ACCO 20133 Income Taxation

Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY & FINANCE Taxation 1: LML / VGL / GSJ
INSTRUCTIONAL MATERIALS
for
ACCO 20133: INCOME TAXATION
(Updated by RA 10963 -TRAIN Law)
COMPILED BY:
DEAN LILIAN M LITONJUA
PROF. VIRGILIO G. LITONJUA
PROF. GENO C. SAN JOSE
NEVER GIVE UP COZ TIME PASSES ANYWAY
1
INTRODUCTION:
There are two types of taxes collected in the Philippines, namely local taxes and
national taxes. Taxes imposed at the national level are called national tax which is collected
by the Bureau of Internal Revenue (BIR), while those imposed at the local level (i.e.,
provincial, city, municipal, barangay) are called local taxes which is collected by a local
treasurer's office. National taxes include Donor’s taxes, Estate tax, Value Added tax, Other
Percentage Tax and Income taxes. These taxes are imposed by the National Government in
accordance with the Tax Code of the Philippines or the NIRC (National Internal Revenue
Code). Last January 1, 2018, amendments were made to our Tax code thru enactment of
TRAIN Law. On this module, we will focus on income taxes levied and collected by the BIR
to different taxpayers.
In the Philippines, the Income Tax is a tax collected from Individuals / Corporations
and is imposed on different sources of income like labour, pensions, interest and dividends.
Revenues from the Income Tax are an important source of income for the government of
Philippines. Also, Income tax is a type of tax that governments impose on income generated
by businesses and individuals within their jurisdiction. Our Tax laws cannot be applied to
other jurisdiction or countries. By law, taxpayers must file an income tax return.
Citizens of the Philippines and resident aliens must pay taxes for all income they have
derived from various sources, which include, but are not limited to: compensation income
(e.g., salary and wages);income of self-employed individuals and/or professionals; capital
gains; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and,
partner's share from the profits of partnership.
Individuals, including nonresident aliens, earning compensation income are taxed

based only on the income tax schedule for individuals. On the other hand, self-employed
individuals and professionals are taxed based on the income tax schedule for individuals,
applicable percentage tax rates. However, if their gross sales (or gross receipts plus other
non-operating income) does not exceed the VAT threshold, they have the option to be taxed
either on the basis of the income tax schedule for individuals and the applicable percentage
taxes, or just with a flat tax rate of 8% on their gross sales (or gross receipts plus other non-
operating income.
On this module, we will discuss the income taxation for Individuals and Corporations
as defined by our Tax Code. Included on these modules are the amendments made in our
Tax Code by TRAIN Law which became effective January 1, 2018.
2
REPUBLIC OF THE PHILIPPINES
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR ACADEMIC AFFAIR
COLLEGE OF ACCOUNTANCY AND FINANCE
OBE COURSE SYLLABUS AND LEARNING PLAN
COURSE TITLE: INCOME TAXATION

COURSE CODE: ACCO 20133
COURSE CREDITS: THREE (3) UNITS
COURSE PRE-REQUISITES: ACCO 20043 FINANCIAL ACCOUNTING AND REPORTING (PART 2)
EFFECTIVITY: School year 2018-2019 onwards
COURSE DESCRIPTION: This subject covers the knowledge of the concepts, principles, laws, rules and procedures
associated with income taxation for individuals, partnerships and corporations. Understanding of the new tax laws, rules and
provisions of the TRAIN ACT (Tax Reform for Acceleration and Inclusion) per RA No. 10963, known as the NIRC of 2017,
effective in the year 2018 and thereafter
This syllabus focuses on key tax topics, along with readings of cases studies, and primary source materials (Income
Tax Textbook and Income Tax Practice Set) and providing time for departmental mid-term assessment /exam and departmental
final assessment /exam.
Students must be able to do the theoretical and practical applications of said concepts, principles, laws, rules and the
procedures related to income taxation. This subject, likewise, is primarily concerned with the: general principle of taxation, tax
remedies of the government and of the taxpayers. Bureau of Internal Revenue organizations, powers and functions,
classifications of and taxation for various income taxpayers, and their compliance with the BIR rules and regulations on matters
and procedures in filing income tax returns and payments of income taxes due.
Institutional Learning Programs Outcomes Course Outcomes
Outcomes
1. Creative and Critical 1. Resolve Business issues and Upon completion of the course, the
Thinking problems with a global and strategic students are expected to know the:
2. Effective perspective, using knowledge and technical 1. Income taxation provisions of the
Communication proficiency in the areas of income taxation. New NIRC of 2017 also known as the
3. Strong Service 2. Conduct Accountancy research TRAIN ACT per RA 10963, effective in year
Orientation through independent studies of relevant 2018 and thereafter
4. Passion to Life-Long literature and appropriate use of principles, 2. Pertinent /relevant BIR revenue
Learning regulations, circulars, rulings and tax
3
5. Sense of Personal and concepts of income taxation, accounting advisory on income taxation in year 2018
Professional Ethics theory and methodologies. onwards
6. Patriotic, Sense of 3. Demonstrate working knowledge 3. Pertinent income taxation
Nationalism and Global in the areas of financial accounting, principles in the decisions of the Court of
Responsiveness reporting, cost accounting, management Tax Appeal and the Supreme Court
7. Community accounting, taxation, auditing, accounting 4. Preferential income taxation for
Engagement information system and accounting tax exemptions provisions pertaining to
8. Adeptness in the research. business and industries.
Responsible Use of Technology 4. Demonstrate self-confidence in 5. Compliance requirements with
9. High Level of performing functions as a professional tax the various income taxation measures,
Leadership and Organizational accountant. which includes: computations of income tax
Skills 5. Employ technology as a business liabilities, accomplishing the income tax
tool in capturing financial and non-financial returns and forms, availment of income tax
information, preparing reports and making incentive benefits, submission of income
decisions. tax regulatory and registration
6. Apply acquired knowledge and requirements and dealing with the various
skills to pass the CPA professional licensure offices involved in income taxation
exam and others. 6. Effective communication matters
7. Confidently maintain a and procedures pertaining to income
commitment to good corporate, business, taxation work to be handled
social and professional responsibility and 7. Knowledge and competencies of
ethical practice in performing functions as an entry-level accountant who can address
tax accountants. the fundamental requirements of the
8. Appraise ethical problems /issues various parties that he will be personally
in practical business, accounting and and professionally inter-acting in the future
taxation situations and recommend
appropriate course of actions that adheres
to the personal and professional code of
ethics.
DETAILED COURSE LEARNING PLAN:

Weeks
Meets, Topics Learning Outcomes Methodologies Resources Assessm
Hours ents
4
Orientation i. Knowledge and 1. take class 1. PUP Observati
Week Day /Agenda compliance with the rules and attendance CAF course ons,
Meet regulations of the PUP and the 2. see income tax
No. 01, 1.Introduction CAF. certificate of syllabus Question
3 hours of the Subject, major 2. Discuss and inculcate in registration s and answers,
topics, sub-topics students’ minds, their free – 3. give income 2 PUP
and relevant matters education benefits, objectives, tax syllabus student handbook Individual
obligations, attendance, attitude, 4. encourage ly and class
2. Class behavior inside and outside the students to read the 3. PUP group,
Objectives classroom, and other issues. student handbook /CAF Memos
3. Outline the income 5. assigned for
3. Obligations taxation subject, major and sub- next meet,
and Tasks of tax topics, other relevant matters in study,
teacher and students learning-process. understand topics in
chapters 1 and 2,
4. Students
Do’s and Dont’s
Topic After the students self- 1. take class Textbook quizzes,

Week /Chapter I. reading attendance, and Phil. Laws seat
Meet General and self-understanding collect homework, on Income Tax works
No. 02, Principles of these tax topics at home and after 2. teacher
2019 Train Act recitation
3 hours Taxation the vital related teacher’s class lectures, by; Virgilio s
BIR Organization, classroom lectures, discussions discuss, illustrations & Lilian Litonjua questions
Power, Task and illustrations, the students on tax topics, & answers
should be able to know and 3. conduct Reference board
1. Principles of comprehend these tax topics: short exercises, s works
Taxation 1. Inherent powers of recitations, NIRC of homewor
2. Tax Remedies government questions and
2017, Train Act, ks,
3. BIR Powers, 2. Limitations on the power answers in Chapters 1, Per RA 10963
Functions, of taxation, situs /place of taxation, 2, Income accompli
4. BIR 3. Principles of Sound Tax tax books by other shment
Commissioner system 4 discuss author of
Powers, 4. Nature, scope, answers to questions Practice Set on
Functions classifications in chapters assigned Income Tax 2019
5
essential characteristics of 5. assigned for BIR per Train
AND taxes, next meet: Revenue Act
4. Enumerations, answer theory Regulations,
definitions, features, question for Rulings,
Topic characteristics of taxes. submission, recitation, Circulars, Tax
/Chapter 2 5.Tax evasion, vs tax quiz, seatwork Advisory,
General avoidance, double taxation, in classroom
Impositions of 6. Legislation of tax laws, Practice
Individual 7. Tax remedies of the Study, Set on
Income Taxation government and taxpayers understand topics in Phil.
8. Org. Powers, Functions, Chapter 3 Income Tax 2019,
1.Changes to of BIR Train Act.
Individual Income a. Primary Officials of the by Virgilio
Taxation by TRAIN BIR and Lilian Litonjua
ACT per RA 10963 in b. Powers, Functions of the
2018 onwards BIR ,
2. c. Powers, Functions of the
Administrative BIR Commissioner
Provisions on
Individual Income ------------------------------------
Taxation 1. Amendments by the
3. Train Act to individual income
Fundamental taxation per RA 10963
Concepts 2.Basic concepts on
on Individual Individual Income Tax
Income Taxation 3. Administrative
4. Practical provisions;
Provisions Persons required to file
on Individual income tax returns,
Income Taxation Place and time to file
income tax returns and pay income
taxes, other taxpayers’
requirements
4. Fundamental concepts;
Basic tax information on
6
various classifications,
enumerations, definitions of terms /
items.
5. Practical provision;
Interpret, discuss illustrate, use
formulas, tax rates, applications to
comply with the laws /rules and
procedures on individual income
taxation
Week /Chapter 3 reading attendance, and Phil. Laws seat
Meet Taxable and self-understanding collect homework, on Income Tax works
No. 03, Income for these tax topics at home and after 2. teacher 2019 Train Act recitation
3 hours Individuals the vital related teacher’s class lectures, by; Virgilio s
classroom lectures, discussions discuss, illustrations & Lilian Litonjua questions
1. Income Tax Laws and illustrations, the students on tax topics, & answers
/Rules should be able to know and 3. conduct Reference board
For Ordinary comprehend short exercises, s works
Individuals these tax topics: recitations, NIRC of home
2. Income Tax Laws 1. Income tax laws, rules questions and 2017, Train Act, works,
/Rules on Ordinary Individuals: answers in Chapters 3 RA 10963
For Special RC, RA, NRC, NRAEBP, , Income accompli
Individuals EEI, SEI, SPI, MIE, 4 discuss tax books by other shment
3. Income Tax Laws 2. Income tax laws, rules answers to questions authors of
/Rules on Special Individuals: in chapters assigned BIR Practice Set on
For Other Individual NRANEBP, SAFE, 5. assigned for Revenue Income Tax 201
Income Taxpayers, 3. Income tax laws, rules next meet: Regulations, per Train
4. Income Tax Laws on Other Individuals; answer theory Rulings, Act
/Rules on Optional Minimum Wage Earner, question for Circulars, tax
Income Taxation
Married Couple, submission, recitation, advisory,
Parent and Child, quiz, seatwork
Taxable Estate and Trust in classroom Practice
4. Optional Income Set on
Taxation for NVRP, Self-employed
individual
7
in NIRC Sec.116. Study, Phil.
understand topics in Income Tax 2019,
Chapters 4 and 5 Train Act.
, by Virgilio
& Lilian Litonjua
After the students self- 1. take class Textbook quizzes,

Week Topic /Chapter 4 reading attendance, and Phil. Laws seat
Meet Classifications of and self-understanding these tax collect homework, on Income Tax, works
No. 04, Tax Items for topics at home and after the vital 2. teacher 2019 Train Act recitation
3 hours Individuals; related teacher’s classroom class lecture, discuss, by; Virgilio s
lectures, discussions and illustration on tax & Lilian Litonjua
1. Classifications of illustrations, the students should topics questions
Income, be able to know and comprehend 3. conduct Reference & answers
2. Classifications of these tax topics: short exercises, s board
Expenses 1. Classifications of Income: recitations, NIRC of works
3. Classifications of Income Exempt from Income Tax questions and 2017, Train Act, home
Income Tax Income subject to final tax answers in Chapters 4, RA 10963 works,
Income subject to the basic tax 5 Income
2. Classifications of Expenses 4 discuss tax books by other accompli
AND Not Business Expense answers to questions author shment
Non-deductible Business Expense in chapters assigned BIR of
Deductible Business
5. assigned for Revenue Practice Set on
Topic Expense
next meet: Regulations, Income Tax 2019
/Chapter 5
answer theory Rulings, per Train
Income Tax 3. Classifications of Income
question for Circulars, Tax Act
Credits Taxes
submission, recitation, Advisory,
for Income tax due before tax
quiz, seatwork in
Individuals credit
classroom Practice
income tax credit
Set on
1. income Tax Income tax due /payable
Study, Phil.
Credits after-tax credit
Quarterly, understand topics in Income Tax 2019,
_____________________
Annually Chapter 6 Train Act.
by Virgilio
1. income Tax Credits:
& Lilian Litonjua
withholding tax on wages
8
2. Income Tax withholding tax at source
Returns excess income tax credit
Variations of income tax in prior
Formats /Formulas quarters,
Quarterly, Income tax in original
Annually income tax return filed, income tax
abroad,
2. Income Tax Credit for
Resident Citizen
3. Income Tax Credit for.
RA, NRC, NRAEB,
4. Income Tax Returns
Various Formulas for
Individuals
RC, RA, NRC, NRAEB,
EEI, SEI, SPI, MIE
Quarterly, Annual Tax
Returns.
9
Week Topic After the students self- 1. take class Textbook quizzes,
Meet /Chapter 6 reading attendance, and Phil. Laws seat
No. 05, Fringe and self-understanding collect homework, on Income Tax works
3 hours Benefits for these tax topics at home and after 2. teacher 2019, Train Act recitation
Individuals the vital related teachers class lectures, by; Virgilio s
and Corporations classroom lectures, discussions discuss, illustrations and Lilian Litonjua questions
and illustrations, the students on tax topics & answers
1. Non- should be able to know and 3. conduct Reference board
Taxable Fringe comprehend short exercises, s works
Benefits these tax topics: recitations, NIRC of home
2. Taxable 1. Components of Non- questions and 2017, Train Act, works,
Fringe Benefits Taxable Fringe Benefits answers in Chapters 6 Per RA 10963
3. De-minimis 2. Components of De- 4 discuss Income accompli
Fringe Benefits minimis Benefits answers to questions tax books by other shment
4. Fringe 3 Components of in chapters assigned authors of
Benefit Tax Unspecified Taxable fringe 5. assigned for BIR Practice Set on
5. Related benefits next meet: Revenue Income Tax 2019
Deduction for Fringe 4. Specified Taxable Fringe answer theory Regulations, per Train
Benefits Benefits: question for Rulings, Act
a. Housing Benefits submission, recitation, Circulars, Tax
b. Expense Account quiz, seatwork in Advisory,
Benefits classroom
c. Vehicle Benefits Practice
d. Household Personnel Study, Set on
Expense Benefits understand topics in Phil.
e. Interest on Loan Chapter 7 Income Tax 2019,
Benefits Train Act.
f. Membership Fees, dues by Virgilio
and other expenses benefits & Lilian Litonjua
g. Holiday and Vacation
Expenses Benefits
h. Educational Assistance
Benefits to the employee or
his dependents
10
i. Life, health, non-life
insurance premiums benefits
j. Foreign travel benefits
5. Other unspecified fringe
benefits,
6. Related deductions for
fringe benefits:
if taxable benefits,
if non-taxable benefits
11
Week Topic reading attendance, and Phil. Laws seat
Meet /Chapter 7 and self-understanding collect homework, on Income Tax works
Gross these tax topics at home and after 2. teacher 2019 Train Act recitation
No. 06 Income for the vital related teachers class lecture, discuss, by; Virgilio s
and Individuals classroom lectures, discussions illustration on tax & Lilian Litonjua questions
No. 07 and Corporations and illustrations, the students topics & answers
should be able to know and 3. conduct Reference board
6 hours 1. Exclusions comprehend short exercises, s works
of items from the these tax topics: recitations, NIRC of home
taxable Gross A. Exclusions from Gross questions and 2017, Train Act, works,
Income, Income; answers in Chapters 7 Per RA
1. Income Exempt from 4 discuss 10963 accompli
2. Inclusions income taxes answers to questions Income shment
of items in the 2. Income Subject to Final in chapters assigned tax books by other of
taxable Gross Income Taxes 5. assigned for author Practice Set on
Income 3. Not Income Items next meet: BIR Income Tax 2019
answer theory Revenue per Train
3.Taxable Gross B. Inclusions in Gross question for Regulations, Act
Income subject to Income; Income at Basic Income submission, recitation, Rulings,
regular income tax Tax; quiz, seatwork in Circulars, Tax
rates 1. Compensation for classroom Advisory
Services
2. Gross Profit from Trade, Study, Practice
Business, Practice of Profession understand Set on
3. Gains from Dealings in topics in Phil.
Assets Chapter 8 Income Tax 2019,
4. Interests Income Train Act.
5. Rental income by Virgilio
6. Royalty Income & Lilian Litonjua
7. Dividend income
8. Annuity income ,
9. Prize, Winnings
10. Pensions and
Retirement Benefits
12
11. Share in the Net
income of Gen. Professional
Partnership
12. Other Income, in general

Week /Chapter 8 reading attendance, and Phil. Laws seat
Meet Allowed and self-understanding collect homework, on Income Tax works
Deduction for these tax topics at home and after 2. teacher 2019 Train Act recitation
No. 08 Individuals and the vital related teachers class lecture, discuss, by; Virgilio s
and Corporations classroom lectures, discussions illustration, on tax & Lilian Litonjua questions
No. 09 and illustrations, the students topics & answers
1. Exclusions should be able to know and 3. conduct Reference board
6 hours of items from the comprehend short exercises, s works
allowed deduction these tax topics: recitations, NIRC of home
A. Exclusions from the questions and 2017, works,
2. Inclusions Allowed Deductions answers in Chapters 8 Train Act,
of items in the 1. Not Business Expenses 4 discuss Per RA accompli
allowed deduction 2. Non-deductible answers to questions 10963 shment
Business Expenses in chapters assigned Income of
3. Actual 3. Not Expense Items 5. assigned for tax books by other Practice Set on
Itemized Deduction next meet: authors Income Tax 2019
Components, B. Inclusions in the Allowed answer theory BIR per Train
Determinations Deductions: question for Revenue Act
Actual Itemized Deduction submission, recitation, Regulations,
4. Conditions (AID) quiz, seatwork in Rulings,
for deductibility 1. Interest Expense classroom Circulars,
of business 2. Taxes Expense Tax
expenses 3. Losses Expense Study, Advisory,
4. Bad Debts Expense understand topics in
5. Optional Standard 5. Depreciation Expense chapters 9 and 10 Practice
Deduction, 6. Amortization Expense Read, Set Phil. Income
Determinations 7. Depletion Expense understand, in pencil Tax 2019 per
8. Charitable Contribution accomplish practice Train Act.
set part 1:
13
9. Research and Individual by Virgilio
Development Cost Income Taxation, & Lilian Litonjua
10. Pension Trust to discuss
Contribution /confirm correct ,
11. Other Business procedures and
Expenses, in general solutions later
in classroom.
Optional Standard
Deduction OSD Prepare very
Who can claim OSD, well
Determination, Formulas for the DMTE
Departmental 65 Multiple Choice

DMTE Mid-term Exam Questions: Perusal
Three Individual 30 Theory Questions, of and grading
(3) Income Taxation (1% credit each) the results of the
HOURS Topics in 35 Problem Questions DMTE.
Chapters 1 to 8 (2% credit each)
of Textbook
Week After the students self- 1. take class Textbook quizzes,

