemption
1. Where the statute granting exemption expressly provides for a liberal interpretation;
2. Special taxes relating to special cases and affecting only special classes of persons;
3. Properly held in private ownership;
4. Traditional exemptees, such as those in favor of religious and charitable institutions;
5. In favor of the government, its political subdivisions or instruments; and
6. By clear legislative intent.
Implication of strictly construed
i. Tax exemptions must never be presumed. It must be established and proved by the taxpayer.
ii. The law must be limited to what it says. It must be confined the statutory language.
iii. Should be personal to the exemptee, or person to the tax beneficiary.

Tax rules and regulations

The general principles in the construction of tax laws applies in the interpretation of tax rules
and regulations. To be valid, the tax rules must be consistent with the provisions of the tax
law which they seek to implement.

Requisites for valid tax regulation:

1. Publication;
2. Germane to the public purpose embodied in the governing statute; and
3. Exercised within the authority.

Penal provisions of tax laws

Strictly construed against the government and liberally in favor of the accused.

Non-retroactive application to taxpayers

Generally, rulings cannot be given retroactive effect for to do so will be prejudicial to the
taxpayer.

(i) Exceptions
Even if a retroactive application is prejudicial to the taxpayer, rulings can be given retroactive
application 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.

SCOPE AND LIMITATION OF TAXATION

1. Inherent Limitations
a) Public purpose
A revenue measure must be laid for public purpose it is the legislature who determines public
purpose (Dimaampao, p. 37).
The proceeds of the tax must be used for:
1. The support of the State; or
2. Some recognized object of government or directly to promote the welfare of the community.
Test in Determining Public Purpose in Tax
1. Duty Test whether the thing to be threatened by the appropriation of public revenue is
something which is the duty of the State, as a government.
2. Promotion of General Welfare Test whether the law providing the tax directly promotes
the welfare of the community in equal measure.

Public purpose is not destroyed by the fact that the tax law may not be beneficial to one
group. The fact that one sector is benefited and in the process another sector is being in a
way prejudiced would not diminish the public character of the tax (Tio v. Videogram Regulatory
Board, G.R. 75697, June, 1987)

The fact that it was donated after, does not cure the defect that the tax was not for a public
purpose at the time the tax law was passed. The public purpose must exist at the time of the
enactment of the tax legislation (Pascual v. Sec of Public Works, G.R. L-10405, Dec. 1960).

b) Inherently legislative
(i) General Rule
Since the power of taxation is a power that is exercised by the Congress as delegates of the
people, then as a general rule, Congress could not re-delegate this delegated power.
(ii) Exceptions
a. Delegation to Local Governments
The Constitution grants each LGU the power to create its own sources of revenue and to levy
taxes, fees and charges which shall accrue exclusively to the LGU.
a. Delegation to the President
Delegation by Congress to the President to fix [TITO] tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts (Section 28(2) Article VI of the
Constitution).
Delegation of Emergency powers to the President (Sec. 23(2) Article VI of the Constitution).
Delegation to the President to enter into Executive agreements, and to ratify treaties which
may contain tax exemption provisions subject to the concurrence by the Senate in the
ratification made by the President.
a

Delegation to Administrative Agencies

Also known as the power of subordinate legislation, subject to the following test:
Completeness test in order for the delegation to be valid, the law must be complete in
all aspects when it leaves the legislature. The only thing left for the delegate to do is to
implement the law. The legislative department has not delegated the power to enact the
law.

Sufficiently Determinate Standards test there must exist a sufficient standard which
should limit the boundaries of the delegates authority by defining legislative policy and
the circumstance under which it is to be pursued and implemented.

CAVEAT: Some authors would argue that Administrative Delegation is NOT an exception since
what is being delegated is not the power to tax but the administrative detail to implement what the
law provides.

On the determination of the Secretary of Finance of certain conditions wherein the VAT
will be increased to 12% from 10%
In the present case, in making his recommendation to the President on the existence of either
of the two conditions, the Secretary of Finance is not acting as the alter ego of the President
or even her subordinate. In such instance, he is not subject to the power of control and
direction of the President. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take effect (ABAKADA
Guro vs. Exec Secretary, G.R. No. 1688056, etc., Sep 1, 2005 & MR on October 18, 2005).

a Territorial
(i) Situs of Taxation
(a) Meaning the place or authority that has the right to impose and collect taxes.
(a) Situs of Income Tax
Factors that determine the situs of income tax (Section 23 NIRC)
1. Nationality or citizenship of the taxpayer;
2. Residence or domicile of the taxpayer;
3. Source of income;
4. Location of the property;
5. Place or exercise of the privilege;
6. Classification of the tax being levied;
7. Possible protection and benefit that may accrue to both the government and to the taxpayer.
(1) From sources within the Philippines
All kinds of taxpayers are subject to income tax derived from sources within the Philippines.
Generally, income is derived from the Philippines, if it is derived from any activity within the
Philippines, in accordance with Sec. 42 of the NIRC.
(2) From sources without the Philippines
Only Residents Citizens and Domestic Corporations are liable to income tax on income
derived from sources without the Philippines.
(1) Income partly within and partly without the Philippines
Taxable income attributable to sources within the Philippines may be determined by
processes or formulas of general appointment prescribed by the Secretary of Finance. Gains,
profits and income from the sale of personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from
sources without the Philippines. (For more, see under Income Taxation: Gross Income Classification
of Income as to Source).

(c) Situs of Property Taxes

Depends upon the place where the act is performed or occupation is engaged in (Allied
Thread vs. City Mayor of Manila, GR No. 40296, November 21, 1984)

(1) Taxes on real property

Places where the real property is located

(2) Taxes on personal property

Situs of tangible personal property where the property is physically located although the
owner resides in another jurisdiction
Situs of intangible personal property the situs is the domicile of the owner (movables
fallowed the person).
Exceptions:
1. When the property has acquired a business situs in another jurisdiction.
2. When the law provides for the situs of the subject of tax.
(d) Situs of Excise Tax
(1) Estate tax
The value of the gross estate of the decedent shall be determined by including the value at
the time of his death of all property, real or personal, tangible or intangible, wherever situated;
PROVIDED, however, that in the case of a nonresident alien decedent who at the time of his
death was not a citizen of the Philippines, only that part of the entire gross estate which is
situated OR deemed situated (Section 104, NICR)
(2) Donors tax
The transmission of property from the donor to a donee may be subject to taxation in the
state where the transferor is a citizen or resident or where the property is located.
(e)
(1)
(2)
(3)

Situs of Business Tax

Sale of real property where the property is located.
Sale of personal property place where the sale is perfected and consummated.
VAT Place place where the transaction was made.

Summary Situs of Tax

KIND OF TAX
Poll/Capitalization/Community
Tax

SITUS
Residence of the
taxpayer,
regardless of the
source of income
or location of the
property of the
taxpayer.

Property Tax
Real Property

Where the real

property is located,
following the
doctrine of Lex rei
sitae or lex situs.

Personal Property

Where it was
actually kept or
located, following
the doctrine of
mobilia sequuntur
personam
(Movables follow
the person)

Excise Tax

On the place
where the act is
performed or
occupation
engaged in.

Value Added Tax

The place where

the transaction is
made. If the
transaction is
made (perfected
and consummated)
outside of the
Philippines, then
we can no longer
tax such
transaction.

Income Tax
Non-resident alien
Non-resident foreign corporation
Non-resident citizen
Resident alien
Resident foreign corporation

Sources of income
derived from within
the Philippines

Resident citizen
Domestic corporation

Sources of income
derived from within
and without the
Philippines

Estate and Donors Tax

Non-resident Alien

Properties situated
within the
Philippines

Resident/Non-resident citizen
Resident alien

Properties
wherever situated

International Comity
Posits that the property of a foreign state or government may not be taxed by another.
States find it mutually advantageous for themselves to create self-imposed restraints on their
taxing powers especially with reference to the properties of foreign governments within their
territorial domain.

Basis:
1. Sovereign equality among states one state cannot exercise powers over another;

2. Usage among states that when one enters the territory of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself under the
jurisdiction of the latter; and
3. Foreign government may not be sued without its consent so that it is useless to assess the
tax anyway because it cannot be collected.

Exemption of Government Entities, Agencies, and Instrumentalities

General Rule: Agencies performing governmental functions are tax-exempt.

Exemption:
1. Agencies performing proprietary functions.
2. When expressly provided by law or their charter is subject to tax
Government-owned and controlled corporations perform propriety functions; hence, they are
subject to tax. However, certain corporations have been granted exemption under Section 27(c)
of R.A. 8424 as amended by R.A. 9337 which took effect on July 1, 2005, to wit:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)

PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Sec 1 of RA 9337 amended Sec 27c of the NIRC by omitting PAGCOR from
the exemption. However, since PAGCOR is exempt from VAT under RA 9337 (pursuant to
Sec 109k), the BIR exceeded its authority in subjecting PAGCOR to 10% VAT (PAGCOR v.
BIR, GR 12087, March 2011).

The exemption of PAL was expressly removed by R.A. No. 7716. (PAL vs. Secretary of
Finance, G.R. No. 115852, 1994).
Moreover, taxes are financial burdens imposed for the purpose of raising revenues to defray
the cost of the operation of the Government, and a tax on property of the Government,
whether national or local, would merely have the effect of taking money from one pocket to
put it in another pocket (Board of Assessment of Appeals of Laguna vs. CTA, G.R. No. L-35683, May
7, 1987).

However, it can also tax itself (Collector vs. Bisaya Land Transportation, L-35668-72, L-35683, May
7, 1987).

Notwithstanding the immunity of the government from taxes, the principle is also well
recognized that the Government may tax itself. In one case, the SC held that there is no
constitutional limitation on the power of the Congress to tax the AFP if it wishes to do so
(Bisaya Land Transportation Co., Inc. vs. CIR, 102 Phil 438).

Constitutional Limitations

a) Provisions directly affecting taxation

(i) Prohibition Against Imprisonment for Non-Payment of Poll Tax
No person shall be imprisoned for debt or non-payment of a poll tax. (Article III, Section 20)
Poll Tax, defined
A tax of fixed amount on individuals residing within a specified territory, whether citizens or not,
without regard to their property or the occupation in which they may be engaged.

One cannot be imprisoned for non-payment of poll tax because payment thereof is not
mandatory, it is merely permissive.

While a person may not be imprisoned for non-payment of poll tax, he may be imprisoned for
non-payment of other kind of taxes where the law expressly so provides.

i
Uniformity and Equality of Taxation
The rule of taxation shall be uniform and equitable. (Article VI, Section 28(1))
Uniformity means that all taxable articles or kinds of property of the same classes shall be taxed
at the same rate. A tax is uniform when it operates with the same force and effect in every place
where the subject of it is found.

Wherever found in the Philippine islands, satisfies the requirement of the Philippines Bill that
the rule of taxation in said islands shall be uniform (Churchill and Tait vs. Conception, G.R. No.
11572, September 22, 1916).

A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike. The Legislature has the inherent power not only to select the subjects of taxation
but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause (Commissioner vs. Lingayen Gulf Elec. Co., G.R. No. L-23771, August 4, 1988).
A local tax on tenement houses does not violate the rule of uniformity and equality of taxation
even if the tax in question is not also levied on other classes of buildings in the locality where
such tax is imposed (Villanueva vs. City Of Iloilo, G.R. No. L-26521, December 28, 1968).
Uniformity is not disregarded if a tax is levied on admission to cinema, theaters, vaudeville
companies, theatrical shows and boxing exhibitions but does not tax other places of
amusement such as race tracks, cockpits, cabarets, concert halls, circuses and other places
of amusement (Eastern Theatrical Co. vs. Alfonso, G.R. No. L-1104, May 31, 1949).
Selections 4, 5 and 6 of RA 9337, provide for a rate of 10% (or 12%) on importation of goods
and properties, importation of goods, sale of services and use or lease of properties. The law
does not make any distinction as to the type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the
rule of uniform taxation does not deprive Congress of the power to classify subjects of
taxation, and only demands uniformity within the particular class (Abakada Guro Party List vs.
Ermita, Ibid).

Uniformity vs. Equitability vs. Equality

Uniformity All taxable property shall be alike to be subjected to tax
Equitability The burden of taxation falls to those better able to pay.
Equality When the burden of the tax falls equally and impartially upon all persons and property
subject to it.

The law is also equitable it is equipped with a threshold margin. The VAT rate of 0% or 10%
(now 12%) does not apply to sales of goods or services with gross annual sales or receipts
not exceeding P1,500,000.00 also, basic marine and agricultural food products in their
original state are still not subject to tax, thus ensuring that prices at the grassroots level will
remain accessible (Abakada Guro Party List vs. Ermita).
Inequalities resulting from the singling out of one particular class for taxation or exemption
infringe no constitutional limitation (Domondon).

Progressive system of taxation

The Congress shall evolve a progressive system of taxation. (Article VI, Section 28(1))
Progressivity Tax rate increases as the tax base increases.

Progressivity of taxation is also mandated by the Constitution our income tax system is one
good example of such progressivity because it is built on the principle of the taxpayers ability
to pay. Taxation is progressive when its rate goes up depending on the resources of the
person affected (Reyes vs. Almanzor, G.R. Nos. 49839-46, April 26, 1991).

Grant by Congress of Authority to the President to Impose Tariff Rates

Section 28 par. 2, Article VI, 1987 Constitution

Requisites of a valid imposition of tariff rates by the President:

1. Delegated by Congress through a law;
2. Subject to Congressional limits and restrictions; and
3. Within the framework of national development program

Prohibition Against Taxation of Religious, Charitable Entities, and Educational Entities

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings and improvements, actually, directly and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation. [Article VI, Section 28(3)]

The tax exemption under this constitutional provision covers PROPERTY taxes only (Section
28(3), Article VI). Exclusive is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and exclusively is defined, in a manner to
exclude; as enjoying a privilege exclusively. If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is subject to
taxation. The words dominant use or principal use cannot be substituted for the words
used exclusively without doing violence to the Constitution and the law (Lung Center of the
Phil. vs. Quezon City, G.R. No. 144104, June 29, 2004).

General Rule: The constitutional exemption applies only to property tax. Gifts are subject to
donors tax.
Exemption: Gifts made in favor of charitable and other institutions may also be exempt from
Donors tax, not under the Constitution but under the NIRC provided certain conditions are met
(Sections 101(A)(3) and 101(B)(2) of the NIRC).

Actual use is necessary. To be exempt from tax, the lands, buildings and improvements must
not only be exclusively but also actually and directly used for religious and charitable
purposes (Province of Abra vs. Hernando, G.R. No. L-49336, August 31, 1981).

USE overrides OWNERSHIP in that if property although actually owned by a religious,

charitable or educational institution is actually used for a non-exempt purpose; the exemption
from tax of said property vanishes.

While the use of the second floor of the main building for residential purposes of the Director
and his family may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose-educational. The lease of the first floor to the
Northern Marketing Corporation cannot, be considered incidental to the purpose of education.
Since only a portion is used for purpose of commerce, it is only fair that half of the assessed
tax be returned to the school involved (Abra Valley vs. Aquino, G.R. No. L-39086, June 15, 1988).

Prohibition Against Taxation of Non-Stock, Non-Profit Institutions

Non-stock, non-profit educational institution actually, directly and exclusively used for
educational purposes are exempt (Section 30E, NIRC).

Reason: Constitutional provision is self-executory.

Proprietary educational institutions are taxable under Section 27 (B) of the Tax Code.
Reason: Constitutional provision used permissive term MAY, which gives Congress discretion to
grant tax exemptions.
(ii) Majority Vote of Congress for Grant of Tax Exemption
No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress. (Article VI, Section 28 (4))
Reason: To prevent indiscriminate grant of tax exemptions.
i

Prohibition on Use of Tax Levied for Special Purpose

Section 29(3), Article VI of the 1987 Constitution provides that all money collected or any tax
levied for special purposes shall be treated as special fund and paid out for such purpose
only. If the purpose for which a special fund was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds of the government.

(i) Presidents Veto Power on Appropriation, Revenue or Tariff Bills

The President shall have the power to veto any particular item or items in an appropriation,
revenue or tariff bill but the veto shall not affect the item or items which he does not object.
(Section 27 [2], Article VI 1987 Constitution)

Appropriation, revenue, tariff bill must exclusively originate in the House of

Representatives
All appropriation, revenue or tariff bills, bills authorizing the increase of public debts, bills of local
application and private bills, shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments. (Section 24, Article II, Constitution)
Any particular item or items in an:
a. Appropriate Bill
b. Revenue Bill
c. Tariff Bill
Shall not affect items to which he does not object
Senate may propose or concur with amendments but it cannot initiate bills
i

Non-Impairment of Jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme Court of its jurisdiction over cases
enumerated in Section 5 hereof. (Article VIII, Section 2)

The Supreme Court shall have the following powers:

a. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed
in relation thereto. (Article VIII, Section 5)
i

Grant of Power to the Local Government Units to Create its Own Sources of Revenue
Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government (Section 5, Article 10, 1987 Constitution).

