PART 1: GENERAL PRINCIPLES OF TAXATION

A. Definition, Concept, and Purpose

Taxation is the inherent power of the government to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising revenues to carry out legitimate objects
of the government. It is the mode of raising revenue for public purposes.

It is the power by which the government raises revenue to defray the expenses of the
government.

The basic and primary purpose of taxation is to raise revenue to enable the state to
promote the general welfare and protection of its citizens.

However, there are also secondary or non-revenue purposes. These are to reduce social
inequality, encourage growth of local industries, protect local industries against unfair
competition, and implement the police power of the state (regulatory measure).

Reduction of social inequality Our present tax system has adopted the progressive
system of taxation and it aims to reduce the inequality in the distribution of wealth by
preventing its undue concentration in the hands of few individuals.
Encouraging growth of local industries tax exemptions and reliefs serve as incentives to
encourage investment in our local industries thus promoting economic growth.
Protecting local industries against unfair competition the Tariff and Customs Code
allows imposition of certain taxes upon imported goods or articles to further protect our
local industries.
Implementation of police power (regulatory measure) the power of taxation may be
used as an implement of the police power of the state with the end in view of regulating a
particular activity.

B. Nature of Taxation

The nature if the power of taxation is two-fold: it is both an inherent power, and a legislative
power.

The power of taxation is an incident of sovereignty as it is inherent in the State, belonging

as a matter of right to every independent government. Constitutional provisions do not give rise
to the power of taxation but merely impose limitations on what would otherwise be an invincible
power. Being an attribute of sovereignty, its relinquishment is never presumed.

On the other hand, it is a power that is purely legislative. This means that the legislature has
the discretion to determine the nature, purpose, extent, subjects, and situs of taxation. It has the
authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or
things within its jurisdiction.
C. Power of Taxation as distinguished from other inherent powers of the state

TAXATION EMINENT POLICE POWER

DOMAIN
Who exercises the Government or its 1) Government or its Government or its
power political subdivisions political subdivisions political subdivisions
2)granted to public
utilities
Purpose Levied to raise Exercised to promote Private property is
revenue for public public welfare taken for public use,
needs through regulation and must be
compensated
Persons affected All persons, property, Operates on an Operates on a
and excises that may individual as owner community or class
be subjected thereto of a particular of individuals
property
Effect Money becomes part Transfer of right to Restraint on an
of public funds property injurious use of
property
Benefits received No special or direct Owner of the No direct benefits are
benefit to the property taken received other than
taxpayer other than receives the market the maintenance of a
the fact that the value of the property healthy economic
government secures standard
to the citizen the
general benefit
resulting from the
protection of his
person and property
Amount of No limit on the No amount imposed Exaction is limited to
imposition amount of tax that but rather the owner the cost of regulation,
may be imposed is paid the market issuance of license,
value of the propertyand necessary
expenses
Relationship to the Subject to superiority Subject to superiority Not subject to
Constitution of obligations of obligations superiority of
imposed in contracts imposed in contracts obligations imposed
in contracts

D. Theory and Basis of Taxation

 It is noteworthy to explain that the theory and basis of taxation are two different concepts. The
theory explains the reason why taxes are necessary, while basis delves upon why the government
can impose taxes.

The Lifeblood Theory taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need. Without the power of taxation, the government
can neither exist nor endure because they cannot have the means to raise revenue to
defray the necessary expenses. However, such collection should be made in accordance
with law because any arbitrariness will negate the very reason for the government itself.
The theory suggests that an assessment of a tax is enforceable despite a contest because
of the governments urgency to collect taxes and raise revenue.
Necessity theory taxation is a necessary burden to preserve the States sovereignty and
a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements for the enjoyment
of citizenry and those which come within the States territory, and facilities and
protection which a government is supposed to provide.
Benefits-Protection Theory (Symbiotic Relationship) the basis of taxation is found in
the reciprocal duties of support and protection between the State and its inhabitants. The
citizens support the State by paying an amount that is demanded by the government, and
the latter for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values.

E. Principles of a Sound Tax System

Fiscal Adequacy Sources of revenue must be adequate to meet government

expenditures and other public needs. This is in consonance with the lifeblood doctrine.
Administrative Feasibility Tax laws must be capable of effective and efficient
enforcement. They must not obstruct business growth and economic development.
Theoretical Justice a good tax system must take into consideration the taxpayers ability
to pay. Our laws mandate that taxes must be reasonable, just, fair, and conscionable. It is
mandated in the Constitution that the rule of taxation must be uniform and equitable, and
the state must evolve a progressive system of taxation. It is said to be equitable when its
burden falls in those better able to pay; and progressive if its rate goes up as the base goes
up.

F. Limitations on the Taxing Power

Inherent limitations

Public purpose the revenues collected from taxation should be devoted to a public
purpose. It is the purpose which determines the public character of the tax law, not the
 number of persons benefited. As long as the ultimate result favors the welfare of the
public in general, the appropriation of a public revenue is deemed done for public
purpose.
The power to determine whether the purpose of taxation is public or private resides in
Congress. However, this does not prevent the court from questioning the proprietary of a
statute on the ground that it is not enacted for public purpose, but once it is settled that
the law is for a public purpose, it may no longer inquire into the wisdom, expediency or
necessity of such tax measure.

Non-delegability of the taxing power only legislature can exercise the power to tax,
unless the same is delegated by the Constitution, or through a law that does not violate
the Constitution.

Exceptions:
1) Delegation of tariff powers to the President under the flexible tariff clause provided in
Article 6, Section 28(2) of the Constitution.
2) Article 10, Section 5 of the Constitution provides that each local government unit
shall have the power to create its own sources of revenue, fees, charges, subject to such
guidelines and limitations as the Congress may provide xxx.

Territoriality or Situs of Taxation the taxing power should be exercised only within the
territorial jurisdiction of the taxing authority.
Exceptions:
1) Where tax laws operate outside territorial jurisdiction like taxation of resident citizens
on their incomes derived from abroad
2) Where tax laws do not operate within territorial jurisdiction of the state like when
exempted by treaty obligations and when exempted through international comity.
Rules Observed:
Poll, or community taxes are based upon the residence of the taxpayer, regardless of
the source of income or location of the property.
Real property is subject to taxation in the state or country where it is located,
regardless of whether the owner is a resident or non-resident.
Personal Property is subject to taxation on the domicile of its owner, wherever the
property may be kept or stored, following the doctrine of mobilia sequuntur personam.
Exception: Properties which have acquired actual situs in the Philippines
provided in RA 8424, Section 104. As a rule, the properties enumerated herein are taxed
in the Philippines, irrespective of the residence of its owner. Except, when the foreign
country grants exemptions or does not impose taxes on intangible properties of Filipino
citizens.
 International Comity the property or income of a foreign state or government may not
be the subject of taxation by another. Comity is respect accorded by one nation to each
other as co-equals. Even the strongest state cannot assume jurisdiction of another state no
matter how weak, nor can it question the validity of its acts in so far as they are made to
take effect within its own territory.

Exemption from Taxation of Government Agencies/Instrumentalities as a general rule,

the State may not be subject to taxation. However, sovereignty being absolute, the State
may tax itself including its political subdivisions. Nothing can prevent the Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax.

Constitutional Limitations

Due Process Due Process is usually violated where the tax imposed is for a private
purpose, or a tax imposed on properties outside the State, and when arbitrary or
oppressive methods are used in assessing and collecting taxes. Also, when it amounts to
confiscation of property, or in violation of inherent limitations.
Equal Protection of the Law equality of taxation is accomplished when the burden of
the tax falls equally and impartially upon all persons and property subject to it, so that no
higher rate or greater levy in proportion to value is imposed upon one person or species
of property than upon others similarly instituted or of like character. It does not require
equal rates of taxation on different classes of property, nor prohibit unequal taxation as
long as the inequality is not based upon arbitrary classification.
Uniformity the rule of taxation shall be uniform and equitable. Our Constitution
requires uniformity in taxation, meaning, all taxable articles or kinds of property of the
same class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class.
Progressive the congress shall evolve a progressive system of taxation. Taxation is said
to be progressive when its rate goes up depending on the resources of the person affected.
The higher the amount of resource taxed (tax base), the higher the rate. The Constitution
does not prohibit the imposition of regressive taxes. Evolving a progressive system is a
mere directive upon Congress, not a justiciable right or a legally enforceable one. We
cannot avoid regressive taxes, but we can minimize them.
Non-impairment Clause no law shall be passed impairing the obligations of contract.
This is significant when the topic goes to tax exemptions.
Non-imprisonment for non-payment of poll tax no person shall be imprisoned for non-
payment of a debt or poll tax.
 Bills to originate from the House of Representatives
Veto power of the President the president shall have the power to veto any particular
item or items in an appropriation, revenue, or tariff bill but the veto shall not affect the
item or items to which he does not object.
Presidents Power to Tax flexible tariff clause
Taxation and Freedom of the Press no law shall be passed abridging the freedom of
speech, of expression, or of the press.
Taxation and Freedom of religion No law shall be made xxx prohibiting the exercise of
religion. The free exercise and enjoyment of religious profession and worship without
discrimination or preference shall forever be allowed. However, the income of such
organization from any activity conducted for profit or from any of their real or personal
property, regardless of the disposition made of such income, is taxable.
Tax exemption of Properties Actually, Directly, and Exclusively used for Religious,
Charitable, and Educational Purposes cemeteries are exempt from the payment of taxes
because of the difficulty in collecting a tax thereon and the obvious impropriety of selling
the graves of the dead to defray the expenses of the government. While, churches and
parsonages or convents appurtenant thereto are exempt because such institutions perform
work which would otherwise have to be carried on by the public at the expense of
taxpayers and the expenses of such institutions from taxation lessens rather than increases
the burden upon other taxpayers. It is noteworthy that only property tax is exempt.
Tax exemptions granted to Non-stock, Non-profit Educational Institutions covers
exemption to income tax, custom duties, and property tax.
Appropriation of Public Money no public money or property shall be appropriated,
applied, paid, or employed directly or indirectly for the use, benefit, or support of any
sect, church, denomination, sectarian institution, or system of religion, or of any priest,
preacher, minister, or other religions teacher or dignitary as such, except, when priest,
preacher, minister, or dignitary, is assigned to the armed forces or to any penal institution
or government orphanage or leprosarium.
Grant of Tax Exemptions in granting tax exemptions, an absolute majority vote of the
Members of the Congress is required, while in cases of withdrawal of such exemption, a
relative majority vote is sufficient.
Local Taxation
Supreme Courts Jurisdiction over tax cases

G. Stages or Aspects of Taxation

Levy refers to the enactment of a law by Congress imposing a tax.

Scope of Legislative Power to tax.
1) Discretion as to purposes for which taxes shall be levied
 2) Discretion as to subjects of taxation
3) Discretion as to the amount or rate of tax
4) Discretion as to the manner, means, and agencies of collection of taxes
Assessment and Collection the act of administration and implementation of the tax law
by the executive department through administrative agencies.
Payment the act of compliance by the taxpayer including whatever remedies are
available to him under the law.

H. DEFINITION, NATURE AND CHARACTERISTICS OF TAXES

DEFINITION

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 for all its public needs.

CHARACTERISTICS OF TAXES

(1) Taxes are ENFORCED CONTRIBUTIONS (not a contract but a positive act of the
government)
(2) Taxes are PROPORTIONAL IN CHARACTER, since taxes are based on ones ability
to pay
(3) Taxes are LEVIED by the authority of the law
(4) Taxes are levied on persons, property and excise;
(5) Taxes are levied for public purpose
(6) Taxes are personal to the taxpayer
(Ex: a corporations tax delinquency cannot, for instance, be enforced against its
stockholders because not only would this run counter to the principle that taxes
are personal, but it would not also be in accord with the rule that a corporation
is vested by law with a personality that is separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it
may be related. Nevertheless, stockholders may be held liable for the unpaid
taxes of a dissolved corporation if it appears that the corporate assets have
passed into their hands) (DOCTRINE OF PIERCING THE CORPORATE VEIL)
I.REQUISITES OF A VALID TAX

(1) That either the person or property taxed be within the JURISDICTION OF THE TAXING
AUTHORITY

(2) That the ASSESSMENT AND COLLECTION OF CERTAIN KINDS OF TAXES GUARANTEE
AGAINST INJUSTICE TO INDIVIDUALS, Especially by providing notice and opportunity for
hearing;

(3) That it SHOULD BE FOR PUBLIC PURPOSE;

(4) The rule of taxations shall be UNIFORM; and

(5) The tax must not impinge on the inherent and constitutional limitations on the power of
taxation.

J. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS/IMPOSITIONS

TAX SPECIAL ASSESSMENT

Are levied on persons, property and
excise;
Personal liability of the taxpayer
Based on necessity and partially on
benefits
Can be levied ONLY ON LAND
Cannot be made a personal liability
of the persons assessed
Is based wholly on benefits

TAX LICENSE
Levied in the exercise of the taxing Emanate from the police power of
power the state
 PRIMARY PURPOSE: to generate
revenues for the support of the
government; and REGULATION is
merely INCIDENTAL
TAX
Demand of SOVEREIGNTY for the
purpose of raising revenues for the
support of the government
TAX
Is a CIVIL LIABILITY. A person is
criminally liable in taxation ONLY
when he fails to satisfy his civil
obligation to pay taxes
TAX
Is NOT A DEBT for the reason that a
tax DOES NOT depend upon the
consent of the taxpayer and there is
NO express or implied contract to
pay taxes.
An obligation based on LAW
NOT ASSIGNABLE
Imposed by public authority
K. KINDS OF TAXES
DIRECT
A direct tax is a tax for which a taxpayer is
directly liable on the transaction or business
it engages in.
Ex: custom duties and ad valorem taxes
SPECIFIC
A specific tax is imposed and based on Based on selling price or other specified
weight or volume capacity or any other value of the goods.
Are imposed for REGULATORY
PURPOSES; If REGULATION IS THE
PRIMARY PURPOSE, the fact that
incidental revenue is also obtained
DOES NOT MAKE THE IMPOSITION A
TAX
TOLL
Demand of PROPRIETORSHIP, an
amount charged for the cost and
maintenance of the property used
PENALTY
Punishment for the commission of a
crime
DEBT
an obligation based on contract or
judgment
assignable
Imposed by private individuals
INDIRECT
Indirect tax is a tax primarily paid by
persons who can shift the burden upon
someone else.
Ex: excise and ad valorem taxes
AD VALOREM
physical unit of measurement. Ex: excise tax on automobiles and non-
Ex: excise taxes on distilled spirits, tobacco essential goods.
products and petroleum products.