Meet Topic /Chapter 9 reading attendance, and Phil. Laws seat
General Imposition and self-understanding collect homework, on Income Tax works
No. 10 of these tax topics at home and after 2. teacher 2019 Train Act recitation
Corporate Income the vital related teachers class lectures, by; Virgilio s
AND Taxation classroom lectures, discussions discuss, illustrations & Lilian Litonjua
and illustrations, the students on tax topics, questions
No. 11 1. Amendments to should be able to know and 3. conduct Reference & answers
Corporate Income comprehend short exercises, s board
6 hours Taxation by the these tax topics: recitations, NIRC of works
TRAIN ACT, RA 1. Amendments by the questions and 2017, Train Act, home
10963 Train Act to corporate income answers in Chapters 9 Per RA works,
2. Administrative taxation and 10 10963
Provisions on 2. Administrative accompli
Corporate Income
Provisions; shment
Taxation
14
3 Fundamental Persons Required to File 4 discuss Income of
Concepts Tax Returns, Place and time to File answers to questions tax books by other Practice Set on
on Corporate Income Tax Returns and Pay in chapters assigned authors Income Tax 2019
Income Taxation Income Taxes, 5. assigned for BIR per Train
4. Practical other requirements on next meet: Revenue Act
Provisions taxpayer answer theory Regulations,
on Corporate 3. Fundamental Concepts; question for Rulings,
Income Taxation Tax information on various submission, recitation, Circulars,
definitions, classification, enumerationsquiz, seatwork in Tax
of items. classroom Advisory
4. Practical Provisions;
AND Interpret, discuss, illustrate, use Study, Practice
formulas, tax rates, applications understand topics in Set Phil. Income
in compliance with the laws Chapters 11 and 12 Tax 2019 per
/rules on corporate income taxation Train Act.
Topic /Chapter 10 _____________________ by Virgilio
Taxable Income of _____ &Lilian Litonjua
Corporations
1. Income Taxation for
Ordinary Corporation; ,
5. Income Tax Laws
DC, RFC, NRFC.
/Rules on Ordinary
Corporations
6. Income Tax Laws Special Corporations;
/Rules on Special a. Proprietary Educational
Corporations Institutions,
7. Income Tax Laws b. Non-Profit Hospital,
/Rules on Other c. Regional
corporations OperatingHeadquarter of Multi-
8. Various Corporate National Corporation,
Income Taxes d. Non-Resident
Cinematographic Film Owner,
Lessor,
e. Resident International
Carrier,
f. Non-Resident Owner,
Lessor of Vessels,
15
g. Non-Resident Owner,
Lessor of Aircrafts, machineries,
equipment
Other corporations:
a. General Professional
Partnership
b. Ordinary Partnership,
c. Taxable Joint Ventures,
d. Non-taxable Joint
Ventures
e. Taxable Co-Ownerships
f. Non-taxable Co-
Ownerships
4. Various Corporate
Income Tax:
MCIT, BCIT, OGIT, BPRT,
IAET,
FCGT, PFIT, FBT, SPCIT,
Topic /Chapter 11 After the students self- 1. take class Textbook quizzes,
Week Classifications of reading attendance, and Phil. Laws seat
Meet Tax Items and self-understanding collect homework, on Income Tax works
No. 12 for Corporations; these tax topics at home and after 2. teacher 2019 Train Act recitation
3 hours the vital related teachers class lecture, discuss, by Virgilio s
1. Classifications of classroom lectures, discussions illustration, on tax & Lilian Litonjua questions
Income, and illustrations, the students topics & answers
2. Classifications of should be able to know and 3. conduct Reference board
Expenses comprehend short exercises, s works
3. Classifications of these tax topics: recitations, NIRC of home
Income Tax 1.Classifications of Income: questions and 2017, Train Act, works,
a. Income Exempt from Income answers in Chapters Per RA
AND Tax 11, 12 10963 accompli
shment
16
Topic b. Income subject to final 4 discuss Income of
/Chapter 12 income tax answers to questions tax books by other Practice Set on
Income Tax c. Income subject to the basic in chapters assigned authors Income Tax 2019
Credits /regular income tax 5. assigned for BIR per Train
for 2. Classifications of Expenses next meet: Revenue Act
Corporations a. Not Business Expense answer theory Regulations,
b. Non-deductible Business question for Rulings,
1. Components of Expense submission, Circulars,
Tax Credits c. Deductible Business recitation, quiz, Tax
Quarterly, Expense seatwork in classroom Advisory
Annually 3. Classifications of Income
2. Income Tax Taxes Study, Practice
Returns Income tax due before tax understand topics in Set Phil. Income
Formats of Income credits, Chapter 13 Tax 2019 per
Tax Returns income taxes creditable Train Act.
Quarterly, Income tax due /payable by Virgilio
Annually after tax credits & Lilian Litonjua
____________________
,
1. income tax credits:
withholding tax at source
excess income tax credit
income tax paid in prior
quarters,
Income tax in original
income tax return filed
income tax abroad,
2. Income tax credit for
Domestic Corporation
3. Income tax credit
for Resident foreign
corporation
4. Income tax returns,
various formulas for
orporations-
17
Quarterly and Annual
income tax returns.
Topic /Chapter 13 After the students self- 1. take class Textbook quizzes,
Week (Chapter 6) reading attendance, and Phil. Laws seat
Meet Fringe and self-understanding collect homework, on Income Tax works
No. 13 Benefits For these tax topics at home and after 2. teacher 2019 Train Act recitation
3 hours Corporations the vital related teachers class lecture, discuss, by; Virgilio s
and Individuals classroom lectures, discussions illustrations on tax & Lilian Litonjua questions
and illustrations, the students topics, & answers
1. Fringe should be able to know and 3. conduct Reference board
Benefits comprehend short exercises, s works
2. Taxable these tax topics: recitations, NIRC of home
Fringe Benefits A. Unspecified Taxable questions and 2017, Train Act, works,
3. Non- fringe benefits answers in Chapters Per RA
Taxable Fringe B. Specified taxable fringe 13 10963 accompli
Benefits benefits: 4 discuss Income shment
4. De-minimis 1. Housing benefits answers to questions tax books by other of
Benefits 2. Expense account in chapters assigned authors Practice Set on
5. Fringe benefits 5. assigned for BIR Income Tax 2019
Benefit Tax 3. Vehicle benefits next meet: Revenue per Train
4. Household personnel answer theory Regulations, Act
benefits question for Rulings,
5. Interest on loan benefits submission, Circulars, Tax
6. Membership fees, dues recitation, quiz, Advisory,,
and other expenses benefits seatwork in classroom
7. Holiday and vacation Practice
expense benefits Study, Set Phil. Income
8. Educational assistance understand topics in Tax 2019 per
benefits to the employee or his Chapter 14 Train Act.
dependents by Virgilio
9. Life, health, non-life & Lilian Litonjua
insurance premiums benefits
10. Foreign travel benefits ,
18
11. Other unspecified
fringe benefits, in general
C. De-minimis Benefits
Items, its
D. Related ded. for fringe
benefits
on taxable fringe benefits
on non-taxable fringe
benefits

Meet /Chapter 14 (Chapter and self-understanding collect homework, on Income works
No. 14 7) these tax topics at home and after 2. teacher Taxaton 2019, per recitation
3 hours Gross the vital related teachers class lecture, discuss, Train Act s
Income For classroom lectures, discussions illustrations on tax by; Virgilio questions
Corporations and illustrations, the students topics, & Lilian Litonjua & answers
and Individuals should be able to know and 3. conduct board
comprehend short exercises, Reference works
1. Exclusions these tax topics: recitations, s home
of items from the A. Exclusions from the questions and NIRC of works,
Taxable Gross Gross Income; answers in Chapters 2017, Train Act,
Income, 1. Income Exempt from 14 Per RA accompli
income taxes 4 discuss 10963 shment
2. Inclusions 2. Income Subject to Final answers to questions Income of
of items in the Income Taxes in chapters assigned tax books by other Practice Set on
Taxable Gross 3. Not Income Items 5. assigned for authors Income Tax 2019
Income B. Inclusions in Gross next meet: BIR per Train
Income; Income at Basic Income answer theory Revenue Act
3. Income subject to Tax question for Regulations,
basic /regular 1. Compensation for submission, BIR
income tax rates Services recitation, quiz, Rulings,
2. Gross Profit from Trade, seatwork in classroom Circulars,
Business and Profession BIR Tax
Advisory
19
3. Gains from Dealings in Study,
Assets understand topics in Practice
4. Interests Income Chapter 15 Set Phil. Income
5. Rental income Tax 2019 per
6. Royalty Income Train Act.
7. Dividend income by Virgilio
8. Annuity income & Lilian Litonjua
9. Prize, Winnings
10. Pensions and
Retirement Benefits
11. Share in the Net
income of General Prof.
Partnership
12. Other Income, in general

Meet /Chapter 15 (Chapter and self-understanding collect homework, on Income Tax works
No. 15 8) these tax topics at home and after 2. teacher 2019 Train Act recitation
3 hours Allowed the vital related teachers class lecture, discuss, by; Virgilio s
Deduction For classroom lectures, discussions illustrations on tax & Lilian Litonjua questions
Corporations and and illustrations, the students topics, & answers
Individuals should be able to know and 3. conduct Reference board
comprehend short exercises, s works
1. Exclusions these tax topics: recitations, NIRC of home
of items from the A. Exclusions from the questions and 2017, Train Act, works,
allowed deduction Allowed Deductions answers in Chapters Per RA
1. Not Business Expenses 15 10963 accompli
2. Inclusions 2. Non-deductible 4 discuss Income shment
of items in the Business Expenses answers to questions tax books by other of
allowed deduction 3. Not Expense Items in chapters assigned authors Practice Set on
5. assigned for BIR Income Tax 2019
3. Actual B. Inclusions in the Allowed next meet: Revenue per Train
Itemized Deduction Deductions: Regulations, Act
20
Components, Actual Itemized Deduction answer theory Rulings,
Determination (AID) question for Circulars, Tax
1. Interest Expense submission, Advisory,
4. Optional Standard 2. Taxes Expense recitation, quiz,
Deduction, 3. Losses Expense seatwork in classroom Practice
Determination, 4. Bad Debts Expense Set Phil. Income
formulas 5. Depreciation Expense Read, Tax 2019 per
6. Amortization Expense understand, Train Act.
7. Depletion Expense in pencil by Virgilio
8. Charitable Contributions accomplish practice & Lilian Litonjua
9. Research and set part 2: Corporate
Development Cost Income Taxation to
10. Pension Trust discuss /confirm
Contribution correct procedures
11. Other Business and solutions later in
Expenses, classroom.
Optional Standard Next meet.

Deduction,OSD Bring practice set
Who can claim OSD
Limitations, Formulas
Week Topic: After the students self- 1. take class Phil. Laws
Meet Practice Set on
reading attendance, and on Income Tax
No. 16 Income Taxation, and self-understanding collect homework, 2019 Train Act perusal of
3 hours Train Act, these tax topics in practice set at 2. teacher by; Virgilio and grading the
per RA
home and after the vital related class lecture, discuss, & Lilian Litonjua accomplished
10963, in 2019, teachers classroom lectures, illustrations on tax practice
by Virgilio
discussions and illustrations, the topics, Reference sets submitted
and Lilian Litonjua students should be able to know, 3. discuss s
to comprehend, to accomplish and analyses, procedures, NIRC of
The Board of to submit the practice set answers and solutions 2017, Train Act,
Accountancy in its on income taxation. to the case problems RA 10963
prescribed CPA in the practice set.
Licensure
21
Examination 1. Tax teacher conducts a 4. Finalize in Income
Syllabus in Taxation, three (3) hours classroom session ball pen, accomplish tax books by other
effective in May 2019 to guide students in needed the practice set part 1. authors
onwards, mandates analyses and solutions to given individual income BIR
that: case problems, processing of taxation and part 2. Revenue
BSA, applicable BIR tax forms and in the corporation Income Regulations,
accountancy realization of the goals of this taxation, Rulings,
students, CPA practice set. submit your Circulars, Tax
candidates, must practice set next meet Advisory
have working 2. Students are provided in the classroom.
knowledge to comply adequate classroom experiences / Practice
with the various “hands-on activities” in the 5. Prepare very Set on
taxation measures. matters, manners, procedures and well for the DFE Phil.
Compliance includes rules in the needed computations Income Tax 2019
computations of taxable gross income, allowed per Train
of taxable income deductions, taxable net income, Act.
amounts and tax income taxes due, income tax by Virgilio
liabilities, credits, income tax payable, filling- & Lilian Litonjua
accomplishing up and filing the various BIR Forms
various income tax Nos. 1700, 1701Q, 1701 1702Q,
returns and BIR tax 1702, with the BIR, at the
forms such as 1700, prescribed place and date
1701Q, 1701, mandated by law.
1702Q, 1702
3. Students will be able to
do the roles and tasks of tax
accountants in giving services to
tax clients.
Perusal
DFE Departmental 65 Multiple Choice of and grading
Three Final Exam Questions: the results of the
(3) Income 30 Theory Questions, DFE
Hours Taxation (1% credit each)
topics in 35 Problem Questions
Chapters 1 to 16 (2% credit each)
22
GRADING SYSTEM:
Students will be evaluated based on homework assignments and examinations.

The homework assignments and exams will be graded on a scale from 28.60% to 100%.
Student’s grade will be divided into two: Midterm Grade (1st Grading period) and Final
Grade (2nd grading period). The Midterm Grade and Final Grade will be based and
computed using the following weights:
Quizzes 50 %
Assignments 20 %
Departmental Exam 30 %
Grades 100 %
1st Grade (Mid-Term Grade) >>> (Midterm Quizzes x 50 %) plus (Midterm Assignments
x 20 %) plus (DMTE x 30 %) equals 100 %
2nd Grade (Final Grade) >>> (Final period Quizzes x 50 %) plus (Final Period Assignments
x 20 %) plus (DMTE x 30 %) equals 100 %
The semestral grade will computed as follows: The semestral grade will be equal to the
average of 1st Grading peroiod and 2nd Grading Period
3rd Grade (Semestral Grade) >>> (1st grade plus 2nd grade) / 2 = 100 %
Grades and Equivalents
Grades Equivalents Descriptions Grades Equivalents Descriptions

1.00 97% – 100% Excellent 2.75 76% - 78% Satisfactory
1.25 94% - 96% Excellent 3.00 75% Passing
1.50 91% - 93% Very Good 4.00 70% - 74% Condition
/Failing
1.75 88% - 90% Very Good 5.00 Below 70% Failed
2.00 85% - 87% Good Inc. Incomplete
2.25 82% - 84% Good W Withdrawn
2.50 79% - 81% Satisfactory D Dropped
23
TABLE OF CONTENTS:
Topics Page/s
Introduction 2
Course Syllabus 3-22
Grading System 23
Course Outcome 26
Assessment / Activity Instructions 27
Module 1: General Principles and Concepts of taxation 28-56

Definitions and purpose of Taxation
Theory and basis of taxation
Tax differentiated from other revenue items / terms
Enumeration of Philippines Taxes and Classification of Taxes

Aspect of taxation and basic principles of Taxation
Limitations of Power of Taxation
Situs of taxation and Double Taxation
Tax avoidance / Tax evasion and Tax amnesty
Sources of tax laws
Power and Duties of BIR
Tax Remedies
Module 2: Administrative provisions of Individual Income Taxation 57-65

Person required to file Income Tax Return (ITR) and Compliance requirement
Procedures for Filing of ITR and BIR forms
Methods of Accounting allowed by law
Classification of Income and Taxpayers
Module 3: Individual Income Taxation 66-84

Classification of Income of Individuals and related Income tax rates (TRAIN Law)
Minimum Wage Earner
Summarized Rules on Individual income taxation after TRAIN Law
Illustrations: Problem Solving (Computation of Income Tax due)
Optional Income Tax rate (8% tax rate) and Requirements
Passive Income Subject to Final tax (Final tax rates)
Illustrations: Problem Solving (Computation of Final tax due)
Capital Gains Tax (Exempted transactions / Requirements)
Other Related Topics
Module 4: Income Tax Credits 85-88

Income tax credits available for Individual taxpayers
Withholding taxes (Two types)
Income Tax returns / BIR forms to be used
Computation of Income Tax due (Quarterly and Annually)
24
Module 5: Fringe Benefits 89-92
Fringe Benefits granted to Employees except Rank and File Employees
Fringe benefits tax rates
De minimis Benefits and Non-taxable Fringe Benefits
Illustrations: Problem Solving (Computation of Fringe Benefit tax due)
Module 6: Gross Income and Allowed Deductions 93-102

Gross Income (Inclusions, Exclusions / Exemptions)
Requisites of Taxable Income
Situs of Taxation
Rule on taxability of Capital Gain /Loss on Sale /Exchange/Barter
Allowed Deductions (OSD and Itemized Deductions)
Illustrations: Problem Solving (Computation of Taxable Net income)
Module 7: Corporate Income Tax (Income Taxation for Corporations) 103-113

Definitions
Classification of taxable Corporations
Taxation for Domestic Corporations
Taxation for Resident Foreign Corporations
Taxation for Non-Resident Corporations
BIR Forms
Minimum Corporate Income Tax (MCIT)
Summary of Corporate Tax rates
References 113
25
COURSE OUTCOMES:
Upon completion of the course, the students will be able to:
1. They are expected to know the old National Internal Revenue Code (NIRC) or
old tax code and the new tax code (as amended by TRAIN law) provisions on
income tax, tax remedies and compliance requirements.
2. The student must be familiar with the Implementing Rules and Regulations,
circulars, rulings and other issuances and jurisprudences pertinent to the
implementation of the various taxation laws earlier specified.
3. The student should know the taxation principles in the decisions of the Court
of Tax Appeals, Court of Appeals and Supreme Court.
4. The students must also be familiar with the taxpayer rights and remedies,
handling disputes on tax issues, knowing the various tax offices that they will
be interacting and basic tax planning to derive the benefits of the tax laws and
incentives.
5. Understand how to apply and follow the provisions of old tax code (NIRC) and
the new tax code (as amended by TRAIN law).
6. Prepare the Quarterly and Annual Income Tax Return of an individual,

Partnership and Corporate Taxpayers.
7. Understand the importance of paying correct taxes to the government.
8. Apply Integrity, honesty and competence in the performance of the service as

a TAX consultant
26
ASSESSMENT / ACTIVITY INSTRUCTIONS:
A. Modified True or False
Kindly write “T” if the statement is correct and “F” if otherwise. If your
answer is “F”, please provide the word/s that make the given statement incorrect.
Write your final answers in a separate clean paper.
B. Multiple Choice
Kindly choose the correct answer from the given choices. If

there is no correct answer from the choices, please write the “correct” answer
in a separate clean paper.
C. Problem Solving
Answer the problems based on the given data and write your final
answers in a separate clean paper. Provide solutions / computations to
support your answer.
NOTE: There will be a deduction of 15 points to those students who will

not follow the above instructions.
27
MODULE 1: GENERAL PRINCIPLES AND CONCEPTS OF TAXATION
OVERVIEW:
The policy of taxation in the Philippines is governed chiefly by the Constitution of

the Philippines and Republic Acts issued by Congress.
Constitution: Article VI, Section 28 of the Constitution states that "the rule of
taxation shall be uniform and equitable" and that "Congress shall evolve a progressive
system of taxation". National law: National Internal Revenue Code (NIRC)—enacted as
Republic Act No. 8424 or the Tax Reform Act of 1997 and subsequent laws amending it;
the law was most recently amended by Republic Act No. 10963 or the Tax Reform for
Acceleration and Inclusion Act; Tariff and Customs Code for collection of customs duties
from importations and, local laws: major sources of revenue for the local government units
(LGUs) are the taxes collected by virtue of Republic Act No. 7160 or the Local Government
Code of 1991 and those sourced from the proceeds collected by virtue of a local
ordinance.
Taxes imposed at the national level under the NIRC are collected by the Bureau
of Internal Revenue (BIR), custom duties are collected by Bureau of Custom or BOC and
those imposed at the local level (i.e., provincial, city, municipal, barangay) are collected
by a local treasurer's office.
The taxes imposed by the national government of the Philippines under the NIRC
include, but are not limited to: Income tax, estate tax, donor’;s tax, Value Added tax,
Percentage Tax, excise tax and documentary stamp tax. On this course, we will discuss
the income tax imposed by BIR to Individuals and Corporations.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1. Learn the nature, scope, classification and essential characteristics of taxation

2. Explain the principles of a sound tax system
3. Define and explain the importance, purpose and basis of taxation
4. Identify the objects of taxation and stages or process of taxation.
5. Know the different types of escapes from taxation
6. Determine the Situs of taxation and its application
7. To gain knowledge of the Limitations of power of taxation (Inherent limitations and
Constitutional Limitations of the power to Tax.
8. Be able to differentiate Taxation from police power, eminent domain and tax
avoidance and tax evasion
9. Know the powers of the commissioners.
10. Learns the nature of tax laws and its sources in the Philippines
11. Enumerate the BIR Commissioner Powers and Functions
12. Understand the penalties / additions to tax.
28
Course Materials:
Taxation
· Taxation is a process or act of imposing a charge by the government authority
on property, individuals or transactions to raise money for public purposes.
· It is also defined as the act of levying a tax, i.e. the process or means by
which the sovereign, through its law-making body, raises income to defray the necessary
expenses of government. It is a method of apportioning the cost of government among
those who, in some measure, are privileged to enjoy its benefits and must therefore bear
its burdens.
Taxes
· Taxes are the enforced proportional contributions from persons and property
levied by the law-making body of the State by virtue of its sovereignty for the support of
the government and all public needs.
Essential elements of a tax

1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.
Purposes of taxation
1. Revenue or fiscal: The primary purpose of taxation on the part of the government is
to provide funds or property with which to promote the general welfare and the protection
of its citizens and to enable it to finance its multifarious activities.
2. Non-revenue or regulatory: Taxation may also be employed for purposes of

regulation or control.
a) Imposition of tariffs on imported goods to protect local industries.

b) The adoption of progressively higher tax rates to reduce inequalities in wealth and
income.
c) The increase or decrease of taxes to prevent inflation or ward off depression.
Caltex v. Commissioner, 208 SCRA 755
29
· Taxation is no longer a measure merely to raise revenue to support the
existence of government. Taxes may be levied with a regulatory purpose to provide means
for the rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State. The oil industry is greatly imbued
with public interest as it vitally affects the general welfare.
Sumptuary purpose of taxation
· More popularly known as the non-revenue or regulatory purpose of taxation.

While the primary purpose of taxation is to raise revenue for the support of the
government, taxation is often employed as a devise for regulation by means of which
certain effects or conditions envisioned by the government may be achieved.
· For example, government may provide tax incentives to protect and promote
new and pioneer industries. The imposition of special duties, like dumping duty, marking
duty, retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary
purpose of taxation.
Theory and basis of taxation
· The power of taxation proceeds upon the theory that the existence of
government is a necessity; that it cannot continue without means to pay its expenses; and
that for these means, it has a right to compel all its citizens and property within its limits to
contribute.
· The basis of taxation is found in the reciprocal duties of protection and

support between the State and its inhabitants. In return for his contribution, the taxpayer
received benefits and protection from the government. This is the so-called “benefits
received principle.”
Life blood or necessity theory
· The life blood theory constitutes the theory of taxation, which provides that
the existence of government is a necessity; that government cannot continue without
means to pay its expenses; and that for these means it has a right to compel its citizens
and property within its limits to contribute..
Illustrations of lifeblood theory
1. Collection of taxes cannot be enjoined by injunction.