(ii) Flexible tariff clause

The President may fix tariff rates, import and export quotas, under TCC.

a. To increase, reduce or remove existing protective rates of import duty (including any
necessary change in classification).
The existing rates may be increased or decreased to any level, on one or several
stages but in no case shall the increased rate of import duty be higher than a
maximum of 100% ad valorem.
a To establish import quota or to ban imports of any commodity, as may be necessary; and
b. To impose an additional duty on all imports not exceeding ten (10%) percent ad valorem
whenever necessary (Sec. 28, Art. VI, Constitution and Sec. 401, TCC).
i

Exemption From Real Property Taxes

In real property taxation, exemption is limited only to those properties which are enumerated
in Section 234 of the Local Government Code. By specifying therein what particular
properties are exempt, it follows by clear implication that the law has withheld from local
governments the power to exempt.

(iii) No Appropriation or Use of Public Money for Religious Purposes

Par. 3 Section 28, 1987 Constitution
Except: If a priest is assigned to armed forces, penal institutions, government, orphanages or
leprosarium
a

Provisions indirectly affecting taxation

(i) Due Process

No person shall be deprived of life, liberty or property without due process of law (Article III,
Section 1, Constitution)

Requisites:
1. Procedural
The interest of the public generally as distinguished from those of a particular class require
the intervention of the State;
Assessment and Collection must not be arbitrary;
Right to notice and hearing;

Substantive
The means employed must be reasonably necessary to the accomplishment of the purpose
and not unduly oppressive.
Assessment should not be harsh, oppressive and confiscatory
It must be by authority of a valid law
It must be imposed within territorial jurisdiction
There is a denial of due process on account of the passage of an ordinance in the City of
Manila which imposes a permit fee of P50.00 on aliens as a condition to employment or
engaging in any business or occupation, where it appears that under said ordinance, the City
Mayor of Manila could withhold or refuse issuance of such permit at will. Aliens, once admitted
in the Philippines, cannot be deprived of life without due process of law and this guarantee
includes the means of livelihood (Villegas vs. Hiu Chiong Tsai Pao Ho, G.R. No. L-29646, November
10, 1978).

Due process was not observed when the trial court, in an action for declaratory relief,
declared that certain property owned by the Roman Catholic Church in Bangued, Abra was
tax-exempt under the 1973 Constitution, it appearing that no court hearing was conducted
(Province of Abra vs. Hernando, G.R. No. L-49336, August 31, 1981).

The ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It
does not distinguish between a motor vehicle for hire and one which is purely for private use.
Neither does it distinguish between a motor vehicle registered in the City of Manila and one
registered in another place but occasionally comes to Manila and uses its streets and public
highways. There is no pretense that the ordinance equally applies to motor vehicles who
come to Manila for a temporary stay or for short errands, and it cannot be denied that they
contribute in no small degree to the deterioration of the streets and public highway. This is an
inequality which we find in the ordinance, and which renders it offensive to the Constitution
(Association of Customs Brokers, Inc. vs. City of Manila, G.R. No. L-4376, May 22, 1953).

Due process was not violated when the VAT law (EO 273) was promulgated because there
was no grave abuse of discretion incident to its promulgation. Further, petitioners failed to
show that EO 273 was issued capriciously and whimsically or in arbitrary or despotic manner
by passion or personal hostility since it appears that a comprehensive study of the VAT was
made before EO 273 was issued (Kapatiran vs. CIR, G.R. No. L-81311, June 30, 1988).
The modified scheduler income tax whereby individual income was classified into three
different classes under different tax rates (compensation, business/other income and passive
investment income) is not a denial of due process because there is no proof of arbitrariness
in the imposition of tax rates (Sison vs. Ancheta, G.R. No. 59431, July 25, 1984).
Section 112 (B) allows a VAT registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent that such input taxes have not
been applied against output taxes. Such unused input tax may be used in payment of his
other internal revenue taxes. The input tax is not a property or property right within the
constitutional purview of the due process clause. A VAT-registered persons entitlement to the
creditable input tax is merely a statutory privilege (Abakada Guro Party List vs. Ermita, Ibid.).
Equal Protection
nor shall any person be denied the equal protection of laws. (Article III, Section 1)

Requisites for a Valid Classification:

1. Must be based upon substantial distinctions;
2. Must be germane to the purpose of law;
3. Must apply to both present and future conditions; and
4. Must apply equally to all members of a class.
Two ways of violating Equal Protection
1. When classification is made when there should be none
2. When classification is not made when called for

If the ordinance is intended to apply to a specific taxpayer and to no one else regardless of
whether or not other entities belonging to the same class are established in the future, it is a
violation of the equal protection clause, but if intended to apply also to similar entities which
may be established in the future, then the tax ordinance is valid (Ormoc Sugar Central vs. CIR,
G.R. No. L-23794, February 17, 1968)

The fact that the taxpayer is the only sugar central or refinery in the municipality where the
tax ordinance is enacted does not make said ordinance discriminatory. The reason is that
since other refineries to be established in the future would also be taxable, no singling out of
the taxpayer to its disadvantage has ever taken place (Victorias Milling Co., Inc. vs. Municipality
Of Victoria, G.R. No. L-21183, September 27, 1968)

The remission of taxes due and payable to the exclusion of taxes already collected does not
constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be
open to attack as class legislation only if all taxpayers belonging to one class were not treated
alike (Juan Luna Subd. Vs. Sarmiento, G.R. No. L-3538, May 28, 1952)

It is true that the uniformity essential to the valid exercise of power of taxation does not
require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation.

A local ordinance which levies an ad valorem tax on motor vehicles registered in Manila
without also taxing those which are registered outside the city but which enters the city and
use its streets occasionally violates the rule on the equality of taxation (Assoc. of Customs
Brokers vs. Municipality Board of Manila, G.R. No. L-4375, May 22, 1953).

There is no discrimination or class legislation if a statute authorizes the City of Manila to levy
occupation taxes whereas that same authority is withheld from other cities or municipalities. It
is not for the courts to decide what cities or municipalities should be so authorized for that is a
matter for the legislature to decide (Pursalan vs. The Municipal Board of Manila, G.R. No. L-4817,
May 26, 1954).

Taxpayers may be classified into different categories. It is enough that the classification must
rest upon substantial distinctions that make real differences (Antero M. Sison, Jr. vs. Ruben B.
Ancheta, G.R. No. L-59431, July 25, 1984).

With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 114 par. C merely provides a method of
collection, or as stated by respondents, a more simplified VAT withholding system. Since it
has not been shown that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies
to all those who deal with the government (Abakada Guro Party List vs. Ermita, Ibid.).

Religious Freedom
No law shall be made respecting an establishment of religion, or prohibiting the free exercise
thereof. The free exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No religious test shall be required for
the exercise of civil or political rights. (Article III, Section 5)

The Constitutional guaranty of the free exercise of religion carries with it the right to
disseminate religious information. Any restraint on such right can only be justified on the
ground that there is a clear and present danger of any substantive evil which the State has
the right to prevent.
Activities simply and purely for propagation of faith are exempt (i.e., sale of bibles and
religious articles by non-stock, non-profit organizations at minimal profit). A license tax, which,
unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional
because it lays a prior restraint on the exercise of its right. Hence, although its application to
others is valid, its application to the press or to religious groups, such as the Jehovahs
Witnesses, in connection with the latters sale of religious books and pamphlets, is
unconstitutional (American Bible Society v. City of Manila, G.R. L-9637, April 1957).

Non-Impairment of Obligations of Contracts

No law impairing the obligation of contracts shall be passed. (Art. III, Sec. 10, 1987
Constitution)

Q: IS A TAX EXEMPTION REVOCABLE?

A: It depends

A law which changes the terms of the contract by making new conditions, or changing those
in the contract, or dispenses with those expressed, impairs the obligation.
However, the non-impairment rule does not apply to public utility franchises since a franchise
is subject to amendment, alteration or repeat by the Congress when the public interest so
requires (Article XII, Section 11). This is so because under the Constitution [now Section 11,
Article XII, 1987 Constitution], the legislature can impair a grantees franchise since a

franchise is subject to amendment, alteration or repeat by the Congress when the public
interest so requires (Cagayan G.R. No. L-60126, September 25, 1985).
Rules:
a. When the exemption is unilaterally granted by law and the same is withdrawn by virtue of
another law, there is no violation.
b. When the exemption is bilaterally agreed upon between the government and the taxpayer, it
cannot be withdrawn without impairing the contract.
c. When the exemption is granted under a franchise, it may be revoked because a franchise is
subject to amendment, alteration, or repeal by Congress.
A

STAGES OF TAXATION

1. Levy
The determination by Congress of the subject and object of taxation as well as the rate
(Domondon, 9th ed, p. 29). It refers to the enactment of tax laws or statutes (Dimaampao, 2011
ed, p. 14).

Note: This is NOT the Levy under Sec. 207 of NIRC, which refers to the remedy of the
Government to collect taxes.

2. Assessment and Collection

Assessment is a notice to the effect that the amount therein stated is due as tax and a
demand for payment thereof.
Rules governing assessment and collection of taxes to prevent its abuse
1. The tax law must designate which agency will collect the taxes
2. The circulars or regulations issued by the Secretary of Finance or the Commissioner of the
Internal Revenue must be in accordance with the tax measures imposed by Congress
Collection is the final stage and goal of tax administration.
1. Payment
The act of compliance by the taxpayer, including such options, schemes or remedies as may
be legally open or available to him.

1. Refund
The taxpayer asks for restitution of the money paid as tax.
A Definition, Nature, and Characteristics of Taxes
Taxes are the enforced proportional contributions from persons and property levied by the
State by virtue of its sovereignty for the support of the government and for public needs.
Essential Characteristics of Taxes
1) It is imposed by the State
2) Levied by the law-making body
3) It is an enforced contribution
4) Payable in money
5) Proportionate in character
6) Levied on persons, property and excise
7) Levied for public purposes
8) Paid at regular periods or intervals
9) Personal to the taxpayer

REQUISITES OF A VALID TAX

1.
2.
3.
4.

It must be for a public purpose.

It must be uniform.
The party being taxed must be within the jurisdiction of the taxing authority.
The tax must not impugned on the inherent and constitutional limitations on the power of
taxation.
5. Assessment and collection of certain kinds of taxes guarantee against injustice to
individuals, especially by providing notice and opportunity for hearing.
A

TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS

TAX

TOLL

All embracing term to include various kinds of

enforced contributions upon persons for the
attainment of public purposes.

A kind of tax imposed on articles which are traded

internationally

A.

TAX

TOLL

All embracing term to include various kinds of

enforced contributions upon persons for the
attainment of public purposes.

A kind of tax imposed on articles which are traded

internationally

A demand of sovereignty for the purpose of raising

public revenue.

A demand or ownership; An amount charged for the

cost and maintenance of the property used.

TAX

LICENSE FEE

Basis
Power of Taxation

Police power

Purpose
To generate revenue

Regulatory

Limitations
Inherent and
constitutional limitations

Limited to costs of
issuing the license;
Necessary inspection or
police surveillance.

Effect of Non-payment
Does not make the
business illegal

TAX
Imposed on persons,

Makes the business illegal

SPECIAL ASSESSMENT
Levied only on land

property and excises

Personal liability attaches Cannot be made a
on the person assessed in personal liability of the
case of non-payment
person assessed
Note: An exception may
be provided in the case of
real property tax (RPT)
which attaches to the
property subject to RPT
Not based on any special
or direct benefit

Based wholly on benefit

Exemption granted is
applicable (Art. VI, Sec.
28(3) 1987 Constitution)
Note: The exemption
under the Constitution is
with respect only to RPT

Exemption does not

apply.
Note: If property is
exempt from Real
Property Tax, it is also
exempt from Special
Assessment. (See Article
234(B) LGC)

TAX

DEBT

An obligation imposed by
law. Tax is not a debt
because it is not an
obligation created by
contracts, express or
implied. Thus, if a
taxpayer fails or refuses
to pay a local tax, he is
liable for criminal
prosecution.

A sum of money due upon

contract or one which is
evidenced by judgment.

Not assignable.

Assignable.

Due to the sovereign

government.

Due to the government

acting in its corporate
facility.

KINDS OF TAXES

1. As to Object
a) Personal tax also known as capitalization or poll taxes. These are taxes of fixed amount
upon all persons of a certain class within the jurisdiction of the taxing power without regard to
the amount of their property or their occupations or businesses in which they may be
engaged.
b) Property tax taxes assessed on all property or all property of a certain class within the
jurisdiction of the taxing power.
c) Privilege tax imposed on the performance of an act, the engaging in an occupation, or the
enjoyment of a privilege. (Blacks law, 6th ed.)
1 As to Burden or Incidence
a) Direct tax demanded from the very person who, as intended, should pay the tax which he
cannot shift to another. (e.g. income tax, estate tax, donors tax)

b) Indirect tax demanded in the first instance from one person with the expectation that he
can shift the burden to someone else, not as a tax but as part of the purchase price. (e.g.
VAT) (from Maceda vs. Macaraeg, 223 SCRA 217)
1 As to Tax Rates
a) Specific tax imposed and based on a physical unit of measurement, as by head or
number, weight, or length or volume (i.e. Taxes on distilled spirits and wines, see Tan vs. Mun of
Pagbilao, G.R. L-14264).

b) Ad Valorem Tax imposed on a fixed portion of the value of property with respect to which
the tax is assessed; Needs an independent appraiser to determine its value.
c) Mixed imposed both specific and ad valorem
1 As to Purposes
a) General tax levied for ordinary or general purpose of the government, to raise revenue for
governmental needs. (ex: motor vehicle registration fees (PAL vs. Edu, G.R. No. 4138, 15 August
1988).

a) Special tax levied for a special purpose, to achieve some social or economic ends (i.e. for
regulation or the exercise of police power), irrespective of whether revenue is actually raised.
(ex: Margin Fees, which is a form of exchange control or restriction designed to discourage
imports and encourage exports (ESSO Std Eastern vs. CIR, G.R. No. 28608-9, July 1989), Oil Price
Stabilization Fund (Lozano vs. ERB, G.R. No. 95119-21, December 1990).

1 As to Scope or Authority to Impose

a) National - Levied by the National Government (ex: internal revenue taxes)
b) Local - Levied by the Local Government (ex: real property tax, municipal tax, business tax)
1 As to Graduation
a) Progressive - imposed whereby the rate or amount of tax increases as the amount of the
income or earning to be taxed increases.
b) Regressive - whereby the tax rate decreases as the amount of income or earning to be taxed
increases.
c) Proportionate - Tax rate is based on a fixed percentage of the amount of the fixed
percentage of the amount of the property, receipts or other bases to be taxed.

NATIONAL INTERNAL REVENUE CODE OF 1997 AS AMENDED (NIRC)

A. INCOME TAXATION
1.
a)

Income Tax Systems

Global tax system
It generally provides for uniform rules
It generally imposes uniform tax rate
It does not generally classify income

Schedular tax system

It classifies income
It provides different tax rules
It imposes different tax rates

Semi-schedular or semi-global tax system

If an individual taxable income is subjected to one graduated rates
If a corporation taxable income is subjected to normal corporate income tax rate

1 Features of the Philippines Income Tax Law

a) Direct Tax
Tax burden is borne by the income tax recipient upon whom the tax is imposed.
b) Progressive
Tax rate increases as the tax base increases.
c) Comprehensive
Adopts the citizenship principle, the residence principle and the source principle.
d) Semi-schedular or semi-global tax system
Taxable income (i.e. gross income less allowable deductions and exemptions) is subjected to
one graduated tax rates (if an individual) or normal corporate income tax rate (if a
corporation)
1 Criteria in imposing Philippine Income Tax
a) Citizenship Principle
A citizen taxpayer is subject to income tax:
1) On his worldwide income (income within and without the Philippines; or
2) Only on his income from sources within the Philippines, if he qualifies as a non-resident
citizen.
a

Residence Principle
A resident alien is liable to pay income tax on his income from sources within the Philippines
but exempt from tax on his income from sources outside the Philippines.

b) Source Principle
A non-resident alien is subject to Philippine income tax because he derives income from
sources within the Philippines such as dividend, interest, rent or royalty.
1
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.