NATIONAL LOCAL
Is imposed by the national government Levied and collected by the local
Ex: revenue taxes under the NIRC and government
custom duties Ex: real property tax and business tax

PERSONAL PROPERTY
Of fixed amount imposed on individuals, Imposed on property, real or personal, in
whether citizens or not, residing within a proportion to its value.
specified territory, without regard to their Ex: real estate tax
property or occupation.
Ex: community tax

PROGRESSIVE
Is one whereby the rate increases as the tax
base (amount) increases.
Ex: income tax, estate and donors tax under
the NIRC
REGRESSIVE
Is one where the tax rate decreases as the
tax base increases.
Ex: In Tolentino v. Secretary of Finance, the
Supreme Court ruled that VAT is a form of
regressive tax.

L. SITUS OF TAXATION

It is the place or authority that has the right to impose and collect taxes.

GENERAL RULE:

A state may not tax property lying outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or privilege derived from the laws of another
state and therein exercised or enjoyed.

Basis: BENEFITS-PROTECTION THEORY

 The state has the power to demand and receive taxes on the reciprocal duties of
support and protection. The citizen supports the State by paying the portion from his property
that is demanded in order that he may, by means thereof, be secured in the enjoyment of the
benefits of an organized society.

EXCEPTIONS:

(1) WHERE TAX LAWS OPERATE OUTSIDE TERRITORIAL JURISDICTION

(2) WHERE TAX LAWS DO NOT OPERATE WITHIN THE TERRITORIAL JURISDICITION OF
THE STATE:
a. When exempted by treaty obligations; or
b. When exempted by international comity

M. CONSTRUCTION AND INTERPRETATION OF TAX LAWS

1. TAX LAWS

NATURE: NOT POLITICAL IN CHARACTER; EFFECTIVE EVEN UNDER BELLIGERENT

OCCUPATION.

2. TAX EXEMPTION AND EXCLUSION

CIR v. YMCA (1998) Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict interpretation in construing tax exemptions. Furthermore, a
claim of statutory exemption from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, the claimed exemption must expressly be
granted in a statute stated in a language too clear to be mistaken.

3. TAX RULES AND REGULATIONS

Statutes levying taxes or duties are to be construed strongly AGAINST THE GOVERNMENT
AND IN FAVOR OF THE SUBJECT OR CITIZENS, because burdens are not to be imposed or
presumed.

4. PENAL PROVISIONS OF TAX LAWS

CIVIL in NATURE AND NOT PENAL IN CHARACTER; HENCE NOT SUBJECT TO EX POST
FACTO LAW PROHIBITIONS.

5. NON-RETROACTIVE APPLICATION TO TAXPAYERS

TAX LAWS ARE PROSPECTIVE IN OPERATION.

N. SOURCES OF TAX LAWS

(1) Constitution

(2) Legislation or statues, including presidential decrees and executive orders on taxation
and tax ordinance, tax treaties and conventions with foreign countries;

(3) Contemporaneous construction by executive or administrative officers, including

Revenue Regulations by the Department of Finance and administrative issuances by the
BIR or the BOC;

(4) Administrative rules and regulations, rulings and opinions of tax officials particularly
the CIR, including opinions of the Secretary of Justice; and

(5) Judicial decisions

O. Doctrines in Taxation

1. Prospectivity of Tax Laws

The general rule under the Civil Code that laws shall have prospective application applies
to tax laws. Retroactive application of revenue laws may be allowed if it will not amount to
denial of due process. There is violation of due process when the tax law imposes harsh and
oppressive tax.

2. Imprescriptibility of Taxes

As a rule, taxes are imprescriptible as they are the lifeblood of the government. However,
tax statutes may provide for statute of limitations. In particular, the National Internal Revenue
Code (NIRC) and the Local Government Code (LGC) provide for prescriptive periods for
assessment and collection of taxes.

In CIR v. B.F. GOODRICH PHILS, the Supreme Court noted that our tax laws provides
for a statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers
from any unreasonable examination, investigation or assessment.

3. Double Taxation
 Double taxation is defined as taxing the same property twice when it should be taxed but
once. It has also been defined as taxing the same person twice by the same jurisdiction over the
same thing. It is sometimes known as duplicate taxation.

The Constitution does not prohibit the imposition of double taxation in the broad sense.
However, if double taxation amounts to a direct double taxation, then it becomes legally
objectionable for being oppressive and inequitable. It violates the equal protection and
uniformity clauses of the Constitution.

Two Types of Double Taxation

a. Direct constitutes double taxation in the objectionable or prohibited sense. This occurs when
the same property is taxed twice when it should be taxed but once; both taxes must be imposed
on the same property or subject matter, for the same purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or taxing district, during the same taxing period,
and they must be of the same kind or character of tax.

b. Indirect is permissible double taxation. Double taxation is indirect where some elements of
direct double taxation are absent such as when the taxes are of different nature or character,
imposed by different taxing authorities.

4. Power to Tax involves the Power to Destroy

Taxation is a destructive power which interferes with the personal and property rights of
the people and takes from them a portion of their property for support of the government.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill 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. (Roxas v. CTA, 23 SCRA
276)

5. Escape from Taxation

a. Shifting of Tax Burden - is the process by which the burden of a tax is transferred from the
statutory taxpayer or the one whom the tax was assessed or imposed to another without violating
the law. Only indirect taxes may be shifted.
Ways of Shifting the Tax Burden

1. Forward shifting - When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate 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 factors of production.

3. Onward shifting When the tax is shifted two or more times either forward or
backward.

b. Tax Avoidance - is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length.

c. Tax Evasion - is a scheme used outside of those lawful means. It connotes fraud through the
use of pretenses and forbidden devices to lessen or defeat taxes.

Three Factors to consider in determining if a scheme is designed to evade taxes:

1. The end to be achieved (which is payment of less taxes than that known by the
taxpayer to be legally due or non-payment of a tax when it is shown that a tax is due);

2. An evil or deliberate state of mind; and

3. A course of action which is unlawful.

6. Exemption from Taxation

A tax exemption is defined as a grant of immunity, express or implied, to particular

persons or corporations from the obligation to pay taxes. Exemptions from taxation may be
created directly by the Constitution or by an act of the legislature, subject to the limitations as the
Constitution may place, expressly or by implication, upon the power of the legislature.

Article VI, Section 28(4) of the 1987 Constitution provides that:

 No law granting any tax exemption shall be passed without the concurrence of a majority
of all the members of Congress.

Note that in granting tax exemptions, an absolute majority vote of the Members of
Congress is required, while in cases of withdrawal of such tax exemption, a relative majority
vote is sufficient.

Since taxation is the rule and exemption therefrom is the exception, the exemption may
be withdrawn at the pleasure of the taxing authority. However, the exemption cannot be
withdrawn if the exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and thus covered by the non-impairment clause
of the Constitution (MCIAA v. Marcos, 261 SCRA 667).

Instances where tax exemptions may be granted other than by act of Congress:

1. Where the President exercises his power under the flexible tariff clause to remove
existing protective tariff rates (Section 28(2), Article VI, 1987 Constitution)

2. The local government may grant exemptions from the payment of local taxes without
congressional approval consequent to its power to levy taxes, fees and other charges (Section 5,
Article X, 1987 Constitution)

3. Where the President enters into and ratifies a tax treaty granting certain exemptions
subject only to Senate occurrence

Nature of Tax Exemptions:

1. Mere personal privileges to the grantees;

2. Generally revocable by the government unless founded on contract which is protected

by the non-impairment clause;

3. Implies a waiver on the part of the Government of its right to collect what otherwise
would be due; and

4. Not necessarily discriminatory so long as the exemption has a rational basis

7. Doctrine of Equitable Recoupment

 The doctrine provides that where the refund of a tax illegally or erroneously collected or
overpaid by a taxpayer is barred by prescription, a tax presently being assessed against a
taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription.
This doctrine is inapplicable in the Philippines in light of the lifeblood theory. (UST v. Collector
104 PHIL. 106)

8. Compensation and Set-off

Taxes cannot be the subject of compensation between the government and the taxpayer.
As held in Caltex v. COA, taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.

Taxes cannot be the subject of set-off because they are not in the nature of contracts
between parties but grow out of a duty to, and, are positive acts of, the Government, to the
making and enforcing of which, the personal consent of the taxpayer is not required (Republic v.
Mambulao Lumber, 4 SCRA 622)

9. Compromise and Tax Amnesty

Compromise

Taxes can be the subject of a compromise. Compromises are allowed and enforceable
when the subject matter thereof is not prohibited from being compromised and the person
entering into it is duly authorized to do so. In fact, under Section 204 of the Tax Code, payment
of internal revenue taxes may be compromised on the grounds of (1) doubtful validity of the
assessment or (2) financial incapacity.

Tax Amnesty

A tax amnesty is a general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax.
(Republic v. IAC, 196 SCRA 335)
Difference between Tax Amnesty and Tax Exemption

Tax Amnesty Tax Exemption

immunity from all criminal, civil and

administrative liabilities arising from immunity from civil liability only
nonpayment of taxes

applies only to past tax periods has prospective application

Deductions from Gross Income

Deductions items or amounts authorized by law to be subtracted from the pertinent items of
gross income to arrive at taxable income. These are expenditures permitted to be subtracted from
income in the determination of income subject to tax. They partake of the nature of tax
exemptions, thus they are likewise construed against the taxpayer.

General rules:

Deductions must be paid or incurred in connection with the taxpayers trade, business, or
profession.
Deductions must be supported by adequate receipts or invoices (except standard
deduction).
Additional requirement relating to withholding.

Return of Capital

Sale of inventory of goods by manufacturers and dealers of properties in every sale,

seller receives return of capital and gains from the sale. That part of the return of capital
is not included in the computation of income subject to income tax.
Sale of stock in trade by a real estate dealer and dealer in securities total cost
specifically identifiable to the real property or shares of stock sold or exchanged

Itemized Deductions
A taxpayer must point to some specific provisions of the statute authorizing the deduction, and
he must be able to prove that he is entitled to the deduction authorized or allowed.

1) Business Expenses

Requisites:

a) Expense must be ordinary and necessary

b) Paid or incurred during the taxable year
c) In carrying the trade or business of the taxpayer
d) Supported by adequate invoices and receipts
e) Tax required to be withheld on the expense paid or payable is shown to have been
remitted in the BIR
f) Must be reasonable
g) Must not be contrary to law, good morals, public policy, and public order.

2) Interest on Indebtedness

Requisites:

a) There must be indebtedness

b) There should be an interest expense paid or incurred upon such indebtedness
c) Indebtedness must be that of a taxpayer
d) Indebtedness must be connected to taxpayers trade, business, or exercise of profession
e) Interest expense must have been paid or incurred during the taxable year
f) Interest must be due
g) Interest payment arrangement must not be between related taxpayers
h) Interest must not be related to finance petroleum operations
i) In case of interest incurred to acquire property used in trade, business, or profession, the
same must not be treated as capital expenditure
j) Interest must have been stipulated in writing
k) Allowable deduction must have been reduced by an amount equal to 33% of interest
income subject to final tax.

3) Taxes

Requisites

a) Payments must be for taxes

b) It must be paid or incurred within the taxable year
c) Must be incurred in connection with trade, business, or profession
d) Imposed by law and payable by the taxpayer (indirect taxes not included)
e) Such taxes are not specifically excluded by law from being deducted from the taxpayers
gross income.
4) Losses

Requisites:

a) Losses must actually be sustained and charged off within the taxable year
b) Evidenced by a closed and completed transaction
c) Loss is not compensated by insurance or otherwise
d) In the case of an individual, the loss must have been incurred in the business, trade, or
profession of the taxpayer, or incurred in any transaction entered into for profit though
not connected with trade or business
e) In the case of casualty loss, declaration filed within 45 days from the occurrence of the
loss.

5) Bad Debts

Requisites:

a) There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable
b) Debt must be connected to taxpayers trade, business, or practice of profession
c) Must not be sustained in a transaction entered into by relatives
d) Must be charged off during the taxable year.
e) Ascertained to be worthless and uncollectible as of the end of the taxable year (BSP
through monetary board shall ascertain).
f) Debts are uncollectible despite diligent effort by the taxpayer.

6) Depreciation

Requisites:

a) Allowance for depreciation must be reasonable

b) It must be for property used in the trade, business, or profession
c) Charged off during the taxable year
d) A statement of the allowance must be attached to the return.

7) Charitable and other contributions

Requisites:

a) Actually paid or made to the Philippine Government or any political subdivision thereof,
or any domestic corporation or association specified in the tax code
b) Made within the taxable year
c) Not exceeding 10% for individuals or 5% for corporations, of the taxpayers taxable
income before the charitable contributions
d) Evidenced by adequate receipts or records
8) Contributions to pension trusts

Requisites:

a) Employer must have established a pension or retirement plan for the payment of
reasonable pension to its employees
b) Pension plan is reasonable and actuarially sound
c) Funded by employer
d) Amount contributed must no longer be subject to the control of the employer
e) Payment has not yet been allowed as deduction.