2. Taxes could not be the subject of compensation or set off.
3. A valid tax may result in destruction of the taxpayer’s property.
4. Taxation is an unlimited and plenary power.
30
Benefit-received principle
· This principle serves as the basis of taxation and is founded on the reciprocal
duties of protection and support between the State and its inhabitants. Also called
“symbiotic relation” between the State and its citizens.
· In return for his contribution, the taxpayer receives the general advantages
and protection which the government affords the taxpayer and his property. One is
compensation or consideration for the other; protection for support and support for
protection.
· However, it does not mean that only those who are able to and do pay taxes
can enjoy the privileges and protection given to a citizen by the government.
· In fact, from the contribution received, the government renders no special

or commensurate benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from the enjoyment of the privileges of living in an
organized society established and safeguarded by the devotion of taxes to public purpose.
The government promises nothing to the person taxed beyond what may be anticipated
from an administration of the laws for the general good. [Lorenzo v. Posadas]
· Taxes are essential to the existence of the government. The obligation to

pay taxes rests not upon the privileges enjoyed by or the protection afforded to the citizen
by the government, but upon the necessity of money for the support of the State. For this
reason, no one is allowed to object to or resist payment of taxes solely because no
personal benefit to him can be pointed out as arising from the tax. [Lorenzo v. Posadas]
TAX DIFFERENTIATED FROM OTHER TERMS
Tariff / Duties
· The term tariff and custom duties are used interchangeably in the Tariff and
Customs Code or PD No. 1464.
· Customs duties, or simply duties, are taxes imposed on goods exported

from or imported into a country. Custom duties are really taxes but the latter term is
broader in scope.
· On the other hand, tariff may be used in one of three senses:
1. A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation or exportation of
goods.
31
License or regulatory fee v. tax
1. License fee is legal compensation or reward of an officer for specific services while
a tax is an enforced contribution from persons or property by the law-making body by virtue
of its sovereignty and for the support of the government and all public needs.
2. License fee is imposed for regulation, while tax is levied for revenue.
3. License fee involves the exercise of police power, tax of the taxing power.
4. Amount of license fee should be limited to the necessary expenses of inspection
and regulation, while there is generally no limit on the amount of the tax to be imposed.
5. License fee is imposed only on the right to exercise a privilege, while tax is imposed
also on persons and property.
6. Failure to pay a license fee makes the act or business illegal, while failure to pay a
tax does not necessarily make the act or business illegal.
Regulatory tax
· Examples: motor vehicle registration fee, sugar levy, coconut levy, regulation
of non-useful occupations
· PAL v. Edu: This involves the imposition of motor vehicle registration fees
which the Supreme Court ruled as taxes. Fees may be regarded as taxes even though
they also serve as instruments of regulation because taxation may be made the implement
of the State’s police power. But if the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly called a tax.
Criteria for determining license fees
1. Imposition must relate to an occupation or activity which involves the health, morals,
safety and development of the people and which needs regulation for the protection and
promotion of the public interest.
2. Imposition must also bear a reasonable relation to the probable expenses of
regulation, taking into account the costs of direct regulation as well as the incidental
expenses.
Instances when license fees could exceed cost of regulation, control or administration
1. When the collection or the license fee is authorized under both the power of taxation
and police powe
2. When the license fee is collected to regulate a non-useful occupation
Special assessment v. tax
32
1. A special assessment is an enforced proportional contribution from owners of lands
specially or peculiarly benefited by public improvements
2. A special assessment is levied only on land.
3. A special assessment is not a personal liability of the person assessed; it is limited
to the land.
4. A special assessment is based wholly on benefits, not necessity.
5. A special assessment is exceptional both as to time and place; a tax has general
application.
Toll v. tax
1. Toll is a sum of money for the use of something. It is the consideration which is paid
for the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are
enforced proportional contributions from persons and property levied by the State by virtue
of its sovereignty for the support of the government and all public needs.
2. Toll is a demand of proprietorship; tax is a demand of sovereignty.
3. Toll is paid for the use of another’s property; tax is paid for the support of government.
4. The amount paid as toll depends upon the cost of construction or maintenance of
the public improvement used; while there is no limit on the amount collected as tax as long
as it is not excessive, unreasonable, or confiscatory.
5. Toll may be imposed by the government or by private individuals or entities; tax may
be imposed only by the government.
Tax v. penalty
1. Penalty is any sanction imposed as a punishment for violation of law or for acts
deemed injurious; taxes are enforced proportional contributions from persons and property
levied by the State by virtue of its sovereignty for the support of the government and all
public needs.
2. Penalty is designed to regulate conduct; taxes are generally intended to generate
revenue.
3. Penalty may be imposed by the government or by private individuals or entities;
taxes only by the government.
Obligation to pay debt v. obligation to pay tax
1. A debt is generally based on contract, express or implied, while a tax is based on

laws.
2. A debt is assignable, while a tax cannot generally be assigned.
3. A debt may be paid in kind, while a tax is generally paid in money.
4. A debt may be the subject of set off or compensation, a tax cannot.
5. A person cannot be imprisoned for non-payment of tax, except poll tax.
33
6. A debt is governed by the ordinary periods of prescription, while a tax is governed
by the special prescriptive periods provided for in the NIRC.
7. A debt draws interest when it is so stipulated or where there is default, while a tax
does not draw interest except only when delinquent.
Rules re: set off or compensation of debts
· General rule: A tax delinquency cannot be extinguished by legal compensation.

This is so because the government and the tax delinquent are not mutually creditors and
debtors. Neither is a tax obligation an ordinary debt. Moreover, the collection of a tax
cannot await the results of a lawsuit against the government. Finally, taxes are not in the
nature of contracts but grow out of a duty to, and are the positive acts of the, government
to the making and enforcing of which the personal consent of the taxpayer is not required.
[Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber, 4 SCRA 622]
· Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA
443] re. claim for payment of unpaid services of a government employee vis-a-vis the
estate taxes due from his estate. The fact that the court having jurisdiction of the estate
had found that the claim of the estate against the government has been appropriated for
the purpose by a corresponding law shows that both the claim of the government for
inheritance taxes and the claim of the intestate for services rendered have already become
overdue and demandable as well as fully liquidated. Compensation therefore takes place
by operation of law.
SURVEY OF PHILIPPINE TAXES

A. Internal revenue taxes imposed under the NIRC
1. Income tax
2. Transfer taxes
a. Estate Tax
b. Donor’s Tax
3. Business / Percentage taxes
a. Value Added Tax
b. Other Percentage Taxes
4. Excise taxes
5. Documentary stamp tax
B. Local/Municipal Taxes
C. Tariff and Customs Duties
D. Taxes/Tax incentives under special laws
CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER OR OBJECT
1. Personal, poll or capitation tax
34
Tax of a fixed amount imposed on persons residing within a specified territory,
whether citizens or not, without regard to their property or the occupation or business in
which they may be engaged, i.e. community tax.
2. Property tax
Tax imposed on property, real or personal, in proportion to its value or in accordance
with some other reasonable method of apportionment.
3. Excise tax
A charge imposed upon the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation.
AS TO PURPOSE
1. General/fiscal/revenue tax
A general/fiscal/revenue tax is that imposed for the purpose of raising public funds for the
service of the government.
2. Special/regulatory tax
A special or regulatory tax is imposed primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for the purpose of raising public funds.
AS TO WHO BEARS THE BURDEN

1. Direct tax
A direct tax is demanded from the person who also shoulders the burden of the tax. It is
a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to
another.
2. Indirect tax
An indirect tax is demanded from a person in the expectation and intention that he or she
shall indemnify himself or herself at the expense of another, falling finally upon the ultimate
purchaser or consumer. A tax which the taxpayer can shift to another.
AS TO SCOPE OF THE TAX

1. National tax
A national tax is imposed by the national government.
2. Local tax
A local tax is imposed by municipal corporations or local government units (LGUs).
AS TO THE DETERMINATION OF AMOUNT

1. Specific tax
A specific tax is a tax of a fixed amount imposed by the head or number or by some other
standard of weight or measurement. It requires no assessment other than the listing or
classification of the objects to be taxed.
2. Ad valorem tax
35
An ad valorem tax is a tax of a fixed proportion of the value of the property with respect to
which the tax is assessed. It requires the intervention of assessors or appraisers to
estimate the value of such property before the amount due from each taxpayer can be
determined.
AS TO GRADATION OR RATE
1. Proportional tax
Tax based on a fixed percentage of the amount of the property receipts or other
basis to be taxed. Example: real estate tax.
2. Progressive or graduated tax
Tax the rate of which increases as the tax base or bracket increases. Example:
income tax.
Digressive tax rate: progressive rate stops at a certain point. Progression halts at a
particular stage.
3. Regressive tax
Tax the rate of which decreases as the tax base or bracket increases. There is no
such tax in the Philippines.
ASPECTS OF TAXATION
Processes that are included or embodied in the term “taxation”
1. Levying or imposition of the tax which is a legislative act.
2. Collection of the tax levied which is essentially administrative in character.
The first is taxation, strictly speaking, while the second may be referred to as tax
administration. The two processes together constitute the taxation system.
TAX SYSTEMS
Constitutional mandate
· The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation. [Section 28(1), Article VI, Constitution]
Progressive system of taxation v. regressive system of taxation
· A progressive system of taxation means that tax laws shall place emphasis
on direct taxes rather than on indirect taxes, with ability to pay as the principal criterion.
· A regressive system of taxation exists when there are more indirect taxes
imposed than direct taxes.
Regressive tax rates
· Tax the rate of which decreases as the tax base or bracket increases. There
are no regressive taxes in the Philippine jurisdiction.
36
Three basic principles of a sound tax system
1. Fiscal adequacy
It means that the sources of revenue should be sufficient to meet the demands of public
expenditures. [Chavez v. Ongpin, 186 SCRA 331]
2. Equality or theoretical justice
It means that the tax burden should be proportionate to the taxpayer’s ability to pay. This
is the so-called “ability to pay principle.”
3. Administrative feasibility
It means that tax laws should be capable of convenient, just and effective administration.
NATURE AND LIMITATIONS OF THE POWER OF TAXATION
NATURE OF THE POWER OF TAXATION

Nature or characteristics of the State’s power to tax
1. It is inherent in sovereignty; hence, it may be exercised although it is not expressly

granted by the Constitution.
2. It is legislative in character; hence, only the legislature can impose taxes (although
the power may be delegated).
3. It is subject to Constitutional and inherent limitations; hence, it is not an absolute
power that can be exercised by the legislature anyway it pleases.
Power to tax v. Police power v. Power of eminent domain
TAXATION POLICE POWER EMINENT DOMAIN

DEFINITION Power of the State to demand enforced contributions for public purposes
Power of the State to enact such laws in relation to persons and property as may promote
public health, safety, morals, and the general welfare of the public Power of the State to
take private property for public use upon paying to the owner a just compensation to be
ascertained according to law
Authority Exercising the Power Only the government or its political subdivisions
Only the government or its political subdivisions May be granted to public service
companies of public utilities
PURPOSE Enforced contribution is demanded for the support of the government
Use of property is regulated for the purpose of promoting the general welfare
Property is taken for public use
Persons Affected Operates upon a community or class of individuals Operates
upon a community or class of individuals (usually) Operates on an individual as the
owner of a particular property
37
EFFECT Money contributed in the concept of taxes becomes part of public funds
No transfer of title, at most, there is restraint on injurious use of the property
Transfer of the right to property whether it be ownership or a lesser right
BENEFITS RECEIVED Assumed that the individual receives the equivalent of the
tax in the form of protection, and benefits received from the government as such Person
affected receives no direct and immediate benefit but only such as may arise from the
maintenance of a healthy economic standard of society Person affected receives the
market value of the property taken from him
AMOUNT OF IMPOSITION Generally no limit on the amount of tax that may be imposed
Amount imposed should not be more than that sufficient to cover the cost of the license
and the necessary expenses of regulation No amount imposed but rather the owner is
paid the market value of the property taken
Relationship to the Constitution Subject to certain Constitutional limitations
Relatively free from Constitutional limitations and is superior to the impairment provisions
Subject to certain Constitutional limitations (e.g. inferior to impairment of contracts clause)
Power to tax involves the power to destroy so it must be exercised with caution
· Chief Justice Marshall declared that the power to tax is also called the power
to destroy. Therefore, it should be exercised with caution to minimize injury to the
proprietary rights of the taxpayer. It must be exercised fairly, equally and uniformly, less
the tax collector kills the “hen that lays the golden egg.” And in order to maintain the
general public’s trust and confidence in the government, this power must be used justly
and not treacherously. [Chief Justice Marshall in McCulloch v. Maryland, reiterated in
Roxas v. CTA, 23 SCRA 276]
Matters within the competence of the legislature
1. The subject or object to be taxed.

2. The purpose of the tax so long as it is a public purpose.
3. The amount or rate of the tax.
4. The manner, means, and agencies of collection of the tax.
· It is inherent in the power to tax that the State be free to select the subjects
of taxation, and it has been repeatedly held that “inequalities which result from a singling
out of one particular class for taxation, or exemption, infringe no Constitutional limitation.”
Power to tax cannot be delegated
· The power of taxation, being purely legislative, Congress cannot delegate

such power. This limitation arises from the doctrine of separation of powers among the
three branches of government.
Exceptions to the non-delegation rule
38
1. Delegation to the President
2. Delegation to local government units
3. Delegation to administrative agencies
TAXPAYER’S SUIT
Taxpayer’s suit
· A case where the act complained of directly involves the illegal disbursement
of public funds derived from taxation.
· Taxpayers have locus standi to question the validity of tax measures or
illegal expenditures of public money. In such cases, they are parties in interest who will be
prejudiced or benefited by the avails of the suit.
· On the other hand, public officials have locus standi because it is their duty
to protect public interest.
· The general rule is that not only persons individually affected but also
taxpayers have sufficient interest of preventing the illegal expenditures of money raised
by taxation. They may, therefore, question in the proper court the constitutionality of
statutes requiring the expenditure of public funds.
· But a taxpayer is not relieved from the obligation of paying a tax because of
his belief that it is being misappropriated by certain officials, for otherwise, collection of
taxes would be hampered and this may result in the paralyzation of important
governmental functions.
INHERENT LIMITATIONS
1. Purpose must be public in nature

2. Prohibition against delegation of the taxing power
3. Exemption of government entities, agencies and instrumentalities
4. International comity
5. Limitation of territorial jurisdiction
Public purpose in taxation
· This is one of the inherent limitations of the power to tax and is synonymous
to “governmental purpose.” A tax must always be imposed for a public purpose, otherwise,
it will be declared as invalid.
· The term “public purpose” has no fixed connotation. The essential point is
that the purpose of the tax affects the inhabitants as a community and not merely as
inhabitants.
39
· It has been said that the best test of rightful taxation is that the proceeds of
the tax must be used:
a) for the support of the government; or

b) some of the recognized objects of government; or
c) to promote the welfare of the community.
Exceptions to the non-delegation rule
1. Delegation to the President

2. Delegation to local government units
3. Delegation to administrative agencies
Delegation to the President

· Congress may authorize, by law, the President to fix, within specified limits
and subject to such limitations and restrictions as it may impose:
1. tariff rates;
2. import and export quotas;
3. tonnage and wharfage dues; and
4. other duties or imposts within the national development program of the government.
Flexible tariff clause
· In the interest of national economy, general welfare and/or national security,

the President, upon recommendation of the National Economic and Development
Authority, is empowered:
1. To increase, reduce, or remove existing protective rates of import duty, provided

that the increase should not be higher than 100% ad valorem;
2. To establish import quota or to ban imports of any commodity; and
3. To impose additional duty on all imports not exceeding 10% ad valorem.
Delegation to local government units
· The power of local government units to impose taxes and fees is always
subject to the limitations which Congress may provide, the former having no inherent
power to tax. [Basco v. PAGCOR]
40
· Municipal corporations are mere creatures of Congress which has the power
to create and abolish municipal corporations. Congress therefore has power of control
over local government units. If Congress can grant to a municipal corporation the power
to tax certain matters, it can also provide for exemptions or even to take back the power.
Delegation to administrative agencies
· With the growing complexities of modern life and the many technical fields
of governmental functions, as in matters pertaining to tax exemptions, delegation of
legislative powers has become the rule and non-delegation the exception. The legislature
may not have the competence, let alone the interest and the time, to provide direct and
efficacious solutions to many problems attendant upon present day undertakings. The
legislature could not be expected to state all the detailed situations wherein the tax
exemption privilege would be restored. The task may be assigned to an administrative
body like the Fiscal Incentives Review Board (FIRB). [Maceda v. Macaraig, 196 SCRA
771]
· For delegation to be constitutionally valid, the law must be complete in itself

and must set forth sufficient standards.
Reasons for exempting governmental entities

· Government will be taxing itself to raise money for itself.
· Immunity is necessary in order that governmental functions will not be
impeded.
What government entities are exempt from income tax?
1. Government Service Insurance System (GSIS)

2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)**
5. Philippine Amusement and Gaming Corporation (PAGCOR)
**Under the TRAIN law (effective Jan 1, 2018), PCSO is removed from tax exempt GOCCs
International comity
· Courteous, friendly agreement and interaction between nations.
· Under international law, property of a foreign State may not be taxed by

another State.
Reasons for exception
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1. Sovereign equality of States
2. When one State enters the territory of another State, there is an implied
understanding that the former does not intend to denigrate its dignity by placing itself under
the jurisdiction of the other State
3. Immunity from suit of a State
Limitation of a territorial jurisdiction
· Tax laws cannot operate beyond a state’s territorial limits.

· Property outside one’s jurisdiction does not receive any protection from the
state.
CONSTITUTIONAL LIMITATIONS:
1. Due process of law
2. Equal protection of laws
3. Rule of uniformity and equity in taxation
4. Prohibition against imprisonment for non-payment of poll tax
5. Prohibition against impairment of obligation of contracts
6. Prohibition against infringement of religious freedom
7. Prohibition against appropriation of proceeds of taxation for the use, benefit, or
support of any church
8. Prohibition against taxation of religious, charitable and educational entities
9. Prohibition against taxation of non-stock, non-profit educational institutions
10. Others
a. Grant of tax exemption
b. Veto of appropriation, revenue, tariff bills by the President
c. Non-impairment of the SC jurisdiction
d. Revenue bills shall originate exclusively from the House of Representatives
e. Infringement of press freedom
f. Grant of franchise
Due process of law
· There must be a valid law.
· Tax measure should not be unconscionable and unjust as to amount to

confiscation of property.
· Tax statute must not be arbitrary as to find no support in the Constitution.
Equal protection of laws
42
· All persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and liabilities imposed.
· The doctrine does not require that persons or properties different in fact be
treated in law as though they were the same. What it prohibits is class legislation which
discriminates against some and favors others.
· As long as there are rational or reasonable grounds for so doing, Congress

may group persons or properties to be taxed and it is sufficient if all members of the same
class are subject to the same rate and the tax is administered impartially upon them.
Requisites of a valid classification
1. It must be based on substantial distinctions which make real differences.