Types of Philippine Income Tax

Net Income Tax
Final Income Tax
Gross Income Tax
Improperly Accumulated Earnings Tax
Minimum Corporate Income Tax
Optional Corporate Income Tax
Fringe Benefits Tax (FBT)
Creditable Withholding Tax (Expanded)
Special Income Tax on certain corporations
Capital Gains Tax
Branch Profit Remittance Tax
Withholding Tax on Compensation

1 Taxable Period
a) Calendar period
Accounting period from January 1 to December 31.
Taxable income is computed based on calendar year if:
1. Accounting period is other than fiscal year.
2. Taxpayer has no accounting period.
3. Taxpayer does not keep books.
4. Taxpayer is an individual.
a

Fiscal period

Accounting period of 12 months ending on the last day of any month other than December.
b) Short period
A taxpayer may have a taxable period of less than 12 months where:
1. Taxpayer dies
2. Corporation is newly organized
3. Corporation changes its accounting period
4. Corporation is dissolved
Change of Accounting Period
If a taxpayer, other than an individual, changes his accounting period, the net income shall,
with the approval of the Commissioner, be computed on the basis of such new accounting
period, subject to the provisions of Sec. 47 (Sec. 46, NIRC).
If the change is from fiscal year to calendar year, a separate final or adjustment return shall
be made for the period between the close of the last fiscal year for which the return was
made and the following Dec. 31.
If the change is from calendar year to fiscal year, a separate final or adjustment return shall
be made for the period between the close of the last calendar year for which return was made
and the date designated as the close of the fiscal year.
If the change is from one fiscal year to another fiscal year, a separate final or adjustment
return shall be made for the period between the close of the former fiscal year and the date
designated as the close of the new fiscal year.
BIR approval is necessary.
1
a)
(i)
(a)

Kinds of Taxpayers
Individual taxpayers
Citizens
Resident Citizens - citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines.

Who are citizens of the Philippines?

A: (Sec. 1, Art. IV, 1987 Constitution)
Those who are citizens of the Philippines at the time of the adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship
upon reaching the age of majority; and
Those who are naturalized in accordance with law.

(b) Non-Resident Citizens

Taxed on income derived from sources within the Philippines which includes a Filipino citizen
who:
i. Establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein.
ii. Leaves the Philippines during the taxable year to reside abroad, either as an immigrant or
for employment on a permanent basis.
iii. Has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a non-resident citizen for the taxable year in which he arrives
in the Philippines with respect to his income derived from sources abroad until the date of
his arrival in the Philippines (Section 22[E], NIRC).

Taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be.

i
Aliens
(a) Resident Alien is an individual who resides in the Philippines and who is not a citizen
thereof (Section 22 F, NIRC).
(b) Non-Resident Aliens
(1) Engaged in trade or business means a non-resident who:
i. Engages in trade and/or business in the Philippines (Principle of habituality in commercial
transactions).

ii. Exercises a profession in the Philippines.

iii. Comes to and stays in the Philippines for an aggregate period of more than 180 days
during any calendar year (Revenue Regulation 2-98).
1

Not engaged in trade or business

Is an individual whose residence is without the Philippines and who is not a citizen and not
doing business therein is liable for income derived from sources within the Philippines.
i
Special Class of Individual Employees
(a) Minimum Wage Earner
Worker in the private sector paid the statutory minimum wage or an employee in the public
sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she assigned.
MWEs shall be exempt from the payment of income tax on their taxable income. The holiday
pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage
earners shall likewise be exempt from income tax.
a Corporations
(i) Domestic Corporations
A corporation created or organized in the Philippines or under its laws and is liable for income
from sources within and without.
(ii) Foreign Corporations
(a) Resident Foreign Corporations
A corporation which is not domestic and engaged in trade or business in the Philippines is
liable for income from sources within.
(a) Non-Resident Foreign Corporations
A corporation which is not domestic and not engaged in trade or business in the Philippines is
liable for income from sources within.
i

Joint Venture and Consortium

Joint Venture or Consortium undertaking construction activity, or engaged in petroleum
operations with operating contract with the government is a partnership exempt from tax.

Partnerships
Under the Philippine setting on taxation, corporation includes partnership no matter how
created or organized, except general professional partnerships, joint ventures or consortium
formed for the purpose of undertaking a construction project or engaging in petroleum, coal,
geothermal and other energy operation pursuant to an operating consortium agreement
under service contract with the government.

a) General Professional Partnerships

Formed by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business (Section 22B, NIRC).
b) Estates and Trusts
Estate refers to the mass of properties left by a deceased person.
Trust a right to the property, whether real or personal, held by one person for the benefit of
another.
c) Co-Ownerships
There is co-ownership when:
Two or more heirs inherit an undivided property from a decedent
A donor makes a gift of an undivided property in favor of two or more donees.
1

Income Taxation

a) Definition
Tax on all yearly profits arising from property, profession, trades of offices, or as a tax on a
persons income, emoluments, profits and the like
b) Nature
Nature of Philippine Income Tax
Direct tax
Progressive tax
Comprehensive system
Semi-schedular or semi-global
a

General principles (Section 23, NIRC)

A citizen of the Philippines, residing therein is taxable on all income derived from sources
within and without the Philippines
A non-resident citizen is taxable only on income derived from sources within the Philippines
An individual citizen of the Philippines who is working and deriving income from abroad as an
Overseas Filipino Worker is taxable only on income from sources within the Philippines:
Provided that a seaman who is a citizen of the Philippines and receives compensation abroad
as a member of the complement of a vessel engaged exclusively in international trade shall
be treated as an overseas contract worker.
An alien individual whether as resident or not of the Philippines is taxable only on income
derived from sources within the Philippines.
A domestic corporation is taxable on all income derived from sources within and without the
Philippines
A foreign corporation whether engaged or not in the trade or business in the Philippines is
taxable only on income derived from sources within the Philippines.

1 Income
a) Definition
All wealth that flows into the taxpayer other than mere return of capital, actually or
constructively received.
Income, Capital, Revenue, Receipts Distinguished
Income it includes flow, service of wealth and fruits during a definite period of time.
Capital fund or property existing at one distinct point of time.
Receipts may constitute capital as well as income; broader scope than income.
Revenue all funds or income derived by the government whether from tax or other sources.

Sources of Income
a. Property(Capital)
b. Labor(Service)
c. Sale/Exchange of Capital asset and activity
d. Income derived from other sources
Treasure found or punitive damages representing profit loss
Amount received by mistake
Cancellation of taxpayers indebtedness
Payment of usurious interests
Illegal gains
Tax Refund
Bad Debt Recovery
a

Nature
Income is a flow of service rendered by capital by the payment of money from it or any other
benefit rendered by the fund through a period of time. Income is the fruit of the capital or
labor severed from the tree (Madrigal vs. Rafferty, GR 12287, August 7, 1918)

a When income is taxable

(i) Existence of Income
1) There must be gain or profit.
Income tax only applies only when there is income, gain or profit. Income, in its broad sense,
means all wealth that flows into the taxpayer other than as a mere return of capital. Unless
otherwise specified, it means cash or its equivalent.
2) The gain must be realized or received
3) The gain must not be excluded by law or treaty from taxation.
i

Realization of Income

(a) Tests of Realization

Unless the income is deemed realized, there is no taxable income.
(b) Actual Vis--Vis Constructive Receipt
Actual receipt is the actual and physical receipt.
Constructive receipt there is no physical receipt but deemed accrued to the taxpayer. It occurs
when the consideration is placed under his complete dominion.

An item of income must be included in gross income if it is credited to the account of or set
apart for the taxpayer, or otherwise made available to the taxpayer, although not yet
physically received or placed to his actual possession.
The Assignment of Income doctrine holds that income is taxable to the taxpayer even if he did
not receive the amount by reason of assigning it to another person in a form of a gift or
donation.
Recognition of Income
Income is received not only when it is actually handed to a person but also when it is merely
constructively received by him.

(ii) Methods of Accounting

(a) Cash Method vis--vis Accrual Method
Cash method income is reported in the year of payments are received while expenses are
deducted in the year paid.
Accrual method income is reported in the year it is earned while expenses are deducted in the
year it is incurred regardless of receipt or disbursement of cash.
(b) Installment Payment vis-a-vis Deferred Payment vis-a-vis Percentage Completion (In
Long Term Contracts)
Installment method appropriate when collections of the proceeds of sales and income extend
over relatively long periods of time and there is strong possibility that full collection will not be
made.
Deferred payment Under section 43 deferred-payment sales of real property include (1)
agreements of purchase and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in
which there is an immediate transfer of title, the vendor being protected by a mortgage or other
lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when
considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in
cash or property other than evidences of indebtedness of the purchaser during the taxable
year in which the sale is made do not exceed 25 percent of the selling price;
(2) Deferred-payment sales not on the installment plan that is sales in which the payments
received in cash or property other than evidences of indebtedness of the purchaser during
the taxable year in which the sale is made exceed 25 percent of the selling price;
Percentage completion method applicable in the case of a building, installation or
construction contract covering a period in excess of 1 year whereby gross income derived from
such contract may be reported upon the bases of percentage of completion.
a Tests in determining whether income is earned for tax purposes
(i) Realization Test
Unless the income is deemed realized, there is no taxable income.
(ii) Claim of Right Doctrine or 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 to return or repay.
(iii) Economic Benefit Test, Doctrine of Proprietary Interest
What is determinative is that income is realized by the taxpayer regardless of the benefit
derived from such income. However, this principle is not controlling.
(iv) Severance Test
Income is recognized when there is separation of something which is of exchangeable value.
(v) All Events Test

Applied in recognizing income or liability under accrual method of accounting. Expenses

incurred in prior year cannot be claimed as expense in another. The determinative question
is: when do the facts present themselves in such a manner that the taxpayer must recognize
income or expense. The following are the requisites of this method:
1. The right to receive the amount must be valid, unconditional and enforceable, i.e., not
contingent upon future time;
2. The amount must be reasonably susceptible of accurate estimate; and
3. There must be a reasonable expectation that the amount will be paid in due course
(Filipinas Synthetic Fiber Corp v. CA, 316 SCRA 480, 1999).

1 Gross Income
a) Definition
All income derived from whatever source, including (but not limited to) the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade of business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and,
11. Partners distributive share from the net income of the general professional partnership.
a

Concept of income from whatever source derived

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, and regardless
of the source of income, is taxable. (Guitierrez vs CIR, CTA Case No. 65, August 31, 1995)
It may be legal or illegal.

Examples of income from whatever source

1. Amount of received by mistake
2. Payment of usurious interest
3. Illegal gains
4. Bad debts recovery
5. Tax refund claimed as deduction from gross income in the preceding year
1) J
Formulas used for determination of:
Gross income (All income less Exclusions)
Net or Taxable Income (Gross Income less Allowable Deductions)
Taxable Compensation Income (Gross Compensation Income less Personal and Additional
Exemptions Individual)
Income Tax Due (Taxable or Net Income multiplied by Income Tax Rate)
Income Tax Payable (Income Tax Due less Creditable Withholding Tax Credit)
a

Gross Income vis--vis net income vis--vis taxable income

Gross Income Means all income derived from whatever sources (Sec. 32, NIRC). It is the
accession of wealth, increase in net worth where the taxpayer has complete control over the
funds.

Net income Means gross income within one taxable period less allowable deductions and/or
personal and additional exemptions, if any, authorized for such type of income by this Code or
other special laws.
Taxable income may refer to:
(1) Net Income arrived at after subtracting the allowable deductions of the individual taxpayer,
including personal exemption or both personal and additional exemptions (Sec 31, NIRC) in the
case of:
a. RESIDENT CITIZEN as to income from all sources; and
b. A NON-RESIDENT CITIZEN as to income from sources within the Philippines (Sec 24[A,
1].

Net Income within the Philippines arrived at after subtracting the allowable deductions of the
individual taxpayer, including personal exemption (when allowed in certain conditions under Sec
35D) as in the case of NON-RESIDENT ALIEN ENGAGED IN TRADE IN THE PHILIPPINES.

(2) Net Income arrived at after subtracting the allowable deductions of the taxpayer, WITHOUT
personal and additional exemptions as in the case of:
a. A NON-RESIDENT ALIEN engaged in trade in the Philippines as to income within the
Philippines (Secs 25 A, 1 and Sec 35 D);
b. A domestic corporation as to income from all sources (Sec 27A); and
c. A resident foreign corporation as to income from the Philippines
1

Gross Income without deductions as in the case of:

a. NON-RESIDENT ALIEN not engaged in trade in the Philippines (Sec 25 B, C, D, E); and
b. NON-RESIDENT FOREIGN CORPORATION as to income received within the
Philippines (Sec 28 B).

Classification of income as to source

(i) Gross Income and Taxable Income from Sources Within the Philippines
1. Interest a) interest derived from sources within this refers to interest earned from deposits
on banks located in the Philippines (location of the blank), or b) residence of the debtor
interst on bonds, notes, or other interest bearing obligations
1. Dividends amount received as dividend from a domestic corporation or from a foreign
corporation, subject to the 50% rule, or at least 50% of its gross income is from sources
within the Philippines.
50% rule: If for the 3-year period preceding the declaration of such dividend, the ration of such
corporations Philippine income to the world (total-within and without) income is:
Less than 50% - Entirely without
50% or more proportionate
3. Compensation for labor or personal services services performed in the Philippines.
2. Rentals and royalties in case of rentals, those properties located in the Philippines. In case
of royalties used in the Philippines
3. Sale of real Property sale of RP located in the Philippines
4. Sale of personal property in case of sale of personal property, the following rules apply:
a. Production and Sale
Production in whole within and sold within income purely within
Produced in whole without and sold without income purely without

Produced within or sold without income partly within and partly without
Produced without and sold within income partly within and partly without
Mere Cases of Buy and Sell (No Production)
Place of market rule (place of sale) applies.
Exception: If the personal property sold is shares of stocks of DOMESTIC corporation the
income is purely within even if the seller sells it abroad. (irrespective of place of sale)

Taxable Income
General Rule From the items of gross income specified above, there shall be deducted the
expenses, interests, losses and other deductions properly allocated thereto and a ratable part of
expenses, interests, losses and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot definitely be allocated to some items or
class of gross income. The remainder, if any, shall be treated in full as taxable income from
sources within the Philippines.
Exception: No deductions for interest paid or abroad shall be allowed from the gross income
from sources within the Philippines unless the indebtedness was actually incurred to provide
funds or use in connection with the conduct or operation of trade or business in the Philippines.
i

Gross Income and Taxable Income from Sources without The Philippines

Gross Income from sources without

1. Interest other than those derived from sources within the Philippines;
2. Dividends other than those derived from sources within the Philippines;
3. Compensation for labor or personal service performed without the Philippines;
4. Rentals or royalties from property located without the Philippines or from any interest in such
property including rentals or royalties for the use of or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade
brands, franchises and other like properties; and
5. Gains, profits and income from the sale of real property located without the Philippines.

Taxable Income from sources without form the items of gross income specified in Subsection
(C) of this Section there shall be deducted the expenses losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of gross income. The
remainder, if shall be treated in full as taxable income from sources without the Philippines.

Income Partly Within or Partly Without the Philippines

From the income partly within and partly without, income purely within is derived as follows:
Value of property within
Value of property without x Net income = Pxxx
ADD:
Sales with
Gross Sales within & without x Net Income = xxx
INCOME PURELY WITHIN
a

Sources of income subject to tax

Pxxx

(i) Compensation Income

All remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the Tax Code.
Test: Whether or not the income is derived from the employer-employee relationship
Note: Gross compensation income does not include compensation for services rendered by an
independent contractor since income is not derived from employer-employee relationship.
Requisites for compensation to be taxable
There must be personal services actually rendered
There must be payment for such services rendered
The payment made is reasonable
Forms of Compensation
1. Cash tax base is the amount of money received.
2. Property tax base is the Fair Market Value
Doctrine of Cash equivalent provides that any economic benefit to the employee whatever
may have been the mode by which it is affected is compensation income.
3. Promissory notes or other evidence of indebtedness
If not discounted: tax base is the fair market value;
If discounted:
(a) Year of receipt tax base if the discounted value;
(b) Maturity date difference between the face value and the fair market value
1

Cancellation of Remission of Debt tax base is the amount of debt cancelled.

Compensation Income exempt from tax

(a) Convenience of the Employer Rule it grants exemption to benefits which are given for the
exclusive benefit of the employer
(b) De minimis benefits Facilities or privileges furnished or offered by an employer to his
employees relatively small in value provided for merely as a means of promoting of health,
goodwill, contentment or efficiency of his employees
i

Fringe Benefits

Nature of Fringe Benefit Tax (FBT) it is a tax imposed on fringe benefits which are granted or
are paid by an employer to an employee occupying a managerial or supervisory position.
Purpose of Fringe Benefit Tax is to enhance the progressiveness and fairness of the tax system
Supervisory employees are those who recommend managerial actions if the exercise of such
authority is not merely routinary or clerical in nature but requires the use of independent
judgment.
Managerial employees those who are given the powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees.
Rank and file employees are those employees who are neither managerial nor supervisory
employees. Rank and file employees are not subject to Fringe Benefit Tax.

(a) Special Treatment of Fringe Benefits

FBT is paid by the employer but he is allowed by law to deduct FBT as a business expense in
determining his taxable income.