9) Deductions under special laws

a) RA 10028 (Expanded Breastfeeding Promotion Act) expenses incurred by a private

health and non-health establishment or institution shall be deductible expenses for
income tax purposes up to twice the actual amount incurred.
b) RA 8502 (Jewelry Industry Development Act) law provides for deduction from taxable
income of 50% of expenses incurred in training schemes
c) RA 8525 (Adopt a School Act) deduction from gross income equivalent to 50% of
expenses incurred in connection with said law
d) RA 9999 (Free Legal Assistance Act) lawyer or professional partnerships rendering
free legal services entitled to an allowable deduction of gross income in such amount that
could have been collected for the actual legal service rendered if not free, or up to 10% of
gross income derived from actual performance of the legal profession, whichever is
lower.
e) RA 9994 (Expanded Senior Citizens Act) discounts given to senior citizens shall be
deducted from income. Also, private institutions employing senior citizens shall be
entitled to additional deductions from gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens.
f) RA 7277 (Magna Carta of Disabled Persons) sales discounts given to persons with
disabilities deductible from gross income, subject to certain limitations.

Optional Standard Deduction in lieu of itemized deductions provided above, an individual

subject to tax, excluding a non-resident alien, may elect for a standard deduction on his gross
sales or gross receipts nor exceeding 40%. In the case of domestic corporations and resident
foreign corporations, not exceeding 40% on their gross income.

Personal and Additional Exemption

a) Basic Personal Exemption php50,000 for each individual.

 b) Additional exemption for dependents php25,000 for each dependent not exceeding
four.
c) Status at the end of the year rule whatever is the status of the taxpayer at the end of the
calendar year shall be used for purposes of determining his personal and additional
exemptions.
d) Exemptions claimed by non-resident aliens personal exemptions but only by way of
reciprocity.

Items not deductible

a) Personal, living, or family expenses

b) Amount paid for new buildings or for permanent improvements (capital expenditure)
c) Amount expended in restoring property (major repairs)
d) Premiums paid on life insurance policy covering life or any other officer or employee
financially interested
e) Interest expense, bad debts, and losses from sales of property between related parties
f) Non-deductible interest
g) Non-deductible taxes
h) Non-deductible losses
i) Losses from wash sales of stock or securities.

Income Tax on Individuals

Income Tax on Resident Citizens, Non-resident Citizens, and Aliens

Resident Citizen taxable on all income derived from sources within and without the
Philippines.

Non-resident Citizen taxable only on income derived from sources within the Philippines.

Resident or Non-resident Alien taxable only on income derived from sources within the
Philippines.

Taxation on compensation income

All remunerations for services rendered by an employee for his employer are subject to tax,
unless specifically excluded by law. Designation of remuneration is immaterial. What is
important is that it is derived from an employer-employee relationship. These include:

Salaries
Wages
 Emoluments
Honoraria
Bonuses
Allowances
Fringe benefits
Directors fee
Taxable pensions
Retirement pay
Other income in similar nature, including compensation paid in kind.

Tax Exempt Compensation

a) Benefits given for the exclusive benefit or convenience of employer

b) De minimis benefits facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the employer
as a means of promoting health, goodwill, contentment, or efficiency.
c) 13th month pay
d) GSIS, SSS, Medicare, and Pag-Ibig contributions
e) Fringe benefits (except those of rank and file employees)
f) All others not included in the computation of gross income.

Allowable Deductions

1) Personal exemptions

Basic personal exemption: php50,000

Each married individual: php50,000
Head of the family: php50,000. Head of the family means an unmarried or legally
separated person with one or both parents or with one or more brothers and sisters or with
one or more legitimate or recognized illegitimate or legally adopted children living with
and dependent upon him for chief support, where such brothers, sisters, or children are
not more than 21 years old, unmarried, and not gainfully employed; or where such
brothers, sisters, or children are incapable of self-support because of mental or physical
defect.
Single or legally separated individual with no dependents: php50,000

2) Additional exemption for qualified dependent child: php25,000 each but not to exceed 4.

3) Premium payments on health and hospitalization insurance

Spouse claiming the additional exemption for dependents

Php2,000 per annum or p200 a month
Family gross income must not be more than php250,000 for the taxable year
Taxation of business income/income derived from practice of profession

a) Income derived by self-employed from trade or business.

Self-employment income consists of the earnings derived by the individual from the
practice of profession or conduct of trade or business carried on by him as a sole
proprietor, or by a partnership of which he is a member.
Self-employed a person engaged in trade or business or performs services for others for
a fee and who derived personal income from such trade or business or from the
performance of such services.
b) Income derived by professionals from the practice of professions.
Professionals persons who derive their income from the practice of their profession.
They may also refer to one who pursues an art and makes living therefrom from such as
artists, athletes, and the like.
c) Gross income of farmers

Taxation of Passive Income

Income subject to final withholding tax

Withholding agent withholds the tax and remits it to BIR
Recipient is not required to include the income in the computation of gross income
Tax withheld constitutes final settlement of tax liability on income.

Taxation of Capital Gains

Capital gain from sale of shares of stock

If not listed and traded through stock exchange:

Net capital gain not over pho100,000: 5%
Any amount in excess of php100,000: 10%

Here, the fair market value is the book value of the shares of stock as shown in the
financial statements

If listed and traded through local stock exchange: % of 1% of gross selling price in the
nature of percentage tax. Here, fair market value is the actual selling price.
Income tax on Non-Resident Aliens Engaged in Trade or Business

An alien who stays in the Philippines for more than 180 days, computed on aggregate basis for
the whole year. Consequently, he shall be subject to income tax on income derived from sources
within the Philippines, taxable in the same manner as an individual citizen or resident alien
subject to the scheduler rate of 5-32%.

He is allowed to avail of itemized deductions including the personal and additional exemptions,
subject to the rule on reciprocity.

Income tax on Non-Resident Aliens Not Engaged in Trade or Business

These are aliens who stay in the Philippines for 180 days or less. They are taxed using the final
tax rate of 25% on its gross income within the Philippines. Not entitled to personal and
additional exemptions.

Individual Taxpayers Exempt from Income Tax

a) Minimum wage earners worker in the private sector paid in the statutory minimum
wage or to an employee in the public sector with compensation income of not more than
the statutory minimum wage in the non-agricultural sector to which he is assigned. They
are exempt from the payment of income tax on their taxable income, provided further,
that the holiday pay, overtime pay, night shift differential received by them shall likewise
be exempt.
b) Senior citizens generally, qualified senior citizens deriving returnable income during
the taxable year, whether from compensation or otherwise are required to pay the tax.
Except in the following circumstances
Returnable income is in the nature if compensation income, but he qualifies as a
minimum wage earner.
If the aggregate amount of gross income earned by the senior citizen during the
taxable year does not exceed the amount of his personal exemptions.

Note that exemption to senior citizens from income tax does not extend to all types of
income earned during the taxable year such as those subject to final taxes.

c) Under international agreements certain persons and entities are exempt because of the
Philippines signatory to treaties which provide for such exemptions.
 Income Tax on Corporations

Income Tax on Domestic Corporations and Resident Foreign Corporations

Regular Tax

For corporations, taxable income would mean net income. For domestic and resident foreign
corporations, regular corporate income tax (30%) is imposed on taxable income. Whereas
for non -resident foreign corporations, it is imposed on its gross income.

More specifically, the regular corporate income tax, in cases of domestic corporations, shall
be imposed on taxable income from sources within and without the Philippines. While for
resident foreign corporations, it is imposed on taxable income from sources within the
Philippines.

Minimum Corporate Income Tax

A minimum corporate income tax of 2% of gross income shall be imposed on a domestic

corporation or a resident foreign corporation beginning on the fourth taxable year, immediately
following the year in which such corporation engaged its business operations when:

The minimum corporate income tax is greater than the regular corporate income tax for
the taxable year
Such operation has zero or negative taxable income.

Corporate taxpayers exempted from minimum corporate income tax:

a) Resident foreign corporations engaged in business as international carriers

b) Resident foreign corporations engaged as offshore banking units
c) Resident foreign corporations engaged in business as regional or area headquarters
d) Firms that are taxed under a special income tax regime.

Branch Profit Remittance Tax

Tax for profits applied for or earmarked for remittance (15% final tax). Attempts to equalize the
income tax burden on foreign corporations maintaining, on one hand, local branch offices, and
on the other hand, subsidiary domestic corporations where at least a majority of the latters
shares of stock are owned by such foreign corporations.

*for allowable deductions, refer to the previous discussion

D.1.5 TAXATION OF PASSIVE INCOME

Passive income- subject to FINAL TAX; the withholding agent withholds the tax and remits
the same to the BIR;
PASSIVE INCOME SUBJECT FROM SOURCES WITHIN FROM SOURCES WITHOUT
TO FINAL TAX THE PHILIPPINES THE PHILIPPINES
RC, NRC, RA, NRA-NETB RC NRC, RA,
NRA-ETB NRA-ETB,
NRA-NETB
1.INTEREST INCOME

(a) From any currency

bank deposit and
yield or any other
monetary benefit 20% 25% Graduated EXEMPT
from deposit rates
substitutes and from
trust funds and
similar arrangements

(b) Interest income

received by an
individual taxpayer RC and RA EXEMPT
(except a non- only - 7.5%
resident individual)
from a depositary
bank under the
expanded foreign
currency deposit
system

(c) Interest income for

long-term deposit or
investment shall be
exempt, PROVIDED,
FINALLY, that
should the holder of
the certificate PRE-
TERMINATE the 25%
deposit or
investment before
the 5th year, a final
tax shall be
imposed:

4 years to less than 5 5%

years;
 3 years to less than 4 12%
years;

Less than 3 years 20%

2. ROYALTIES

(1) Royalties 20% 25% Graduated Exempt

rates

(2) Royalties from

literary works, books 10% 25% Graduated Exempt
and musical rates
compositions (LBM)

3. PRIZES

(1) If amount is more 20% 25% Graduated Exempt

than P10,000; rates

(2) If amount is less than Graduated 25% Graduated Exempt

P10,000 rates rates

4. WINNINGS (EXCEPT
PCSO AND LOTTO)

Regardless of amount of 20% 25% Graduated Exempt

winnings: rates
5. DIVIDENDS
Requirements to be passive:
A.
(1)Must be cash/property RC, NRC,
dividends RA- 10%
(2)Recipient is an 25%
INDIVIDUAL TAXPAYER;
(3)Received from a NRA-ETB-
DOMESTIC CORPORATION 20%

B. IF FROM A FOREIGN Graduated 25% Graduated Exempt

CORPORATION rates rates

D.1.6 TAXATION OF CAPITAL GAINS

Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange

Not over P100,000 5%

Greater than P100,000 10%

Capital Gains from SALE OF REAL PROPERTY

A final tax of 6% based on the gross selling price or current fair market value is
imposed upon capital gains presumed to have been realized from the sale, exchange or
other disposition of real property located in the Philippines, classified as CAPITAL
ASSETS.

D.2 INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS

Taxable on income derived WITHIN THE 25% OF GROSS INCOME

PHILIPPINES
Gross rentals, lease or charter fees or 4.5%
charters to Filipino citizens or corporations
Rentals,charters and other fees derived 7.5%
WITHIN THE PHILIPPINES
D.3 INCOME TAX ON SPECIAL CORPORATIONS:

D.3.1 DOMESTIC CORPORATIONS

I. PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS

Proprietary schools are taxed at 10% subject to the PREDOMINANCE TEST
RULE
PREDOMINANCE TEST RULE: If the gross income from unrelated trade,
business or activity exceeds 50% of the total gross income derived by such schools
or hospitals from all sources, the tax shall be based on the usual tax rates imposed
on ordinary corporations.
II. NON-PROFIT HOSPITALS
Exempt provided that:
(1) It is non-stock and non-profit;
(2) Its assets, property and revenues are used actually, directly, and exclusively
for the primary purpose.

III. GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES OR

INSTRUMENTALITIES

The same rule governing domestic corporations engaged in a similar

business, industry or activity shall apply.

Exceptions:

(1) Government Service Insurance System (GSIS)

(2) Social Security System (SSS)
(3) Philippine Health Insurance Corporation (PCHIC)
(4) Philippine Charity Sweepstakes Office (PCSO)
(5) Local Water Districts (LWD)

IV. DEPOSITORY BANKS (FOREIGN CURRENCY DEPOSIT UNITS)

Income derived by a depositary bank under the expanded foreign
currency deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks, including
branches of foreign banks that may be authorized by the BSP to transact business
with foreign currency deposit system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from all taxes, except
net income from such transactions as may be specified by the Secretary of Finance,
upon recommendation by the Monetary Board to be subject to the regular income
tax payable by banks: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said expanded system to
 residents other than offshore banking units in the Philippines or other depository
banks under the expanded system, shall be subject to a final tax at the rate of
ten percent (10%).

D.3.2 RESIDENT FOREIGN CORPORATIONS

I. INTERNATIONAL CARRIER DOING BUSINESS IN THE PHILIPPINES

An international carrier doing business in the Philippines shall pay a tax of

2.5% on its Gross Philippine Billings.

II. OFFSHORE BANKING UNITS

Income derived by offshore banking units authorized by the Bangko Sentral ng

Pilipinas (BSP) from foreign currency transactions with nonresidents, other offshore banking
units, local commercial banks, including branches of foreign banks that may be authorized by
the BSP to transact businesses SHALL BE EXEMPT from ALL TAXES except NET INCOME.

EXCEPTION: Any interest income derived from foreign currency loans granted to
residents, other than offshore banking units or local commercial banks, including local
branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units,shall be subject only to a final tax at the rate of 10%.

III. RESIDENT DEPOSITORY BANKS (foreign currency deposit units)

Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign
currency deposit system units and other depository banks under the expanded foreign
currency deposit system shall be exempt from all taxes, except net income from such
transactions as may be specified by the secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular tax payable by banks: Provided, however. That
interest income from foreign currency loans granted by such depositors banks under said
expanded system to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at the rate of ten
percent (10%).

"Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt from
income tax.
 IV. REGIONAL OR AREA HEADQUARTERS AND REGIONAL OPERATING
HEADQUARTERS OF MULTINATIONAL COMPANIES.

REGIONAL OR AREA HEADQUARTERS OF MULTINATIONAL COMPANIES- Exempt

from income tax. It is also exempt from all kinds of local taxes, fees or charges imposed by a
local government unit EXCEPT REAL PROPERTY TAX ON LAND IMPROVEMENTS AND
EQUIPMENT.