2. The classification must be germane to the purpose of the law.
3. The classification must not be limited to existing conditions only but must also apply
to future conditions substantially identical to those of the present.
4. The classification must apply equally to all members of the same class. [Tiu v. Court
of Appeals, 301 SCRA 278 (1999)]
Tiu v. Court of Appeals, 301 SCRA 278 (1999)
Uniformity v. equity in taxation
· Section 28 (c), Article VI of the Constitution provides that “the rule of taxation
shall be uniform and equitable.”
· The concept of uniformity in taxation implies that all taxable articles or

properties of the same class shall be taxed at the same rate. It requires the uniform
application and operation, without discrimination, of the tax in every place where the
subject of the tax is found. It does not, however, require absolute identity or equality under
all circumstances, but subject to reasonable classification.
· The concept of equity in taxation requires that the apportionment of the tax
burden be, more or less, just in the light of the taxpayer’s ability to shoulder the tax burden
and, if warranted, on the basis of the benefits received from the government. Its
cornerstone is the taxpayer’s ability to pay.
Prohibition against imprisonment for non-payment of poll tax
· No person shall be imprisoned for debt or non-payment of poll tax. [Section

20, Article III, Constitution]
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· The non-imprisonment rule applies to non-payment of poll tax which is
punishable only by a surcharge, but not to other violations like falsification of community
tax certificate and non-payment of other taxes.
Poll tax
· Poll tax is a tax of fixed amount imposed on residents within a specific

territory regardless of citizenship, business or profession. Example is community tax.
Prohibition against impairment of obligation of contracts

· No law impairing the obligation of contracts shall be passed. [Section 10,
Article III, Constitution]
· The obligation of a contract is impaired when its terms or conditions are
changed by law or by a party without the consent of the other, thereby weakening the
position or rights of the latter.
· An example of impairment by law is when a later taxing statute revokes a

tax exemption based on a contract. But this only applies when the tax exemption has been
granted for a valid consideration.
· A later statute may revoke exemption from taxation provided for in a franchise
because the Constitution provides that a franchise is subject to amendment, alteration or
repeal.
Prohibition against infringement of religious freedom
· No law shall be made respecting an establishment of religion, or prohibiting

the free exercise thereof.
Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of
any church
Section 29, Article VI, Constitution
1. No money shall be paid out of the Treasury except in pursuance of an appropriation

made by law.
2. No public money or property shall be appropriated, applied, paid, or employed
directly or indirectly, for the use, benefit, or support of any church, denomination, sectarian
institution or system of religion, or of any priest, preacher, minister or other religious
teacher, or dignitary as such except when such priest, preacher, minister or dignitary is
assigned to the armed forces, or to any penal institution, or government orphanage or
leprosarium.
3. All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a special fund
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was created has been fulfilled or abandoned, the balance, if any, shall be transferred to
the general funds of the government.
Prohibition against taxation of real property actually, directly and exclusively used for
religious, charitable and educational purposes
· 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. [Section 28 (3) , Article VI, Constitution]
· This is an exemption from real property tax only.
· All revenues and assets of non-stock, non-profit educational institutions used

actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of the corporate existence of such institutions,
their assets shall be disposed of in the manner provided by law. [Section 4, Article XIV,
Constitution]
· This exemption from corporate income tax is embodied in Section 30 of the

NIRC which includes a non-stock, non-profit educational institution.
· Note however the last paragraph of Section 30 which states: “Notwithstanding

the provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their property, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.”
Department of Finance Order 145-85
· Non-stock, non-profit educational institutions are exempt from taxes on all

their revenues and assets used actually, directly and exclusively for educational purposes.
· However, they shall be subject to internal revenue tax on income from trade,
business or other activity, the conduct of which is not related to the exercise or
performance by such educational institution of its educational purposes or functions.
· Interest income shall be exempt only when used directly and exclusively for
educational purposes. To substantiate this claim, the institution must submit an annual
information return and duly audited financial statement. A certification of actual utilization
and the Board resolution or the proposed project to be funded out of the money deposited
in banks shall also be submitted.
Department of Finance Order 137-87
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· An educational institution means a non-stock, non-profit corporation or
association duly registered under Philippine law, and operated exclusively for educational
purposes, maintained and administered by a private individual or group offering formal
education, and with an issued permit to operate by the DECS.
· Revenues derived from and assets used in the operation of cafeteria/canteens,

dormitories, and bookstores are exempt from taxation provided they are owned and
operated by the educational institution as ancillary activities and the same are located
within the school premises.
Taxation of proprietary educational institutions
· Proprietary educational institutions, including those cooperatively owned,

may likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for investment. [Section 4 (3), Article
XIV, Constitution]
· Under Section 27(B) of the NIRC, proprietary educational institutions and

hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income
except for passive incomes which are subject to different tax rates.
SITUS IN TAXATION
· Literally, situs of taxation means place of taxation. It is the State or political
unit which has jurisdiction to impose a particular tax.
· The determination of the situs of taxation depends on various factors including

the:
1. Nature of the tax;
2. Subject matter thereof (i.e. person, property, act or activity;
3. Possible protection and benefit that may accrue both to the government and the
taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of the income.
Situs of tax on persons (poll tax

· Poll tax may be properly levied upon persons who are inhabitants or residents
of the State, whether or not they are citizens.
Situs of tax on real property
· Situs is where the property is located pursuant to the principle of lex rei sitae.
This applies whether or not the owner is a resident of the place where the property is
located.
· This is so because the taxing authority has control over the property which
is of a fixed and stationary character.
46
· The place where the real property is located gives protection to the real
property, hence, the owner must support the government of that place.
Lex rei sitae
· This is a principle followed in fixing the situs of taxation of a property. This

means that the property is taxable in the State where it has its actual situs, specifically in
the place where it is located, even though the owner resides in another jurisdiction.
· With respect to property taxes, real property is subject to taxation in the

State where it is located and taxable only there. Lex rei sitae has also been adopted for
tangible personal property under Article 16 of the Civil Code. A different rule applies to
intangible personal property, specifically, mobilia sequuntur personam.
Situs of tangible personal property
· It is taxable in the State where it has actual situs although the owner resides
in another jurisdiction.
· As stated above, lex rei sitae has also been adopted for tangible personal
property under Article 16 of the Civil Code.
Situs of taxation of intangible personal property
· General rule: Situs is the domicile of the owner pursuant to the principle of
mobilia sequuntur personam. This rule is based on the fact that such property does not
admit of any actual location and that such property receives the protection and benefits of
the law where they are located.
· Exceptions:
1. When it is inconsistent with the express provisions of the statute
2. When the property has acquired a business situs in another jurisdiction
Mobilia sequuntor personam

· This Latin maxim literally means that the property follows the person. Thus,
the place where the owner is found is the situs of taxation under the rule that movables
follow the person. This is generally where the owner resides.
· In taxation, this principle is applied to intangible personal property the situs
of which is fixed by the domicile of the owner. The reason is that this type of property
rarely admits of actual location.
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· However, there are two exceptions to the rule. One is when it is inconsistent
with the express provisions of a statute. Two, when the interests of justice demand that it
should not be applied, i.e. where the property has in fact a situs elsewhere.
Situs of income tax in the Philippines
· The situs is where the income is derived.

· The source of an income is the property, activity or service that produced
the income. For the source of income to be considered as coming from the Philippines, it
is sufficient that income is derived from an activity within the Philippines. In BOAC’s cases,
the sale of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made in the Philippines. The
flow of wealth proceeded from and occurred in the Philippine territory, enjoying the
protection accorded by the Philippine government; in consideration of such protection, the
flow of wealth should share the burden of supporting the government.
Multiplicity of situs
· Multiplicity of situs, or the taxation of the same income or intangible subject

in several taxing jurisdictions, arises from various factors:
1. The variance in the concept of domicile for tax purposes;

2. Multiple distinct relationships that may arise with respect to intangible personal
property; or
3. The use to which the property may have been devoted all of which may receive the
protection of the laws of jurisdictions other than the domicile of the owner thereto.
· The remedy to avoid or reduce the consequent burden in case of multiplicity

of situs is either to:
1. Provide exemptions or allowance of deduction or tax credit for foreign taxes; or

2. Enter into tax treaties with other States.
DOUBLE TAXATION
Double taxation in the strict sense v. double taxation in the broad sense
· In its strict sense, referred to as direct duplicate taxation, double taxation

means:
1. taxing twice;
2. by the same taxing authority;
3. within the same jurisdiction or taxing district;
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4. for the same purpose;
5. in the same year or taxing period;
6. some of the property in the territory.
· In its broad sense, referred to as indirect double taxation, double taxation is

taxation other than direct duplicate taxation. It extends to all cases in which there is a
burden of two or more impositions.
Constitutionality of double taxation
· Unlike the United States Constitution, our Constitution does not prohibit
double taxation.
· However, while it is not forbidden, it is something not favored. Such taxation
should, whenever possible, be avoided and prevented.
· In addition, where there is direct double taxation, there may be a violation of
the constitutional precepts of equal protection and uniformity in taxation.
· The argument against double taxation may not be invoked where one tax is
imposed by the State and the other is imposed by the city, it being widely recognized that
there is nothing inherently obnoxious in the requirement that license fees or taxes be
exacted with respect to the same occupation, calling, or activity by both the State and a
political subdivision thereof. And where the statute or ordinance in questions applies
equally to all persons, firms and corporations placed in a similar situation, there is no
infringement of the rule on equality. [City of Baguio v. De Leon, 25 SCRA 938]
MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION
Six basic forms of escape from taxation

1. Shifting
2. Capitalization
3. Evasion
4. Exemption
5. Transformation
6. Avoidance
Note: With the exception of evasion, all are legal means of escape.
SHIFTING
· Shifting is the transfer of the burden of a tax by the original payer or the one
on whom the tax was assessed or imposed to someone else.
Only indirect taxes may be shifted; direct taxes cannot be shifted.
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Ways of shifting the tax burden
1. Forward shifting
When the burden of the tax is transferred from a factor of production through factors of
distribution until it finally settles on the ultimate purchaser or consumer.
Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn
shifts it to the retailer, who also shifts it to the final purchaser or consumer.
2. Backward shifting
When the burden of the tax is transferred from the consumer or purchaser through the
factors of distribution to the factor of production.
Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing
only after the price is reduced, and from the latter to the wholesaler, and finally to the
manufacturer or producer.
3. Onward shifting
When the tax is shifted two or more times either forward or backward.
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to
the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to
the purchaser by the retailer, we have three shifts in all.
Impact and incidence of taxation
· Impact of taxation is the point on which a tax is originally imposed. In so far

as the law is concerned, the taxpayer is the person who must pay the tax to the
government. He is also termed as the statutory taxpayer – the one on whom the tax is
formally assessed. He is the subject of the tax.
· Incidence of taxation is that point on which the tax burden finally rests or
settle down. It takes place when shifting has been effected from the statutory taxpayer to
another.
Statutory taxpayer
· Impact is the imposition of the tax; shifting is the transfer of the tax; while
incidence is the setting or coming to rest of the tax.
TAX EVASION
· Tax evasion is the use by the taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It is also known as “tax dodging.” It is punishable
by law.
· Tax evasion is a term that connotes fraud through the use of pretenses or
forbidden devices to lessen or defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160]
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· Example: Deliberate failure to report a taxable income or property; deliberate
reduction of income that has been received.
TAX AVOIDANCE
· Tax avoidance is the exploitation 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. It is politely called “tax minimization” and is not punishable by law.
TAX EXEMPTION
· It is the grant of immunity to particular persons or corporations or to persons
or corporations of a particular class from a tax which persons and corporations generally
within the same state or taxing district are obliged to pay. It is an immunity or privilege; it
is freedom from a financial charge or burden to which others are subjected.
· Exemption is allowed only if there is a clear provision therefor.
SOURCES OF TAX LAWS

1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special laws
8. Decisions of the Supreme Court and the Court of Tax Appeal
9. Revenue rules and regulations and administrative rulings and opinions
Tax treaty
· A tax treaty is one of the sources of our law on taxation. The Philippine
Government usually enters into tax treaties in order to avoid or minimize the effects of
double taxation. A treaty has the force and effect of law.
REVENUE RULES AND REGULATIONS AND ADMINISTRATIVE RULINGS AND

OPINIONS
Authority to promulgate rules and regulations and rulings and opinions
· The Secretary of Finance, upon recommendation of the Commissioner of

Internal Revenue, shall promulgate needful rules and regulations for the effective
enforcement of the provisions of the NIRC.
· This is without prejudice to the power of the Commissioner of Internal

Revenue to make rulings or opinions in connection with the implementation of the
51
provisions of internal revenue laws, including rulings on the classification of articles for
sales tax and similar purposes.
Purpose of rules and regulations
1. To properly enforce and execute the laws

2. To clarify and explain the law
3. To carry into effect the law’s general provisions by providing details of administration
and procedure
Requisites for validity of rules and regulations

1. They must not be contrary to law and the Constitution.
2. They must be published in the Official Gazette or a newspaper of general circulation.
EFFECTIVITY AND VALIDITY OF A TAX ORDINANCE
Tuazon v. Court of Appeals, 212 SCRA 739
· If the resolution is to be considered as a tax ordinance, it must be shown to

have been enacted in accordance with the requirements of the Local Government Code.
These would include the holding of a public hearing on the measure and its subsequent
approval by the Secretary of Finance, in addition to the usual requisites for publication of
ordinances in general.
INTERPRETATION AND APPLICATION OF TAX LAWS
Nature of internal revenue laws

1. Internal revenue laws are not political in nature.
2. Tax laws are civil and not penal in nature.
Not political in nature
· Internal revenue laws are not political in nature. They are deemed to be the
laws of the occupied territory and not of the occupying enemy.
· Thus, our tax laws continued in force during the Japanese occupation.
Civil, not penal, in nature
· Tax laws are civil and not penal in nature, although there are penalties
provided for their violation.
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· The purpose of tax laws in imposing penalties for delinquencies is to compel
the timely payment of taxes or to punish evasion or neglect of duty in respect thereof.
Construction of tax laws
1. Rule when legislative intent is clear

Tax statutes are to receive a reasonable construction with a view to carrying out their
purpose and intent.
They should not be construed as to permit the taxpayer easily to evade the payment of
taxes.
2. Rule when there is doubt
No person or property is subject to taxation unless within the terms or plain import of a
taxing statute. In every case of doubt, tax statutes are construed strictly against the
government and liberally in favor of the taxpayer.
Taxes, being burdens, are not to be presumed beyond what the statute expressly and
clearly declares.
3. Provisions granting tax exemptions
Such provisions are construed strictly against the taxpayer claiming tax exemption.
Application of tax law
· General rule: Tax laws are prospective in operation because the nature and
amount of the tax could not be foreseen and understood by the taxpayer at the time the
transactions which the law seeks to tax was completed.
· Exception: While it is not favored, a statute may nevertheless operate

retroactively provided it is expressly declared or is clearly the legislative intent. But a tax
law should not be given retroactive application when it would be harsh and oppressive.
POWERS AND DUTIES OF BIR:

Under the Tax Code, as amended, Section 2. Powers and duties of the Bureau of Internal
Revenue. –
The Bureau of Internal Revenue shall be under the supervision and control of the
Department of Finance and its powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and charges, and the enforcement
of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary
courts. The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws
Section 3. Chief Officials of the Bureau of Internal Revenue. –
The Bureau of Internal Revenue shall have a chief to be known as Commissioner of
Internal Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs
to be known as Deputy Commissioners.
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Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. –
The power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary
of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals.
Section 5. Power of the Commissioner to Obtain Information, and to Summon, Examine,

and Take Testimony of Persons. –
In ascertaining the correctness of any return, or in making a return when none has been
made, or in determining the liability of any person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized:
(A) To examine any book, paper, record, or other data which may be relevant or material
to such inquiry;
(B) To Obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the
Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce
such books, papers, records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to time of any
revenue district or region and inquire after and concerning all persons therein who may be
liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.
TAX REMEDIES: CHAPTER III - PROTESTING AN ASSESSMENT, REFUND, ETC.
Section 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer
of his findings: provided, however, That a preassessment notice shall not be required in
the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
54
(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded
or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall
be required to respond to said notice. If the taxpayer fails to respond, the Commissioner
or his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration
or reinvestigation within thirty (30) days from receipt of the assessment in such form and
manner as may be prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant supporting documents shall
have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision
or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of
the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the
decision shall become final, executory and demandable.
Section 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, of any sum alleged to have been
excessively or in any manner wrongfully collected without authority, or of any sum alleged
to have been excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without
a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid
Watch:
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Read: https://www.slideshare.net/fimportado/general-principles-of-taxation
Activities/Assessments: True or False (1 point each)
55
1.A. For the existence of power to tax, the state can tax anything at any time.
B. No person shall be imprisoned for non payment of poll tax.
2. A. Taxation is essentially legislative. Even in absence of any constitution provision,
taxation power falls on Congress as part of general law-making power.
B. An inherent limitation of taxation may be disregarded by application of constitutional
limitations.
3. A. Equality in taxation means, taxes must be based on taxpayer’s ability to pay.
B. A country which was conquered by foreign country will automatically extinguish its
power to tax.
4. A. There is no regressive tax system in the Philippines.
B. Opinions of authors of taxations are considered source of tax rulings
5. A. The provision of constitution are grants of power to tax.
B. If the Phil Govt incurred a deficit, the primary remedy is to increase taxes to increase
revenues of the Phil Govt.
Multiple Choice (1 point each). Write letter E if there is no correct answer from the given
choices.
1. A tax must be imposed for public purpose. Which of the following is not a public
purpose?
a. national defense c. Improvement of sugar industry and coconut
industries
b. Public education d. Public health care
2. The aspects of taxation are
a. Legislative in character c. Shared by the legislative and executive dept
b. Executive in character d. Judicial in nature
3. It is the privilege of not being imposed of financial obligation to which others are subject:
a. Tax incentive c. Tax amnesty
b. Tax exemption d. Tax credit
4. The following are agents and deputies for the collection of National Internal revenue
taxes, except:
a. The Commissioner of Customs with respect to collection of taxes on imported goods
b. City and municipal treasurers with respect to collection of real property taxes.
c. The head of appropriate government office with respect to collection of energy tax.
d. Bank duly accredited by the CIR with respect to receipt of payments of internal revenue
taxes authorized to be made thru banks
5. The powers and duties of the BIR, except:
a. The issuance of rules and regulations and enactment of revenue bills to ensure that the
State can provide for the needs of those under its jurisdiction
b. The assessment and collection of all national taxes
c. Enforcement of all forfeitures, penalties and fines connected with assessment and
collection of national internal revenue taxes.
d. The execution of judgment in all cases decided by the CTA (Court of Tax Appeals)
56
MODULE 2: ADMINISTRATIVE PROVISIONS FOR INDIVIDUAL INCOME TAXATION
OVERVIEW:
Taxation is the inherent power by which the sovereign, through its law-making
body, raises revenue to defray the necessary expenses of the government. It is a manner
of apportioning the costs of the government among those who, in some measure, are
privileged to enjoy its benefits and must bear its burdens.
Taxation is both a power and a process. As power, it refers to inherent power of

the State, co extensive with sovereignty to demand contributions for public purposes to
support the government. As a process, it passes a legislative undertaking through the
enactment of tax laws which will be implemented by the Executive branch of the
government through Bureau of Internal revenue or BIR, to raise revenues from the
inhabitants in order to pay the necessary expenses of the government.
Taxes collected by BIR are called national taxes which includes the following:
income tax, estate tax, donor’s ta, Value Added tax, percentage tax and Documentary
Tax. These taxes are imposed to different classes of taxpayers or persons. Taxpayers
includes individuals and businesses such as partnership and corporations
This module will discuss the administrative provisions of the Tax Code, as
amended to Individual Income taxation which includes filing and payment of income taxes
and other provisions provided by the New Tax Code.
MODULE OBJECTIVES:
1. Be able to know where the place and due date of the Income Tax Returns (Annual,
Quarterly, as applicable) & other administrative provisions of the Bureau of Internal
Revenue.
2. Be able to know the compliance requirements of BIR on keeping of book of accounts,
prescriptive period and administrative requirements.
3. To gain knowledge of the tax return preparation and filing and tax payments.
4. Be able to know different accounting periods an accounting method for income
recognition in accounting (PFRS) vs Tax accounting
5. Enumerate the requisites of taxable income
6. Identify the different classes of Income and Taxpayer
Course Materials:
Administrative provisions on Individual Income Taxation:
57
Income Tax is a tax on a person's income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions
if any, authorized for such types of income, by the Tax Code, as amended, or other special
laws.
Compliance Requirements:
Any merchant or business organization in whatever form or nature, if liable for any national
tax as provided by the Tax Code, are mandated to comply with the following requirements:
a. Registration with BIR

b. Keeping of accounting records and books
c. Issuance of sales invoice and official receipts
d. Filing of tax returns and payment of related taxes
e. Withholding of taxes on specified payment to suppliers-sellers.
Required to File Income Tax Returns

A. Individuals
1. Resident citizens receiving income from sources within or outside the
Philippines
➢ Employees deriving purely compensation income from two or more
employers, concurrently or successively at any time during the taxable year
➢ Employees deriving purely compensation income regardless of the
amount, whether from a single or several employers during the calendar year,
the income tax of which has not been withheld correctly (i.e. tax due is not
equal to the tax withheld) resulting to collectible or refundable return
➢ Self-employed individuals receiving income from the conduct of trade or
business and/or practice of profession
➢ Individuals deriving mixed income, i.e., compensation income and income
from the conduct of trade or business and/or practice of profession
➢ Individuals deriving other non-business, non-professional related income
in addition to compensation income not otherwise subject to a final tax
➢ Individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose spouse
is not entitled to substituted filing
2. Non-resident citizens receiving income from sources within the Philippines
3. Aliens, whether resident or not, receiving income from sources within the
Philippines
B. Non-Individuals
1. Corporations including partnerships, no matter how created or organized.
2. Domestic corporations receiving income from sources within and outside the
Philippines
3. Foreign corporations receiving income from sources within the Philippines
4. Estates and trusts engaged in trade or business
Persons who are Not required to file Income Tax returns:
58
1. An individual earning purely compensation income whose taxable income does not
exceed P250,000.00
2. An individual whose income tax has been withheld correctly by his employer, provided
that such individual has only one employer for the taxable year
3. An individual whose sole income has been subjected to final withholding tax or who is
exempt from income tax pursuant to the Tax Code and other special laws.
4. An individual who is a minimum wage earner
5. Those who are qualified under “substituted filing”. However, substituted filing applies
only if all of the following requirements are present:
➢ the employee received purely compensation income (regardless of amount) during
the taxable year;
➢ the employee received the income from only one employer in the Philippines during
the taxable year;
➢ the amount of tax due from the employee at the end of the year equals the amount
of tax withheld by the employer;
➢ the employee’s spouse also complies with all 3 conditions stated above;
➢ the employer files the annual information return (BIR Form No. 1604-CF); and
➢ the employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each
employee.
The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income
derived from sources within the Philippines.
Annual Income Tax For Individuals Earning Purely Compensation Income (Including Non-
Business/Non-Profession Related Income)
File the BIR Form 1700 - Annual Income Tax For Individuals Earning Purely Compensation
Income (Including Non-Business/Non-Profession Related Income)
Documentary Requirements
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316)
2. Duly approved Tax Debit Memo, if applicable
3. Proofs of Foreign Tax Credits, if applicable
4. Income Tax Return previously filed and proof of payment, if filing an amended return
for the same taxable year.
Deadline for Filing of Annual ITR

On or before the 15th day of April of each year covering taxable income for
calendar year 2018 and thereafter
Annual Income Tax For Individuals, Estates, and Trusts
59
BIR Form 1701 - Annual Income Tax Return Individuals, Estates and Trusts
Deadline for filing the Annual ITR