(b) Definition
Any goods, services or benefits furnished or granted in cash or in kind by an employer to an
individual employee, in addition to basic salaries, except a rank and file employee. (Sec 2.33
(B), RR (3.98)
(c) Taxable and Non-Taxable Fringe Benefits
Fringe benefits subject to fringe benefit tax:
1. Housing
2. Expense account
Revenue Regulation 3-98
Expenses incurred by the managerial worker were it was reimbursed by the
management.
1 Vehicle of any kind.
3. Household personnel (maid or driver)
4. Interest on loans at less than market rate to the extent of the difference between the market
rate and the actual rate granted
5. Membership fees, dues and other expenses borne by the employer for the employee in social
and athletic clubs, and similar organizations
6. Holiday and vacation expenses
7. Expenses of foreign travel: The foreign travel must not be in line with the trader or business.
8. Educational assistance to the employee or his dependants.
9. Life or health insurance and other non-life insurance premiums.
Fringe benefits not taxable under Sec. 33:
1. Fringe Benefits which are authorized and exempted under special laws, such as the 13 th
month Pay and Other Benefits with the ceiling of P30,000.
2. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
3. Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
1. De minimis benefits those facilities or privilege furnished to employees that are of relatively
small value and are offered or furnished merely as a means of promoting health, goodwill,
contentment or efficiency of employees, such as but not limited to the following (RR Nos. 82012,5-2011 and 5-2008):

a. Monetized unused vacation leave credits of PRIVATE employees not exceeding (10)
days during the year and the monetized value of leave credits paid to government
officials and employees;
b. Medical cash allowance to dependents of employees not exceeding P750 per semester
or P125 per month;
c. Uniform and clothing allowance not exceeding P5,000 per annum;
d. Actual yearly medical benefits not exceeding P10,000 per annum;
e. Rice subsidy of P1,500.00 or one (1) sack of 50kg. rice per month amounting to not more
than P1,500.00;
f. Laundry allowance not exceeding P300per month;
g. Flowers, fruits, books or similar items given under special circumstances such as on
account of illness, marriage, etc;
h. Employee achievement awards which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not exceeding 1/2 month

i.
j.

of the basic salary of the employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees;
Christmas and major anniversary celebration for employees and their guests not
exceeding P5,000 per employee per annum.
Company picnics and sports tournaments in the Philippines and participated exclusively
by the employees.

Fringe benefits not considered as gross income: if it is required/ necessary to the business of
the employer or for the convenience or advantage of the employer.
4. FBT not taxable under NIRC (Sec. 32(B))
i

Professional Income
Fees derived from engaging in an endeavor requiring special training as a professional as a
means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers,
engineers and the like.

(ii) Income from Business

Gains or profits derived from rendering services, selling merchandise, manufacturing
products, farming and long term construction contracts.
(iii)
(a)
(1)
a.

Income from Dealings in Property

Types of Properties
Ordinary assets (SOUR)
Stock in trade of the taxpayer or other properties of a kind which would properly be included
in the inventory of the taxpayer;
b. Property held by the taxpayer primarily for sale to customers in the ordinary course of
business;
c. Personal Property used in trade or business and subject to depreciation; and
d. Real property used in trade or business.
1

Capital assets

Includes all property held by the taxpayer whether or not connected in trade or business but not
including those enumerated above (#1) as ordinary assets
a Types of Gains from Dealings in Property
(1) Ordinary income vis--vis capital gain
Ordinary income includes any gain from sale or exchange of property which is not a capital
asset or property.
Capital gain The gain derived from the sale or exchange of capital assets.
(1) Actual gain vis--vis presumed gain
Actual Income or gain The actual gain from the sale of real property classified as an ordinary
asset by an individual or corporation is subject to income tax at the graduated income tax rates
(in the case of individuals), or at 30% of its net taxable income (in arrived at by deducting the cost
or adjusted bases of the property sold from the amount realized (i.e., amount of cash and/or fair
market value of property received). As a general rule, the income tax imposes the tax only when
there is actual income, gain or profit.
Presumed income or gain where an individual or a corporation sold real property (land and/or
building) classified as a capital asset, the law presumes that there was a capital gain realized,

and the capital gains tax is computed at 6% of the actual consideration or the fair market value at
the time of sale of the real property, whichever is higher. In other words, regardless of whether or
not the seller makes a profit or incurs a loss from the transaction, the capital gains tax must be
paid thereon by the seller. However, no donors tax is due on the transfer of said real property for
less than its full and adequate consideration and the fair market value. This is an exception to the
general rule that there must be actual income, gain or profit realized by the taxpayer in order that
income tax may be imposed thereon.
The rule described above on the presumed income or gain in the sale of real property classified
as capital asset and located in the Philippines is not applicable, however, to the sale of shares of
stock of a domestic corporation.
(2) Long term capital gain vis--vis short term capital gain
Long Term Capital Gain if the asset sold or exchanged is held for more than 12 months
Short Term Gain if the asset sold or exchanged is held for 12 months or less
(3) Net capital gain, net capital loss
Net Capital Gain The excess of the gains from sales/exchanges of capital assets over the
losses from such sales/exchanges.
Net Capital Loss The excess of the losses from sales or exchanges of capital assets over the
gains from such sales or exchanges.
(4) Computation of the amount of gain or loss
(a)

Cost or basis of the property sold

By purchase the cost thereof.
By inheritance fair market price or value as of the date of acquisition.
By gift the basis shall be the same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except that if such basis is greater than
the fair market value of the property at the time of the gift then, for the purpose of determining
loss, the basis shall be such fair market value.
For less than an adequate consideration in money or moneys worth the amount paid by the
transferee for the property.
Cost or basis of the property exchanged in corporate readjustment

(1) Merger/Consolidation/transfer to a controlled corporation (tax-free exchanges)

The basis of the stock or securities received by the transferor upon the exchange in a
corporate readjustment shall be the same as the basis of the property, stock or securities
exchanged,
Decreased by:
The money received, and
The fair market value of the other property received.
Increased by:
The amount treated as dividend of the shareholder and
The amount of any that was recognized on the exchange:
a. The property received as boot shall have as basis its fair market value:

b. If as part of the consideration to the transferor or acquires from the latter property subject
to a liability, such assumption or acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money received by the transferor on the
exchange;
c. If the transferor receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stock or securities.
Boot, defined
Any cash or property given in addition to the shares of stock received by a transferor in a tax-free
exchange. The amount of boot is taxable.
The basis of the property transferred in the hands of the transferee shall be the same as it would
be in the hands for the transferor increased by the amount of the gain recognized to the transferor
on the transfer.
Tax Free Exchanges
Sales or exchanges resulting in non-recognition of gains or losses:
1. Exchange solely in kind in legitimate mergers and consolidation; includes:
a. Between the corporations which are parties to the merger or consolidation (property for
stocks);
b. Between a stockholder of a corporation party to a merger or consolidation and the other
party corporation (stock for stock);
c. Between a security holder of a corporation party to a merger or consolidation and the
other party corporation (securities for securities).
1. Transfer to a controlled corporation exchange of property for stocks resulting in acquisition
of corporate control by a person, alone or together with others not exceeding four.
a

Recognition of gain or loss in exchange of property

(1) General Rule

Upon the sale or exchange of property, the entire gain or loss, as the case may be, shall be
recognized (Sec. 40 C1).
(a) Where no gain or loss shall be recognized
Exchange of property solely in kind in pursuance of mergers and consolidations.
Exchange by a person of his property for stocks in a corporation as a result of which said
person, along or together with others not exceeding four (4) persons, gains, control of said
corporation.
1

Exceptions

(a) Meaning of merger, consolidation, control securities

Merger or consolidation means the ordinary merger or consolidation or the acquisition by one
corporation of all or substantially all the properties of another corporation solely for stock
undertaken for a bonafide business purpose and not solely for the purpose of escaping the
burden of taxation.
Control securities means ownership of stocks in a corporation amounting to at least 51% of
the total voting power of all classes of stocks entitled to vote.
(b) Transfer of a controlled corporation

No gain or loss shall be recognized if property is transferred to a corporation by a person in

exchange for stock or unit of participation in such a corporation by a person in exchange for stock
or unit of participation in such a corporation of which as a result of such exchange, said person,
alone or together with other, not exceeding four (4) persons, gains control of said corporation.
Provided, that stocks issued for services shall not be considered as issued in return for property.
(6) Income tax treatment of capital loss
(a) Capital Loss Limitation Rule (Applicable to Both Corporations and Individuals)
General Rule: Capital losses are allowed only to the extent of capital gains; hence the net capital
loss is NOT deductible.
Exception: If a domestic bank or trust company, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or political
subdivision), any loss shall not be included in determining the applicability of the limitation.
(b) Net Loss Carry-Over Rule (Applicable Only to Individuals)
If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such
loss (in an amount not in excess of the net income for such year) 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.
The rule on net capital loss carry-over for the next succeeding year applies only to
individuals.

(7) Dealings in real property situated in the Philippines

In the case of an individual, if the property is capital asset located within the Philippines it is
not included in the income tax return because it is subject to final income tax.
For domestic corporations, the gains from the disposition of capital assets are subject to a
capital gains tax (which is a Final Withholding Tax) even if the property is located abroad.
(5) Dealings in shares of stock of Philippine corporations
(a) Shares Listed and Traded in the Stock Exchange
Stock transaction tax of of 1% of the gross selling price of the stock.
Exceptions to the Tax
Gains derived by dealers in securities.
All other gains which are specifically exempt from income tax under existing investment
incentives and other special laws.
(b) Shares not Listed and Traded in the Stock Exchange
Net capital gains derived during the taxable year from sale, exchange, or transfer shall be
taxed as follows (on a per transaction basis):
Not over P 100,000 -5%

Over

P 100,000

-10%

(9) Sale of principal residence

Exemption of certain individual from the capital gains tax on the sale or disposition of a
Principal Residence.
Conditions
1. Sale or disposition of the old principal residence;
2. By natural persons citizen or resident alien individual taxable under Sec. 24 of the Code
(does not include an estate or a trust);
3. The proceeds of which is fully utilized in (a) acquiring or (b) constructing a new principal
residence within eighteen (18) calendar months from date of sale or disposition;
4. Notify the Commissioner within thirty (30) days from the date of sale or disposition through a
prescribed return of his intention to avail the tax exemption;
5. Can only be availed of only once every ten (10) years;
6. The historical cost or adjusted basis of his old principal residence sold, exchanged or
disposed shall be carried over to the cost basis of his new principal residence.
7. If there is no full utilization, the portion of the gains presumed to have been realized shall be
subject to capital gains tax.

In case a real property is sold in installment (initial payment not exceeding 25% of the
contract price) wherein the initial payment was paid in cash and the balance in the form of
interest bearing promissory notes and the seller discounted the promissory notes in the year
of sale, the entire gain on the sale must be reported in the year of sale (Baas vs. Court of
Appeals, G.R. No. 102967, February 10, 2000).

Thus, where an installment obligation is discounted at a bank or finance company, a taxable

disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of the property in case of default. Although the
proceeds of a promissory note is not considered initial payment, still it must be included as
taxable income in the year it was converted into cash.

i
Passive Investment Income
(a) Interest Income
Interest derived from sources within the Philippines, and interests on bonds, notes or other
interest-bearing obligations of residents, corporate or otherwise.
(b) Dividend Income
(1) Cash dividends
Individual Taxpayer
From Domestic Corporations
RC,NRC,RA

10% (Sec.24A)

NRAETB

20% (Sec.25A2)

NRANETB

25% on gross income

(Sec.25B)

From Foreign Corporations

RC, NRC, RA, NRANETB

5-32% (Sec.24A, 25A1)

NIT

NRANETB

25% on gross income

(Sec.25B)

Corporate Taxpayer
a. Foreign to Domestic Corporations 30% (Sec. 32A)
b. Domestic to Domestic Corporations Exempt; Inter-corporate dividends (Section 27,D)
c. Domestic to Foreign Corporation:

Resident Foreign Corporations - Exempt (Section 28(A)(7)(D)

Non-resident Foreign Corporations 15% subject to the condition stated in Sec. 28B5.
Otherwise, it shall be taxed at 30% (CIR vs. Procter and Gamble, 204 SCRA 377). Unless, exempt
based on a treaty.

Stock dividend

General Rule: Not subject to tax because it does not constitute income; it represents transfer of
surplus to capital account. (Sec. 73B, 1997 NIRC)
Exceptions:
1. Section 73B, 1997 NIRC
a. There is redemption or cancellation of shares of stock.
b. The transaction involves stock dividends, and
c. The time and manner of the transaction makes it essentially equivalent to a distribution of
taxable dividends (CIR vs. CA, CTA & ANSCOR, G.R. No. 108576, January 30, 1999).
1. The recipient is other than the shareholder (Brachrach vs. Seifert, 87 Phil. 438, 1950).
2. Change in the stockholders equity results by virtue of the stock dividend issuance.
1

Property dividend
Subject to final tax annually or constructively received by an individual (Sec. 24 [B][2])

(2) Liquidating dividend

When a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporation, is taxable
income or deductable loss, as the case may be (Section 73[A], NIRC).
A liquidating dividend is not a dividend income. The transaction is considered a sale or
exchange of property between the corporation and the stockholder.
a

Royalty Income
It is the payment for the use and exhaustion of property such as earnings from copyrights,
patents, trademarks, formulas and natural resources under lease.
Included in the gross income if derived from sources outside the Philippines because those
from sources within are subject to final withholding tax.
If the recipient of the royalty paid by a DC is either a NRA-NETB or NRFC, a lower tax rate
may be allowed under an existing treaty.

(a) Rental Income

(1) Lease of personal property
Amount or compensation paid for the use or enjoyment of a personal property.
(2) Lease of real property
Amount or compensation paid for the use or enjoyment or real property.
(3) Tax treatment of:
(a) Leasehold Improvements by Lessee
Method of reporting the value of permanent improvements introduced by the lessee:

Outright method recognized as income to lessor at the time when such buildings
improvements are completed at fair market value.
Spread-out method the lessor spread over the life (or remaining period) of the lease, the
estimated depreciated value of such buildings or improvements at the termination of the lease
and report as an income for each year of the lease, an aliquot part thereof.

VAT Added to Rental/Paid by the Lessee

The amount of the VAT in a VATable lease which the lessor passed on to the lessee does form
part of the rental income of the lessor, since such amount is to be paid by the lessor as output
VAT on the sale of leasing services to the BIR.
(b) Advance Rental/Long Term Lease
Prepaid or advance rental is taxable income to the lessor in the year received, if so received
under a claim of right and without restriction as to its use, and regardless of method of
accounting employed.
Security deposit applied to the rental of the terminal month or period of contract must be
recognized as income at the time it is applied.
If security deposit is to ensure contract compliance, it is not income to the lessor until the
lessee violates any provision of the contract.
i

Annuities, Proceeds from Life Insurance or Other Types of Insurance

Refer to annuity policies sold by insurance companies, which provide installment payments
for life, or for a guaranteed fixed period of time whichever is longer.

(iv) Prizes and Awards

Refer to amount of money in cash or in kind received by chance or through luck and are
generally taxable except if specifically mentioned under the exclusions from the computation
of gross income under Section 32 B, NIRC.
(v) Pensions, Retirement Benefit, or Separation Pay
Refers to amount of money received in lump sum or on staggered basis in consideration of
services rendered given after an individual reaches the age of retirement.

(vi) Income From Any Source Whatever

(a) Forgiveness of Indebtedness

Taxable income if the creditor cancels the debt as a consideration of the services performed
by the debtor to the creditor.
A gift if the creditor cancels the debt without any consideration.
A capital transaction if the corporation forgives the debt of its stockholder, it has the effect of
payment of an indirect dividend.

(a) Recovery of Accounts Previously Written Off

The recovery of bad debts previously allowed as deduction in the preceding year or years
shall be included as part of the taxpayers gross income in the year of such recovery to the
extent of the income tax benefit of the said deduction.
(b) Receipt of Tax Refunds or Credit
If a taxpayer received a tax credit certificate or refund for erroneously paid tax which was
claimed as deduction from his gross income that resulted in a lower net taxable income or a
higher net operating loss that was carried over to the succeeding taxable year, he realizes
taxable income and must be included in his income tax return in the year of receipt. This
principles does not apply to tax credits or refunds of erroneously paid income tax, estate tax,
donors tax, and special assessments since they are not deductible form gross income.
(c) Income From Any Source Whatever
Embraces all income not expressly exempted within the class of taxable income under the
law, irrespective of the voluntary of involuntary action of the taxpayer in producing the gains,
and whether derived from legal or illegal source.
(d) Sources Rules in Determining Income from Within and Without
(1) Interests
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax. (FIT)
(2) Dividends
Must be issued by a foreign corporation. When it is issued by a domestic corporation, it
becomes passive income and subject to FIT, unless otherwise exempt from tax.
(3) Services
Compensation For Services; the following income earners are liable to pay by way of FIT and
is not included in Section 32 (A)(I) of the NIRC:
Alien Individual Employed by
1. Multinational Companies
2. Offshore banking units
3. Petroleum Service Contractor or Subcontractor.
Revenue Regulation 12-2002:
Filipinos employed in managerial or technical position in multinational companies which is either
regional area headquarters or regional operating headquarters have an option to pay by way of
the net or the final income tax. But for Filipinos working in offshore banks and in the petroleum
services, they have no option.
(4) Rentals
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax.
(4) Royalties
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax.