REGIONAL OPERATING HEADQUARTERS OF MULTINATIONAL COMPANIES- Taxable

on income within the Philippines at 10%

D.4 IMPROPERLY ACCUMULATED EARNINGS TAX

There is imposed for each taxable year, in addition to other taxes imposed, a tax
equal to 10% of the improperly accumulated taxable income of corporations formed
or availed of for the purpose of avoiding the income tax with respect to its shareholders or
the shareholders of any other corporation, by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or distributing them to the
shareholders. The rationale is that if the earnings and profits were distributed, the
shareholders would then be liable to income tax thereon, whereas if the distribution were
not made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. Thus, a tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them by the corporation.

The touchstone of the liability is the purpose behind the accumulation of the income
and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to
some other causes, such as the use of undistributed earnings and profits for the reasonable
needs of the business, such purpose would not generally make the accumulated or
undistributed earnings subject to the tax. However, if there is a determination that a
corporation has accumulated income beyond the reasonable needs of the business, the
10% improperly accumulated earnings tax shall be imposed.

The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on

improperly accumulated taxable income earned starting January 1, 1998 by domestic
corporations as defined under the Tax Code and which are classified as closely-held
corporations. Provided, however, that Improperly Accumulated Earnings Tax shall not
apply to the following corporations:

a. Banks and other non-bank financial intermediaries;

 b. Insurance companies;

c. Publicly-held corporations;

d. Taxable partnerships;

e. General professional partnerships;

f. Non- taxable joint ventures; and

g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA)

under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and

Development Act of 1992 under R.A. 7227, as well as other enterprises duly

registered under special economic zones declared by law which enjoy payment of

special tax rate on their registered operations or activities in lieu of other taxes,

national or local.

D.5 EXEMPTION FROM TAX ON CORPORATIONS

Exemptions from Tax on Corporations. - The following organizations shall not be

taxed under this Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes and
without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or a mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
(F) Business league, chamber of commerce, or board of trade, not organized for profit
and no part of the net income of which inures to the benefit of any private stockholder or
individual;

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization of a
purely local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code.

D.6 TAX ON GENERAL PARTNERSHIPS, GENERAL PROFESSIONAL PARTNERSHIPS, CO-

OWNERSHIPS, JOINT VENTURES AND CONSORTIUM

Partnership is taxable as a corporation EXCEPT GENERAL PROFESSIONAL

PARTNERSHIP (GPP); GPP is NOT A TAXABLE ENTITY FOR INCOME TAX PURPOSES;

All other partnerships, no matter how created or organized, which include

unregistered joint ventures and business partnerships, are subject to the corporate income
tax, except when:

(a) Undertaking construction projects or;

(b) Engaged in petroleum, coal, geothermal and other energy operations under a
service contract with the government.
 In Co-ownership, before the partition of property it is NOT taxable when the activities
are limited to the preservation of the co-owned property and the collection of the
income therefrom. Each co-owner is taxed individually on his distributive share.

After partition of property, should the co-owners invest the income of the co-
ownership in any income-producing properties after partition, they would constitute
themselves into an unregistered partnership which is subject to income tax as a
corporation.

E. FILING OF RETURNS AND PAYMENT OF INCOME TAX

E.1 DEFINITION OF A TAX RETURN AND INFORMATION RETURN

TAX RETURN is a report made by the taxpayer to the BIR on all gross income
received during the taxable year, the allowable deduction including exemptions, the net
taxable income, the income tax rate, the income tax due, the income tax withheld, if any, and
the income tax still to be paid or refundable.

INFORMATION RETURN - The Bureau of Internal Revenue (BIR), in its mission

of providing an efficient and convenient service to its taxpayers, is implementing a hassle-
free method of filing Individual Income Tax Returns (BIR Form 1700). This method of filing
recognizes under certain circumstances, the employers Annual Information Return (BIR
Form No. 1604CF) as the substitute income tax return filed by the employee since it contains
the same information found in the income tax return ordinarily filed.

Under substituted filing, an individual taxpayer although required under the law to
file his income tax return, will no longer have to personally file his own income tax return but
instead the employers annual information return filed will be considered as the substitute
income tax return of the employee inasmuch as the information in the employers return is
exactly the same information contained in the employees return.

Every employer required to deduct and withhold the taxes in respect of the wages of
his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to
the Commissioner an annual information return containing a list of employees, the total
amount of compensation income of each employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of the statement referred to in the
preceding paragraph, and such other information as may be deemed necessary. This return, if
made and filed in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect of such wages.

E.2 PERIOD TO FILE INCOME TAX RETURN OF INDIVIDUALS AND CORPORATIONS

INDIVIDUAL TAXPAYERS- the return of any individual shall be filed on or before the
15th day of April of each year covering income for the preceding taxable year.

CORPORATE TAXPAYERS

(a) shall file an annual return on or before the 15 th day of the 4th month following the
taxable year;
(b) shall file quarterly return 60 days after the close of each of the first 3 quarters of
the taxable year.

E.3 PERSONS LIABLE TO FILE INCOME TAX RETURNS

E.3.1 INDIVIDUAL TAXPAYERS

I. GENERAL RULE AND EXCEPTION

GR: The following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from
sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources
within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines;

EXCEPTION: The following individuals shall NOT be required to file an income tax
return:

(a) An individual whose gross income DOES NOT EXCEED HIS TOTAL
PERSONAL AND ADDITIONAL EXEMPTIONS FOR DEPENDENTS, PROVIDED
THAT A CITIZEN OF THE PHILIPPINES and any alien individual engaged in
business or practice of profession within the Philippines shall file an income
tax return, regardless of the amount of gross income;
(b) An individual with respect to Pure compensation income derived from such
sources within the Philippines, the income tax on which has been correctly
withheld; PROVIDED, THAN AN INDIVIDUAL DERIVING COMPENSATION
 CONCURRENTLY FROM TWO OR MORE EMPLOYERS AT ANY TIME DURING
THE TAXABLE YEAR SHALL FILE AN INCOME TAX RETURN;
(c) An individual whose sole income has been subjected to final withholding
tax;
(d) A minimum wage earner or an individual who is exempt from income tax

II. SUBSTITUTED FILING

Substituted filing is a mode of filing when the employers annual information return of
withholding taxes on compensation may be considered as the substitute ITR of employee
inasmuch as the information provided in his ITR would exactly be the same information
contained in the employers annual information return.

How is Substituted Filing different from Non-Filing?

Under substituted filing, an individual taxpayer although required under the law
to file his income tax return, will no longer have to personally file his own income tax return
but instead the employers annual information return filed will be considered as the
substitute income tax return of the employee inasmuch as the information in the employers
return is exactly the same information contained in the employees return.
Non-filing is applicable to certain types of individual taxpayers who are not required
under the law to file an income tax return. An example is an employee whose pure
compensation income does not exceed P60,000, and has only one employer for the taxable
year and whose tax withheld is equivalent to his tax due.

REQUISITES FOR SUBSTITUTED FILING:

(1) Employee receives PURELY COMPENSATION INCOME;

(2) The income is only from One Employer;
(3) Amount of Tax due from the employee equals the amount of tax withheld by the
employer;
(4) Employees spouse also complies with all 3 conditions stated above;
(5) Employer files the annual Information Return
(6) Employer Issues BIR Form. No. 2136

The following individuals are not qualified for substituted filing:

a. Individuals deriving compensation income from two or more employees, concurrently or

successively at anytime during the taxable year

b. Employees deriving compensation income, regardless of 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 a collectible or refundable
return

c. Employees whose monthly gross compensation income does not exceed Five Thousand Pesos
(P5, 000) or the statutory minimum wage, whichever is higher, and opted for non-withholding
of tax on said income

d. Individuals deriving other non-business, non-profession-related income in addition to

compensation not otherwise subject to final tax

e. Individuals deriving purely compensation income from a single employer, although the
income of which has been correctly subjected to withholding tax, but whose spouse is not
entitled to substituted filing

f. Non-resident aliens engaged in trade or business in the Philippines deriving purely

compensation income or compensation income and other business or profession related
income.

E.3.2 CORPORATE TAXPAYERS

Every corporation subject to tax, except foreign corporations not engaged in

trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return. The return shall be filed by the president,
vice-president or other principal officer, and shall be sworn to by such officer and by the
treasurer or assistant treasurer.

E.4 WHERE TO FILE INCOME TAX RETURNS

Except in cases where the Commissioner otherwise permits, the return shall be filed
with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such person has his legal residence or principal
place of business in the Philippines, or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner.

E.5 PENALTIES FOR NON-FILING OF RETURNS

CIVIL PENALTIES- there shall be imposed, in addition to the tax required to be paid, a
penalty equivalent to 25% of the amount due in the following cases:

(a) Failure to file any return and pat the tax due as required;
 (b) Filing a return with an internal revenue officer other than those with whom the
return is required to be filed; or
(c) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
(d) Failure to pay the full or part of the amount of tax shown on any return required to
be filed or the full amount of tax due for which no return is required to be filed, on
or before the date prescribed for its payment.

In case of willful neglect to file the return within the period prescribed by this Code or
by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty
to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any
payment has been made on the basis of such return before the discovery of the falsity or fraud:
Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner pursuant to the
rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima
facie evidence of a false or fraudulent return: Provided, further, That failure to report sales,
receipts or income in an amount exceeding thirty percent (30%) of that declared per return,
and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render
the taxpayer liable for substantial underdeclaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.

INTEREST

In General. (A) There shall be assessed and collected on any unpaid amount
of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as
may be prescribed by rules and regulations, from the date prescribed for payment until
the amount is fully paid.

Deficiency Interest. - Any deficiency in the tax due, shall be subject to the
interest prescribed in Subsection (A) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.

Delinquency Interest. - In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

A deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the Commissioner, there shall be assessed and collected on the unpaid
amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid,
which interest shall form part of the tax.
F. WITHHOLDING OF TAXES

F.1 CONCEPT OF WITHHOLDING TAXES

Taxes imposed or prescribed are to be deducted and withheld by the payor-

corporations and/or persons from payments made to payees-corporation and/or persons for
the former to pay the same directly to the BIR.

F.2 KINDS OF WITHHOLDING TAXES

(1) FINAL WITHHOLDING TAX -constituted as a full and final payment of the
income due from the payee on the said income;

(Examples: All income subject to final taxes, fringe benefits)

(2) CREDITABLE WITHHOLDING TAX AT SOURCE- withholding of a tax on the

items of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than 1% but not more
than32% thereof, which shall be credited against the income tax liability of the taxpayer for
the taxable year.

(a) WITHHOLDING TAX ON COMPENSATION- applies to all employed

individuals whether citizens or aliens, deriving income from compensation for services
rendered in the Philippines wherein the employer is constituted as the withholding agent.

(b) WITHHOLDING VAT

(1) FINAL WITHHOLDING VAT ON Payments made by government- the

government is required to deduct and withhold a final VAT of 5% for its purchases.

(2) CREDITABLE WITHHOLDING OF VAT ON PAYMENTS OF NON-RESIDENTS-

the government or any of its political subdivisions, instrumentalities or agencies, including
GOCCs, as well as private corporations, individuals, estates and trusts, whether large or non-
large taxpayers shall withhold 12% VAT with respect to:

(1) lease or use of properties of property rights owned by non-residents;

(2) other services rendered in the Philippines by non-residents.

(c) EXPANDED WITHHOLDING TAX -`Withholding taxes on ordinary

business income which is still subjected to income tax and therefore, it is deductible as tax
credit.
PROFESSIONAL FEES FOR SERVICES
RENDERED BY INDIVIDUALS
If gross income for current year exceeds 15%
P720,000 or professional does not file Sworn
Declaration of Gross income for first semester
of the year with BIR,regardless of gross
income
If gross income for current year does not 10%
exceed P720,000

PROFESSIONAL ENTERTAINERS AND

ATHLETES AND DIRECTORS
If gross income for current year exceeds 15%
P720,000
If gross income for current year does not 10%
exceed P720,000

RENTAL INCOME
Real properties 5%
Personal properties 5%
Poles, satellites and transmission facilities 5%
Billboards 5%
INCOME DISTRUBUTION TO 15%
BENEFICIARIES

INCOME PAYMENTS TO CERTAIN BROKERS 10%

AND AGENTS
INCOME PAYMENTS TO PARTNERS OF GPP
If gross income for current year exceeds 15%
P720,000
If gross income for current year does not 10%
exceed P720,000

PROFESSIONAL FEES PAID TO MEDICAL

PRACTITIONERS
If gross income for current year exceeds 15%
P720,000
If gross income for current year DOES NOT 10%
exceed P720,000

GROSS ADDITIONAL PAYMENTS TO 15%

GOVERNMENT PERSONNEL FROM
IMPORTERS, SHIPPING AND AIRLINE
COMPANIES, OR THEIR AGENTS
COMMISSIONS OF INDEPENDENT AND 10%
EXCLUSIVE DISTRIBUTORS,
MEDICAL/TEHCNICAL AND SALES
REPRESENTATIVE, AND MARKETING
AGENTS OF MULTI-LEVEL MARKETING
COMPANIES
TOLLING FEES PAID TO REFINERIES 5%
INCOME PAYMENTS MADE BY PRE-NEED 1%
COMPANIES TO FUNERAL PARLOR
PAYMENTS MADE TO EMBALMERS 1%
INCOME PAYMENTS TO CERTAIN 2%
CONTRACTORS
PAYMENTS MADE BY TOP 20,000 ON 1%
REGULAR PURCHASES OF GOODS
PAYMENTS MADE BY TOP 20,000 ON 2%
REGULAR PURCHASES OF SERVICES

TRANSFER TAXES

A. ESTATE TAX

1. BASIC PRINCIPLES, CONCEPT AND DEFINITION

Estate Tax

A tax levied on the transmission of properties from a decedent to his or her heirs. It is
the tax on the privilege to transmit property at death and on certain transfers which are made
the equivalent of testamentary dispositions by the statute

Basic Principles

The transfer of the net estate of every decedent, whether resident or non-resident, is
subject to estate tax
Estate tax is imposed upon the basis of the net estate of the decedent, considered as a
unit, regardless of the number of shares into which it may be divided or the relationship
of the beneficiaries
Estate taxation is governed by the statute enforced at the time of the death of the
decedent
 Estate tax accrues upon the death of the decedent
The accrual of the estate tax is distinct from the obligation to pay the same

2. NATURE, PURPOSE AND OBJECT

Nature

Estate tax is:

a. not a tax on property

b. a tax imposed on the privilege to transmit property at death and is measured by the
value of the property

Purpose and Object

a. To generate additional revenue for the government

b. To reduce the concentration of wealth
c. Provide for an equal distribution of wealth
d. Most appropriate and effective method for taxing the privilege which the decedent
enjoys of controlling the dispositions
e. Only method of collecting the share which is properly due to the State as a partner in
the accumulation of property which was made possible on account of the protection
given by the State

3. TIME AND TRANSFER OF PROPERTIES

The properties and rights are transferred to the successors at the time of death of the
decedent. However, despite the transfer of properties and rights at the time of death, the
executor or administrator shall not deliver a distributive share to any party interested in the
estate unless there is a certification from the CIR that estate tax has been paid.