Final Adjustment Return or Annual Income Tax Return - On or before the
15th day of April of each year covering income for calendar year 2018 and thereafter
Account Information Form For Self-Employed Individuals, Estates And Trusts (Including
Those With Mixed Income, i.e., Compensation Income and Income from Business and/or
Practice of Profession)
BIR Form 1701 AIF - Account Information Form for Self-Employed Individuals, Estates
and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income
from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade
or Business)
NOTE: Pursuant to Sec. 71 of RA 10963, otherwise known as Tax Reform Acceleration

and Inclusion Act, amending Sec. 232 of the Tax Code, as amended, in relation to
Revenue Memorandum Circular No. 6 – 2001, corporations, companies or persons whose
gross annual sales, earnings, receipts or output exceed P3,000,000 may not accomplish
this form. In lieu thereof, they may file their annual income tax returns accompanied by
balance sheets, profit and loss statement, schedules listing income-producing properties
and the corresponding income therefrom, and other relevant statements duly certified by
an independent CPA.
Quarterly Income Tax For Individuals, Estates And Trusts Including Those With Mixed
Income, i.e., Compensation Income and Income from Business and/or Practice of
Profession
BIR Form 1701Q - Quarterly Income Tax Return For Individuals, Estates and Trusts
Deadlines for Filing of Quarterly Income Tax returns:
•May 15 of the current taxable year– for the first quarter

•August 15 of the current taxable year – for the second quarter
•November 15 of the current taxable year – for the third quarter
Income Tax For Individuals Deriving Purely Compensation Income:
The yearly Income tax return shall be filed on or before April 15 of the
following year.
SUBSTITUTED FILING
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An individual taxpayer will no longer have to personally file his own Income Tax
Return (BIR Form 1700) but instead the employer's Annual Information Return on Income
Taxes Withheld (BIR Form No. 1604-C) filed will be considered as the "substitute" ITR of
the employee.
REQUISITES FOR INDIVIDUALS QUALIFIED FOR SUBSTITUTED FILING OF BIR

FORM NO. 1700
1. Receives purely compensation income regardless of amount;
2. Compensation from only one employer in the Philippines for the calendar year;
3. Income tax has been withheld correctly by the employer (tax due equals tax withheld);
4. the employee's spouse also complies with all the three conditions stated above;
5. Employer files the BIR Form No. 1604-C; and
6. The employer issues each employee BIR Form No. 2316 (latest version)
NOTE:
All the above requisites must be present. The annual Information Return of Income Taxes
Withheld on Compensation (BIR Form No. 1604-C) filed by their respective employers
filed their respective employers duly submitted to the eSubmission facility of the BIR.
REQUISITES FOR INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED FILING OF BIR
FORM NO. 1700
1. Individuals with two or more employers concurrently and/or successively at anytime
during the taxable year.
2. Employees whose income tax have not been withheld correctly resulting to collectible
or refundable return.
3. Individuals deriving other non-business, non-profession-related income in addition to
compensation income not otherwise subject to final tax.
4. Individuals receiving purely compensation income from a single employer whose
income tax has been correctly withheld but whose spouse does not qualify tor
substituted filing.
5. Non-resident aliens engaged in trade or business in the Philippines deriving purely
compensation income or compensation income and other non-related business, non-
profession-related income.
SUBMISSION OF BIR FORM NO. 2316
The employer are required to submit the duplicate original copy of BIR Form No.
2316 to the Revenue District Office where they are registered on or before February 28
AMENDED INCOME TAX RETURNS:
The individual income tax return maybe amended on any day within 3 years from
its filing or from the last day prescribed by law for filing, provided that no notice of
assessment or tax audit has been actually served to the taxpayer in the meantime.
61
Under Section 51 of RA 8424, as amended:
(C) When to File. –
(1) The return of any individual specified above shall be filed on or before the fifteenth
(15th) day of April of each year covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after
each transaction and a final consolidated return on or before April 15 of each year covering
all stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a
return within thirty (30) days following each sale or other disposition.
Section 51; Filing of Husband and Wife:
(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident
aliens, who do not derive income purely from compensation, shall file a return for the
taxable year to include the income of both spouses, but where it is impracticable for the
spouses to file one return, each spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau for purposes of verification for the
taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried minors
derived from properly received from a living parent shall be included in the return of the
parent, except (1) when the donor's tax has been paid on such property, or (2) when the
transfer of such property is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return
may be made by his duly authorized agent or representative or by the guardian or other
person charged with the care of his person or property, the principal and his representative
or guardian assuming the responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed
return shall be prima facie evidence for all purposes that the return was actually signed by
him.
Self-Assessment System:
As mandated by law, an income taxpayer is required to file his / her ITR, computing
such declarable gross income with claimable allowed deductions by himself /herself or
with the assistance of accountant based on their knowledge / interpretation of income tax
laws.
Taxable Year:
62
There are two kinds of taxable year or accounting period which may be adopted y taxpayer
namely: Calendar year and Fiscal year.
The term 'taxable year' means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed under this Title.
'Taxable year' includes, in the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the commissioner, the period for which such return is
made.
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the
last day of any month other than December
An individual taxpayer whether an employee or self employed only may only

employ calendar year for filing of ITR.
Methods of Accounting Allowed by law:

1. Cash basis
2. Accrual basis
3. Accounting for Long term Contracts- Must used Percentage of Completion method to
recognize income.
Section 48. Accounting for Long-term Contracts. - Income from long-term
contracts shall be reported for tax purposes in the manner as provided in this Section.
As used herein, the term 'long-term contracts' means building, installation or
construction contracts covering a period in excess of one (1) year. Persons whose
gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion. The return should be
accompanied by a return certificate of architects or engineers showing the percentage
of completion during the taxable year of the entire work performed under contract.
There should be deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the material and
supplies on hand at the beginning and end of the taxable period for use in connection
with the work under the contract but not yet so applied. If upon completion of a contract,
it is found that the taxable net income arising thereunder has not been clearly reflected
for any year or years, the Commissioner may permit or require an amended return
4. Installment basis method.
Section 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, a person
who regularly sells or otherwise disposes of personal property on the installment
plan may return as income therefrom in any taxable year that proportion of the
installment payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale
or other casual disposition of personal property (other than property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close
of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of
a sale or other disposition of real property, if in either case the initial payments do
63
not exceed twenty-five percent (25%) of the selling price, the income may, under
the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner
above prescribed in this Section. As used in this Section, the term 'initial payments'
means the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual
who sells or disposes of real property, considered as capital asset, and is otherwise
qualified to report the gain therefrom under Subsection (B) may pay the capital gains
tax in installments under rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner
Preservation of Accounting Books:
Taxpayer shall preserve the accounting books and other pertinent documents for
a period of ten years (before 2016, it was for 3 years from the last entry in each books)
Requisites of Taxable Income:

Taxation is an act of levying a tax or the process by which government raises
revenue to defray expenses of government. Income Tax is imposed on income earned by
taxpayer
1. There must be a profit or gain
2. The gain or profit must be realized or received actually or constructively.
3. The gain or profit must not be excluded or exempted by law from income taxation.
Classification of Income as to Source:

1.Compenasation income
2. Income from Business
3. Other income- Income or profits earned or derived from sale of properties or personal
transactions of taxpayers such as royalty income, gain on sale of assets.
CLASSIFICATION OF TAXPAYERS:
1.Special Individual taxpayers- Are individual whose income from Philippines are taxed at
preferential or single rate, hence are no longer required to file ITR.
a. Special Aliens
b. Nonresident alien not engaged in business in the Phil (NRANEBP)- means
foreigners who are resident of foreign country and who are not authorized to engage
in business in the Philippines. Also refers to aliens who shall come to the Philippines
for definite purpose which in nature maybe accomplished promptly.
c. MIE (Minimum Wage Earner)- refers to worker in private or public sector receiving
compensation of not more than the statutory minimum wage in agricultural and non
agricultural sector where he is assigned.
64
2. Ordinary Individual taxpayer- Those individuals whose income are subject to income
tax and required to file Income tax return.
(a) A resident citizen - on his income from all sources; A Filipino individual with
residence in the Philippines. Persons Considered Citizen of the Philippines are
natural born citizen of the Philippines, naturalized citizen of the Phil and Citizen of the
Philippines at the time of adoption of the Philippine Constitution.
(b) A nonresident citizen - on his income derived from sources within the Philippines;
Example are OFW or OCW (Overseas Contract Worker). Who stayed outside the
Philippines for more than 183 days.
(c) A resident alien - on his income derived from sources within the Philippines; means
an individual whose residence is within the Philippines and who is not a citizen
thereof.. Also refers to a foreigner who come to the Philippines for definite purpose
which requires extended stay.
(d) A nonresident alien engaged in trade or business in the Philippines - on his income
derived from sources within the Philippines. An alien who is not resident of the
Philippines but authorized to engaged in trade / business therein. Taxable based on
its income less allowed deductions.
Non resident alien engaged in business are individual who is not citizen of Philippines
and is not resident thereof but has a business operating and established within the
Philippines AND;
A nonresident alien individual who shall come to the Philippines and stay therein for
an aggregate period of more than 180 days during the calendar year.
(e) A nonresident alien not engaged in trade or business in the Philippine- taxable at
Gross income (without allowed deductions)
Assessment:
1. Asta, a resident of Manila, the sole proprietor, of ABC Company engaged in selling
of goods in Manila. In October 2019, Asta sold goods to customers for total sales
of 1,000,000 (50% was on credit). The 50% on credit was collected only in
January 2020. On January 2020, Asta sold goods worth 500,000 for cash. The
cost of sales ratio is 60% and OPEX is 20% of sales.
What will be the taxable net income of Asta for Annual ITR that he must submitted
to BIR on April 2020?
2. Asta lives in Manila in 2003. He is a Japanese national and later on, became a
Filipino in 2005 under RA Xxxx. He acquired lands worth 1M in 2006. Another
land in Cebu worth 2M. In 2019, due to increase in value of lands, all of his lands
had a fair value of 10M. Asta did not file an Income Tax return in 2020 despite of
increase in value of his wealth / properties. BIR sued Asta for tax evasion and
demanding from him to pay 3M pesos for taxes and surcharges.
Asta hired a lawyer to defend him. If you are the lawyer of Asta, what will you do?
Explain
65
MODULE 3: INDIVIDUAL INCOME TAXATION
OVERVIEW:
Income tax is a type of tax that governments impose on income generated by

businesses and individuals within their jurisdiction. By law, taxpayers must file an income
tax return annually to determine their tax obligations. Income taxes are a source of
revenue for governments. They are used to fund public services, pay government
obligations, and provide goods for citizens.
The Philippines follows a pay-as-you-file system for income tax, so the quarterly
and annual income tax payments would fall due on the same filing deadlines. Under this
module, we will determine the income tax due / payable of different classes of individual
taxpayer. With the enactment of TRAIN law or RA 10963 on January 1, 2018, there are
amendments in the computation of income tax due of individuals.
MODULE OBJECTIVES:
1. Know the due dates filing income tax return as per NIRC, as amended
2. Be able to identify the different classification of Income and the applicable tax rates.
3. Identify the different classification of taxpayer and their tax situs.
4. Be able to know how to compute for the taxable net income of an individual taxpayer
5. Compute the income tax due for taxable estate and trust
Course Materials:
Taxable Income means the pertinent items of gross income specified in tax
Code less allowed deductions as authorized by law or special laws.
The basic income tax shall be computed based on the basic income tax rates of 0% to
35% as follows: NIRC Formula of Individual ITR:
Gross Income 750,000
Less; Allowed Deductions 295,000
Taxable Net Income 455,000
Income tax Due (based on Graduated tax rate table) 43,750*

Less: Income tax Credit (given) 26,000
Income Tax payable 17,750
* Please see the table below, taxable net income is 455,000 which is in the 3rd layer
(400,000 to 800,000). Formula: 455,000 less 400,000= 55,000 X 25%= 13,750; Then add
30,000. So, income tax due is 13,750 plus 30,000 or 43,750.
Classification of Income of Individual:
1. Income subject to Graduated tax rate table or to regular / Personal Income Tax (Basic
Income Tax). Examples are compensation income and business income
66
2. Income subject to Final Income Tax.
a) Final Income Tax on Capital Assets (Capital Gain Tax). Gain on sale of shares
and Sale of real properties held as capital assets
b) Final Income tax on Passive Income. Examples are interest income from banks
and royalty income.
3. Income exempted / excluded from Income Tax. Example is 13th month pay (up to
90,000 limit)
Income Tax Rates (for Income Subject to Basic Income Tax)

I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession
A. For Purely Compensation income earner: Graduated Income Tax Rates under
Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963
Effective January 1, 2018 to December 31, 2022:
Taxable Net Taxable
Income Over Net Income NOT
Over
- P250,000 0%
P250,000 P400,000 20% of the excess over P250,000
P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over
P2,000,000
P8,000,000 P2,410,000 + 35% of the excess over
P8,000,000
Effective January 1, 2023 onwards

Taxable Net Taxable
Income Over Net Income NOT
Over
- P250,000 0%
P250,000 P400,000 15% of the excess over P250,000
P400,000 P800,000 P22,500 + 20% of the excess over P400,000
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000
P2,000,000 P8,000,000 P402,500 + 30% of the excess over
P2,000,000
P8,000,000 P2,202,500 + 35% of the excess over
P8,000,000
B. For Purely Self-Employed Individuals and/or Professionals Whose Gross

Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT
Threshold of P3,000,000, the tax shall be, at the taxpayer’s option:
67
1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of
P250,000 in Lieu of the Graduated Income Tax Rates and the Percentage
Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
C. For Individuals Earning Both Compensation Income and Income from Business
and/or Practice of Profession (Mixed Income Earner / MIE), their income taxes
shall be:
1. For Income from Compensation: Based on Graduated Income Tax Rates;

and
2. For Income from Business and/or Practice of Profession:

a. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of
P3,000,000, the Individual Taxpayer May Opt to Avail:
i. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income
in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
ii. Income Tax Based on Graduated Income Tax Rates
b. If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000

i. Income Tax Based on Graduated Income Tax Rates
II. For Non-Resident Aliens Engaged in Trade or Business

A. For taxable net income from business / trade, the taxable income is subject to
graduated tax rate same as the resident / citizen taxpayer.
III. For Non-resident Aliens Not Engaged in Trade or Business
1. Gross amount of income derived from all sources within the 25%
Philippines
2. Capital gains from the exchange or other disposition of real 6%
property located in the Philippines
3. Net Capital gains from the sale of shares of stock not traded in the
Stock Exchange
- Not Over P100,000 5%
- Any amount in excess of P100,000 10%
IV. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters
and Regional Operating Headquarters (ROH) of Multinational Companies, Offshore
Banking Units (OBUs), Petroleum Service Contractor and Subcontractor (Special Aliens)
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On the gross income consisting of salaries, wages, annuities, Graduated
compensation, remuneration and other emoluments, such as Income Tax
honoraria and emoluments derived from the Philippines Rates
V. For Minimum Wage Earner (MWE)- minimum wage earners as defined in Section
22(HH) of this Code shall be exempt from the payment of income tax on their taxable
income: Provided, further, That the holiday pay, pay received by such minimum wage
earners shall likewise be exempt from income tax.
Income items (Statutory minimum Wage Items) of MWE that are exempt from
income tax:
1. Basic pay / Daily minimum wage
2. Holiday pay
3. Hazard pay
4. Overtime pay
5. Night shift differential
However, MWE shall be subject to basic income tax rate of 0% to 35% on ‘other
taxable income” such income from business and other profits not included in the
exemptions.
Section 79 of Tax Code provides: Requirement of Withholding. - Every employer

making payment of wages shall deduct and withhold upon such wages a tax determined
in accordance with the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner: Provided, however, That no withholding of a
tax shall be required where the total compensation income of an individual does not
exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month,
whichever is higher.
SUMMARIZED RULES ON INCOME TAXATION (After TRAIN LAW)
Classes of Individuals Tax base Tax Source Tax rate

1. Resident Citizen Taxable Net Income Within the Graduated tax
(RC) Philippines and rate 0% to 35%
Abroad
2. Resident Alien (RA) Taxable Net Income Within the Graduated tax
Philippines only rate 0% to 35%
3. Nonresident Citizen Taxable Net Income Within the Graduated tax
(NRC) Philippines only rate 0% to 35%
4.Nonresident Alien Taxable Net Income Within the Graduated tax
engaged in Business Philippines only rate 0% to 35%
(NRAEB)
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5. Nonresident Alien Taxable Gross Within the 25% rate
Not engaged in Income Philippines only
Business (NRENEB)
6. Special Alien* Gross Within the Graduated tax
Compensation Philippines only rate 0% to 35%
income
*Under RA 10963 (TRAIN Law), pertaining to “Special Alien”:
Subsections C, D and E pertains to preferential tax rate of Special Aliens which is

15% of their gross income. However, as provided by RA 10963 under paragraph (F) as
stated below:
"(F) The preferential tax treatment provided in Subsections (C), (D), and (E) of this
Section shall not be applicable to regional headquarters (RHQs), regional operating
headquarters (ROHQs), offshore banking units (OBUs) or petroleum service contractors
and subcontractors registering with the Securities and Exchange Commission (SEC) after
January 1, 2018: Provided, however, That existing RHQs/ROHQs, OBUs or petroleum
service contractors and subcontractors presently availing of preferential tax rates for
qualified employees shall continue to be entitled to avail of the preferential tax rate for
present and future qualified employees."
OTHER INFORMATION on Different Clauses of Taxpayers under the Tax Code:
Section 24 provides that: For married individuals, the husband and wife, subject to
the provision of Section 51 (D) hereof, shall compute separately their individual income
tax based on their respective total taxable income: Provided, That if any income cannot
be definitely attributed to or identified as income exclusively earned or realized by either
of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
"Provided, That minimum wage earners as defined in Section 22(HH) of this Code
shall be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, pay received by such minimum wage earners shall likewise be
exempt from income tax.
Illustration 1:
Asta has the following taxable income in 2019:
Income Within the Philippines Abroad- USA

Gross income- business 500,000 800,000
Allowed Deductions 200,000 100,000
Interest income from banks 10,000
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Compute the Basic Income tax due of Asta based on different scenarios under the
Graduated Tax rate:
Resident Citizen Non-resident Non-resident
Citizen / alien engaged in
Resident Alien Business/Trade
Gross Income- Phil 500,000 500,000 500,000
Gross Income-Abroad 800,000 0 0
Less:
Allowed Deductions-Phil 200,000 200,000 200,000
Allowed Deductions-Abroad 100,000 0 0
Taxable Net Income 1,000,000 300,000 300,000
Income Tax Due** 190,000 10,000 10,000

Note: The interest income from banks is subject to Final Tax; thus excluded from the
computation of Basic Income Tax. Please see the next module for details.
• Resident Citizen are taxable for income earned within the Phil and Abroad.
** For resident citizen, using the graduated tax rate table, the formula is: (1,000,000-
800,000) x 30% PLUS 130,000 = 190,000; For resident Alien or NRC or NRAEBT, the
formula is: (300,000-250,000) X 20% = 10,000.
Illustration 2:
Yuno is an Alien Individual Employed by Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Companies in 2019. He received the following:
Salaries of P 900,000 and honoraria and allowances of P 300,000. Assuming that the
Corporation where does not avail the preferential tax rate. What is the income tax due of
Yuno?
Solution: Using the graduated tax rate table, the income tax due is :
Salaries 900,000
Honoraria 300,000
Total Gross Income 1,200,000
Income tax due using the Graduated tax rate 250,000

Table
Assuming that the Company of Yuno (Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies) avails the preferential rate of 15%,
then, the income tax due of Yuno will be:
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Salaries 900,000
Honoraria 300,000
Total Gross Income 1,200,000
Income tax due using Preferential tax rate of 180,000

15%
Illustration 3:
Asta, a nonresident alien not engaged in business (NRANEB), earned the following:
Philippines Abroad-Canada
Allowances 50,000 40,000
Dividend income 30,000 90,000
Other profits 10,000 50,000
What is the income tax due of Asta?
Solution:
Philippines
Allowances 50,000
Dividend income 30,000
Other profits 10,000
Total 90,000
Multiply by tax rate 25%
Income tax Due 22,500
Since Asta is NRANEB, he is taxable at gross income at a tax rate of 25% fr all income
earned within the Philippines only.
Illustration 4:
Asta, a minimum wage earner, employed in ABC Corp, earned the following:
Philippines
Allowances 50,000
Overtime pay 30,000
Hazard pay 10,000
What is the income tax due of Asta?
Solution:
Philippines
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Allowances 50,000
Dividend income 30,000
Other profits 10,000
Total 90,000
Income tax Due P0
No income tax because Asta is a minimum wage earner
Illustration 5:
The following data are available for Mr Asta, self-employed individual, married, with 3
dependent children for CY 2019:
Sales 2,500,000
Other non-operating income 200,000
Cost of Sales / Expenses 1,300,000
Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax)
under section 116.
A. Compute the normal tax (income tax due) assuming that Asta opted/selected to be
taxed at graduated tax rate:
Sales 2,500,000
Taxable Net Income 1,400,000
Income tax Due at Graduated tax rate 310,000

(1,400,000 minus 800,000) X 30% PLUS 130,000
B. Assuming that, Asta selected/opted to be taxed at 8% optional income tax rate,

compute the tax due of Asta.
Sales 2,500,000
Total Gross Sales and other income 2,700,000
Less: 250,000 250,000
Net: 2,450,000
Tax rate 8%
Income tax and business tax due: 196,000
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Note: To avail the 8% Optional tax rate, the taxpayer must meet the following
requirements:
a. Sales and other non-operating income do not exceed P 3,000,000
b. The taxpayer is subject to OPT under Section 116
c. Has business income or engaged in business / trade
Illustration 6:
The following data are available for Mr Asta, mixed income earner, married, with 3
dependent children for CY 2019:
Sales 2,500,000
Compensation income 520,000
Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax)
under section 116.
A. Compute the normal tax (income tax due) assuming that Asta opted/selected to be
taxed at graduated tax rate:
Sales 2,500,000
Add; Compensation Income 520,000
Income tax Due at Graduated tax rate 466,000