(1) Sale of real property

Gain must be from ordinary asset or capital asset located abroad.
In the case of an individual, if the property is capital asset located within the Philippines it is
not included in the income tax return because it is subject to final income tax.
For domestic corporations, the gains from the disposition of capital assets are subject to a
capital gains tax (which is a Final Withholding Tax) even if the property is located abroad.
(5) Sale of personal property
Personal property produced by the taxpayer within the Philippines and sold without the
Philippines or produced by the taxpayer without and sold within the Philippines any gain,
profit or income shall be treated as derived partly from sources within and partly from sources
without the Philippines.
Purchase of personal property within and its sale without the Philippines, or purchase of
personal property without and its sale within the Philippines any gain, profit or income shall
be treated as derived entirely from sources within the country in which sold.
(6) Shares of stock of domestic corporation
The disposition of shares of stock in a domestic corporations not traded through the local
stock exchange is always subject to CGT (Final tax). If the shares of stock are not in a
domestic corporation, apply first the source rule under Section 42 (consider the taxpayer). If
taxable, it is subject to regular corporate income tax. However, if the shares of stock are listed
and traded in the local stock exchange, it is subject to percentage tax under Section 127 of
the NIRC.

Sec 7 of Rev. Regs 6-2013, covers sale or exchange of shares of domestic corporations not
traded through a local stock exchange. The fair market value of the shares of stock sold shall
be the value at the time of sale. In determining the value of the shares, the Adjusted Net
Assets Method shall be used, whereby all assets and liabilities are adjusted to FMV.
For purpose of this Sec. the appraised value of real property at the time of sale shall be (1)
FMV as determined by CIR; (2) FMV as shown in the schedule of values fixed by Assesor; or
(3) FMV as determined by a dependent appraiser, whichever is higher (Rev Regs 6-2013, April
2013).

(a) Situs of Income Taxation

(See discussion on under Inherent Limitations - Territorial)
(e)
(1)

Exclusions from Gross Income

Rationale for the exclusions
They represent return of capital or are not income, gain or profit.
They are subject to another kind of internal revenue tax.
They are income, gain or profits that are expressly exempt from income tax under the
Constitution, tax treaty, tax code, or a general or special law.

1
1.
2.
3.
4.
5.

Taxpayers who may avail of the exclusions

Resident Citizens
Resident Aliens
Non-Resident Aliens Engaged in Trade of Business
Domestic Corporations
Resident Foreign Corporations

Exclusions distinguished from deductions and tax credit

EXCLUSIONS
(SEC. 32B)

DEDUCTIONS
(SEC. 34)

Refer to flow of wealth which are not treated

as part of gross income due to; (1) exempted
by the fundamental law; (2) exempted by
statute; (3) not come within the definition of
income.

Refer to the amounts which the law allows to be subtracted

from gross income in order to arrive at net income.

Pertain to the computation of gross income.

Pertain to the computation of the net income.

Something earned or received by the taxpayer

which do not form part of gross income.

Something spent or pain in earning of gross income.

1 Under the Constitution:

(a) Income Derived by the Government or its Political Subdivisions from the Exercise of
any Essential Governmental Function
Income derived by the Philippine Government or to any political subdivision from any:
a. Public utility
b. Exercise of any government function are also exclusions:

Thus income by the government from sources other than those mentioned above are subject
to tax. Except: GSIS, SSS, PHIC and PCSO.
A political subdivision however may partly earn income from (a) and (b) and partly from other
sources. The political subdivision is still liable to pay tax for the latter income earned.
All assets and revenues of a non-stock, non-profit private educational institution used directly,
actually, and exclusively for private educational purposes shall be exempt from taxation [Sec.
4(3), Art. XIV, Constitution].

Under the Tax Code

(a) Proceeds of Life Insurance Policies

Policy are excluded if payable upon death of the insured whether in lump sum or monthly
except an agreement to pay interest between the insured and the insurer, which shall be
included in the income tax return.
The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or installment, except if such amounts are held by the
insurer under an agreement to pay interest thereon, the interest payments shall be included
in gross income.
Reason: Indemnity rather as gain or profit.
(b) Return of Premium Paid
The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract.
No death occurs in this case only a maturity of the term.
Only the amount of premium paid is excluded.
Ex. Insurance contracts earned one million pesos out of the total premium paid which is
P100,000. Only the P100,000 is excluded, the P900,000 is liable to tax under Net.
Reason: Return of capital

(c) Amounts Received under Life Insurance, Endowment or Annuity Contracts

1. Amounts received through accident or health insurance or under workmens
compensation acts, as compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on account of such injuries or
sickness.
2. Compensations for damages to personal or family rights, damages for slander and libel,
award for loss of life, damages for injuries to the goodwill of a taxpayers business unless
they exceeded its cost are not taxable.
3. Damages received for patent infringement, breach of contract or fiduciary duty and
recoveries (except punitive damages) under the clayton act for antitrust violations are
excluded from the gross income to the extent that the losses to which the damages relate
did not give rise to a tax benefit either in recovery year or earlier tax years.
(d) Value of Property Acquired by Gift, Bequest, Devise or Descent
Gifts, Bequests, and Devises are donations because it is given gratuitously. The income
received by the donee from the said items is subject to income tax:
Reason: Not product of capital or industry
(b) Amount Received Through Accident or Health Insurance Compensation for Injuries or
Sickness Refers to:
a. Any amount received by reason of compensation for personal injury or sickness through
Accident or Health Insurance or under Workmens Compensation Acts.
b. Plus the amount of any damages received, whether by suit or agreement, on account of
such injuries or sickness.
c. The injury or sickness must arise from an employee employer relationship.
Reason: Compensatory, not gain/profit.
(f) Income Exempt Under Tax Treaty
Premised on adherence to the generally accepted principles of International Law.
Income exempt under tax treaty with foreign countries.
Note: Not all countries have tax treaty with the Philippines.
(g) Retirement Benefits, Pensions, Gratuities, Etc.
1. Retirement benefits under R.A. 4917 where:
a. Retiree employed by the same employer for at least 10 years
b. Retiree at least 50 years old
c. Avails of the benefit only once
d. BIR approved private benefit plan
1

Retirement benefits under R.A. 7641 where:

a. No private retirement plan
b. Must have served the company for at least 5 years
c. Retiree at least 60 years old but not more than 65 years of age at the time of retirement.

Monetized value of retirees accumulated vacation leave and sick leave subject to the
following rules:
a. For compulsory retirement (60 years for private corp.; 65 years for government; 70 years
for judiciary) ALL
b. For optional retirement (10 years of service and 50 years of age) up to 10 days only while
the excess of VL and SL is taxable

4. Separation pays due to circumstances beyond the control of the employee.

5. Social security benefits, retirement gratuities, pensions and other similar benefits received by
citizens and aliens who come to reside permanently here from foreign government agencies
and other institution, private or public.
6. Benefits due to residents under the laws of the U.S. administered by the U.S. Veterans
Administration.
7. SSS and GSIS benefits.
(h) Winnings, Prizes, and Awards, Including Those in Sports Competition
1. Those made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if the recipient:
a. Was selected without any action on his part to enter the contest or proceeding; and
b. Is not required to render any substantial future service as a condition to receiving the
prize or award.
1

Those granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad provided sanctioned by their national sports
associations.

Under Special Law

a. Under R.A. No. 7916 (Philippine Export Zone Authority Law), PEZA registered enterprises
are given income tax holidays of six or four years from the date of commercial operation,
depending on whether their activities are considered as pioneer or non-pioneer; after enjoying
income tax holidays, they are subject to the 5% gross income tax on their gross income
earned, in lieu of all national and local taxes.
b. Under R.A. No. 6657 (Comprehensive Agrarian Reform Package Law), gain arising from the
transfer of the agricultural property covered under the law shall be exempt from capital gains
tax for ten (10) years.
c. Under R.A. No. 7653 (New Central Bank Act), the Bangko Sentral ng Pilipinas is exempt from
all national, provincial, municipal and city taxes for five (5) years.
d. Under R.A. No. 7279 (Urban Development Housing Act of 1992), the National Housing
Authority is exempt from all fees and charges of any kind, whether local or national, such as
income and realty taxes.
(a) Personal Equity and Retirement Account
Refers to the voluntary retirement account established by and for the exclusive use and
benefit of the contributor for the purpose of being invested solely in the Personal Equity and
Retirement Account investment products in the Philippines (R.A. 9505, Personal Equity and
Retirement Account Act of 2008).

(i) Deductions from Gross Income

(1) General rules
(a) Deductions Must Be Paid or Incurred in Connection with the Taxpayers Trade,
Business or Profession
Requisites to be Deductible:
1. It must be ordinary and necessary Expenses.
Ordinary Expenses normal or usual in the line of business.
Necessary Expenses appropriate and helpful in the development of taxpayers business.
1 Paid or incurred within the taxable year.
2. Paid or incurred in carrying on a trade or business.

Directly attributable to the development, management, operation and/or conduct of business

or exercise of profession, including the following reasonable allowance:
1. Substantiated with sufficient evidence, such as official receipts or other adequate records.
2. If subject to withholding taxes, proof of payment to BIR
a

Deductions Must Be Supported by Adequate Receipts or Invoices (Except Standard

Deduction)
The lack of supporting vouchers, receipts and other documentary proof, however, may be
excused under Section 337 (now Section 235) of the Tax Code. This provision requires the
preservation of the books of accounts and other accounting records for a period of 3 years
from the date of last entry.

(b) Additional Requirement Relating to Withholding

Sufficient evidence such as official receipts must be presented in order to validly withhold
expenses. Otherwise, those not withhold cannot be included in deduction of expenses in
income.
1 Return of capital (cost of sales or services)
(a) Sale of Inventory of Goods by Manufacturers and Dealers of Properties
Manufacturing:
Cost of Sales = All cost of production of finished goods, such as
1. Raw material used;
2. Direct labor;
3. Manufacturing overhead;
4. Freight cost;
5. Insurance premiums;
6. Other costs incurred to bring the raw materials to the factory or warehouse.
a

Sale of Stock in Trade by a Real Estate Dealer and Dealer in Securities

Where a corporation engages the services of stock transfer agents, both domestic and
foreign, the fees paid for such services are deductible because they are both ordinary and
necessary expenses. The shares of stocks are listed in domestic as well as foreign stock
exchanges.

(b) Sale of Services

Cost of Services = All direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including:
a. Salaries and employee benefits of personnel, consultants and specialists directly rendering
the service;
b. Cost of facilities directly utilized in providing the service. It shall not include interest expense
except for banks and other financial institutions.
Gross income excludes passive income subject to final tax.
Other income and Extraordinary Income are included since RR 9-98 provides that gross
sales include sales contributory to income taxable under the regular corporate tax.
Allowable Deductions
Items or amount that the law authorizes to be deducted to the operating income to arrive at the
net income
Basic Principles
The taxpayer must point to some specific provisions of law authorizing such deductions
The taxpayer must be able to prove that he is entitled to deductions

Cohan Rule
If there is a showing that expenses have been incurred but the exact amount cannot be
ascertained due to lack of documentary evidence, it is the duty of the BIR to make an estimate of
deduction that may be allowed [RMC 23-2000].
Deductions vs. Exclusions
DEDUCTIONS
Amounts deducted from
gross income to arrive at
net income

EXCLUSIONS
Amounts exempt from tax

Deductions vs. Personal Exemption

DEDUCTIONS

PERSONAL
EXEMPTION

Applies to both individual

and corporate taxpayers

Applies only to individuals

Business expenses over

the cost of doing business

Cover personal, living or

family expenses

Deductions vs. Tax Credit

DEDUCTIONS
Reduces taxable Income

1
(a)
(1)
(a)

TAX CREDIT
Reduces tax liability

a.
b.
c.
d.

Itemized deductions
Expenses
Requisites for Deductibility
Nature: ordinary and necessary
Ordinary when it is normal in relation to the business of the taxpayer and the surrounding
circumstances
Necessary it is intended to realize a profit or to minimize a loss
It must be incurred in trade or business carried on by the taxpayer
There must be proof
It must be reasonable
Not contrary against law, public policy or public morals

Paid and incurred during taxable year

i.
ii.
1

Cash Basis Method deducts expenses in the year in which they are paid
Accrual Basis Method recognizes expenses in the year they accrue
Salaries, wages and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of the fringe benefit subjected to
fringe benefit tax which tax should have been paid.

It includes:
Salaries, wages, commissions, professional fees, vacation leave pay, retirement pay and
other compensation.
Bonus are deductible expenses if paid in good faith as additional compensation for services
rendered and subjected to withholding tax

In Aguinaldo vs. CIR (112 SCRA 136), the bonus given to corporate officers was disallowed as
a deduction.

Pensions and compensations for injuries, if not compensated for by insurance or otherwise
Grossed-up monetary value of fringe benefit provided for, as long as the final tax imposed
has been paid.

Traveling/Transportation expenses
For travel here and abroad while away from home in the pursuit of trade, business or
profession.

(2) Cost of materials

Deductible only to the amount actually consumed or used in operation during the year.
(3)

Rentals and/or other payments for use or possession of property

Requisites of deductibility:
Made as a condition to the continued use or possession of property.
Taxpayer has not taken or is not taking title to the property or has no equity other than that of
a lessee, user or possessor.
Property must be used in trade or business.
Subjected to withholding tax of 5% otherwise it shall be disallowed as a deduction.

Repairs and maintenance

Minor or ordinary repairs are deductible from gross income because it keeps the assets in its
ordinary working conditions.
Major or extraordinary repairs are not deductible since major repairs tend to prolong the life of the
asset (these are capitalized or added to the cost of the asset subjected to repair)
(4) Expenses under lease agreements
It is not the cost of the leasehold improvements but only its annual depreciation that is
considered as rental expense.
(5) Expenses for professionals
A professional may claim as deductions the cause of supplies used by him in the practice of
his profession, expenses paid in the operation and repair of transportation equipment used in
making professional calls, dues in professional societies and subscription to professional
journals, the rent paid for office rooms, the expenses of the fuels, light, water, telephone, etc.,
used in such offices, and the hire of office assistant. Amounts currently expended for books,
furniture, and professional instruments and equipments, the useful of which is short, maybe
deducted but the amounts expended for books, furniture and professional instruments and
equipments of a permanent character are not allowable as deduction (Sec. 69, RR No. 2).
(6) Entertainment/ Representation expenses
For entertainment or recreation connected to the trade, business or profession or directly
related to or in furtherance of the conduct of the business, PROVIDED however that expense
incurred contrary to law, morals, public policy or public order shall not be deductible.
(7) Political campaign expenses

Amounts expended for political campaign purposes or payments to campaign funds are not
deductible either as business expenses or contributions (Montenegro Inc. vs. CIR, CTA Case
695, April 30, 1969).

Note: Under the Omnibus Election Code, the contributions to political parties registered with the
COMELEC are deductible
1

Training expenses
Constitute ordinary and necessary expenses of a taxpayer.

a
(1)
1.
2.
3.
4.
5.
6.
7.

Interest
Requisites for deductibility
There must be indebtedness
Taxpayer is the debtor.
Interest expense was paid or incurred upon such indebtedness
Debt must be related to the business or profession of the taxpayer.
Interest is stipulated
Interest should be legally due.
Interest paid or accrued during the taxable year.

1 Non-deductible interest expense

Interest expense not allowed as deduction:
1. Individual taxpayer on the cash basis paying interest in advance through discount or
otherwise. But interest is allowed as deduction in the year the indebtedness is paid; if payable
in amortization then an aliquot portion of the interest corresponding to the ratio of the principal
paid is allowed as deduction.
2. Interests on loans between related parties referred in Section 36 (B).
3. Interest on indebtedness incurred to finance petroleum exploration.
1 Interest subject to special rules
(a) Interest paid in advance
Individual taxpayer on the cash basis paying interest in advance through discount or otherwise.
But interest is allowed as deduction in the year the indebtedness is paid; if payable in
amortization then an aliquot portion of the interest corresponding to the ratio of the principal paid
is allowed as deduction.
(b) Interest periodically amortized
Generally, the interest period commences at the date of the indebtedness arises.
Except with respect to business out of sales, lease or supply or goods and services which are
considered as trace accounts or receivables or payables.
(a) Interest expense incurred to acquire property for use in trade, business or exercise or
a profession.
It may be allowed as a deduction or treated as a capital expenditure.
(c) Reduction of interest expense/ interest arbitrage
Requisites
a. There must be an indebtedness
b. There should be an interest expense paid or incurred upon such indebtedness;
c. Indebtedness must be that of the taxpayer
d. Indebtedness must be connected with the taxpayers trade, business or exercise of profession
e. Interest expense must have been paid or incurred during the taxable year;
f. The interest must have been stipulated in writing
g. Interest must be due;
h. Interest payment arrangement must not be between related taxpayers under Sec. 34 (B)(2)
(b) in relation to Sec. 36 (B) of NIRC
i. Interest must not be incurred to finance petroleum operations; and

j.