4. CLASSIFICATION OF DECEDENT

a. Resident citizens
b. Non-resident citizens
c. Resident alien
d. Non-resident alien
**Note: Only natural persons can be held liable for estate tax.

5. GROSS ESTATE AND NET ESTATE

Gross Estate

The value of all the property, real or personal, tangible or intangible, of the decedent
wherever situated to the extent of his interest at the time of his death as well as other items
includible in the gross estate

Note: In the case of a non-resident alien decedent, only that part of the entire gross estate
which is situated in the Philippines shall form part of his gross estate.

Net Estate

The value of the gross estate less the ordinary and special deductions

6. DETERMINATION OF GROSS AND NET ESTATE

Determination of Gross Estate

a. Resident Citizen, Non-Resident Citizen, Resident Alien

All properties, real or personal, tangible or intangible, wherever situated, plus
items includible in gross estate
b. Non-Resident Alien
Only those properties situated in the Philippines provided that with respect to
intangible personal property, its inclusion in the gross estate is subject to the
rule of reciprocity

Rule of Reciprocity

There is reciprocity if the foreign country of which the decedent was a citizen or
resident at the time of his death:

a. Did not impose an estate tax; or

b. Allowed a similar exemption from estate tax with respect to intangible personal
property owned by Filipino citizens not residing in that foreign country

Rule in determining the situs of intangible personal property for estate tax purposes

General Rule
 The intangible property is taxed based on the domicile of the owner (res mobilia
sequuntur personam)

Exceptions

The following intangibles are deemed located in the Philippines:

a. Franchises being exercised in the Philippines

b. Shares, obligations, or bonds issued by domestic corporations, or partnerships, business
or industry located in the Philippines
c. Shares, obligations or bonds issued by foreign corporations at least 85% of the business
of which is located in the Philippines
d. Shares, obligations or bonds issued by foreign corporations which have acquired situs in
the Philippines
e. Shares or rights in any partnership, business or industry established in the Philippines

Determination of Net Estate

a. Resident Citizen, Non-Resident Citizen, Resident Alien

Net estate is equal to gross estate less ordinary and special deductions and
exclusions allowed by law
Note: The special deductions are: (1) Family Home; (2) Standard deduction (3)
Medical expenses and (4) Amount received by heir under RA 4917
b. Non-Resident Alien
Net estate is equal to gross estate less ordinary deductions and exclusions
allowed by law
Note: Non-resident alien decedent cannot avail of special deductions

7. ITEMS TO BE INCLUDED IN THE GROSS ESTATE

a. Decedents interest at the time of death

includes any interest having value or capable of being valued, transferred by the
decedent at his death
b. Transfers in contemplation of death
transfers where the impelling motive or reason for such is the thought of death,
regardless of whether the transferor is near the possibility of death or not
c. Revocable transfers
 transfers where the transferor has reserved his right to alter, amend, or revoke
such transfer, regardless of whether the power is actually exercised or not during
his lifetime and whether the power should be exercised by him alone or in
conjunction with someone else
d. Transfer of property under general power of appointment
where the transferor gives the transferee the power to appoint any person,
including himself, as successor to enjoy the property
e. Proceeds of a life insurance
where the beneficiary is the estate, his executor or administrator irrespective of
whether or not the insured retained power of revocation; or any beneficiary
designated as revocable
f. Transfers for insufficient consideration
transfers that are not bona fide sales of property for an adequate and full
consideration in money or moneys worth

8. DEDUCTIONS AND EXCLUSION FROM ESTATE

Deductions Allowed to the Estate of a Citizen or a Resident

1. Ordinary Deductions

a. Expenses, Losses, Indebtedness, Taxes (ELIT)

1. Funeral Expenses
those which are actually incurred in connection with the interment or
burial of the deceased which must be duly supported by receipts or
invoices or other evidence to show that they were actually incurred
actual amount or in an amount equal to 5% of the gross estate,
whichever is lower, but in no case to exceed P200,000
2. Judicial Expenses
those incurred during the settlement of the estate but not beyond the
last day prescribed by law (within 6 months from the date of death of the
decedent) or the extension thereof (in meritorious cases, the CIR may
grant reasonable extension not exceeding 30 days) for the filing of the
estate tax return
3. Claims against the estate
debts or demands of pecuniary nature which could have been enforced
against the deceased in his lifetime and could have been reduced to
simple money judgments
 to be deductible, the debt instrument must be duly notarized at the time
the indebtedness was incurred; and, if the loan was contracted within 3
years before the death of the decedent, the administrator or executor
shall submit a statement showing the disposition of the proceeds of the
loan
4. Claims against insolvent persons
to be deductible, the amount must be initially included as part of the
gross estate; and the incapacity of the debtors to pay their obligation is
proven, not merely alleged
5. Unpaid mortgage or indebtedness on property
to be deductible, the FMV of the property mortgaged, without deducting
the indebtedness, must be initially included as part of the gross estate;
and the indebtedness was contracted in good faith and for an adequate
and full consideration in money or moneys worth
6. Taxes
those which have accrued as of or before the death of the decedent; and
those unpaid as of the time of his death, regardless of whether or not it
was incurred in connection with trade or business
7. Losses
to be deductible, the loss must be incurred during the settlement of the
estate arising from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement, when such losses are not compensated
for by insurance or otherwise, and if at the time of the filing of the return,
such losses have not been claimed as a deduction for income tax
purposes in an income tax return, and provided that such losses were
incurred not later than the last day for the payment of the estate tax
b. Vanishing Deduction
a deduction allowed on the property left behind by the decedent which he had
acquired previously by inheritance or donation
to be deductible, the following requisites must be complied with:
o the present decedent died within 5 years from date of death of the prior
decedent or date of gift
o the property with respect to which deduction is sought can be identified as
the one received from prior decedent or from donor
o the property must form part of the gross estate situated in the Philippines of
the prior decedent or was a taxable gift of the donor
o estate tax or donors tax due thereon must have been paid
 o no vanishing deduction on the property was allowed to the estate of the
prior decedent
Note: The rationale is to minimize the effects of double taxation on the same
property within a short period of time
c. Transfer for Public Use
the amount of all bequests, legacies, devises, or transfers to or for the use of the
Government or any political subdivision thereof, exclusively for public purposes

2. Special Deductions

a. Family Home
the amount equivalent to the current FMV of the decedents family home which
shall not exceed P1,000,000
the family home must be the actual residential home of the decedent and his family
at the time of his death as certified by the barangay captain
b. Standard Deduction
P1,000,000 without need of substantiation
c. Medical Expenses
those incurred by the decedent within 1 year prior to his death which shall be duly
substantiated with receipts, but in no case to exceed P500,000
d. Amount received by heir under RA 4917
the amount received from the decedents employer as a consequence of the death
of the decedent-employee as retirement benefits under RA 4917 is allowed as a
deduction provided that the amount of benefit is included in the gross estate

3. Share in the Conjugal Property

the net share of the surviving spouse in the conjugal partnership property as
diminished by the obligations properly chargeable to such property shall be
deducted from the net estate of the decedent

Deductions Allowed to the Estate of a Non-Resident

1. Ordinary Deductions

a. Expenses, Losses, Indebtedness, Taxes (ELIT)

1. Funeral Expenses
2. Judicial Expenses
3. Claims against the estate
4. Claims against insolvent persons
 5. Unpaid mortgage or indebtedness on property
6. Taxes
7. Losses
b. Vanishing Deduction
c. Transfer for Public Use

2. Share in the Conjugal property

**Note: Non-resident alien decedent cannot avail of special deductions. No deduction shall be
allowed unless the executor, administrator, or anyone of the heirs, as the case may be, includes
in the estate tax return of the decedent the value at the time of his death that part of the gross
estate of the non-resident not situated in the Philippines

Exclusions from Estate

1. The capital (exclusive property) of the surviving spouse is considered as an exclusion in

the gross estate
2. Other items which are excluded:
a. GSIS proceeds/benefits
b. Accruals from SSS
c. Proceeds of life insurance where the beneficiary is irrevocably appointed
d. Proceeds of life insurance under a group insurance taken by employer (not taken
out upon his life)
e. War damage payments
f. Transfer by way of bona fide sales
g. Transfer of property to the government or to any of its political subdivisions
h. Merger or usufruct in the owner of the naked title
i. Properties held in trust by the decedent
j. Acquisition and/or transfer expressly declared as not taxable

9. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY

It is a remedy against international double taxation to minimize the onerous effect

of taxing the same property twice
 Only the estate of a citizen or a resident alien at the time of death can claim tax
credit for any estate taxes paid in a foreign country
The estate tax imposed by the Philippines shall be credited with the amounts of an
estate tax imposed by the authority of a foreign country. However, the amount of
tax credit is subject to the following limitations:
o Per country basis: The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against which such
credit is taken which the decedents net estate situated within such country
taxable under the NIRC bears to his entire net estate
o Overall basis: The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
decedents net estate situated outside the Philippines taxable under the NIRC
bears to his entire net estate

10. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS

a. Merger of the usufruct in the owner of the naked property

b. Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to
the fideicommissary
c. Transmission from the first heirs, legatees or donees in favor of another beneficiary in
accordance with the desire of the testator
d. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the income of which inures to the benefit of any individual,
provided that not more than 30% of the said bequests, devises, legacies or transfers
shall be used for administrative purposes

11. FILING OF NOTICE OF DEATH

Instances where Notice of Death is required:

o in all cases of transfers subject to tax; or
o where, though exempt from tax, the gross value of the estate exceeds P20,000
Time of Filing:
o within 2 months after the death of the decedent; or
o within 2 months after the executor or administrator qualifies as such
12. ESTATE TAX RETURN

Instances where Estate Tax Return is required:

o in all cases of transfers subject to tax;
o where, though exempt from tax, the gross value of the estate exceeds P200,000;
or
o when the said estate consists of registered or registrable property regardless of
the gross value of the estate
Time of Filing:
o General Rule: Within 6 months from the death of decedent
o Exceptions: The CIR, in meritorious cases, may grant an extension not exceeding
30 days for filing the return
Time of Payment:
o General Rule: At the time the return is filed by the executor, administrator or the
heirs
o Exception: The CIR, if he finds that the payment on the due date would impose
undue hardship, may grant an extension of:
Not to exceed 5 years in case the estate is settled judicially
Not to exceed 2 years in case the estate is settled extrajudicially
Prohibition from withdrawing the funds in the bank account of a deceased depositor:
o General Rule: If the bank has knowledge of the death of the person who
maintains a bank deposit alone or jointly with another, it shall not allow any
withdrawal from said deposit account unless the CIR has certified that estate
taxes have been paid
o Exception: The CIR may allow the administrator or anyone of the heirs to
withdraw an amount not exceeding P20,000 without the certification that estate
taxes have been paid

B. DONORS TAX

1. BASIC PRINCIPLES, CONCEPT AND DEFINITION

Donors Tax

An excise tax imposed on the privilege to transfer property by way of gift inter vivos
based on pure act of liberality without any or less than adequate consideration and without any
legal compulsion to give
Basic Principles

It is imposed only on donations inter vivos

It is imposed upon the transfer by any person, resident or non-resident, of any property
by gift
It is governed by the statute in force at the time of the transfer

2. NATURE, PURPOSE AND OBJECT

Nature

Donors Tax is:

a. not a tax on property

b. a tax imposed on the privilege of the donor to give or on the transfer of property by way
of gift inter vivos

Purpose and Object

a. To raise revenues
b. To tax the wealthy and reduce certain other excise taxes
c. To discourage inter vivos transfers of property which could reduce the mortis causa
transfers on which a higher tax, the estate tax, would be collected
d. It will tend to reduce the incentive to make gifts in order that distribution of future
income from the donated property may be to a number of persons with the result that
the taxes imposed by the higher brackets of the income tax are avoided

3. TIME AND TRANSFER OF PROPERTIES

A transfer becomes complete and taxable only when the donor has divested himself of
all beneficial interests in the property transferred and has no power to recover any such
interest in himself or his estate.

4. REQUISITES OF A VALID DONATION

a. Capacity of donor
All persons who may contract or dispose of their property may make a donation
b. Donative intent (intention to donate)
 Necessary only in case of a direct gift. If the gift is indirectly taking place by way
of sale, exchange or other transfer of property as contemplated in cases of
transfers for less than adequate and full consideration, donative intent is not
always essential to constitute a gift
c. Delivery, whether actual or constructive, of the subject gift
There is delivery when the subject matter is within the dominion and control of
the donee
d. Acceptance by the done
Necessary because nobody is obliged to received a gift against his will
e. Form prescribed by law

Requisites for a valid donation of Movable Property

a. Donation may be oral or in writing

b. If oral, the donation must be accompanied with delivery
c. If value is more than P5,000, the donation must be in writing and accepted in writing

Requisites for a valid donation of Immovable Property

a. It must be in public document

b. The property donated and the value of the charges which the donee must satisfy must
be specified
c. The donee must accept through a deed or similar instrument

Requirements for a donation to be subject to donors tax

a. Property donated is not real property that is a capital asset

b. The transfer is for less than adequate consideration
c. The transfer is inter vivos

5. TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION

a. Sale/Exchange/Transfer of property for insufficient consideration

General Rule: Sales, exchanges and other transfers of property for less than an
adequate and full consideration in money or moneys worth
Exception: Transfers of real property considered as capital assets which is subject
to Capital Gains Tax
b. Condonation/Remission of debt
Condonation or remission of debt where the debtor did not render service in
favor of the creditor
 Note: Condonation or remission of a debt would constitute a donation to the
extent of the fair value of the debt condoned or remitted

6. TRANSFERS FOR LESS THAN ADEQUATE AND FULL CONSIDERATION

Where property, other than real property classified as capital asset subject to final
capital gains tax, is transferred for less than an adequate and full consideration in money or
moneys worth, the amount by which the fair market value of the property exceeded the value
of the consideration shall, for purposes of donors tax, be deemed a gift.