(1,920,000 minus 800,000) X 30% PLUS 130,000
B. Assuming that, Asta selected/opted to be taxed at 8% optional income tax rate,

compute the tax due of Asta.
Sales 2,500,000
Total Gross Sales and Other income 2,700,000
Tax rate 8%
Income tax from business income 216,000
Compensation Income 520,000
74
Income tax Due from Compensation income 60,000
(520,000 minus 400,000) X 25% PLUS 30,000
Tax from Business income 216,000
Tax from Compensation Income 60,000
Income tax due of Asta under 8% Optional tax rate 276,000
Passive Income subject to Final Tax (FT)
I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession
A. On Certain Passive Income of Individual Citizens and Resident Aliens
Passive Income Tax rate

1. Interest from currency deposits, trust funds and deposit 20%
substitutes
2. Royalties (on books as well as literary & musical 10%
compositions)
- In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax Rates
- Over P10,000 20%
4. Winnings including PCSO winnings (except from PCSO 20%
and Lotto amounting to P10,000 or less )
- From PCSO and Lotto amounting to P10,000 or less exempt
5. Interest Income from a Depository Bank under the 15%
Expanded Foreign Currency Deposit System
6. Cash and/or Property Dividends received by an 10%
individual from a domestic corporation/ joint stock company/
insurance or mutual fund companies/ Regional Operating
Headquarter of multinational companies
7. Share of an individual in the distributable net income 10%
after tax of a partnership (except GPPs)/ association, a joint
account, a joint venture or consortium taxable as corporation of
which he is a member or co-venture
8. Interest Income from long-term deposit or investment in Exempt
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 Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be
imposed on the entire income from the proceeds of the long-term
deposit based on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
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- Less than three (3) years 20%
II. For Non-Resident Aliens Engaged in Trade or Business
Certain passive Income Tax rates

1. Interest from currency deposits, trust funds and deposit 20%
substitutes
2. Royalties (on books as well as literary & musical 10%
compositions)
- In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
- Over P10,000 20%
4. Winnings (except from PCSO and Lotto) 20%
- From PCSO and Lotto exempt
5. Cash and/or Property Dividends received from a domestic 20%
corporation/ joint stock company/ insurance/ mutual fund companies/
Regional Operating Headquarter of multinational companies
6. Share of a non-resident alien individual in the distributable 20%
net income after tax of a partnership (except GPPs) of which he is a
partner or from an association, a joint account, a joint venture or
consortium taxable as corporation of which he is a member or co-
venture
7. Interest Income from long-term deposit or investment in the Exempt
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 Bangko Sentral ng
Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed
on the entire income from the proceeds of the long-term deposit based
on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%
III. For Non-resident Aliens Not Engaged in Trade or Business
1. Gross amount of income derived from all sources within the 25%
Philippines
Stock Exchange
- Not Over P100,000 5%
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Illustration:
Asta earned the following income for year 2019:

• Interest income from banks 20,000
• Royalty income from books of P 30,000
• Interest income from a depository bank under expanded Foreign currency deposit
system in Phil of P 10,000 (under EFCDS)
• Dividend income from Domestic Corporation of 40,000
• Compensation Income of P 900,000
Compute the Final Income tax due from Asta:
Case 1: Asta is a resident Citizen
Interest income Royalty- books Interest Divided Income

EFCDS
Income 20,000 30,000 10,000 40,000
Tax Rate 20% 10% 15% 10%
Final Tax 4,000 3,000 1,500 4,000
*The compensation income is subject to basic Income tax at Graduated Tax rate; not
subject to Final tax.
Total Final Income Tax due for Asta is 12,500
Case 2: Asta is a Nonresident alien engaged in business
Interest income Royalty- books Interest EFCDS Divided

Income
Income 20,000 30,000 10,000 40,000
Tax Rate 20% 10% 0% / Exempted 20%
Final Tax 4,000 3,000 0 8,000
Case 3: Asta is a Non-resident Citizen
Interest income Royalty- books Interest EFCDS Divided

Income
Income 20,000 30,000 10,000 40,000
Tax Rate 20% 10% 0% /exempted 10%
Final Tax 4,000 3,000 0 4,000
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Income Subject to Final Capital Gain Tax (CGT)
A. On Certain Passive Income of Individual Citizens and Resident Aliens
1. Capital gains from sale, exchange or other disposition 6%

of real property located in the Philippines, classified as capital
asset. (6% of Fair market value or Sales price whichever is
higher)
2. Net Capital gains from sale of shares of stock not traded 15%
in the stock exchange (15% of net capital gain)
B. For Non-Resident Aliens Engaged in Trade or Business
1. Capital from the sale, exchange or other disposition of real 6%

property located in the Philippines classified as capital asset
2. Net Capital gains from sale of shares of stock not traded in
the Stock Exchange*
- Not over P100,000 5%
B. For Non-resident Aliens Not Engaged in Trade or Business

Stock Exchange
- Not Over P100,000 5%
Rules for the determination of amount and recognition of gain or loss in the sale, barter,
or exchange of shares of stock not traded through the Local Stock exchange.
A. “Determination of Selling Price. — In determining the selling price, the following rules
shall apply:
a.1) In the case of cash sale, the selling price shall be the total consideration per deed of
sale.
78
a.2) If the total consideration of the sale or disposition consists partly in money and partly
in kind, the selling price shall be sum of money and the fair market value of the property
received.
a.3) In the case of exchange, the selling price shall be the fair market value of the property
received.” [Sec. 7 (c) (c.1) RR No. 6-2008]
a.4) “Where property, other than real property referred to in Section 24(D), is transferred
for less than an adequate and full consideration in money or money's worth, then the
amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year: Provided, however, that a sale, exchange, or other
transfer of property made in the ordinary course of business (a transaction which is a bona
fide, at arm’s length, and free from any donative intent) will be considered as made for an
adequate and full consideration in money’s worth.” (Sec. 16, RR No. 12-2018)
B.) Definition of "fair market value" of the Shares of Stock.

b.1) “In the case of listed shares which were sold, transferred or exchanged outside of the
trading system and/or facilities of the Local Stock Exchange, the closing price on the day
when the shares are sold, transferred, or exchanged. When no sale is made in the Local
Stock Exchange on the day when the Listed shares are sold, transferred, or exchanged,
the closing price on the day nearest to the date of sale, transfer or exchange of the shares
shall be the fair market value.” [Sec. 7 (c.2.1) RR No. 6-2008]
b.2) “In the case of shares of stock not listed and traded in the local stock exchanges, the
value of the shares of stock at the time of sale shall be the fair market value. In determining
the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets
and liabilities are adjusted to fair market values. The net of adjusted asset minus the
liability values is the indicated value of the equity.
The appraised value of real property at the time of sale shall be the higher of –
1. The fair market value as determined by the Commissioner of Internal Revenue, or
2. The fair market value as shown in the schedule of valued fixed by the Provincial and
City Assessors, or
3. The fair market value as determined by Independent Appraiser.” (Sec. 2, RR No. 6-
2013)
b.3) In the case of a unit of participation in any association, recreation or amusement club
(such as golf, polo, or similar clubs), the fair market value thereof shall be its selling price
or the bid price nearest published in any newspaper or publication of general circulation,
whichever is higher. [Sec. 7 (c.2.3) RR No. 6-2008]
C.) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. — The gain
from the sale or other disposition of Shares of Stock. — The gain from the sale or other
disposition of shares of stock shall be the excess of the amount realized therefrom over
the basis or adjusted basis for determining gain, and the loss shall be the excess of the
basis or adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of money received plus the
fair market value of the property (other than money) received, if any. [Sec. 7 (c.3) RR No.
6-2008]
79
Applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue Code
of 1997, as amended by Republic Act No. 10963/ TRAIN Law
A. For Real Properties – Six percent (6%)

B. For Shares of Stocks Not Traded in the Stock Exchange:
Effective January 1, 2018 to present (Republic Act No. 10963 or TRAIN Law)
B.1 For Individual - 15 %
B.2. For Corporation:
B.1 Domestic - 15 %
B.2 Foreign:
B.2.1 Not Over P100,000 - 5.0 %
B.2.2 On any amount in excess of P100,000 - 10 %
Effective January 1, 1998 to December 31, 2017 (Republic Act No. 8424/NIRC)
• Not over P 100,000 – Five percent (5%)
• On any amount in excess of P 100,000 – Ten percent (10%)
Exempt from the payment of Final Capital Gains Tax:
1.Dealer in securities, regularly engaged in the buying and selling of securities

2.An entity exempts from the payment of income tax under existing investment
incentives and other special laws
3.An individual or non-individual exchanging real property solely for shares of
stocks resulting in corporate control
4.A government entity or government-owned or controlled corporation selling
real property
5.If the disposition of the real property is gratuitous in nature
6.Where the disposition is pursuant to the CARP law
Conditionally exempt from the payment of Final Capital Gains Tax:
1. Natural persons who dispose their principal residence, provided that the following
criteria are met:
• The proceeds of the sale of the principal residence have been fully utilized in
acquiring or constructing new principal residence within eighteen (18) calendar
months from the date of sale or disposition;
• The historical cost or adjusted basis of the real property sold or disposed will be
carried over to the new principal residence built or acquired;
• The Commissioner of Internal Revenue has been duly notified, through a
prescribed return, within thirty (30) days from the date of sale or disposition of the
person’s intention to avail of the tax exemption;
• Exemption was availed only once every ten (10) years;
80
• In case there is no full utilization of the proceeds of sale or disposition, the portion
of the gain presumed to have been realized from the sale or disposition will be
subject to Capital Gains Tax.
• In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold
from the seller and shall deduct from the agreed selling price/consideration the 6%
capital gains tax which shall be deposited in cash or manager’s check in interest-
bearing account with an Authorized Agent Bank (AAB) under an Escrow
Agreement between the concerned Revenue District Officer, the Seller and the
Transferee, and the AAB to the effect that the amount so deposited, including its
interest yield, shall only be released to such Transferor upon certification by the
said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized
in the acquisition or construction of the Seller/Transferor’s new principal residence
within eighteen (18) calendar months from date of the said sale or disposition. The
date of sale or disposition of a property refers to the date of notarization of the
document evidencing the transfer of said property. In general, the term “Escrow”
means a scroll, writing or deed, delivered by the grantor, promisor or obligor into
the hands of a third person, to be held by the latter until the happening of a
contingency or performance of a condition, and then by him delivered to the
grantee, promise or obligee.
OTHER TOPICS RELATED TO CGT:

What is meant by capital asset?
Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec. 39(A)(1) of the Code. [Sec. 2(a) of
RR No. 7-2003]
What is meant by ordinary asset?
Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec. 34(F)
of the Code; or
4. Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as ordinary
assets. [Sec. 2(b) of RR No. 7-2003]
What is meant by "Stock classified as Capital Asset"?

“Stock Classified as “Capital Asset” means all stocks and securities held by taxpayers
other than dealers in securities. [Sec. 2(a) of RR No. 6-2008]
What is meant by "Dealer in Securities"?
81
“Dealer in Securities” refers to a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers; that is one,
who as merchant buys securities and re-sells them to customers with a view to the gains
and profits that may be derived therefrom. "Dealer in securities" means any person who
buys and sells securities for his/her own account in the ordinary course of business (Sec.
3.4, SRC). [Sec. 2(b) of RR No. 6-2008]
What is meant by real property?

Real property shall have the same meaning attributed to that term under Article 415 of
Republic Act No. 386, otherwise known as the Civil Code of the Philippines. [Sec. 2(c) of
RR No. 7-2003]
6.) What does a real estate dealer refer to?
A real estate dealer shall refer to any person engaged in the business of buying and selling
or exchanging real properties on his own account as a principal and holding himself out
as a full or part-time dealer in real estate. [Sec. 2(d) of RR No. 7-2003]
NOTE: To subject 6% Capital Gain Tax, the asset sold must be:
a. A capital asset
b. Located in the Philippines
c. A real property
d. Assets not held by dealer or seller of properties / engage din business / trade
Illustration:
A, RC, sold his house and lot, located in manila, held as capital asset. The sales price is
750,000 and cost is 500,000. The FMV is 900,000.
Case 1: if not a principal residence the sale is subject to CGT; 900,000 x 6% = 54,000 final
income tax or capital gain tax.
Case 2: If a principal residence but violated any of the requisites for exemptions, sale is
subject to CGT; 900,000 x 6% = 54,000 final income tax or capital gain tax.
Case 3; If a principal residence and no violations any of the requisites for exemptions, sale
is NOT subject to CGT. CGt is zero.
Case 4: If a principal residence and no violations any of the requisites for exemptions
EXCEPT that only 80% of the proceeds was used to purchase a new home, the sale is
PARTIALLY subject to CGT. CGT is 900,000 x 6% x 20%= 10,800. (Note: One of the
requisite is, ALL or 100% of the proceeds must be used to purchase a new home)
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https://www.bir.gov.ph/index.php/tax-information/income-tax.html
Assessment / Activity:
Problem Solving (2 points each)
1.A, non-resident alien not engaged in business in the Philippines, has the
following income within and without the Philippines for 2018:
Within the Abroad

Phil
Salary and allowances 100,000 150,000
Royalty income 50,000 40,000
What is the income tax due / payable of A?
2-3. A, resident alien, has the following income within and without the Philippines
for 2018:
Within Abroad
the Phil
Salary and allowances 300,000 150,000
Royalty income-others 50,000 40,000
Business income-net of 200,000 300,000
expenses
Interest income-bank 30,000 40,000
deposits
What is the total final income tax due of A?
3. What is the basic income tax due of A?
4. A, non-resident citizen, has the following income within and without the
Philippines for 2018:
Within Abroad
the Phil
Interest income from depository 70,000
bank under expanded foreign currency
deposit system in Philippines
Business income-net of expenses 200,000 300,000
Interest income-bank deposits 30,000 40,000
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5. A, non-resident alien engaged in business in the Philippines, has the following
income within and without the Philippines for 2018:
Within Abroad
the Phil
Interest income from depository 70,000
bank under expanded foreign currency
deposit system in Philippines
Business income-net of expenses 250,000 300,000
Interest income-bank deposits 30,000 40,000
Prizes / winnings 9,000 20,000
6. Based on number 5, what is the basic income tax due of A?
7. A, resident alien engaged in business in the Phil, sold his house and lot (principal
residence) costing P 1,000,000 to B for proceeds of P 1.8M. The fair market value of the
property is 2M. He filed the final income tax return to BIR after 10 days. Within 12 months,
A purchased a new house and lot for P 2.2M. What is the final capital gain tax?
8. Z, minimum wage earner, received the following for 2018: basic salary of P
140,000, overtime pay of P 20,000, night shift differential of P 10,000 and 13th month pay
of 100,000. What is the taxable net income of Z?
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MODULE 4: INCOME TAX CREDITS and WITHHODLING TAXES
OVERVIEW:
Income tax due is determined based on taxable net income of individual. The tax
computed is reduced by income tax credits to arrive at Income tax payable to BIR. The
filing and payment of income tax payable by the Individual to BIR is made in a quarterly
basis and an Annual ITR filed on or before April 15 of the following year. The quarterly ITR
is prepared in a cumulative basis.
On the other hand, Fringe Benefits already subjected to FBT are no longer
included in the Quarterly and Annual ITR of individual. Fringe benefits’ are defined as any
goods, services, or other benefits furnished or granted in cash or in kind by an employer
to an individual employee, except rank and file employees, Fringe benefits furnished to
managerial and supervisory-level employees by the employer are subject to Fringe Benefit
Tax (FBT). Benefits subjected to FBT are no longer included in the employees’ taxable
income reported in the Quarterly and Annual ITR.
MODULE OBJECTIVES:

1. Identify the sources of income tax credits of Individual
2. Compute the income tax still due of individual taxpayer
3. Determine the rules on application of income tax credits
4. Prepare a quarterly ITR and compute the related income tax due per quarter
5. Identify the benefits subject to FBT
6. Enumerate the de minimis benefits
7. Rule son fringe benefits and De minimis benefits
8. Compute taxable income of Individual
9. Compute the Fringe benefit tax of different classes of Taxpayer
Course Materials:
INCOME TAX CREDIT:
Income tax credits are directly deducted from the income tax due to arrive at
income tax payable. The Income Tax return of individual is filed on a cumulative quarterly
basis and a Annual Income tax return (cumulative).
The income tax credits are as follows:
Tax Credits 1st Quarter 2nd Quarter 3rd Quarter Annual ITR
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1.Withlding taxes on Not deducted/ Not Not Yes.Deducted
wages (Creditable) NA deducted/ deducted/
NA NA
2.Witholding tax at Yes yes yes yes
Source
3. Prior Quarter None/NA yes yes yes
payments
4.Income tax paid in yes yes yes Yes
original return
5. Excess tax Credit in yes yes yes Yes
Prior year
6.Income Tax paid Yes if RC Yes if RC Yes if RC Yes if RC
abroad*
*Income tax paid abroad is applicable only to Resident Citizen because this taxpayer is
subject to income tax for income earned within the Phil and Abroad. However, this tax
credit is subject to limit.
NOTE: The compensation income is reported / included in the Annual ITR only. It is not
included in the Quarterly ITR of Individual.
Two types of Withholding Taxes:
1. Final Withholding tax or Non Creditable Withholding Taxes- refers to icome tax
withheld on specific or certain income type subject to final taxes. Example, passive
income subjected to Final Income Tax.
FINAL WITHHOLDING TAX

The amount of income tax withheld by the withholding agent is constituted as a
full and final payment of income tax due from the payee of the said income.
The liability for payment of tax rests primarily on the payor as a withholding
agent. Failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from payor/withholding agent.
The payee is not required to file an income tax return for the particular income.
2. Creditable Withholding taxes- income tax withheld on income payments which per law
is allowed to be a deduction against the basic income tax due.
• Withholding tax on wages- is the tax withheld from income payments to

individuals arising from an employer-employee relationship.
• Expanded Withholding Tax/ Withholding tax at Source / Expanded – is a kind
of withholding tax which is prescribed on certain income payments and is
creditable against the income tax due of the payee for the taxable quarter/year
in which the particular income was earned.
WITHHOLDING TAX TABLE on WAGES
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REVISED WITHHOLDING TAX TABLE
Effective January 1, 2018 to December 31, 2022
DAILY 1 2 3 4 5 6
P6
Compe P6 P1,0 P2,1 P5,4 P21,9
85 and
nsation Range 85 -P1,095 96 – P2,191 92 – P5,478 79 – P21,917 18 and above
below
Prescri
0.0 P82. P356 P1,3 P6,60
bed 0.0
0 +20% 19 +25% .16 +30% 42.47 +32% 2.74 +35%
Withholding 0
over P685 over P1,096 over P2,192 over P5,479 over P21,918
Tax
WEEK
1 2 3 4 5 6
LY
P4, P4, P7,6 P15, P38,
Compe P153,
808 and 808 – 92 – 385 – 462 –
nsation Range 846 and above
below P7,691 P15,384 P38,461 P153,845
Prescri 0.0
P57 P2,5 P9,4 P46,3
bed 0.0 0 +20%
6.92 +25% 00.00 +30% 23.08 +32% 46.15 +35%
Withholding 0 over
over p7,692 over p15,385 over P38,462 over P153,846
Tax P4,808
SEMI-
1 2 3 4 5 6
MONTHLY
P1 P1 P16, P33, P83,
Compe P333,
0,417 and 0,417 – 667 – 333 – 333 –
below P16,666 P33,332 P83,332 P333,332
Prescri 0.0 P1,2
P5,4 P20, P100,
bed 0.0 0 +20% 50.00 +25%
16.67 +30% 416.67 +32% 416.67 +35%
Withholding 0 over over
over P33,333 over P83,333 over P333,333
Tax P10,417 P16,667
MONT
1 2 3 4 5 6
HLY
P2 P2 P33, P66, P166
Compe P666,
0,833 and 0,833 – 333 – 667 – ,667 –
below P33,332 P66,666 P166,666 P666,666
Prescri 0.0 P40, P200,
P2,5 P10,
bed 0.0 0 +20% 833.33 +32% 833.33 +35%
00.00 +25% 833.33 +30%
Withholding 0 over over over
over 33,333 over P66,667
Tax P20,833 P166,667 P666,667
EXPANDED WITHHOLDING TAX
The Withholding of Creditable Tax at Source or simply called Expanded

Withholding Tax is a tax imposed and prescribed on the items of income payable to natural
or juridical persons, residing in the Philippines, by a payor-corporation/person which shall
be credited against the income tax liability of the taxpayer for the taxable year.
Example of Income payments and related w/tax rates:

W/tax rate for 1% Rental payments 5%
Goods
W/tax for services 2%
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INCOME TAX RETURN:
BIR form to be used:

Employee Individual Only BIR form 1700
Self Employed Individual only BIR form 1701Q and 1701
Mixed Income Earner BIR form 1701Q and 1701
Income tax return of Self Employed Individual and Mixed Income Earner is filed on
a quarterly basis and; filed a Annual ITR on a cumulative basis.
Illustration:
Asta, self employed individual, has the following data for CY 2019:
1st Q 2nd Q 3rd Q 4th Q