In case of interest incurred to acquire property used in trade, business or exercise of

profession, the same was not treated as a capital expenditure (Rev. Reg 13-2000)

a
(1)
i.
ii.
iii.

Taxes
Requisites for deductibility
Related to the business of the taxpayer.
Imposed by law on, and payable by, taxpayer.
Paid or accrued during the taxable year.

1
i.
ii.

Non-deductible taxes
Income tax.
Income tax paid or incurred to any foreign country, if the taxpayer is claiming a tax credit for
such foreign tax.
iii. Estate or donors tax.
iv. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (special assessment).
1

Treatments of surcharges/interests/fines for delinquency

The interest on deficiency donors tax is deductible. The SC explained that taxes here are
considered obligation or indebtedness. And it ruled that we have to relax the distinction
between tax and ordinary obligation in this respect.
Interest on deficiency income tax can also be claimed as deductible interest expense
because taxes here are considered ordinary obligations.

1 Treatment of special assessment

Special assessment or the tax imposed on the improvement of a parcel of land is non-deductible.
(2)

a
(1)
i.
ii.
iii.
iv.
v.
vi.

Tax credit vis--vis deduction

Taxes as deductions maybe claimed as deductions from gross income.
Tax credit is a deduction from final income tax.
Tax as deduction includes those taxes which are paid or incurred in connection with the trade,
business or profession of the taxpayer. However, the sources of a tax credit is foreign income
tax paid, war profit tax, excess profit tax paid to the foreign country.
The foreign income tax paid to the foreign country is not always the amount that may be
claimed as tax credit because under the limitations provided under the Tax Code, it must not
be more than the ratio of foreign income to the total income multiplied by the Phil. income tax.
Losses
Requisites for deductibility
Must be actual; nature of the loss must be sudden;
Sustained in a close and completed transaction;
Not be compensated for by insurance or otherwise;
Must be liquidated and charged-off during the taxable year.
Not claimed as a deduction for estate tax purposes; and
If due to casualty, robbery, theft or embezzlement, must be reported to the BIR within 45 days
from date of discovery.

1 Other types of losses

(a) Capital losses
Capital loss can never be deducted from an ordinary gain. Capital loss can only be deducted
from capital gain in accordance Section 39 (c) of the NIRC.
1. Losses from sale or exchange of capital assets
2. Losses resulting from securities becoming worthless and which are capital assets
3. Losses from short sales of property
4. Losses due to failure to exercise privilege or option to buy or sell property.

Securities becoming worthless

If the stock of the corporation becomes worthless (not mere fluctuations), the cost or other
basis may be deducted by the owner in the taxable year in which the stock becomes
worthless.

(b) Losses on wash sales of stocks or securities

Wash sales, defined
It is a sale or disposition of stock or securities where substantially identical securities are acquired
or purchased within 61-day period beginning 30 days before the sale and ending 30 days after
the sale.
Wash sales are NOT deductible because these are considered to be artificial loss.
(c) Wagering losses
Deductible only to the extent of gain or winnings; deemed to apply only to individuals. A
wager is made when the outcome depends upon the CHANCE.
(d) Net Operating Loss Carry-over (NOLCO)
The net operating loss of the business or enterprise for any taxable year immediately
preceding the current taxable year, which has not yet been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next three
consecutive taxable years immediately following the year of such loss
Net operating loss means the excess of allowable deduction over gross income of the business
in a taxable year.
Said deduction, however, is subject to some limitations, to wit:
1. It is necessary that the loss had not been previously offset as deduction from gross income;
2. Any net loss incurred in a taxable year during which the taxpayer was exempt from income
tax (as in the case of tax honeymoon) shall not be allowed as a deduction;
3. A NOLCO shall be allowed only if there had been no substantial change in the ownership of
the business or enterprise.
a. Can be carried over to the next 3 years after the year the net operating loss was
sustained.
b. No substantial change in ownership of the business or enterprise (75% interest
retention rule) to avoid peddling of losses purely for tax benefit purposes.

NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who
sustained and accumulated the net operating losses regardless of the change in its
ownership. This rule shall also apply in the case of merger where the taxpayer, which
incurred the losses, is the surviving entity. Any individual (including estates and trusts)
engaged in trade or business or in the exercise of his profession, and domestic and resident
foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or
preferential tax rates under the Code (e.g., private educational institutions, hospitals, and
regional operating headquarters) on their taxable income shall be entitled to deduct from
his/its gross income for the current year his/its accumulated net operating losses for the
immediately preceding three (3) consecutive taxable years (Section 4, Revenue Regulations No.
14-2001).

The following shall not be entitled to claim deduction of NOLCO:

a. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit
Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the
Banko Sentral ng Pilipinas (BSP);

b. An enterprise registered with the Board of Investments (BOI) with respect to its BOIregistered activity enjoying the income Tax Holiday incentive. Its accumulated net operating
losses incurred or sustained during the period of such income Tax Holiday shall not qualify for
purposes of the NOLCO;
c. An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to
R.A. No. 7916, as amended, with respect to its PEZA-registered business activity. Its
accumulated net operating losses incurred or sustained during the period of its PEZA
registration shall not qualify for purposes of the NOLCO;
d. An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered
business activity. Its accumulated net operating losses incurred or sustained during the period
of its said registered operation shall not qualify for purposes of the NOLCO;
e. Foreign corporations engaged in international shipping or air carriage business in the
Philippines; and
f. In general, any person, natural or juridical, [who is] enjoying exemption from income tax,
pursuant to the provisions of the Code or any special law, with respect to its operation during
the period for which the aforesaid exemption is applicable. Its accumulated net operating
losses incurred or sustained during the said period shall not qualify for purposes of the
NOLCO (Section 4, Revenue Regulations No. 14-2001).

A corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any
taxable year. The running of the three-year period for the expiry of NOLCO is not interrupted by
the fact that such corporation is subject to MCIT in any taxable year during such three-year period
(Section 6.5, Revenue Regulations No. 14-2001).

Bad Debts

(1) Requisites for deductibility

(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
(2) The same must be connected with the taxpayers trade, business or practice of profession;
(3) The same must not be sustained in a transaction entered into between related parties
enumerated under Sec. 36(B) of the Tax Code of 1997;
(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of
the taxable year; and
(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year (Sec. 3, R.R. No. 5-1999 as amended by R.R. 25-2002).
For debts to be considered as worthless, and thereby qualify as bad debts making them
deductible, the taxpayer should show that:
(1) There is a valid and subsisting debt.
(2) The debt must be actually ascertained to be worthless and uncollectible during the taxable
year;
(3) The debt must be charged off during the taxable year; and
(1) The debt must arise from the business or trade of the taxpayer. Additionally, before a debt can
be considered worthless, the taxpayer must also show that it is indeed uncollectible even in
the future (PRC vs. CA, 256 SCRA 667).

(2) Effect of recovery of bad debts

The recovery of bad debts previously allowed as deduction in the preceding years shall be
included as part of the taxpayers gross income in the year of such recovery to the extent of the
income tax benefit of said deduction. The total bad debts recovered will not necessarily form part
of the taxpayers income but only to the extent that he was benefitted.

a
(1)
i.
ii.
iii.

Depreciation
Requisites for deductibility
Must be reasonable;
Must be on property used in the conduct of the business; and
Must be treated as expenditure for the taxable year.

(2) Methods of computing depreciation allowance

(a) Straight-line method
The depreciation expense deductible in each of the years of the propertys estimated useful
life is constant.
a

Declining-balance method
Depreciation allowance per year varies. It is largest in the first year and decreases towards
the end of the useful life of the property.

Sum-of-the-years-digit method
Annual depreciation is computed by applying a changing fraction to the depreciable cost
(original cost less salvage value) of the property.

a Charitable and Other Contributions

(1) Requisites for deductibility
1. The contribution must actually be paid, or made payable to the Philippine government or any
political subdivision thereof, or any domestic corporation or association specified by the
NIRC.
2. No part of the net income of the beneficiary must inure to the benefit of any private
stockholder or individual.
3. It must be made within the taxable year.
4. It must not exceed 10% in case of an individual, and 5% in case of a corporation, of the
taxpayers taxable income (except when the donation is deductible in full) to be determined
without the benefit of the contribution.
5. It must be evidenced by adequate records or receipts.
1

Amount that may be deducted

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the
term utilization means:
i. Any amount in cash or in kind (including administrative expenses) paid or utilized to
accomplish one or more purposes for which the accredited non-government organization
was created or organized.
ii. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or
more purposes for which the accredited nongovernment organization was created or
organized.

An amount set aside for a specific project which comes within one or more purposes of the
accredited nongovernment organization may be treated as a utilization, but only if at the time
such amount is set aside, the accredited nongovernment organization has established to the
satisfaction of the Commissioner that the amount will be paid to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of funds.
Partial Deduction:
10% (individual) or 5% (corporation) of the taxable income of the donor, if made to the following
donees:

a. To Government of the RP or any of its agencies / political subdivision thereof exclusively for
public purposes, or
b. Accredited domestic corporations or associations organized and operated exclusively for
religious, charitable, scientific, youth
c. And sports development, cultural or educational purposes or for the rehabilitation of veterans,
or to social welfare institutions, or to non-governmental organizations.
No part of the net income of which inure to the benefit of any private stockholder or individual.
Full Deduction:
If made to the following:
1. Donations to the Government of the Philippines and any of its agencies/political subdivisions
fully-owned government corporation.
The donation must be exclusively to finance undertaking priority activities in accordance
with the national priority plan determined by the NEDA in the following fields:
Science
Education
Youth and Sport Development
Culture
Economic Development
Human Settlement
1 Donations to Certain Foreign Institutions or International Organizations.
2. Donations to Accredited Nongovernmental Organizations whose purpose are exclusively for:
a. Scientific
b. Educational
c. Character building and Youth and Sports Development
d. Cultural
e. Health
f. Research
g. Social Welfare
h. Charitable and
i. Any combination of the above.
a Contributions to Pension Trusts
(1) Requisites for deductibility
1. The employer must have established a pension or retirement plan to provide for the payment
of reasonable pensions to his employees.
2. The pension plan is reasonable and sound.
3. It must be funded by the employer.
4. The amount contributed must no longer be subject to the control or dispositions of the
employer.
5. The payment has not been allowed as deduction.
6. The deduction is apportioned in equal parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or payment was made.

(i) Deductions under Special Laws

The following are institutions governed by special laws that allow full deductions on donations:
National Museum, Library and Archives (P.D. 373)
Development Academy of the Philippines (P.D. 205)
Intramuros Administration (P.D. 1616)
The Cultural enter of the Philippines
Internationa Rice Research Institute
Ministry of Youth & Sports Commission

Museum of Philippine Costumes

University of the Philippines and other state colleges and universities
The Integrated Bar of the Philippines (P.D. 81)

1 Optional standard deduction

(a) Individuals, Except Non-Resident Aliens
Individual Taxpayers Entitled
(1) Resident Citizen
(2) Non-Resident Citizen
(3) Resident Alien
Individual Taxpayers Not Entitled
Non-Resident Alien engaged in trade or business
Non-Resident Alien not engaged in trade or business
1. An individual subject to income tax, other than a nonresident alien, may elect a standard
deduction in an amount NOT Exceeding 40% Of His Gross sales or gross receipt, as the
case may be.
2. Optional standard deduction is in lieu of all other itemized deduction (RA 9504)
3. Unless the taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions allowed under
Section 34.
4. This option is now applicable to corporations. The OSD is computed at 40% of its gross
income.

Once OSD is elected, it is irrevocable for the taxable year for which the return is made.

Corporations, Except Non-Resident Foreign Corporations

Corporate Taxpayers Entitled

Domestic Corporation
Resident Foreign Corporation
In the case of corporation subject to tax under Section 27 (A) and 28 (A) (1) of NIRC, it may elect
a standard deduction in an amount not exceeding forty percent (40%) of gross income.
(c) Partnership see above discussion - Corporations
1 Personal and additional exemption (Republic Act 9504 Minimum Wage Earner Law)
(a) Basic Personal Exemptions
Personal exemptions are arbitrary amounts allowed, in the nature of a deduction from taxable
income, for personal, living or family expenses of an individual taxpayer.
There shall be allowed a basic personal exemption of P 50,000 for each individual taxpayer
(R.A 9504).
(b) Additional Exemptions for Taxpayer with Dependents
There shall be allowed an additional exemption of P 25,000 for each dependent child not
exceeding four (4).

The additional exemption for dependents shall be claimed by only one of the spouses in the
case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children.
Qualified Dependents
Parents does not include step parents and parents-in-law
Brothers and sisters full or half-blood
Children whether legitimate or illegitimate
Senior Citizen
Benefactor any person whether or not related to the senior citizen who takes care of the
later as dependent
Premium payments on Health and/or Hospitalization Insurance
Requisites
The claimant must be the spouse claiming the additional exemption for dependents
The amount allowed is P2,400 per annum or P200 a month
The family gross income must not be more that P250,000 for the taxable year.
a

Status-at-the-End-of-the-Year Rule
If the taxpayer marries or should have additional dependent(s) as defined above during the
taxable year, the taxpayer may claim the corresponding additional exemption, as the case
may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents died,
or as if such dependents married, became twenty-one (21) years old or became gainfully
employed at the close of such year.

(d) Exemptions Claimed by Non-Resident Aliens

Taxes paid or incurred within the taxable year in connection with the taxpayers profession,
trade or business, shall be allowed only if and to the extent that they are connected with the
income from sources within the Philippines (Sec. 34 [c][2])
1 Items not deductible
(a) General Rules
In computing net income, no deduction shall in any case be allowed.
(a) Personal, Living or Family Expenses
These are personal expenses and not related to conduct of trade or business.
(b) Amount Paid for New Buildings or for Permanent Improvements (Capital Expenditures)
These are capital expenditures added to the cost of the property and the periodic
depreciation is the amount that is considered as deductible expense.
(c) Amount Expended in Restoring Property (Major Repairs)
These are capital expenditures added to the cost of the property and the periodic
depreciation is the amount that is considered as deductible expense.

(d) Premiums Paid on Life Insurance Policy Covering Life or Any Other Officer or
Employee Financially Interested
These are items not normally subject to income tax and therefore not deductible.
A person is said to be financially interested in the taxpayers business, if he is a stockholder
thereof or he is to receive as his compensation a share of the profits of the business.
(e) Interest Expense, Bad Debts, and Losses From Sales of Property Between Related
Parties
Provisions between related parties will apply.
1. Between members of a family (which shall include only his brothers and sisters, spouse,
ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual except in the case of
distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of which
is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC].

a Losses From Sales or Exchange or Property

Provisions between related parties will apply.
1. Between members of a family (which shall include only his brothers and sisters, spouse,
ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual except in the case of
distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of which
is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust [Sections 36(B), NIRC]
a Non-Deductible Interest
1. Individual taxpayer on the cash basis paying interest in the advance through discount or
otherwise. But interest is allowed as deduction in the year the indebtedness is paid; if payable
in amortization then an aliquot portion of the interest corresponding to the ratio of the principal
paid is allowed as deduction.
2. Interest on loans between related parties referred in Sec. 36 (B).
3. Interest on indebtedness incurred to finance petroleum exploration.
a Non-Deductible Taxes
1. Income tax.
2. Income tax paid or incurred to any foreign country, if the taxpayer is claiming a tax credit for
such foreign tax.
3. Estate or donors tax.
4. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (special assessment).
a

Non-Deductible Losses

1. Not connected with profession, trade or business, and

2. Sustained in a transaction entered into between parties mentioned under Section 36(B) of
this Code.
a Losses From Wash Sales of Stock or Securities
NOT deductible because these are considered to be artificial loss.
(7) Exempt corporations
1. General professional partnerships;
2. Joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.
(a) Propriety Educational Institutions and Hospitals
Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, that if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on
the entire taxable income. For purposes of this Subsection, the term unrelated trade,
business or other activity means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function. A Proprietary educational institution is any private
school maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS), or the Commission
on Higher Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations. (Sec. 27 [B])
(b) Government Owned or Controlled Corporations
In General Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22(B)
of this Code and taxable under this Title as a corporation, organized in, or existing under the
laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall
be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying
the number of months covered by the new rates within the fiscal year by the taxable income of
the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of
gross income as defined herein, after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to
GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost
of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term gross income derived from business shall be equivalent to
gross sales less sales returns, discounts and allowances and cost of goods sold. Cost of goods
sold shall include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.
For a trading or merchandising concern, cost of goods sold shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in transit.
For a manufacturing concern, cost of goods manufactured and sold shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to
the factory or warehouse.
In the case of taxpayers engaged in the sale of service, gross income means gross receipts less
sales returns, allowances and discounts.
1

Taxation of Resident Citizens, Non-Resident Citizens, and Resident Aliens

a) General Rule that Resident citizens are Taxable on income from all sources within and
without the Philippines
a

Non-Resident Citizens
Taxable on all income derived from sources with the Philippines.