**Note: The element of donative intent is conclusively presumed in transfers of property for less
than an adequate or full consideration in money or moneys worth

7. CLASSIFICATION OF DONOR

a. Taxable within and outside Philippines:

1. Resident citizen
2. Non-resident citizen
3. Resident alien
4. Domestic corporation
b. Taxable only within the Philippines:
1. Non-resident aliens
2. Foreign corporation

**Note: A corporation can be subject to donors tax because it is capable of entering into a
contract of donation through the appropriate Board Resolution

8. DETERMINATION OF GROSS GIFT

Gross Gift

All property, real or personal, tangible or intangible, that is given by the donor to the
donee by way of gift, without the benefit of any deduction
Net Gift

The net economic benefit from the transfer that accrues to the donee

9. COMPOSITION OF GROSS GIFT

a. For resident citizen, non-resident citizen, and resident alien (wherever situated)
1. Real property wherever situated (within & without the Philippines)
2. Personal property wherever situated, tangible or intangible
b. For non-resident alien (only within)
1. Real property situated within the Philippines
2. Personal property
i. Tangible property situated within the Philippines
ii. Intangible personal property with situs in the Philippines unless
exempted on the basis of reciprocity

10. VALUATION OF GIFTS MADE IN PROPERTY

a. Personal property
The fair market value of the property given at the time of the gift shall be the
value of the gross gift
b. Real property
The fair market value the fair market value as determined by the CIR or the fair
market value as shown in the schedule of values fixed by the provincial and city
assessors (zonal value), whichever is higher. If there is no zonal value, taxable
base is FMV that appears in the latest tax declaration

11. TAX CREDIT FOR DONORS TAXES PAID IN A FOREIGN COUNTRY

The donors tax imposed upon a donor who is a citizen or a resident at the time of
donation shall be credited with the amount of any donors taxes of any character and
description imposed by the authority of a foreign country
Only donors who are citizens or residents at the time of the donation are entitled to
claim tax credit
The donors tax imposed by the Philippines shall be credited with the amounts of a
donors tax imposed by the authority of a foreign country. However, the amount of tax
credit is subject to the following limitations:
 o Per country basis: The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against which such
credit is taken which the net gifts situated within such country taxable under
donors tax bears to his entire net gifts
o Overall basis: The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the donors
net gifts situated outside the Philippines taxable under donors tax bears to
his entire net gifts

12. EXEMPTIONS OF GIFTS FROM DONORS TAX

a. Dowries or donations made:

on account of marriage
before its celebration or within one year thereafter

by parents to each of their legitimate, recognized natural or adopted children

to the extent of the first php10,000
b. Gifts made to or for the use of the national government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government
c. Gifts in favor of an education and/or charitable, religious, cultural or social welfare
corporation, institution, accredited NGO, trust or philanthropic organization or research
institution or organization, provided,
not more than 30% of said gifts shall be used by for administration purposes
the donee must be a non-stock, non-profit organization or institution paying no
dividends
the donee organization or institution should be governed by trustees who do not
receive any compensation
the donee devotes all of its income to the accomplishment and promotion of its
purposes

**Note: Non-resident aliens are exempt from donors tax with respect to (b) and (c) as
enumerated above
Other Exemptions allowed on Gross Gift

a. Encumbrances on the property donated if assumed by the donee

b. Donations made to entities exempted under special laws (e.g. IBP, IRRI, National
Museum, National Library)
c. Amount specifically provided by the donor as a diminution of the property donated
d. Athletes Prizes and Awards
in local and international sports tournaments and competitions
held in the Philippines or abroad
sanctioned by their respective national sports associations

13. PERSONS LIABLE

Every person, whether natural or juridical, resident or non-resident, who transfers or

causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or
indirect and whether the property is real or personal, tangible or intangible. In other words, the
donor is always liable to pay the donors tax.

Husband and wife are considered as separate and distinct taxpayer's for purposes of the
donor's tax. However, if what was donated is a conjugal or community property and only the
husband signed the deed of donation, there is only one donor for donor's tax purposes, without
prejudice to the right of the wife to question the validity of the donation without her consent
pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of
the Philippines.

14. TAX BASIS

a. The tax shall be computed on the basis of the total net gifts made during the calendar
year in accordance with the graduated donors tax rates
b. The applicable donors tax rate shall depend upon the relationship between the donor
and the donee
if the donee is a stranger to the donor, the tax rate is 30% of the net gifts
if the donee is not a stranger to the donor, the tax for each calendar year shall be
computed on the basis of the total net gifts made during the calendar year in
accordance with the schedule provided in Section 99(A) of the Tax Code
**Note: Stranger is a person who is not a:

1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal

descendant; or
2. Relative by consanguinity in the collateral line within the fourth degree of
relationship

Formula:
In general:
Gross gifts made
Less: Deductions from the gross gifts
= Net gifts made
Multiplied by: Applicable rate____________
= Donors tax on the net gifts

If several gifts were made during the year:

Gross gifts made
Less: Deductions from the gross gifts
= Net gifts made on this date
Add: All prior net gifts during the year
= Aggregate net gifts
Multiplied by: Applicable rate______________
= Donors tax on aggregate net gifts
Less: Donors tax paid on prior net gifts
= Donors tax payable on the net gifts to date

10. Taxpayers Suit

a. Nature and Concept

A taxpayer has sufficient personality and interest to seek judicial assistance with a view of
restraining what he believes to be an attempt to unlawfully disburse public funds.

Jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim that
public funds are illegally disbursed or that public money is being deflected to any improper
purpose, or that public funds are wasted through the enforcement of an invalid or
unconstitutional law or ordinance (Landbank vs. Cacayuran, G.R. No. 191667, April 17,
2013).
 b. As distinguished from a citizens suit
In a taxpayers suit, one can sue where there is an assertion that public funds are illegally
disbursed or deflected to an illegal purpose, or that there is a wastage of public funds
through the enforcement of an invalid or unconstitutional law. On the other hand, in a
citizens suit, the person complaining must allege that he has been or is about to be denied
some right or privilege to which he is lawfully entitled or that he is about to be subjected to
some burdens or penalties because of the statute or act complaint of (Province of North
Cotabato vs. Government of the Philippines, G.R. No. 183591, October 14, 2008).

c. Requisites of a Taxpayers suit challenging the constitutionality of a tax measure or act of a

taxing authority; concept of locus standi, doctrine of transcendental importance and ripeness
for judicial determination

Concept of locus standi as applied in taxation

Locus standi is a right of appearance in a court of justice on a given question (Abaya vs.
Ebdane, G. R. No. 167919, February 14, 2007). It is a partys personal and substantial
interest in the case, such that the party has sustained or will sustain direct injury because of
the government act being challenged. It calls for more than just a generalized grievance. A
party need not be a party to the contract to challenge its validity.

Doctrine of transcendental importance

In cases of paramount importance where serious constitutional questions are involved, the
standing requirements may be relaxed and a suit may be allowed to prosper even where
there is no direct injury to the party claiming the right of judicial review.

Ripeness for judicial determination

Nature of actual case or controversy - an actual case or controversy involves a conflict of
legal rights, an assertion of opposite legal claims susceptible of judicial adjudication
(ABAKADA Guro Party List, etc., vs. Purisima, etc., et al., G. R. No. 166715, August 14, 2008
citing Cruz, Isagani, PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23).

Criteria of being ripe for judicial determination - a closely related requirement is ripeness,
that is, the question must be ripe for adjudication. And a constitutional question is ripe for
adjudication when the governmental act being challenged has a direct adverse effect on the
individual challenging it (ABAKADA Guro Party List, etc., vs. Purisima, etc., et al., G. R. No.
166715, August 14, 2008).

PART II. NATIONAL TAXATION

A. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of the Secretary of Finance to promulgate rules and regulations the
Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful
rules and regulations for the effective enforcement of the provisions of the Tax
Code (Section 244, Tax Code of 1997).
 b. Specific provisions to be contained in rules and regulations

2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue

a. Powers and duties of the Bureau of Internal Revenue
o Assessment ad collection of all national internal revenue taxes, fees and charges;
o Enforcement of all forfeitures, penalties and fines connected therewith;
o Execution of judgements in all cases decided in its favor by the Court of Tax Appeals
(CTA) and the ordinary courts; and
o Give effect to and administer the supervisory and police powers conferred to or by
the National Internal Revenue Code (NIRC) or other laws (p.54 Ampongan IT)

b. Power of the Commissioner to interpret tax laws and to decide tax cases the power to
interpret the provisions of the National Internal Revenue Code (NIRC) 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 the NIRC or other laws or portions thereof administered by the bureau is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals (CTA). (p.54-55 Ampongan IT)

c. Non-retroactivity of rulings

B. National Internal Revenue Code (NIRC) of 1997, as amended

1. Income taxation
a. Definition, Nature and General Principles
a.1 Income Tax systems
o Global a system or tax treatment which views, indifferently the tax base, and
generally treats in common all categories of taxable income of the taxpayer (Tan vs.
del Rosario) (p.2 Dimaampao IT)
Provides for uniform tax rules/tax rates
Income Tax of Corporations (Secs. 27 and 28) generally does not
categorize/classify income
Imposes uniform corporate tax rates

o Schedular system in law, where the income tax rules/treatment varies and made
to depend on the kind/category of taxable income of the taxpayer (Tan vs. del
Rosario). It operates under the following characteristics: (p.1 Dimaampao IT)
Categorizes/classifies income: Sec. 32a; Secs. 24, 25 and 26 (imposes
different tax rates) categorizes income of individual taxpayers
Provides for different tax treatment
Imposes different tax rates

o Semi-schedular or Semi-Global Taxpayers Income - the compensation income,

business or professional income, capital gain and passive income not subject to final
tax, and other income are added together to arrive at the gross income, and after
deducting the sum of allowable deductions from business or professional income,
capital gain and passive income not subject to final tax, and other income, in the
 case of corporations, as well as personal and additional exemptions, in the case of
individual taxpayers, the taxable income is subjected to one set of graduated tax
rates; method of taxation under the NIRC.

a.2 Features of the Philippine Income Tax Law

o Direct tax is imposed on the income-earner
o Progressive tax base increases as the tax rate increases
o Comprehensive - the Philippines adopts the citizenship principle, residence
principle, and the source principle
o Semi-schedular more schedular with respect to individual taxpayers but more
global treatment on corporations
o American origin

a.3 Criteria in imposing Philippine income tax

o Citizenship Principle
o Residence Principle
o Source Principle

a.4 Types of Philippine income tax

o National Tax
o Excise Tax
o Direct Tax
o General Tax

a.5 Taxable period

o Calendar year
o Fiscal year

a.6 Kinds of taxpayers

A.6.1. Individuals
Citizens
o Resident Citizens all sources inside and outside; net income.
o Engaged in trade or business or profession entitled to deductions on
his business income and personal and additional exemptions
o Purely compensation income earners not entitled to deductions; only
personal and additional exemptions
o Non-resident Citizens all sources inside

Aliens gross income

o Resident Aliens all sources inside
o Non-resident Aliens all sources inside
o Engaged in trade or business in the Philippines 180 days
o Not engaged in trade or business in the Philippines
NOTA BENE: For purposes of income tax, an overseas contract worker who is a Filipino citizen and
deriving income from abroad is deemed a non-resident citizen and therefore taxed only on income
sourced within the Philippines. However, in order to qualify as a non-resident citizen, the worker must be
physically present abroad most of the time or at least 183 days (continuous or not) during the calendar
year.

ADDENDUM: Certain aliens are entitled to preferential tax rates if they are employed by: (1) regional or
area headquarters and regional operating headquarters of multinational companies in the Philippines;
(2) offshore banking units established in the Philippines; and (3) foreign service-contractor or sub-
contractor engaged in petroleum operations in the Philippines. This is provided that their Filipino
counterparts are also afforded the same preferential tax rate. These Filipinos have the option to be taxed
under the preferential tax rate or under the graduated tax rates.

A.6.2. Estates and Trusts entitled to personal exemption of P20,000

NOTA BENE: Co-ownership is considered a separate taxable entity like estates and trusts. The co-owners
are subject to income tax on their individual distributive share only. However, if the co-owners, after
partition of property invest the income of co-ownership in any income-producing properties, this
constitutes an unregistered partnership and subject to income tax as a corporation. But if it is merely an
isolated transaction, then it cannot be said that a partnership has been formed.

A.6.3. Corporations net taxable income

Domestic all sources inside and outside the Philippines

Foreign

a. Resident Foreign Corporations engaged in trade or business in the

Philippines; ex. a Philippine branch of a foreign corporation

ENTITLED TO PREFERENTIAL TAX RATES (Engaged in trade or business in the

Philippines):
Regional operating headquarters of multinational corporations in the
Philippines

Offshore banking units and foreign currency deposit units of Philippine

branches of foreign banks international air carriers whether online or
offline and international shipping lines
Foreign service-contractors or sub-contractors engaged in petroleum
operations in the Philippines

Registered enterprises with the PEZA and SBMA

b. Non-resident Foreign Corporations not engaged in trade or business

in the Philippines; gross income from sources within the Philippines paid
to NRFC subject to final withholding tax (withheld by payor)
 A.6.4. Partnerships
Taxable Partnership treated as corporations

NOTA BENE: The principle of constructive receipt of income is applied in partnerships. This means that
the partners are taxable on their distributive shares in the taxable year that the profit was made,
regardless of whether such has already been distributed and received by the partners.