Gross Income 800,000 700,000 900,000 1,200,000
per Quarter
Deductions per 500,000 400,000 650,000 750,000
Quarter
W/tax at source 2,000 3,000 0 1,000
per quarter
Compute the income tax due per quarter of Asta under the Graduated tax rate:
Gross Income- 800,000 1,500,000 2,400,000 3,600,000
cumulative
Deductions per 500,000 900,000 1,550,000 2,300,000
Quarter
Taxable Net 300,000 600,000 850,000 1,300,000
income
Income Tax 10,000 80,000 145,000 280,000
Due
Less: Tax
Credit
Income Tax 0 8,000 75,000 140,000
paid in previous
quarter
W/tax at source 2,000 5,000 5,000 6,000
per quarter
Incme tax 8,000 67,000 65,000 134,000
payable/paid
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Module 5: Fringe Benefits Tax (FBT)
Fringe benefits furnished to managerial and supervisory-level employees by the

employer are subject to a final FBT of 35%* (for RC, RA. NRC) on the grossed-up
monetary value of the benefits.
Managerial employees are those who may mandate and execute management
policies to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline
employees. Supervisory employees are those who effectively recommend such
managerial actions if the exercise of authority on behalf of the employer is not merely
routine or clerical in nature but requires the use of independent judgement.
The FBT is a final tax payable on a calendar quarterly basis by the employer and
deductible as part of fringe benefit expense. Benefits subjected to FBT are no longer
included in the employees’ taxable inc
FRINGE BENEFITS GRANTED TO EMPLOYEES (EXCEPT RANK AND FILE
EMPLOYEES)
Fringe Benefit means any good, service or other benefits furnished or granted in cash or
in kind by an employer to an individual employee (except rank and file) such as but not
limited to the following:
a. Housing
b. Expense account
c. Vehicle of any kind
d. Household personnel (maid, driver and others)
e. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted
f. membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to employee or his dependents; and
j. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
Monetary value versus Actual value of Benefits
Actual value of benefits pertains to benefits received by the employee. The

monetary value of benefits is the tax base to compute for the FBT. Pls see illustration
below for the computation. Sometimes, the actual value of benefits is not equal to
monetary value.
The monetary value of benefits in the form of housing and motor vehicles used for
both personal and business purposes is equal to 50% of the lease payment or the
depreciation value of the property, whichever is applicable. However, if the housing unit is
situated in or adjacent (within 50 metres) to the business premises, the benefit is not
taxable. Likewise, a motor vehicle used normally for business purposes is not taxable.
In general, if a fringe benefit is granted in money or directly paid for by the
employer, the value of the fringe benefit is the amount granted or paid for. If furnished in
property and ownership thereof is transferred to the employee, the value of the fringe
benefit is the fair market value of the property as determined by the Commissioner of
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Internal Revenue, pursuant to the Commissioner’s power to prescribe real property
values. If the fringe benefit is granted or furnished by the employer in the form of a property
but ownership is not transferred to the employee, the value of the fringe benefit is equal
to the depreciation value of the property.
Fringe benefits (as listed above; those subject to FBT) given to employees
other than rank and file employees are subject to Fringe Benefit Tax (FBT). Fringe
benefits subjected to FBT are no longer subject to Basic Income tax, thus, not
included in the taxable net income of Individual. On the other hand, fringe benefits
given to rank and file employees are NOT subject to FBT but shall be included in
their gross income subject to basic income tax.
The FBT rate and computation of FBT is as follows:
Illustration:
RC, NRC, NRA NOT engaged Special Alien
NRAEBP, RA in business
Monetary value of 160,000 150,000 250,000
Fringe benefits
Divided by grossed 65% 75% 85%
Up rates
Gross Up Monetary 246,154 200,000 294,118
value
FBT rates 35% 25% 15%
Fringe Benefit tax 86,154 50,000 44,118
The following fringe benefits are not taxable:
1. Fringe benefits required by the nature of or necessary to the trade, business, or

profession or for the convenience or advantage of the employer.
2. Benefits authorised by and exempted from tax under special laws.
3. Employer contributions for the benefit of the employee to retirement, insurance, and
hospitalisation benefit plans.
4. Benefits given to rank and file employees, whether or not granted under a collective
bargaining agreement. However, these are subject to WHT on compensation, unless
otherwise tax exempt.
5. De minimis (small value) benefits as defined and enumerated in the rules and
regulations.
DE MINIMIS BENEFITS NOT SUBJECT TO FRINGE BENFIT TAX AND WITHHOLDING
TAX
a. Monetized unused vacation leave credits to private employees not exceeding ten (10)
days during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
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c. Medical cash allowance to dependents of employees, not exceeding P1,500 per
employee per semester of P250 per month;
d. Rice subsidy of P2,000 or one sack of 50kg rice per month amounting to not more than
P2,000;
e. Uniform and clothing allowance not exceeding P6,000 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/executive check-up, maternity assistance, and routine
consultations, not exceeding P10,000.00 per annum;
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g. for length of service or safety achievement,
which in the form of a tangible personal property other than cash or gift certificate, with
an annual monetary value not exceeding P10,000 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the
basic minimum wage;
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA)
and productivity incentive schemes provided that the total annual monetary value
received from both CBA and productivity incentive schemes combined do not exceed
ten thousand pesos (Php 10,000.00)per employee per taxable year;
RULE on TAX TREATMENT ON ANY AMOUNT OF DE MINIMIS BENEFIT IN EXCESS

OFTHE RELATED / IMPOSED AMOUNT OF CAP OR CEILING, EARNED RECEIVED
BY AN EMPLOYEE:
• If received by rank and file employee, such excess amount of de minimis benefits
over the cap / ceiling shall be treated as part of “other benefits” also known as “13th
month and other incentive pay” where the first 90,000 or less is exempt from
income tax. However the excess amount of the “other benefits” over the 90,000
per year cap shall be subject o basic income tax of said rank and file employee.
• If received by managerial or supervisory employee, such excess amount of de
minimis benefits over the cap / ceiling shall be treated as part of “other benefits”
also known as “13th month and other incentive pay” where the first 90,000 or less
is exempt from income tax. However the excess amount of the “other benefits”
over the 90,000 per year cap shall be subject to FBT.
Illustration:
A, accounting staff, resident citizen, received the following benefits for year 2019:
Rice subsidy 50,000 Uniform allowance 20,000
th
13 month pay 50,000 Laundry allowance 10,000
Compute the income tax due of A.
Solution:
Actual per year Limit per year Excess
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Rice subsidy 50,000 2,000x 12= 24,000 26,000
Uniform allowance 20,000 6,000 per yr 14,000
Laundry allowance 10,000 300/mo x 12= 3,600/yr 6,400
Total Excess over Cap/ limt to become part of Other benefits 46,400
th
13 month pay 50,000
th
Total 13 month pa and other incentives 96,400
Non taxable / Exempted 90,000
Taxable benefits 6,400
Taxable Income 506,400

Income tax Due based on graduated tax rate 56,600
1. ABC Corp’s staff is processing an invoice and other related documents for
disbursements. The invoice pertains to CLOVER Corp for the goods/inventories
purchased by ABC. The invoice amount is 80,000.
How much should ABC withheld, as withholding tax agent, on payment to Clover Corp?
2. Z Corp provides the following benefits to its employees:

• Household personnel benefit of P 30,000 to B, Finance manager
• Local travel expenses paid by the company for A, Finance staff
• Rental payments of P 100,000 for the apartment rented/leased by the company for
C, Chief Financial Officer, as his usual place of residence.
What is the fringe benefit tax (All employees are resident citizen)?
3-5. A, resident citizen, engaged in business in the Philippines, has the following for 2018:
Gross Income 600,000 740,000 980,000 1,450,000
per Quarter
Deductions per 280,000 430,000 610,000 850,000
Quarter
W/tax at source 2,000 3,000 0 1,000
per quarter
Interest income 40,000 20,000 10,000 10,000
-bank
Compensation 200,000 200,000 200,000 200,000
income
W/tax on 5,000 6,000 6,000 8,000
compensation
What is the income tax due / payable of A per quarter?
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MODULE 6: GROSS INCOME AND ALLOWED DEUCTIONS
OVERVIEW:
Income taxes are computed based on taxable net income for resident / citizen and
Corporations. Taxable net income is derived deducting the allowed deductions from the
Gross income of the taxpayer. The are income items and deductions that are not allowed
by law to be part of gross income and deductions, respectively. On this module, we will
discuss in detail the inclusion and exclusion including limits of gross income items and
allowed deductions under the Tax Code.
MODULE OBJECTIVES:
1. Enumerate the income items that are included on taxable gross income
2. Enumerate the income items that are excluded on taxable gross income
3. Define gross income and taxable net income under the Tax Code
4. Compute the total gross income
5. Determine the provisions of Tax Code for reporting of gross income and capital losses.
6. Enumerate and understand the allowed deductions under the Tax code
7. Determine the deductions not allowed under the Tax Code
8. Compute the taxable net income under Itemized and Optional Standard deductions for
Individual and Corporations.
Course Materials:
Definitions:
Compensation income-remunerations earned by an employee from an employee-

employer relationship such as salaries and wages, allowances.
Gross income means all income derived from whatever source.
Net income- refers to amount remaining from the gross income after deducting allowed
deductions permitted by law.
Taxable income-refers to the income subject to tax, either gross income or taxable net
income.
Formula of Individual Income Tax Returns:
Gross income 1,250,000
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Less: Allowed Deductions 750,000
Taxable Net income 500,000
Basic Income tax due 55,000

Less: Income Tax credit 35,000
Income Tax still due / payable 20,000
Gross income includes, but is not limited to the following:
1. Compensation for services, in whatever form paid, including but not limited to fees,
salaries, wages, commissions and similar items
2. Gross income derived from the conduct of trade or business or the exercise of
profession
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of the general professional
partnerships
Some of the exclusions from gross income
Exclusions from Gross Income. - The following items shall not be included in gross income
and shall be exempt from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - 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.
(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise,
or descent: Provided, however, That income from such property, as well as gift, bequest,
devise or descent of income from any property, in cases of transfers of divided interest,
shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health
Insurance or under Workmen's 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.
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(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer: Provided, That the
retiring official or employee has been in the service of the same employer for at least ten
(10) years and is not less than fifty (50) years of age at the time of his retirement: Provided,
further, That the benefits granted under this subparagraph shall be availed of by an official
or employee only once. For purposes of this Subsection, the term 'reasonable private
benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by
an employer for the benefit of some or all of his officials or employees, wherein
contributions are made by such employer for the officials or employees, or both, for the
purpose of distributing to such officials and employees the earnings and principal of the
fund thus accumulated, and wherein its is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
because of death sickness or other physical disability or for any cause beyond the control
of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with
the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign governments, and (iii) international
or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from
any public utility or from the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
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(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes
in local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion under
this subparagraph Ninety thousand pesos (₱90,000)
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate
at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor
upon redemption of shares of stock in a mutual fund company as defined in Section 22
(BB) of this Code
Requisites of Taxable Income:
Taxation is an act of levying a tax or the process by which government raises

revenue to defray expenses of government. Income Tax is imposed on income earned by
taxpayer
4. There must be a profit or gain

5. The gain or profit must be realized or received actually or constructively.
6. The gain or profit must not be excluded or exempted by law from income taxation.
INCOME FROM SOURCE WITHIN THE PHILIPPINES:
SITUS of TAXATION
Interest income Criteria is residence of Debtor
Compensation income Criteria is place of service
Rental income Place of property
Royalty Place where it was use / has right
Sale of real property Place of property
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Sale of personal property Place of property
Dividend Income
From Domestic Corp Always within the Philippines
From resident Foreign If silent, 100% within the Philippines,
Corp
RULE ON GAINS AND LOSSES FROM SALE, BARTER OR EXCHANGE OF CAPITAL

ASSETS:
A. Sale of real property held as capital asset in the Philippines

The sale of real property held as capital asset located in the Philippines is subject
to Capital gain Tax of 6% of FMV or Gross selling price whichever is higher.
B. Sale of other property (other than Real property) held as capital asset
B.1. Sale of shares of stocks of Domestic Corporation sold in the Philippines

B.1.1. Sales of stocks thru Local Stock Exchange- Subject to OPT of 6/10
of 1% of the gross Selling price
B.1.2. Sale of stocks not thru local stock exchange- subject to Capital gain
tax of 15% of net capital gain
B.2 Sale of other property (other than Real property and stocks)-the Net capital
gain will be part of gross income and will be subject to basic Income tax
RULE ON TAXABILITY OF CAPITAL GAIN OR LOSS ON SALE OF OTHER CAPITAL

ASSETS (OTHER THAN REAL PRPERTY AND SHARES OF STOCKS OF DOMESTIC
CORPORATION)
Individual Corporation
Holding Period If the capital asset is held 100% recognized the gain
for less than or equal to 1 or loss regardless of
year= recognize 100% holding period
gain/loss (called Shor term
gain /loss)
If the capital asset is held

for more than 1 year=
recognize 50% gain/loss
(Caleld Long term Gain /
Loss)
Capital loss Deductible only to Capital Deductible only to Capital
gain. Cannot be deducted gain. Cannot be deducted
from other income nor in from other income nor in
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ordinary gain; nor in gross ordinary gain; nor in gross
income income
Capital Gain Added to gross income- net Added to gross income- net
of capital loss of capital loss
Net capital Loss Cannot be deducted from Cannot be deducted from
gross income / disregard / gross income / disregard /
not part of deductions not part of deductions
Net Capital Loss carryover Net Capital Loss can be Cannot be carried over to
carried over as deduction to next year.
capital gain only in the
immediately following year
only.
However, the amount net

capital loss carry over shall
be lower amount between
actual net capital loss
incurred OR the net income
in the period where the
capital loss incurred.
ALLOWED DEDUCTIONS;
Allowable deductions from gross income:
a) *Optional Standard Deduction – In lieu of itemized allowable deductions, an individual,

other than a non-resident alien, may elect an optional standard deduction (OSD) not
exceeding 40% of gross business or professional income.
• an amount not exceeding 40% of the gross sales/receipts for individuals

• an amount not exceeding 40% gross income for corporations;
A General Professional Partnership (GPP) may avail of the OSD only once, either by
the GPP or the partners comprising the partnership.
OR;
b) Itemized Deduction
In the case of individuals engaged in business or the practice of a profession, and
who opted to be taxed at the regular graduated income tax rates, the following expenses
are allowed as deductions from gross income:
• Expenses- All ordinary and necessary expenses paid or incurred during the taxable
year in connection with the trade, business, or profession, including raw materials,
supplies, and direct labour
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• Interest- Interest paid or incurred within a taxable year in connection with the
conduct of a taxpayer's profession, trade, or business, less an amount equal to
33% of the interest income subject to final tax.
• Taxes- Corporate taxpayers can claim a deduction for all taxes paid or accrued
within the taxable year in connection with their trade or business, except for the
following:
➢ Philippine CIT.
➢ Income taxes imposed by authority of any foreign country, unless the
taxpayer elects to take a deduction in lieu of a foreign tax credit. For a
resident foreign corporation, the only option is to deduct; foreign tax credit
is not allowed to be claimed (see Foreign
➢ tax credit in the Tax credits and incentives section for more information).
➢ Donor's tax and estate tax
➢ Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
➢ In the case of a foreign corporation, deductions for taxes are allowed only
if they are connected with income from sources within the Philippines.
• Losses
• Bad Debts- Bad debts are deductible expenses when written-off, subject to certain
requirements.
• Depreciation- Depreciation is generally computed on a straight-line basis, although

any reasonable method may be elected if the aggregate amount of depreciation,
plus salvage value at the end of the useful life of the property, will equal the cost
of the property. Gain on the sale of depreciated property is taxable as ordinary
income. Generally, tax depreciation should conform to book depreciation, unless
the former includes incentives.
➢ Properties used in petroleum operations may be depreciated over a period
of ten years using the straight-line or declining-balance method, at the
option of the service contractor. Properties used in mining operations with
expected life of more than ten years may be depreciated over any number
of years between five years and their expected life.
• Charitable Contributions and Other Contributions- Research and Development-

The deduction for charitable contributions ordinarily may not exceed 5% of taxable
income for Corporations and 10% of taxable net income for Individual. However,
contributions to certain institutions are 100% deductible, subject to certain
conditions.
• Pension Trusts
• Entertainment, amusement, and recreation expenses, not to exceed the following

ceilings:
➢ 0.50% of net sales for taxpayers engaged in sale of goods or properties.
➢ 1% of net revenue for taxpayers engaged in sale of services, including
professionals and lessors of properties.
• Net operating losses
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A net operating loss for any taxable year immediately preceding the current taxable
year, which had not been previously offset as a deduction from gross income, may
be carried over as a deduction from gross income for the next three consecutive
taxable years immediately following the year of this loss (except losses during the
period when the taxpayer was tax-exempt), provided there has been no substantial
change in the ownership of the business or enterprise where 75% of the paid up
capital or nominal value of the shares are held by the same persons.
• For mines, other than oil and gas wells, a net operating loss calculated without the
benefit of incentives provided for under EO No. 226, or the Omnibus Investments
Code of 1987, as amended, incurred in any of the first ten years of operation may
be carried over as a deduction from taxable income for the next five years
immediately following the year of such loss.
(I) Research and Development.-
(1) In General. - a taxpayer may treat research or development

expenditures which are paid or incurred by him during the taxable year in
connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The
expenditures so treated shall be allowed as deduction during the taxable
year when paid or incurred.
(J) Pension Trusts. - An employer establishing or maintaining a pension

trust to provide for the payment of reasonable pensions to his employees shall be
allowed as a deduction (in addition to the contributions to such trust during the
taxable year to cover the pension liability accruing during the year, allowed as a
deduction under Subsection (A) (1) of this Section ) a reasonable amount
transferred or paid into such trust during the taxable year in excess of such
contributions, but only if such amount (1)has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts over a period of ten (10)
consecutive years beginning with the year in which the transfer or payment is
made.
Illustration:
ABC has the following data for 2019;

Sales 2,000,000 Operating expenses 500,000
Sales return 100,000 Interest income-bank 10,000
Royalty -Philippines 300,000 Cost of Sales 900,000
Compute the taxable net income of ABC:
Case A; Individual, resident citizen, opted / selected Itemized deductions:

Sales 2,000,000
Less Sales return 100,000
Net Sales 1,900,000
100
Less: Cost of Goods sold 900,000
Gross profit 1,000,000
Add; other income 0
Gross Income 1,000,000
Operating expenses 500,000
Case B; Individual, resident citizen, opted / selected Optional Standard Deduction (OSD)
Sales 2,000,000
Net Sales 1,900,000
Multiply by OSD rate 40%
Optional Standard Deduction 760,000
Net sales 1,900,000

OSD 760,000
Case B; Domestic Corporation, opted / selected Optional Standard Deduction (OSD)
Sales 2,000,000
Net Sales 1,900,000
Less: Cost of Goods sold 900,000
Gross income 1,000,000
OSD rate 40%
OSD 400,000
Gross Income 1,000,000

OSD 400,000
Regular Corporate income Tax (RCIT) at 180,000
30%
Minimum Corporate Income Tax (MCIT) 20,000
at 2% of gross income
Income tax Due of Corporation (which 180,000
ever is higher between RCIT and MCIT)
Read:
https://www.bir.gov.ph/index.php/tax-information/income-tax.html
101
1. Mr Asta, resident citizen, revealed the following data for 2019:

Gross income from business is P 800,000
Business expenses allowed for deduction is P 600,000 (excluding contributions)
Charitable contributions:
To Govt for priority activities of P 50,000

To Govt for public purposes (not priority) of P 60,000
To church of P 15,000
What is the taxable net income?
2. Mr Asta, domestic corporation, revealed the following data for 2019:
Gross income from business is P 800,000

Business expenses allowed for deduction is P 600,000 (excluding contributions)
Charitable contributions:
To Govt for priority activities of P 50,000
To Govt for public purposes (not priority) of P 60,000
To church of P 15,000
What is the taxable net income?
3. ABC corp paid the following taxes which is incurred in connection with business;
Community tax of 1,000; surcharge of P 250 plus interest of 125. Real property tax of
5,000 plus surcharge of 1,250 and interest of 500. Income tax expense of 90,000 plus
surcharge of 25,000 and interest of 10,000.
How much is the deductible tax expense for 2019 of ABC Corp?
4-5. Asta, Corp has the following data:
• Gross income of P 400,000