Taxation on Compensation Income

a Inclusions
(a) Monetary Compensation
(1) Regular salary/wage
All remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the Code
(2) Separation pay/retirement benefit not otherwise exempt
Pension forms part of gross income if the same is NOT EXEMPT.

(3) Bonuses, 13th month pay, and other benefits not exempt
13th month pay and other benefits in excess of the P 30,000 threshold.
(4) Directors fees
If there is an employer-employee relationship between the director and the corporation, the
directors fees would fall under compensation income.
a
(1)

Non-Monetary Compensation
Fringe benefit not subject to tax
Required or necessary to the business of employer, or
For the convenience or advantage of employer.

i
Exclusions
(a) Fringe Benefit Subject to Tax
A final income tax of 32% is imposed on the grossed-up monetary value of the fringe benefit
(FB) granted by an employer (individual or corporation) to supervisory and managerial
employees, except:
1. Where such FB is required by the nature of, OR necessary to the trade, business or
profession of the employee, or
2. When the FB is for the convenience OR advantage of the employer.
(b) De Minimis Benefits
De minimis benefits those facilities or privileges furnished to employees that are of relatively
small value and are offered or furnished merely as a means of promoting heath, goodwill,
contentment or efficiency of employees, such as but not limited to the following:
1. Monetized unused vacation leave credits of PRIVATE employees not exceeding (10)
days during the year and the monetized value of leave credits paid to government
officials and employees;
2. Medical cash allowance to dependents of employees not exceeding P750 per semester
or P125 per month;
3. Uniform and clothing allowance not exceeding P5.000 per annum;
4. Actual yearly medical benefits not exceeding P10,000 per annum;
5. Rice subsidy of P1,500.00 or one (1) sack of 50kg. rice per month amounting to not more
than P1,500.00;
6. Laundry allowance not exceeding P300 per month;
7. Flowers, fruits, books or similar items given under special circumstances such as on
account of illness, marriage, etc;
8. Employee achievement awards which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not exceeding 1/2 month
of the basic salary of the employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees;
9. Christmas and major anniversary celebration for employees and their guests;
10. Company picnics and sports tournaments in the Philippines and participated exclusively
by the employees.
(c) 13th Month Pay and Other Benefits and Payments Specifically Excluded From Taxable
Compensation Income
13th month Pay and Other Benefits with the ceiling of P30,000.
(iii) Deductions
(a) Personal Exemptions and Additional Exemptions
Personal Exemptions the theoretical personal, living and family expenses of an individual
taxpayer. These are arbitrary amounts which have been calculated by ouur lawmakers to be
roughly equivalent to the minimum of subsistence, taking into account the personal status
and additional qualified dependents of the taxpayer.
Additional exemption there shall be allowed an additional exemption of P 25,000 for each
dependent child not exceeding four (4).
(b) Health and Hospitalization Insurance
It is an amount of premium on health and/or hospitalization paid by an individual taxpayer
(head of family or married), for himself and members of his family during the taxable year.
Requisites to be Deductible
1. Not to exceed P2,400 per family or P200 a month paid during the taxable year for health
and/or hospitalization insurance taken by the taxpayer for himself, including his family;

2. Said family has a gross income of not more that P250,000 for the taxable year.
3. In the case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
a Taxation of Compensation Income of a Minimum Wage Earner
(1) Definition of statutory minimum wage
This refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor and Employment Statistic (BLES) of the Department of Labor
and Employment.
(2) Definition of minimum wage earner
Worker in the private sector paid by the statutory minimum wage or an employee in the public
sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned. (RA 9504)
(3) Income also subject to tax exemption: holiday pay, overtime pay, night shift
differential, and hazard pay.
MWEs shall be exempt from the payment of income tax on their taxable income. The holiday
pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage
earners shall likewise be exempt from income tax.
a

Taxation of Business Income/Income from Practice of Profession

Business income are the gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and long-term construction contracts.

Formula: Gross Business Income Less Itemized deductions or Optional standard deductions.
Professional income are fees derived from engaging in an endeavor requiring special training as
a professional as a means of livelihood, which included, but is not limited to the fees of CPAs,
doctors, lawyers, engineers and the like.
Formula: Professional income Less Itemized deductions or Optional standard deductions.
b) Taxation of Passive Income
a Passive Income Subject to Final Tax
(a) Interest Income
From any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements.
Exception: if the loan is granted by a foreign government, or an international or regional
financing institution established by governments, the interest income of the lender shall not be
subject to the final withholding tax.
Rates:
RC, NRC, RA, NRA-ETB is 20% NRA-NETB is 25%
a

Treatment of income from long term deposits

From long-term deposit or investment in the form of savings, common or individual trust
funds, deposit, substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the BSP.

Rates:
RC, NTC, RA, NRA-ETB held for 5 years or more is exempt

4 years to less than 5 years is 5%

3 years to less than 4 years is 12%
Less than 3 years is 20%
NRA-ETB is 25%
a

Royalties

Royalties payments for use of property, includes earnings from copyrights, patents, trademarks
and natural resources under lease.
Royalties derived from sources outside the Philippines do not constitute passive income
Royalties from sources within Philippines are passive; subject to 20% Final Income Tax
Royalties on books, as well as literary works and musical composition from sources within
Philippines subject to 10% Final Income Tax in case of individual taxpayer.
a

Dividends from Domestic Corporation

Cash and Property Dividends when received by an individual citizen (RC, NRC, OCW) and a
resident alien from a domestic corporation, constitute passive income and are subject to final
income tax.

Rates:
RC, NRC, RA is 10%
NRA-ETB is 20%
NRA-NETB is 25%
(b) Prizes and Other Winnings
Prizes derived from contests or promotions derived from sources within the Philippines over
P10,000.
Winnings derived from gambling.
For a winning to be passive it is sufficient that it is derived from sources within the Philippines.
Exception: If the winning is obtained from PCSO or Lotto, it shall be exempt from FIT
i
Passive income not subject to final tax
From long-term deposit or investment in the form of savings, common or individual trust funds,
deposit, substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the BSP.
Rates:
RC, NRC, RA, NRA-ETB held for 5 years or more is exempt.
Prizes and winnings not exceeding P10,000.
Stock dividends
a Taxation of Capital Gains
a Income From Sale of Shares of Stock of a Philippine Corporation
(a) Shares Traded and Listed in The Stock Exchange
If the stock is traded in the stock exchange, it is NOT subject to capital gains tax but to stock
transaction tax of of 1% on its gross selling price.
(b) Share Not Listed and Traded in The Stock Exchange
It will be subject to capital gains tax; 5% for the first P 100,000 and 10% for the amount in
excess of P 100,000.

Income From the Sale of Real Property Situated in the Philippines

It involves the sale or other disposition of real property classified as capital asset located in
the Philippines. They are non-dealer in real estate, and subject to CGT.

Tax Base: The higher between:

1. The gross selling price; and
2. Prescribed zonal value of the real properties as determined by the CIR or the fair market
value as shown in the schedule of values of the Provincial and City assessors whichever is
higher.
Tax rate: 6%
i

Income From the Sale, Exchange, or Other Disposition of Other Capital Assets
It involves sale or exchange or one considered as equivalent to a sale or exchange of
property classified as capital asset except:
a. Shares of a domestic corporation;
b. Real property in the Philippines held as capital asset.

11. Taxation of Non-Resident Aliens Engaged in Trade or Business

a) General rules
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 received from all sources within the Philippines. 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.
Any calendar year meaning
when an expatriate stays in the Philippines for more than 180 days in any calendar year, he she
should already be taxed not only in the year that his stay exceeds the 180-day period but also in
the other years of assignment even if his stay during those other years did not exceed 180 days
(BIR Ruling 057-05, Feb 2005).
a) Cash and/or property dividends
Same as to resident citizen by only on income from sources within.
b) Capital gains
Same as to resident citizen but only on income from sources within.
Exclude: Non-resident Aliens Not Engaged in Trade or Business
12. Individual Taxpayers Exempt from Income Tax
a) Senior citizens
Under Section 4 (c) of the Senior Citizen Law (RA 9257), senior citizens are exempt from
payment of individual income taxes, provided that their annual taxable income does not
exceed the poverty level as determined by the NEDA for that year.
b) Minimum Wage Earners
Refer to a worker in the private sector paid the statutory minimum wage, or to an employee in
the public sector with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned.
Minimum wage earners is exempt from the payment of income tax on their taxable income:
provided that the holiday pay, overtime pay, night shift differential pay and hazard pay

received by the minimum wage earners shall be exempt from income tax (Sections 1 and 2, RA
No. 9504)

c) Exemptions granted under international agreements

The residence tax (or community tax) which is a personal tax is not imposed on diplomatic
and consular representatives as well as transient visitors when their stay in the Philippines
does not exceed three (3) months (Sec. 159, LGC)
13. Taxation of Domestic Corporations
a) Tax payable
(i) Regular Tax
Corporation liable: DC and RFC
Tax rates: 30% effective January 1, 2009
Tax Base: Net taxable income
(ii) Minimum Corporate Income Tax (MCIT)
(a) Imposition of MCIT
MCIT is imposed on domestic and resident foreign corporations whenever:
a. Such corporation has zero or negative taxable income; or
b. The amount of MCIT is greater than the normal income tax due from such corporation
determined under Sec. 27[A].
Tax Rate: 2%
This scenario is possible if the corporation obtained too much deductions.
Applicable to RFC and DC covered with NCIT.
a

Carry Forward of Excess Minimum Tax

Any excess of MCIT over the normal income tax can be carried forward on an annual basis.
The excess can be credited against the normal income tax due in the next 3 immediately
succeeding taxable years.
Any amount of the excess MCIT which cannot be credited against the normal income tax due
in the next 3-year period shall be forfeited.
Possible only if NCIT is greater than MCIT.
Relief From the MCIT under Certain Conditions
The Secretary of Finance is authorized to suspend the imposition of the MCIT on any
corporation which suffers losses because of:
a. Prolonged labor dispute;
b. Force majeure; or
c. Legitimate business reverses

a Corporations Exempt from the MCIT

1. Those operating as proprietary educational institutions subject to preferential tax of 10% on
their taxable income; (Domestic)
2. Those engaged in hospital operations which are non-profit subject to tax at 10% on their
taxable income; (Domestic)
3. Those engaged in business as depository banks under the expanded foreign currency
deposit system subject to final income tax at 10% of such income; (Domestic)
4. Firms that are taxed under a special income tax regime such as those in accordance with RA
7916 and 7227 (The PEZA law and the Bases Conversion Development Act, respectively).
5. Resident foreign international carrier
6. Resident foreign offshore banking units
7. Resident foreign ROHQ

Applicability of the MCIT Where a Corporation is Governed Both Under the Regular
System Tax System and a Special Income Tax
For Domestic Corporations whose operations are partly covered by the regular tax system
and partly covered under a special income tax system, the MCIT shall apply on operations
covered by the regular tax system.

Allowable deductions

(i) Itemized Deductions

ITEMIZED DEDUCTIONS
1. Expenses;
2. Interest;
3. Taxes;
4. Losses;
5. Bad Debts;
6. Depreciation;
7. Depletion of Oil and Gas Wells and Mines;
8. Charitable and Other Contributions;
9. Research and Development;
10. Pension Trust; and
11. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer.
The above mentioned itemized deductions are available to ALL taxpayers who are subject to NIT.
EXCEPT:
1. NRFC
2. NRANETB
i

Optional Standard Deduction

Optional standard deduction is in lieu of all other itemized deduction (RA 9504)
This option is now applicable to RFC and DC. corporations. The OSD is computed at 40% of
its gross income.

Once OSD is elected, it is irrevocable for the taxable year for which the return is made.

a
a

Taxation of passive income

Passive Income Subject to Tax

(a) Interest From Deposits and Yield or Any Other Monetary Benefit From Deposit
Substitutes and From Trust Funds and Similar Arrangements and Royalties (same rules
as those imposed on individuals)
(b) Capital Gains From the Sale of Shares of Stock Not Traded in The Stock Exchange
(same rules as those imposed on individuals)
(c) Income Derived Under the Expanded Foreign Currency Deposit System (same rules as
those imposed on individuals)
(a) Intercorporate Dividends
Received by a domestic corporation:
1. From another domestic corporation Exempt
2. From a foreign corporation 30% tax

Capital Gains Realized From the Sale, Exchange, or Disposition of Lands and/or
Buildings (Same rules as those imposed on individuals)

Passive Income Not Subject to Tax (same rules as those imposed on individuals)

Taxation of capital gains

(i) Income From Sale of Shares of Stock (same rules as those imposed on individuals)
(ii) Income From the Sale of Real Property Situated in the Philippine (same rules as those
imposed on individuals)
(i) Income From the Sale, Exchange, or Other Disposition of Other Capital Assets (same
rules as those imposed on individuals)
a

Tax on propriety educational institutions and hospitals

General Rule: Tax rate is 10%

Exceptions:
a. 30% if the gross income from unrelated trade, business or other activity exceeds 50% of the
total gross income derived from all sources.
b. Exempt if a non-stock, non-profit educational institution.
a

Tax on government-owned or controlled corporations, agencies or instrumentalities

General Rule: The rules governing domestic corporations engaged in similar business,
industry or activity shall apply.
Exceptions:
a. Government Service Insurance System
b. Social Security System
c. Philippine Health Insurance Corporation
d. Philippine Charity Sweepstakes Office

14. Taxation of resident foreign corporations

a) General rule
A corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the preceding taxable year from all sources within
the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
b) With respect to their income from sources within the Philippines
A corporation which is not domestic and engaged in trade or business is liable for income
from sources within.

c) Minimum corporate income tax

(Same rules imposed on domestic corporation but only for the gross income from sources
within the Philippines shall be considered)
d) Tax on certain income
(i) Interest From Deposits and Yield or Any Other Monetary Benefit From Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties (Same rules imposed
on domestic corporation but only for the gross income from sources within the Philippines
shall be considered)
i

Income Derived Under the Expanded Foreign Currency Deposit System (Same rules
imposed on domestic corporation but only for the gross income from sources within the
Philippines shall be considered)

(i) Capital Gain From Sale of Shares of Stock Not Traded in the Stock Exchange (Same
rules imposed on domestic corporation but only for the gross income from sources within the
Philippines shall be considered)
(i) Inter-Corporate Dividends
Received by a Resident Foreign Corporation:
a. From a domestic corporation Exempt
b. From a foreign corporation: If from sources within 30% If from sources without exempt.
Received by a NRFC Corporation:
It is subject to final tax of 15% as long as the country in which the NRFC is domiciled allows a tax
credit for taxes deemed paid in the Philippines equivalent to 15% or does not impose tax on
dividends. It will be subject to 30% if the country in which the NRFC is domiciled does not allow a
tax credit.
EXCLUDE:
(i) International carrier
(ii) Offshore banking units
(iii) Branch profits remittances
(iv) Regional or area headquarters and Regional operating headquarters of multinational
companies
15. Taxation of Non-resident Foreign Corporations
a) General rule
A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five percent (35%) of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraph 5(c): Provided, that effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
b) Tax on certain income
(i) Interest on Foreign Loans (Same as to Domestic Corporation)
(ii) Intercorporate Dividends
Received from a domestic corporation:

15% as long as the country in which the NRFC is domiciled allows a tax credit for taxes
deemed paid in the Philippines equivalent to 15% or does not impose tax on dividends. It
will be subject to 30% if the country within which the NRFVC is domiciled does not allow a tax
credit.
(iii) Capital gains from sale of shares of stock not traded in the stock exchange (Exempt
from CGT if proud under a Tax Treaty in case of sale between NRFC)
EXCLUDE:
(i) Non-resident cinematographic film owner, lessor or distributor
(ii) Non-resident owner or lessor of vessels chartered by Philippine nationals
(iii) Non-resident owner or lessor of aircraft machineries and other equipment
16. Improperly Accumulated Earnings of Corporations (IAET)
Rate: 10% of the Improperly Accumulated Taxable Income (in addition to other taxes).
The tax which is essentially a penalty tax is imposed for each taxable year in addition to the other
income taxes imposed on corporations. The purpose of the 10% IAET is to prevent individual
taxpayers from avoiding the progressive rates of income tax by employing the corporate form for
the accumulation of table income.