Exempt Partnership
o General professional partnership partnerships formed by
persons for the sole purpose of exercising their common
profession; exempt from income tax but must still file an
income tax return - the partners are the ones liable for income
tax based on their respective distributive shares

o Joint venture or consortium undertaking construction activity,

or engaged in petroleum operations with operating contract
with the government

ii. REALIZATION OF INCOME

iii. RECOGNITION OF INCOME

iv. CASH METHOD OF ACCOUNTING VERSUS ACCRUAL METHOD OF

ACCOUNTING

b.2.3 TEST IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES

i. REALIZATION TEST

II. CLAIM OF RIGHT DOCTRINE/DOCTRINE OF OWNERSHIP, COMMAND AND

CONTROL

iii. ECONOMIC BENEFIT TEST, DOCTRINE OF PROPRIETARY INTEREST

iv. SEVERANCE TEST

v. ALL EVENTS TEST

b.2.4 CLASSIFICATION OF INCOME

b.2.5 SITUS OF INCOME TAXATION

b.3 GROSS INCOME

b.3.1 DEFENITION
 b.3.2 CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED

b.3.3 GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXABLE INCOME

b.3.4 SOURCES OF INCOME SUBJECT TO TAX

b.3.5 CLASSIFICATION OF INCOME SUBJECT TO TAX

i. COMPENSATION INCOME

ii. FRINGE BENEFIT

iii. PROFESSIONAL INCOME

iv. INCOME FROM BUSINESS

v. INCOME FROM DEALING IN PROPERTY

vi. PASSIVE INVESTMENT INCOME

vii. ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF

INSURANCE

viii. PRIZES AND AWARDS

ix. PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY

x. INCOME FROM ANY SOURCE WHATEVER

b.3.6 EXCLUSIONS FROM GROSS INCOME

i. RATIONALE FOR THE EXCLUSIONS

ii. TAXPAYERS WHO MAY AVAIL OF THE EXCLUSIONS

iii. EXCLUSIONS DISTINGUISHED FROM DEDUCTIONS AND TAX CREDIT

iv. EXCLUSIONS UNDER THE CONSTITUTION

v. EXCLUSIONS UNDER THE TAX CODE

vi. EXCLUSIONS UNDER SPECIAL LAWS

ii. REALIZATION OF INCOME

Under the realization principle, revenue is generally recognized when both

conditions are met: a) earning process is complete or virtually complete and b) an exchange has
taken place

Income is received not only when it is actually handed to a person but also when it is
merely constructively received by him
When is income considered realized? (2011 BAR)

iii. RECOGNITION OF INCOME

Recognition of income is when an income is reflected on the books and is based upon
the method of accounting used.

iv. CASH METHOD OF ACCOUNTING VERSUS ACCRUAL METHOD OF ACCOUNTING

Cash method is a method of accounting whereby all items of gross income received
during the year shall be accounted for in such taxable year and that only expenses actually paid
shall be claimed as deductions the year. Income is realized upon actual or constructive receipt
of cash or its equivalent while expenses are deductible only upon actual payment thereof.
(Mamalateo)
 Accrual method is a method of accounting for income in the period it is earned,
regardless whether it has been received or not. On the other hand, expenses are accounted for
in the period they are incurred and not the period they are paid. (ibid.)

Cash method Distinguished from accrual method:

In cash method, income is reported in the year payments are received while expenses
are deducted in the year paid. On the other hand, in accrual method, income is reported in the
year it is earned while expenses are deducted in the year it is incurred, regardless of receipt or
disbursement of cash. (ibid.)

The necessity of adopting an accounting method is based upon the express mandate of
the law that the method of accounting regularly employed by the taxpayer in keeping his books
must clearly reflect his income for the year. (see sec. 43 NIRC)

Taxpayer must choose only one accounting method but if no such method of accounting
has been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income. (see sec. 43 NIRC)

b.2.3 TEST IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES

i. REALIZATION TEST

There is no taxable income until there is a separation from capital of something of

exchangeable value, thereby supplying the realization or transmutation which would result in
the receipt of income. (Eisner v. Macomber 252 U.S. 189)

ii. CLAIM OF RIGHT DOCTRINE OR DOCTRINE OF OWNERSHIP, COMMAND AND CONTROL

Claim of right doctrine - A taxable gain is conditioned upon the presence of a claim of
right to the alleged gain and the absence of a definite unconditional obligation to return or
repay that which would otherwise constitute a gain. (Mamalateo)

Doctrine of command or control of income. The power to dispose of income is the

equivalent of ownership of it. The exercise of that power to procure the payment of income to
another is the enjoyment; hence, the realization of the income by him who exercises it. (ibid.)

iii. ECONOMIC BENEFIT TEST, DOCTRINE OF PROPRIETARY INTEREST

Any economic benefit to the employee that increases his networth, whatever may have
been the mode by which it is effected, is taxable.
 Total assets - total liabilities = networth (ibid.)

iv. SEVERANCE TEST

Also referred to as Realization Test

v. ALL EVENTS TEST

Income is reportable when all the events have occurred that fix the taxpayers right to
receive the income and the amount can be determined with reasonable accuracy. (CIR v.
Isabela Cultural Corp, G.R. NO. 172231)

b.2.4 CLASSIFICATION OF INCOME

As to source:

a) Income from sources within the Philippines

b) Income from sources without the Philippines
c) Income from sources partly within and partly without the Philippines.
d)

b.2.5 SITUS OF INCOME TAXATION

Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines:

Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

(Sec. 23 NIRC)

Interests = Residence of the debtor or Obligor

Dividends = Residence of the Corporation paying dividend

Services = Place of performance of the services. ( Non-resident alien taxed only on her
commission income for services rendered in the Philippines)

International shipping line = Gross Philippine billings. (Gross Philippine billing means gross
revenue whether for passenger, cargo, or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight documents.)

International air carrier = Gross Philippine billing. (GPB refers to gross revenue derived from
carriage of persons, excess baggage, cargo or mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or payment of ticket.

Sale of real property = location of real property.

Sale of personal property

a) Produced within and sold without or produced without and sold within = partly
within and partly without the Philippines.
b) Purchased within and sold without or purchased without and sold within = Country
where sold.
c) Shares of stocks of DC = within the Philippines.

(Mamalateo)

b.3 GROSS INCOME

b.3.1 DEFENITION

Gross income was defined by Tax code by giving items included therein.

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

(see Section 32(A), NIRC)

b.3.2 CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED

Income from whatever sources refers to all income not expressly excluded or exempted
from the class of taxable income, irrespective of the voluntary or involuntary action of the
taxpayer in producing the income (Gutierrez v. CIR, CTA CASE NO. 65, AUGUST 31, 1965]

b.3.3 GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXABLE INCOME

"Net income" means gross income less statutory deductions and exemptions. ( sec. 36
rev. reg. nos. 2)

Taxable income means the pertinent items of gross income specified in this Code, less
the deductions and/or personal and additional exemptions, if any, authorized for such types of
income by this Code or other special laws. (sec. 31 NIRC)

What is taxable income (2000 BAR)

b.3.4 SOURCES OF INCOME SUBJECT TO TAX

b.3.5 CLASSIFICATION OF INCOME SUBJECT TO TAX

i. COMPENSATION INCOME

In general, the term "compensation" means all remuneration for services performed by
an employee for his employer under an employer-employee relationship,

Employee refers to any individual who is the recipient of wages and includes an officer,
employee or elected official of the government or any political subdivision, agency or
instrumentality thereof.
 Officers and directors of a Corporation is considered employee. (First Lepanto v. CIR GR
no. 197117)

Compensation income means all remuneration performed by an individual employee for

his employer.

Statutory Minimum Wage

Compensation income falling within the meaning of "statutory minimum wage" shall be
exempt from income tax and withholding tax. (R.A. No. 9504)

Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by
Minimum Wage Earner (MWE) shall
likewise be covered by the above exemption, (ibid.)

Additional compensation not included above not exempt (ibid.)

Backwages, Allowances, and benefits awarded in labor dispute

Subject to withholding tax on wages because they are still considered as compensation
and should be allocated over the years corresponding to such amount.

Garnishees (such as bank) will be considered as withholding agent equivalent to 5% of

the taxable backwages, allowances and benefits. (RMC 32-2012)

Following remunerations are not compensation:

(a) for agricultural labor paid entirely in products of the farm where the labor is
performed
(b) for domestic service in a private home;
(c) for casual labor not in the course
of the employer's trade or business;
(d) for services by a citizen or resident of the Philippines for a foreign government or an
international organization.
(sec. 78 NIRC)

13th month pay and other benefits are excluded from compensation income (sec 32 (B) NIRC)

ii. FRINGE BENEFIT

Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means
any good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined herein) such as, but not limited
to, the following:.

(1)Housing;
(2)Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows. (sec. 33 NIRC)

Fringe benefit tax

General Rule

A final tax of (32%) effective January 1, 2000 and thereafter, is hereby imposed on the
grossed-up monetary value of fringe benefit (unless the

Exception

Fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or advantage of
the employer.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by (68%) effective January 1, 2000 for Citizens, RA,
and NRAETB; (75%) for NRANEBT; (85%) alien employed by RAHQ, ROHQ, OBU and foreign
service contractor engaged in petroleum.

Thereafter multiply the grossed-up monetary value to the applicable fringe benefit tax
rate.

FBT tax rates:

Citizens, RA, NRAETB = 32 %

NRANETB = 25%
 Alien employed by RAHQ, ROHQ, OBU, or foreign petroleum service contractors or
subcontractors, or any of their Filipino individual employees who are employed and
occupying same positions as those held by the alien employees = 15% (see sec. 33 and
25 of NIRC)

Applies only to managerial and supervisory employee.

Income recipient is the person liable but the fringe benefit tax is mandated to be
assumed by the employer and allows the latter to deduct such tax as business expense. (NIRC)

Non taxable fringe benefit:

(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner. (sec. 33 (C) NIRC)

De minimis benefits are limited to facilities or privileges furnished or offered by an

employer to his employees that are relatively small value and are offered or furnished
by the employer merely as a means of promoting the health, goodwill, commitment or
efficiency of his employees. Following are considered as such:

1. Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year;

2. Monetized value of vacation and sick leave credits paid to government officials and
employees;

3. Medical cash allowance to dependents of employees, not exceeding P750 per

employee per semester or P125 per month;

4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more
than P1,500;

5. Uniform and clothing allowance not exceeding P5,000 per annum;

 6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical check-up, maternity assistance, and routine consultations, not exceeding
P10,000 per annum;

7. Laundry allowance not exceeding P300 per month;

8. Employees achievement awards, e.g. for length of service or safety achievement, with
an annual monetary value not exceeding P10,000;

9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;48

10. Daily meal allowance for overtime work and night/graveyard shift not exceeding
25% of the basic minimum wage per region basis. (RR 005-11 as amended by RR 008-12)

Stock option plans (SOP):

Income derived from SOP which is the difference of BV or FMV of shares whichever is
higher, at time stock option is exercised, and price fixed on the shares on the grant date that
qualifies as fringe benefit tax is subject to FBT (Mamalateo)

FBT arises whether shares is that of domestic or foreign corporation. (ibid.)

iii. PROFESSIONAL INCOME

Professional income refers to the fees received by a professional from the practice of his
profession, provided that there is no employer-employee relationship between him and his
clients. (ibid.)

Material factor is existence of Employer-Employee relationship.

iv. INCOME FROM BUSINESS

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar environmental
circumstances. (Commissioner vs. British Overseas Airways Corp., G.R. L-65773)

"To engage" is to embark in a business or to employ oneself therein. The word "engage"
connotes more than a single act or a single transaction; it involves some continuity of action
(Imperial vs. Collector, 97 Phil. 992,1002).
 Gross income from business In the case of manufacturing, merchandising, or mining
business, "gross income" means the total sales, less the cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In determining the
gross income, subtractions should not be made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the cost of goods sold. (sec. 43 RR no. 2)

Long-term contracts means building, installation, or construction contracts covering a

period in excess of one year. Persons whose income is derived in whole or in part from
such contracts shall report their income on the basis of percentage of completion. (Mamalateo)

Sale of patents and copyrights Income or loss is the difference between the selling
price and the cost increased or decreased by depreciation. (ibid.)

Sale of goodwill income or loss is determined by the difference of selling price and the
FMV as proven by the taxpayer. (ibid.)

Forced sale of property through expropriation income or loss is determined by the

difference between the proceeds and the FMV of the property at the time of acquisition. (ibid)

Lease of real property rental income is likewise treated as business income subject to
tax in rate as provided by law. (RC, NRC, NRAETB-graduated, NRANETC-25%) (ibid)

v. INCOME FROM DEALING IN PROPERTY

Dealings with:

Capital Assets (CA) subject to capital gains tax

General types of CA:

a) Shares of stocks including warrants and options to purchase stocks and units of
participation in partnership.

Rules:
If seller is dealer in securities the shares are ordinary asset (OA), subject to graduated
tax.
If seller not a dealer in securities shares are CA
o If listed and traded in local stock exchange subject to of 1% stock transfer tax
based on gross selling price.
o If shares not listed, or if listed but not traded in local stock exchange subject to
capital gains tax of 5% for 1st 100,000 and 10 % for excess of 100, 000 based on
net capital gains.
 b) Real property

Rules:

If seller is real estate dealer the property is OA and subjected to graudated tax rates.
Seller not a real estate dealer determine whether:
o The real property is a) used in tax payers trade, business or profession or b)
treated as a fixed asset used in his trade, business or profession -
ordinary asset subject to graduated tax rates.
o The real property is not among abovementioned capital asset subject to 6%
capital gains tax based on gross selling price or FMV of the property at the time
of sale whichever is higher.

c) Other capital asset

Dealings with other capital assets, except shares of stock of a domestic corporation and
real property located in the Philippines, shall be subjected to graduated tax rate.