• Interest expenses-business amounting to 50,000
• Interest income subject to final tax-net amounting to 9,600
• Ordinary loss of P 10,000
• Bad debts of 30,000 ( 10,000 is guaranteed by an insurance company and 5,000
was set as provision for bad debts expenses)
• Wagering losses of P 3,000
• Loss on wash sales of P 1,000
• Donors tax expenses of P 2,000
• Percentage tax (sec 116 OPT rate) of P 5,000
What is the allowed deductions for Asta?
10. What is the taxable net income of Asta?
THANK YOU!!!
NEVER GIVE UP COZ TIME PASSES ANYWAY!!--- GSJ
102
MODULE 7: INCOME TAXATION OF CORPORATIONS:
OVERVIEW:
In Corporate income taxation, we must classify first the different types of corporate
taxpayer because they are subject to different tax rates. Same with Individuals,
Corporation’s income is subject to income taxes depending on the type of income. Passive
income of Corporations is also subject to Final tax and those active income or income from
business operations are subject to regular Corporate Tax or MCIT. On this module, we
will discuss the different classification of Corporations and their different income earned
with their corresponding tax rates as provided by the Tax Code, as amended.
MODULE OBJECTIVES:
1. Enumerate the income items that are included on taxable gross income
2. Enumerate the income items that are excluded on taxable gross income
3. Define gross income and taxable net income under the Tax Code
4. Know the classification of Corporations and their income.
5. Know the different income tax rates applicable to Corporations.
6. Enumerate and understand the allowed deductions under the Tax code
7. Determine the deductions not allowed under the Tax Code
8. Compute the taxable net income under Itemized and Optional Standard deductions
for Individual and Corporations.
Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"),
the term "corporation" includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), associations, or insurance
companies, but excluding general professional partnerships and a 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.
Under the Tax Code, there are three (3) types of taxable corporations –
1. a domestic corporation,
2. a resident foreign corporation and
3. a non-resident foreign corporation.
A domestic corporation is a corporation created or organized under Philippine law. A

domestic corporation is taxable on all income derived from sources within and without the
Philippines.
A foreign corporation is corporation organized, authorized, or existing under the laws of

any foreign country. A foreign corporation is either a resident - a corporation engaged in
103
trade or business in the Philippines, or a non-resident - a corporation not engaged in trade
or business in the Philippines. Note, however, that a foreign corporation who wishes to
engage in trade or business in the Philippines should first secure a license from the
Philippine Securities and Exchange Commission.
A foreign corporation, whether resident or non-resident, is taxed only on income derived

from sources within the Philippines. The following items are, among others, deemed
income from sources within the Philippines:
a. Interests;
b. Dividends;
c. Compensation for labor or personal services performed in the Philippines;
d. Rentals and Royalties from property located in the Philippines or from any interest in
such property, including rentals or royalties for:
• The use of or the right or privilege to use in the Philippines any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade brand
or other like property or right;
• The use of, or the right to use in the Philippines any industrial, commercial or
scientific equipment;
• The supply of scientific, technical, industrial or commercial knowledge or
information;
• The supply of any assistance that is ancillary and subsidiary to, and is furnished
as a means of enabling the application or enjoyment of, any such property or right
as is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in paragraph
(c);
• The supply of services by a nonresident person or his employee in connection with
the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such nonresident person;
• Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and
• The use of or the right to use:
✓ Motion picture films;
✓ Films or video tapes for use in connection with television; and
✓ Tapes for use in connection with radio broadcasting.
• Gains, profits and income from the sale of real property located in the Philippines;
and
• Gains, profits and income derived from the sale within the Philippines of personal
property.
• However, gains from the sale of shares of stock in a domestic corporation shall be
treated as derived from sources within the Philippines regardless of where said
shares are sold.
Taxation of Domestic Corporations
104
Except for certain passive incomes and incomes of domestic non-profit proprietary
educational institutions and hospitals, a domestic corporation is taxed at thirty per cent
(30%) of its taxable income; that is, its gross income from all sources within and without
the Philippines less allowable deductions. These allowable deductions are:
• Ordinary and necessary trade or business expenses;

• Interests paid or incurred within a taxable year on indebtedness in connection with
the taxpayer's trade or business;
• Taxes except income tax, estate and donor's taxes, and taxes assessed against
local benefits of a kind tending to increase the value of the property assessed.
• Income tax imposed by authority of any foreign country is allowed either as a
deduction or tax credit. However, a foreign corporation shall not be allowed a tax
credit for the taxes imposed by foreign countries;
• Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity and incurred in trade or business, including
casualty losses
• The excess of allowable deductions over gross income of the business or
enterprise for any taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss, provided, that there has
been no substantial change in the ownership of the corporation (known as NOLCO
or Net Operating Loss Carry-over)
• Bad Debts except those sustained in certain transactions entered into between
related parties;
• Depreciation ;
• Charitable and Other Contributions or gifts actually paid or made within the taxable
year to, or for the use of the Government of the Philippines or any of its agencies
or any political subdivision thereof exclusively for public purposes, or to accredited
domestic corporations or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare
institutions, or to nongovernment organizations;
• Research and Development expenditures;
• Amounts transferred or paid to Pension Trusts (in addition to the contributions to
such trusts during the taxable year which contributions are deductible as ordinary
expenses).
However, beginning the fourth taxable year immediately following the taxable year in which
a corporation commenced its business operations, a minimum corporate income tax
("MCIT") of two per cent (2%) of the gross income as of the end of said taxable year shall
be imposed instead of the foregoing "normal corporate tax" if such MCIT is greater than
the normal income tax. Any excess of the MCIT over the normal income tax shall be carried
forward and credited against the normal income tax for the three (3) immediately
succeeding taxable year.
The Secretary of the Department of Finance may suspend the imposition of the MCIT on
any corporation which:
105
1. suffers losses on account of prolonged labor dispute,
2. or because of force majuere, or
3. because of legitimate business reverses.
In addition to the foregoing taxes, an improperly accumulated earnings tax ("IAET")

shall be imposed which tax is equivalent to ten per cent (10%) of the improperly
accumulated taxable income. The IAET, however, shall not apply to publicly-held
corporations, banks and other nonbank financial intermediaries, and insurance
companies.
Taxation of Resident Foreign Corporations
In general, a resident foreign corporation is taxed in the same manner as a

domestic corporation on its income derived from all sources within the Philippines. That
is, a resident foreign corporation shall be subject to the normal income tax rate of thirty
per cent (30%) of its taxable Philippine-sourced income.
In the computation of taxable income, there shall be deducted from the Philippine-
sourced gross income, such allowable expenses, 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.
However, the following shall be subject to a different tax rate:

1. International carriers doing business in the Philippines shall be taxed at two
and one-half per cent (2 1/2 %) of gross Philippine billings;
2. Income derived by offshore banking units from foreign currency transactions
with local commercial banks and branches of foreign banks and interest
derived from foreign currency loans to residents shall be subject to a final tax
at the rate of ten per cent (10%) of such income;
3. Regional operating headquarters shall pay a tax of ten per cent (10%) of their
taxable income. A Regional operating headquarter refers to a branch
established in the Philippines by multinational companies which are engaged
in any of the following services: general administration and planning; business
planning and coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services; research and
development services and product development; technical support and
maintenance; data processing and communication; and business development
.
Taxation of Non-Resident Foreign Corporations
In general, a non-resident foreign corporation shall pay a tax equal to thirty per
cent (30%) of the gross income received during each taxable year from all sources within
the Philippines.
106
However, the following non-resident foreign corporations shall be subject to a different tax
rate27:
1. Nonresident Cinematographic Film Owner, Lessor or Distributor - twenty-five per cent

(25%) of its gross income from all sources within the Philippines.
2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals - four and
one-half per cent (4 1/2%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.
3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment - seven
and one-half per cent (7 1/2%) of gross rentals or fees.
The following passive incomes of a nonresident foreign corporation are subject to a final
tax as follows:
1. Twenty per cent (20%) on the amount of interest on foreign loans contracted on or
after August 1, 1986;
2. The net capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or disposed
of through the stock exchange are, in the same manner as domestic and resident
foreign corporations, taxed at the rate of five per cent (5%) for the 1st P 100,000 and
ten per cent (10%) for amount in the excess of P 100,000. (Old Tax Code)
3. Fifteen per cent (15%) on the amount of cash and/or property dividends received from
a domestic corporation subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit against the tax due
from the nonresident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to seventeen per cent (17%), which represents the difference
between the regular income tax of thirty-two per cent (32%) on corporations and the
fifteen per cent (15%) tax on dividends as provided herein;
The income of nonresident foreign corporations from transactions with depository banks
under the expanded foreign currency deposit system shall be exempt from income tax.
There are special laws which provides favorable tax treatments to

corporations involved in any of the activities listed in the Philippines Investment Priority
Plan or those locating in special economic zones throughout the Philippines (i.e. those
locating in Subic Bay Freeport, pay 5% of gross income in lieu of income taxes plus tax
free importations). Furthermore, where a foreign element is involved, applicable tax
treaties with which the Philippines is a signatory may likewise provide a preferential tax
treatment. Presently, the Philippines has the tax treaties with other countries.
Annual Income Tax For Corporations And Partnerships
BIR Form 1702 – Annual Income Tax Return (For Corporations and Partnerships)
107
Deadline for Filing
Final Adjustment Return or Annual Income Tax Return – On or before the 15th day of the
fourth month following the close of the taxpayer’s taxable year
Quarterly Income Tax For Corporations And Partnerships

BIR Form 1702Q – Quarterly Income Tax Return (For Corporations and Partnerships)
Documentary Requirements
1.Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
2.Duly approved Tax Debit Memo, if applicable
3.Previously filed return, if an amended return is filed for the same quarter
Deadline: Corporate Quarterly Declaration or Quarterly Income Tax Return – On or before

the 60th day following the close of each of the quarters of the taxable year
Account Information Form For Corporations And Partnerships
BIR Form 1702 AIF – Account Information Form (For Corporations and Partnerships)
NOTE: Pursuant to Sec. 71 of RA 10963, otherwise known as Tax Reform Acceleration

and Inclusion Act, amending Sec. 232 of the Tax Code, as amended, in relation toRevenue
Memorandum Circular No. 6 – 2001, corporations, companies or persons whose gross
annual sales, earnings, receipts or output exceed P3,000,000 may not accomplish this
form. In lieu thereof, they may file their annual income tax returns accompanied by balance
sheets, profit and loss statement, schedules listing income-producing properties and the
corresponding income therefrom, and other relevant statements duly certified by an
independent CPA.
Income Taxation of Corporations:
Domestic and Resident Foreign Corporations are subject to RCIT or MCIT (whichever is
higher). RCIT or regular Corporate Income Tax is 30% of taxable net income while
Minimum Corporate Income Tax is 2% of gross income which is applicable only on the
fourth year of operation of the corporation and so on. Domestic Corporations are subject
to income tax for all income earned within and without the Philippines; while Foreign
Corporation, resident or nonresident are subject to income tax for income earned within
the Philippines only.
In addition to Income tax, Corporations are also subject to Final tax on passive income
and Capital Gain Tax on sale of real property and stocks. Also, they are subject to
withholding taxes.
Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income
tax?
108
No, the MCIT is not an additional tax. An MCIT of 2% of the gross income as of the end
of taxable year (whether calendar or fiscal year, depending on the accounting period
employed) is imposed on a corporation taxable under Title II of the Tax Code, as amended,
beginning on the 4th taxable year immediately following the taxable year in which such
corporation commenced its business operations when the MCIT is greater than the regular
income tax. The MCIT is compared with the regular income tax, which is due from a
corporation. If the regular income is higher than the MCIT, then the corporation does not
pay the MCIT but the amount of the regular income tax.
Corporations covered by MCIT

The MCIT covers domestic and resident foreign corporations which are subject to the
regular income tax. The term “regular income tax” refers to the regular income tax rates
under the Tax Code. Thus, corporations which are subject to a special corporate tax or to
preferential rates under special laws do not fall within the coverage of the MCIT.
For corporations whose operations or activities are partly covered by the regular income
tax and partly covered by the preferential rate under special law, the MCIT shall apply the
regular income tax rate on its operations not covered by the tax incentives. Newly
established corporations or firms which are on their first 3 years of operations are not
covered by the MCIT.
When does a corporation start to be covered by the MCIT
A corporation starts to be covered by the MCIT on the 4th year following the year of the
commencement of its business operations. The period of reckoning which is the start of
its business operations is the year when the corporation was registered with the BIR. This
rule will apply regardless of whether the corporation is using the calendar year or fiscal
year as its taxable year.
When is the MCIT reported and paid.

The MCIT is paid on an annual basis and quarterly basis. The rules are governed by
Revenue Regulations No. 12-2007.
How is MCIT computed
The MCIT is 2% of the gross income of the corporation at the end of the taxable year.
The computation and the payment of MCIT, shall likewise apply at the time of filing the
quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax
Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if the
computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to
be paid for such taxable quarter at the time of filing the quarterly income tax return shall
be the MCIT which is two percent (2%) of the gross income as of the end of the taxable
quarter.
“Gross income” means gross sales less sales returns, discounts and cost of goods sold.
Passive income, which have been subject to a final tax at source do not form part of gross
income for purposes of computing the MCIT.
109
For sale of services, gross income means gross receipts less discounts and cost of
services which cover all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including:
o Salaries and employees benefits of personnel, consultants
and specialists directly rendering the service;
o Cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used;
o Cost of supplies
Interest Expense is not included as part of cost of service, except in the case of banks and
other financial institutions.
“Gross Receipts” means amounts actually or constructively received during the taxable
year. However, for taxpayers employing the accrual basis of accounting, it means amounts
earned as gross income.
Carry forward provision under the MCIT
Any excess of the MCIT over the normal income tax may be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable years.
Recording of MCIT for accounting purposes
Any amount paid as excess minimum corporate income tax should be recorded in the
corporation’s books as an asset under account title “Deferred charges-MCIT”
CORPORATE TAX RATES:
I. For Domestic Corporations
Income tax due of Corporation is equal to: 30% of taxable net income (RCIT) or
2% of gross income, whichever is higher (MCIT)*.
Tax Rates on passive Income Rate

1. Interest from currency deposits, trust funds, deposit substitutes 20%
and similar arrangements received by domestic corporations
2. Royalties from sources within the Philippines 20%
3. Interest Income from a Depository Bank under Expanded 15%
Foreign Currency Deposit System
4. Cash and Property Dividends received by a domestic 0%
corporation from another domestic corporation
5. Capital gains from the sale, exchange or other disposition of 6%
lands and/or building
6. Net Capital gains from sale of shares of stock not traded in the 15%
stock exchange
II. MCIT. *Beginning on the 4th year immediately following the year in which such
corporation commenced its business operations, when the minimum corporate
income tax is greater than the tax computed using the normal income tax.
110
III. For Resident Foreign Corporation
1) a. In General – on taxable income derived from sources within 30%

the Philippines
b. Minimum Corporate Income Tax – on gross income 2%
c. Improperly Accumulated Earnings – on improperly 10%
accumulated taxable income
2) International Carriers – on gross Philippine billings 2½%
3) Regional Operating Headquarters of Multinational 10%
Companies– on taxable income
4.) Regional or Area Headquarters of Multinational Companies exempt
5) Corporation Covered by Special Laws Rate
specified under
the respective
special laws
6) Offshore Banking Units (OBUs) 10%
In general – Income derived by OBUs from foreign currency Exempt
transactions with non-residents, other OBUs, local commercial banks
and branches of foreign banks authorized by BSP
On interest income derived from foreign currency loans 10%
granted to residents other than offshore banking units or local
commercial banks, local branches of foreign banks authorized by BSP
to transact business with OBUs
7) Income derived under the Expanded Foreign Currency Deposit
System
Interest income derived by a depository bank under the 7½%
expanded foreign currency deposit system.
On Income derived by depository banks under the expanded exempt
foreign currency deposit systems from foreign currency transactions with
non-residents, OBUs in the Philippines, local commercial banks
including branches of foreign banks that may be authorized by BSP
On interest income derived from foreign currency loans 10%
granted by depository banks under the expanded foreign currency
deposit systems to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system
8.) Branch Profit Remittances – on total profits applied or 15%
earmarked for remittance without any deduction for the tax component
thereof (except those activities which are registered with the Philippines
Economic Zone Authority)
9.) Interest from currency deposits, trust funds, deposit 20%
substitutes and similar arrangements
10. Royalties derived from sources within the Philippines 20%
True or False (1 point each)
1.Under TRAIN, interest earned from depository bank under expanded foreign currency
deposit system received by corporations shall be subject to 7.5% final tax.
111
2. Dividend received from a domestic corporation by a non resident foreign corporation
shall be subject to 15% final tax subject to the condition that the country where the
nonresident foreign corporation is domiciled allows a credit for taxes deemed paid in the
Philippines equivalent to 15%.
3. The computation and payment of MCIT shall apply at the time of filing quarterly and
annual corporate income tax returns.
4. Special domestic corporations such as proprietary educational institutions shall not be
covered by MCIT as long as they are taxed at preferential rate of 10%.
5. Profits which have been subjected to IAET when finally declared as dividends shall be
subject to tax on dividends.
6. A general professional partnership and the partners comprising such partnership may
avail the OSD only once by the general professional partnership and only once by the
partner.
7. Corporations that avail of OSD are allowed to deduct the cost of sales or cost of
services.
8. Proprietary educational institutions and nonprofit hospitals may be subject to
preferential tax rates of 10% on their net income from sources within the Phil only.
9. Regional operating headquarters (ROHQ) is a branch of multinational company which
is engaged in different services and is subject to Phil income tax at 10% of its net income
within and without the Philippines. ROHQ is different from Regional Area headquarters;
the latter is tax exempt.
10. Gross Philippines billings refers to gross revenue derive from carriage of persons,
excess baggage or mail originating from Phil in continuous and uninterrupted flight
provided the ticket was sold in the Phil.
Problem Solving (2 points each):
11-12. A resident foreign Corp has the following data: Gross Sales in Phil is 9M; Cost of
sales-Phil is 2M; Gross sales in USA is 7M; cost of sales USA is 2M; Business expenses
in Phil is 2M; business expenses in USA is 1M; Royalties on Phil copyrights is 500K;
interest income from bank deposits in Phil is 100K; Remittances of profit during the year-
net amounting to P 170K and payment for the first three quarters to BIR of P 100K.
11. What is the Phil income tax due and payable using OSD?
12. What is the tax on branch profit remittances?
13-14. SAN JOSE Corp has the following data for two year period CY 2019-2020:
CY 2019: Income tax due is 250,000 while tax credits is 300,000.
CY 2020:
1st Q 2ndQ 3rd Q 4th Q
Sales, 500,0 1,100,0 1,500,0 2,200,0
gross of 1% 00 00 00 00
CWT
Cost of 250,0 650,000 800,000 1,200,0
Sales 00 00
Expens 50,00 150,000 300,000 500,000
es 0
112
13. What is the income tax payable in third quarter using OSD?
14. What is the income tax payable in the 2nd quarter using itemized deductions?
15. The following data are available for SAN JOSE CORP:
4th year 5th year

Gross Sales 2,000,000 4,000,000
Cost of Sales 1,500,000 2,000,000
OPEX 600,000 1,000,000
What is the income tax payable in the 5th year?
Answer Sheet
1. 6. 11
2. 7. 12
3. 8. 13
4. 9. 14
5. 10. 15
Watch:
https://www.youtube.com/watch?v=updXWJU8D88-
REFERENCES:
Book/E-book:
✓ Philippine Laws on Transfer and Business Taxes; 2018 edition by Dean Lilian M,
Litonjua, CPA and Prof Virgilio G. Litonjua, CPA.
✓ RA 10963 / RA 8424
Online resources:
✓ https://www.bir.gov.ph/index.php/legal-matters/tax-guide-on-philippine-
taxation.html
✓ https://taxsummaries.pwc.com/philippines/individual/taxes-on-personal-income
✓ https://www.gov.ph/tax
✓ https://www.mondaq.com/income-tax/9710/corporate-taxation-under-the-
national-internal-revenue-code-of-the-philippines
✓ https://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
113

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Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

NEVER GIVE UP COZ TIME PASSES ANYWAY

Individuals, including nonresident aliens, earning compensation income are taxed

OBE COURSE SYLLABUS AND LEARNING PLAN

COURSE TITLE: INCOME TAXATION

DETAILED COURSE LEARNING PLAN:

Topic After the students self- 1. take class Textbook quizzes,

After the students self- 1. take class Textbook quizzes,

Topic After the students self- 1. take class Textbook quizzes,

Departmental 65 Multiple Choice

Week After the students self- 1. take class Textbook quizzes,

After the students self- 1. take class Textbook quizzes,

After the students self- 1. take class Textbook quizzes,

Optional Standard Next meet.

Students will be evaluated based on homework assignments and examinations.

Grades and Equivalents

Grades Equivalents Descriptions Grades Equivalents Descriptions

Module 1: General Principles and Concepts of taxation 28-56

Enumeration of Philippines Taxes and Classification of Taxes

Module 2: Administrative provisions of Individual Income Taxation 57-65

Module 3: Individual Income Taxation 66-84

Module 4: Income Tax Credits 85-88

Module 6: Gross Income and Allowed Deductions 93-102

Module 7: Corporate Income Tax (Income Taxation for Corporations) 103-113

6. Prepare the Quarterly and Annual Income Tax Return of an individual,

7. Understand the importance of paying correct taxes to the government.

8. Apply Integrity, honesty and competence in the performance of the service as

A. Modified True or False

Kindly choose the correct answer from the given choices. If

NOTE: There will be a deduction of 15 points to those students who will

The policy of taxation in the Philippines is governed chiefly by the Constitution of

After successful Completion of this module, you should be able to:

1. Learn the nature, scope, classification and essential characteristics of taxation

Essential elements of a tax

2. Non-revenue or regulatory: Taxation may also be employed for purposes of

a) Imposition of tariffs on imported goods to protect local industries.

Caltex v. Commissioner, 208 SCRA 755

Sumptuary purpose of taxation

· More popularly known as the non-revenue or regulatory purpose of taxation.

Theory and basis of taxation

· The basis of taxation is found in the reciprocal duties of protection and

Life blood or necessity theory

Illustrations of lifeblood theory

1. Collection of taxes cannot be enjoined by injunction.

· In fact, from the contribution received, the government renders no special

· Taxes are essential to the existence of the government. The obligation to

TAX DIFFERENTIATED FROM OTHER TERMS

· Customs duties, or simply duties, are taxes imposed on goods exported

· On the other hand, tariff may be used in one of three senses:

Criteria for determining license fees

Special assessment v. tax

Obligation to pay debt v. obligation to pay tax

1. A debt is generally based on contract, express or implied, while a tax is based on

Rules re: set off or compensation of debts

· General rule: A tax delinquency cannot be extinguished by legal compensation.

SURVEY OF PHILIPPINE TAXES

AS TO SUBJECT MATTER OR OBJECT

1. Personal, poll or capitation tax

AS TO WHO BEARS THE BURDEN