With the additional tax, corporations will be compelled to distribute corporate gains or
earnings not necessary in the business to stockholders in the form of dividends which are
now taxable.
IAET shall not apply in cases where the corporation is entitled to a preferential tax rate. The
retained earnings of a domestic corporation with the Subic Bay Metropolitan Authority
(SBMA) from its gross income earned from registered activities which were already subjected
to 5% preferential tax rate are not subject to IAET (BIR Ruling DA-587-09, Oct 2009).
The tax shall not apply to the three kinds of corporation enumerated in Sec 29 B-2 and also
the following:
a. Taxable partnerships
b. GPP
c. Non-taxable joint ventures
d. Enterprises duly registered under the Philippine Economic Zone Authority under R.A.
7916
e. Enterprises registered pursuant to the Bases Conversion and Development Act of 1992
under R.A. 7227
f. Other enterprises duly registered under special economic zones declared by law which
enjoy payment of special tax rate on their registered operations or activities (Sec 4, Rev
Regs No. 2-2001).

g. Banks and other non-banks financial intermediaries

h. Publicly-held corporations
i. Insurance companies
j. Foreign corporations
Income derived by a subcontractor of a petroleum service contractor of the Government from
petroleum subcontracting operations is exempt from the IAET. However, the exemption shall
be limited only to income derived from petroleum subcontracting under P.D. 1354. Income
from other sources shall be subject to normal income tax rate or MCIT, as the case may be
(BIR Ruling 302-04, June 2004).

Presumptions of Improper Accumulation

There is prima facie evidence of a purpose to avoid the tax upon its shareholders where:

(2) The corporation is a mere holding company;

(3) The corporation is an investment company and at any time during the taxable year more than
50% in value of its outstanding stocks is owned, directly or indirectly, by one person; and
(4) The corporation permits its earnings or profits to be accumulated beyond the reasonable
needs of the business.
For purposes of Rev. Regs 2-2001, the term holding or investment company, shall refer to a
corporation having practically no activities except holding property, and collecting the income
therefrom or investing the same
The touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. If there is a determination that a corporation has
accumulated income beyond the reasonable needs of the business, IAET shall be imposed.
To determine reasonable needs, Immediacy Test shall be applied. The accumulated profits
must be used within a reasonable time after the close of the taxable year. The taxpayer must
establish by clear and convincing evidence that such accumulation was for the immediate
needs of the business.
The tax is imposed for each taxable year on the improperly accumulated taxable income
equal to 10% of such income. Thus, year to year basis.
Once the profit has been subject to IAET, the same shall no longer be subject to it even if not
declared as dividends. Notwithstanding, once finally declared, the dividends shall still be
subject to tax on dividends under NIRC.
17. Exemption From Tax on Corporation

The tax exemption of a non-stock corporation under Sec 30 covers only income tax for which
it is directly liable (BIR Ruling No. DA-099, June 2010). The exemption of corporations from tax
does not extend to the shareholders or members (Manila Gas Corp. v. Coll. 62 Phil 895).

An exemption from taxation is a personal privilege. It cannot be assigned or transferred by

the grantee without the consent of the legislature which may be given either in the original act
granting the exemption or in a subsequent law.
The income derived by a charitable organization from any of its charitable operations is
exempt but the rentals from leasing of its building are subject to income tax.

Condominium dues received from the unit owners, which are merely held in trust and which
are used by the Condominium Corporation solely for administrative expenses, utilities, and
maintenance of the common areas for the benefit of the unit owners and from which the
Condominium Corporation could not realize any gain or profit are not subject to income and
consequently, to withholding tax (BIR Ruling No. DA- 336-08, Oct 23, 2008).

a. Agricultural and Horticultural Organizations

Requisites:
(1) Have no net income inuring to the benefit of any member;
(2) Are educational or instructive in character;
(3) Have as their objects the betterment of the conditions of those engaged in such pursuits,
the improvement of the grade of their products and the development of a higher degree
of efficiency in their respective occupations.
a Mutual Savings Bank
It must appear that it is an organization which has no capital stock represented by shares and
whose earnings less only the expenses of operation, are distributable whole among the
depositors. If it appears that the organization has shareholders who participate in the profits, the
organization will not be exempt.
b. Beneficiary Society

Only if operated for the exclusive benefit of the members such as a fraternal organization
operating under the lodge system. It is necessary that the fraternal organization should have an
established system for payment to its members of life, sick, accident, or other benefits.
c. Cemetery Company
It must be owned by and operated exclusively for the benefit of its lot owners or if it is not
operated for profit.
d. Religious, Charitable, Scientific, Athletic or Cultural Corporation or Corporation for the
Rehabilitation of Veterans
(1) It must be a non-stock and organized and operated for one or more specified purposes;
and
(2) No part of its net income or asset shall belong to or inure to the benefit of any member.
a Charitable Institutions
Charity may be fully defined as a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise
lessening the burden of government.
Charitable institutions does not lose its character as such because it derives income from paying
patients so long as the money received is devoted or used altogether to the charitable object
which it is intended to achieve.

If tax exempt charitable institution conducts any activity for profit, regardless of the disposition
made of such income, such activity is not tax exempt even as its not-for-profit activities
remain exempt from income tax.

a Business League
An association of persons having some common business interest, which limits its activities to
work for such common interest and does not engage in a regular business of a kind ordinarily
carried on for profit.
e. Civic League
Those not organized for profit but operated exclusively for purposes beneficial to the community
as a whole. For the promotion of social welfare covers activities that advance the common good
and the general welfare of the people of the community.
f. Government educational institution
May include associations whose sole purpose is the instruction of the public. Associations formed
to disseminate controversial or partisan propaganda are not educational with the meaning of the
law (Sec 30, Rev. Regs No. 25).
Sec 30 pertains to various non-stock, non-profit organization whose income received as such are
exempt from tax imposed under Title II o the Tax Code. On the other hand, Par. 3 Sec 4, Article
XIV of the Constitution categorically exempts from taxes and duties all revenues and assets of
non-stock, non-profit educational institutions.
The tax exemption granted under Sec. 30 covers only income taxes for which is directly liable.
Such exemption does not cover indirect taxes such as VAT.
18. Taxation for Partnerships:
a) General Professional Partnerships

b) Joint venture on consortium formed for the purpose of:

1) Undertaking construction projects or
2) Engaged in petroleum, coal, geothermal and other energy operations
19. Taxation of General Professional Partnerships
The income tax is imposed on the partners themselves in their separate and individual
capacity on their separate and respective distributive shares of the net income of the
partnership computed in the same manner as corporation.
Unlike an ordinary business partnership which is treated as a corporation for income tax
purposes and, therefore, subject to corporate income tax, a general professional
partnership is not in itself an income taxpayer.
A General Professional Partnership, provided that no part of its income is derived from
engaging in any other trade or business, is exempt from corporate income tax.
If it derives income from other sources, the GPP nonetheless remains to be exempt from
the payment of corporate income tax if the income from other sources has been
subjected to final income tax.
They are required to file tax returns for the purpose of furnishing information as to the
share in the nait gains or profits which each partner shall include in his individual return.
A partners share in the net profits of DPP is not compensation income (BIR Ruling No.
008, Jan. 1989). Payments made to individual partners are subject to 15% withholding tax
pursuant to Sec. 2.57.2 H, Rev. Regs. No. 2-98, as amended.
Requisites for Exemption:
a. Formed by persons for the sole purpose of exercising their common profession.
b. No part of its income is derived from engaging in any trade or business.

A General Professional Partnership, provided that no part of its income is derived from
engaging in any other trade or business, is exempt from corporate income tax.
If it complies with the above mentioned conditions, then each persons engaging in business
as partners in a general professional partnership are liable for the payment of income tax in
their separate and individual capacity.
If the conditions set by law are not met, the exemption from corporate income tax is
withdrawn and the partnership is subjected to tax as an ordinary corporation (Tan vs. Del
Rosario, G.R. No. 109289, October 3, 1994).

20. Withholding Tax

a) Concept
The concept of a withholding tax on income obviously and necessarily implies that the amount of
the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax
withheld constitutes income earned by the taxpayer, then that amount manifestly forms part the
taxpayers gross receipt. Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability. The amount withheld indubitably
comes from income of the taxpayer, and thus forms part of his gross receipts (China Banking
Corporation v. CA, 403 SCRA 634, 2003).

A withholding tax on income is not a new kind of tax but simply a manner or system by which
income taxes may be collected when the income is paid or received. It is in the nature of
advance tax payment by a taxpayer on the annual tax which may be due at the end of the
taxable year.
Primary reasons for the withholding tax system was devised for three primary reasons:
1. To provide the taxpayer a convenient manner to meet his probable income tax liability;

2. To ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns; and
3. To improve the governments cash flow.
a Kinds
1) Withholding tax at source (Secs. 34K, 57-59);
i) Withholding tax on quarterly corporate income (Secs 75-76);
ii) Withholding tax on quarterly individual income (Secs 74);
2) Withholding tax on employers compensation or wages (Secs. 78-83);
3) Withholding of value-added tax (Sec 114c); and
2) Withholding of percentage tax (Secs 116-128).
(i) Withholding of Final Tax of Certain Incomes
The amount of income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability for payment
of the tax rests primarily on the payor as a withholding agent.
(i) Withholding of Creditable Tax at Source
Taxes withheld on certain income payments are intended to equal or at least approximate the
tax due from the payee on said income. The income recipient is still required to file an income
tax return, as prescribed in Sec. 51 and 52, to report the income and/or pay the difference
between the tax withheld and the tax due on the income.
Final Withholding Tax (FWT) and Creditable Withholding Tax (CWT) distinguished
1. In FWT, the amount of income tax withheld by the withholding agent is constituted as a full
and final payment of the income tax due from the payee on the said income. In CWT, the
taxes withheld on certain income payments are intended to equal or at least approximate the
tax due of the payee on said income.
2. In FWT, the liability for payment of the tax rests primarily on the payor as a withholding agent.
In CWT, Payee of income is required to report the income and/or pay the difference between
the tax withheld and the tax due on the income. The payee also has the right to ask for a
refund if the tax withheld is more than the tax due.
3. In FWT, the payee is not required to file an income tax return for the particular income. In
CWT, the income recipient is still required to file an income tax return, as prescribed in Secs.
51 and 52.

FWT is imposed on the sale of capital assets. CWT is imposed on the sale of ordinary assets.
(Chamber of Real Estate and Builders Assocs., Inc v. Romulo, 614 SCRA 605, 2010).

Persons Constituted as Withholding Agent (Sec. 3 of Revenue Regulation No. 14-2002)

1. Any juridical person whether or not engaged in trade or business;
2. Any individual, with respect to payments made in connection with this trade or business.
However, insofar as taxable sale, exchange or transfer of real property is concerned,
individual buyers who are not engaged in trade or business are also constituted as
withholding agents; and
3. All government offices including GOCC, as well as provincial, city and municipal governments
and barangays.
a

Withholding of VAT

(See VAT discussions)

b) Filing of return and payment of taxes withheld

(i) Return and Payment in Case of Government Employees

If the employer is the Government of the Philippines or any political subdivision, agency or
instrumentality thereof, the return of the amount deducted and withheld upon any wage shall
be made by the officer or employee having control of the payment of such wage, or by any
officer or employee duly designated for the purpose (Section 81, NIRC).
(ii) Statements and Returns
Requirements Every employer required to deduct and withhold a tax shall furnish to each
such employee in respect of his employment during the calendar year, on or before January
thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of
such calendar year, on the same day of which the last payment of wages is made, a written
statement confirming the wages paid by the employer to such employee during the calendar
year, and the amount of tax deducted and withheld under this Chapter in respect of such
wages. The statement required to be furnished by this Section in respect of any wage shall
contain such other information, and shall be furnished at such other time and in such form as
the Secretary of Finance, upon the recommendation of the Commissioner, may by rules and
regulation, prescribe.
Annual Information Returns Every employer required to deduct and withhold the taxes in
respect of the wages of his employees shall, on or before January thirty-first (31 st) of the
succeeding year, submit to the Commissioner an annual information return containing a list of
employees, the total amount of compensation income of each employee, the total amount of
taxes withheld therefrom during the year, accompanied by copies of the statement referred to in
the preceding paragraph, and such other information as may be deemed necessary. This return, if
made and filed in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect of such wages.
Extension of time. The Commissioner, under such rules and regulations as may be promulgated
by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish
and submit the statements and returns required under the Section (Section 83, NIRC).
a

Final withholding tax at source

Withholding taxes are deducted by the withholding agents (who have control, custody, or
receipt of the funds) when the income payments are paid or payable, they are described as
withholding taxes at source. In order words the income tax of the recipient of income is
withheld and deducted at the source and at the time at deducted at the source and at the time
at the accrual or payment of the expense by the withholding agent payor of income.

In case of failure to withhold the tax or in case of under withholding, the deficiency tax shall
be collected from the payor/withholding agent.
The finality of the withholding tax is limited only to the payees liability on the particular
income. It does not extend to payees other tax liability on said income, such as when the
said income is further subject to a percentage tax.

Creditable withholding tax

Taxes withheld on certain income payments are intended to equal or at least approximate the
tax due of the payee on said income. The income recipient is still required to file an income
tax return, to report the income and or pay the difference between the tax withheld and the
tax due. Taxes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.

(i) Expanded withholding tax

Essential Requisites
a. An expense is paid or payable by a taxpayer, which is income to the recipient thereof subject
to income tax

b. The income is fixed or determinable at the time of payment

c. The income is one of the income payments listed in the regulation that is subject to
withholding tax
d. The income recipient is a resident of the Philippines liable to income tax
e. The payor-withholding agent is also a resident of the Philippines
i

Withholding Tax on Compensation

A method of collecting that income tax at source upon receipt of income. It applies to all
employed individual whether citizens or aliens, deriving income from compensation for
services rendered in the Philippines, and the employer is constituted as the withholding
agents (Revenue Regulation 2-79, amending Section 9-10, 19-23 of Regulation V-8 and Revenue
Regulation 2-98).

Withholding on wages
(i)
a.
b.
c.

Requirement for withholding

Employer-employee relationship
Constructive or actual payment of compensation or wages for services rendered
Payroll period

(ii) Tax paid by recipient

The income recipient is the person liable to pay the income tax, yet to improve the collection of
compensation income of employees, the State requires the employer to withhold the tax upon
payment of the compensation income.
(iii) Refunds or credits
a. Employer when there has been an overpayment of tax under this Section, refund or credit
shall be made to the employer only to the extent that the amount of such overpayment was
not deducted and withheld hereunder by the employer.
b. Employees the amount deducted and withheld under the Code during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under
Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be
granted under rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited
within three (3) months from the fifteenth (15 th) day of April. Refunds or credits made after such
time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman, Commission on Audit
or the latters duly authorized representative as an exception to the requirement prescribed by
Section 49, Chapter 8, Subtitle B, Title 1 of Book V of the Administrative Code of 1987.
i
Year-end adjustment
Every withholding agent required to deduct and withhold taxes shall submit to the CIR an annual
information return containing the list of employees and income payments, amount of taxes due
and amount of taxes withheld from each employees.
(ii) Liability for tax
Employer The employer shall be liable for the withholding and remittance of the correct amount
of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as required to be withheld under the provision of this Chapter,
such tax shall be collected from the employer together with the penalties or additions to the tax
otherwise applicable in respect to such failure to withhold and remit.

Employee Where an employee fails or refuses to file the withholding exemption certificate or
willfully supplies false or inaccurate information thereunder, the tax otherwise required to be
withheld by the employer shall be collected from him including penalties or additions to the tax
from the due date of remittance until the date of payment. On the other hand, excess taxes
withheld made by the employer due to:
(1) Failure or refusal to file the withholding exemption certificate; or
(2) False and inaccurate information shall not be refunded to the employee but shall be forfeited
in favor of the Government.
Fringe benefit tax
Fringe Benefit Tax tax imposed on fringe benefits which are granted or are paid by an employer
to an employee occupying a managerial or supervisory position. It is a measure to ensure that an
income tax is paid on fringe benefit.
It is collected from the employer even if the employer is a tax exempt corporation, or an
instrumentality of the Philippine Government.
a

Timing of withholding
(Sec. 4, Revenue Regulation No. 12-2001)

The obligation of the payor to deduct and withhold tax at source arises at the time an income
payment is paid or payable, or the income payment is accrued or recorded as an expense or
asset, whichever comes first. Provided, however, where the income is not yet paid or
payable but the same has been recorded as an expense or asset in the payors books, the
obligation to withhold shall arise in the last month of the return period in which the same is
claimed as an expense or amortized for tax purpose.
The term payable refers to the date the obligation becomes due, demandable, or legally
enforceable.
Under the accrual basis method of accounting, income is reportable when all the events have
occurred that fix the taxpayers right to receive the income and the amount can be
determined with reasonable accuracy.