Ordinary Assets Graduated tax rates

a) Stock in trade of the taxpayer or other 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,
b) Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business,
c) Property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or
d) Real property used in trade or business of the taxpayer (sec. 39 NIRC).

vi. PASSIVE INVESTMENT INCOME

a) Interest Income

Interest means the amount which a depositary bank may pay on savings and time
deposits in accordance with rates authorized by Bangko Sentral ng Pilipinas. (RR12-80)

Interest income from Philippines currency deposits and deposit substitutes subject to
20% final withholding tax except NRANETB which is subject to 25%
 Deposit substitute means an alternative form of obtaining funds from the public other
than deposits, which may be through issuance, endorsement, or acceptance of debt
instrument for the borrowers account for the purpose of relending or purchasing
receivables and other obligations, or financing their own needs or that of their agent or
dealers. (Mamalateo)
o Interest from currency bank deposits and yield or any other monetary benefit
from deposit substitute, trust fund and other similar arrangement - 25% FWT for
NRANETB and the rest is 20% 20%.
o Interest from government debt instrument and securities - the debt instrument
is considered as deposit substitute regardless of number of investor and
subjected to same FWT. (20% or 25%)
o Interest from long term deposits or investment maturity period exceeds 5 years
will be exempted.
o Interest from depositary bank under expanded foreign currency deposit system
7.5% FWT- if interest received by residents
Exempt if interest is received by non-residents
50% exempt 50% 7.5 joint account of a resident and non-resident.
Interest income on foreign currency deposit
o 7.5% FWT - gross interest income from foreign currency deposit with OBU, FCDU.
o 10% FWT - interest income from foreign currency transactions of a bank.
Interest income from traditional loans by local banks and other creditors subject to
graduated tax rates except:
o NRANETB 25% Final tax.
o NRFC 20% Final tax.
Discounts are treated in the same manner as interest income
Interest income from long term deposits or investments of individuals is exempt
o Exceeding 5 years exempt
o 4 years to less than 5 years - 5%
o 3 years to less than 4 years 12%
o Less than 3 years 20%

(sec. 24 and 25 NIRC)

b) Dividend Income

Dividends comprise any distribution whether in cash or other property in the ordinary
course of business.(Mamalateo)

Dividend is defined as a corporate profit set aside, declared, and ordered by the
directors to be paid to stockholders on demand or at a fixed time. (Fisher v. Collector)
Distinction between Cash dividend and Stock dividend

The former is disbursement to the stockholder of the accumulated earnings, and the
corporation parts irrevocably with all interest therein while the latter is dividend
payable in reserve or increase of additional stock of the corporation.
The former unlike the latter involves disbursement.
The former unlike when declared and paid cannot be reached by corporations creditors
unlike the latter being in essence still the property of corporation can be reached by the
creditors.

b.a) Stock dividends

Generally exempt from tax except if it gives shareholder an interest different from that which
his former stockholdings represent.

Subsequent cancellation or redemption of stock dividend is essentially equivalent to the

declaration of a cash dividend.
(Mamalateo)

Rules on taxation of cash or property dividends

Recipient is Citizen or RA- 10% FWT

Recipient is NRAETB 20% FWT
Recipient is NRANETB 25% FWT
Recipient is DC and RFC
o From DC exempt because doing otherwise will subject the dividend to tax
twice. First from corporate level the dividend being part of its taxable income
and second on the shareholder level being a dividend income which will
ultimately result in extra or double taxation.
Recipient is NRFC
o From DC 15% FWT provided that the NRFC domicile allows a tax credit due
from NRFC which is deemed to have been paid in the Philippines.

Tax sparing rule is a credit granted by the residence country for foreign taxes that for
some reasons were not actually paid to the source country but that would have been paid
under the countrys normal tax rules. (ibid.)

c) Royalty Income
 Royalty is a valuable property that can be developed and sold on a regular basis for
consideration - it is an active business subject to normal corporate income tax. (ibid)

Where a person pays royalty to another for use of intellectual property it is a passive
income and subject to 20% FWT (ibid.)

Rules:

Royalty paid by DC
o Recipient is a citizen, RA , NRAETB, DC, or RFC 20 % FWT
o Recipient is NRANETB 25 % FWT
o Recipient is NRFC 30% FWT.
Royalty paid by FC
o Recipient is RC and DC subject to graduated rates.
o Recipient is NRC , alien, and FC not taxable because they are liable only from
sources within the Philippines.
d) Rental Income

Rules

Lease of personal property located in Philippines but paid to a non-resident:

o Vessel 4.5% for non-resident corporation and 25% for NRA
o Aircraft, machineries and other equipment 7.5 % for non-resident corporation
and 25% for NRA.

vii. ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF INSURANCE

(see discussion on exclusion)

viii. PRIZES AND AWARDS

Rules:

General Rule:

Prizes and winnings within the Philippines 20% FWT

If the recipient is a NRANETB 25 % FWT.

Exception:

Graduated rate if:

o Prizes amounts to 10000 or less
o PCSO and lotto winnings
 Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement are excluded from gross income if: a)
recipient was selected without action on his part and b) recipient not required to render
substantial future services as a condition. (sec. 32 NIRC)

Prizes and awards in local or international sports competition whether held in the
Philippines or not is also excluded from gross income. (sec. 32 NIRC)

Grand prize in Philippine Centennial Commemorative is subject to 20 % FWT though

government sponsored project.(BIR Ruling No. 005-2001)

ix. PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY

Separation pay is included in gross income only when the cause of separation is within
the control of the employee. (Mamalateo)

Retirement benefit and pensions are generally excluded from gross except if the
retirement of employee does not meet requirements laid by RA 4917 and RA 7641. (ibid)

(See discussion on exclusion)

x. INCOME FROM ANY SOURCE WHATEVER

This words disclose the legislative policy to include all income not expressly exempted
within the taxable income under our laws, irrespective of the voluntary or involuntary action of
the taxpayer in producing the gain (Blas Gutierrez v. Collector)

The principle underlying the taxability of an increase in the net worth of a taxpayer rests
on the theory that such an increase in net worth, if unreported and not explained by the
taxpayer, comes from the income derived from a taxable source. (Hermanos v. Commisioner
and CTA)

b.3.6 EXCLUSIONS FROM GROSS INCOME

i. RATIONALE FOR THE EXCLUSIONS

Exclusions are items not included in determination of gross income because they are
either expressly exempted by the Constitution, Tax Code, tax treaties, or special laws; they are
mere return of capital; or they are subject to another kind of tax.

ii. TAXPAYERS WHO MAY AVAIL OF THE EXCLUSIONS

 All taxpayers may avail of the exclusions

iii. EXCLUSIONS DISTINGUISHED FROM DEDUCTIONS AND TAX CREDIT

Exclusions v. Deductions

Former is the flow of wealth to the taxpayer which is not treated as part of gross income
because it is exempted or it does not come within the definition of income while the latter is
the amounts which the law allows to be subtracted from gross income in order to arrive at net
income

Former pertain to the computation of gross income while latter pertains to computation of
taxable income.

Former is something received or earned by the taxpayer but which do not form part of gross
income while the latter are something spent or paid in earning gross income

Exclusions v. Tax Credits

Former are amounts that are not included in gross income while latter are amounts subtracted
from the computed tax in order to arrive at taxes payable

Former are not income while the latter are taxes that are not collected. (Atty. PM Reyes Bar
Reviewer)

iv. EXCLUSIONS UNDER THE CONSTITUTION

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. (sec.
4(3) Art. XIV Constitution)

v. EXCLUSIONS UNDER THE TAX CODE

Section 32 of the Tax Code enumerates the excluded items from gross income

a) Life Insurance proceeds

Proceeds of life insurance paid by reason of the death of an insured to any beneficiary
(individual, partnership, or corporation, but not a transferee for a valuable consideration),
directly or in trust, are excluded from the gross income of the beneficiary.

REASON: they are mere compensation for the loss of the recipient.

Immaterial whether proceeds are received in a single sum or in installments.

 However, if proceeds are held by the insurer under an agreement to pay interest
thereon, the interest payments must be included in income.

b) 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.

REASON: Proceeds of life insurance, payable upon the death of the insured, are considered
as indemnity rather than income to the heirs or beneficiaries who could be corporations or
individuals (El Oriente Fabrica de Tabacos vs. Posadas, G.R. No. 34774).

Amounts received (other than amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life insurance, endowment, or annuity contract
are excluded from gross income but if such amounts (when added to amounts already received
before the taxable year under such contract) exceed the aggregate premiums or considerations
paid (whether or not paid during the taxable year), then the excess shall be included in gross
income.

However, in the case of a transfer for a valuable consideration, by assignment or otherwise,

of a life insurance, endowment, or annuity contract, or any interest therein, only the actual
value of such consideration and the amount of the premiums and other sums subsequently
paid by the transferee are exempt from taxation. (RR 02-40 sec.62)

c) Gifts, Bequests, and Devises. -

Gifts, bequests and devises (which are subject to estate or gift taxes) are excluded, but not
the income from such property. If the amount received is on account of services rendered,
whether constituting a demandable debt or not, or the use or opportunity to use of capital, the
receipt is income (Pirovano vs. Commissioner, 14 SCRA 832).

d) 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 are excluded
from gross income.

Compensations for damages to personal or family rights, damages for slander and libel,
award for loss of life, damages for injuries to the goodwill of a taxpayer's business are not
taxable. Unless they exceeded its cost in which case excess is taxable.
 Damages received for patent infringement, breach of contract or fiduciary duty and
recoveries under the Clayton Act for antitrust violations are excluded from gross income to the
extent that the losses to which the damages relate did not give rise to a tax benefit either in the
recovery year or earlier tax years.

However, "insider profits" recovered by a corporation from the insider (major stockholder
or director) under the Securities Exchange Act of 1934 or the Investment Company Act of 1940
are taxed to the corporation.

Moral damages are also excluded in gross income because it is in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a penalty on
the wrongdoer (Kierulf v. CA GR No. 142029)

e) Income Exempt under Treaty

Business profits of a foreign corporation organized under the laws of a treaty country from
sources within the Philippines are not subject to Philippines income tax, unless such profits are
attributable to a permanent establishment of the foreign corporation created or deemed
created in the Philippines

Capital gains from sale of shares of stock of a domestic corporation, which is always
presumed by law to have situs in the Philippines, are generally not subject to Philippine income
tax, if there exist no real property interest.

f) Retirement Benefits, Pensions, Gratuities, etc.

1) Retirement benefits under RA.. Nos. 4917 and 7641, and under Section 60(B) of Tax
Code.

Retirement benefits received under R.A. No. 7641 and those received by officials and
employees of private firms, in accordance with a reasonable private benefit plan
maintained by the employer (under R.A. No. 4917),

Provided that the retiring official or employee:

o Have been in service for at least 10 years

o Not less than 50 years of age at the time of his retirement,
o Benefit shall be availed of by an official or employee only once.

Separation pay for causes beyond the control of employee.

 The phrase "for any cause beyond the control of the said official or employee" means
that the separation of the employee must be involuntary and not initiated by him such
as:

Retrenchment, installation of labor saving devices dissolution of company

Terminal leave pay

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
due to death, sickness, or other physical disability or for any cause beyond the control of
said official or employee is excluded, the tax exemption applies to salary or cash equivalent
of accumulated vacation and sick leaves such as the terminal leave pays of retiring
government employees, which are considered not part of the gross salary. (Commissioner
v. Castaneda 203 SCRA 72)

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.
Payments of benefits to any person residing in the Philippines under the laws of the
United States administered by the United States Veterans Administration.
Benefits received from SSS in Republic Act No. 8282.
Benefits received from the GSIS under Republic Act No. 8291, including
Retirement gratuity received by government officials and employees.

g) Miscellaneous items

Philippines Investment income in loans, stocks, bonds or other domestic securities, or

interest on Philippines bank deposits of:
o Foreign governments,
o Financing institutions owned, controlled or enjoying refinancing from the foreign
governments, and
o International or regional financial institutions established by foreign government.

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.
 Prizes and Awards - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
o The recipient was selected without any action on his part to enter the contest or
proceeding; and
o The recipient is not required to render substantial future services as a condition to
receiving the prize or award.

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.

To be eligible for exemption, the national sports association referred to in the law that
should sanction said sport activity is the Philippine Olympic Committee (BIR Ruling No.
026-2000, June 13, 2000).

13th Month Pay and Other Benefits. -

Exclusion shall not exceed 82,000. (NIRC as amended by RA no. 10653)
The ceiling covers:
o Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
o Benefits received by employees pursuant to Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;
o 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
o Other benefits such as productivity incentives and Christmas bonus: Provided,

GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
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.

Gains cannot include interest, since it clearly refers to gains from the sale of bonds,
debentures and other certificates of indebtedness. Whereas, the term gains includes
interest in its general sense, this rule cannot be applied to (this section) in specific
sense. Tax Code defines gross income and it is clear that there is distinction between
gains derived from dealings in property and interest. Gains realized from the sale or
exchange or retirement of bonds, debentures and other certificate of indebtedness
 would fall under the category of gains derived from dealings in property. (Nippon Life
Insurance v. CIR Case no. 6142)

(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.

vi. EXCLUSIONS UNDER SPECIAL LAWS

R.A. No. 7916 (Philippine Export Zone Authority Law)

PEZA-registered enterprises are given income tax holidays of six or four years from the date of
commercial operation and after such, 5% final tax on their gross income.

R.A. No. 6657 (Comprehensive Agrarian Reform Package Law)

Gain from transfer of agricultural property covered under the law shall be exempt from capital
gains tax for ten (10) years.

R.A. No. 7653 (New Central Bank Act)

Bangko Sentral ng Pilipinas is exempt from all taxes for (5) years.

R.A. No. 7279 (Urban Development Housing Act of 1992)

National Housing Authority is exempt from all fees and charges of any kind such as
income tax; realty taxes; and documentary stamp tax on sales transactions executed by
and in favor of the NHA in connection with socialized housing projects.

Private Sector Participating In Socialized Housing:

Exempt from the payment of the following national internal revenue taxes

1) Project-related corporate or individual income taxes on a per project basis on

income directly realized from the development of socialized housing sites:

Provided, that the sale or any disposition of lot and/or house and lot packages
beyond the maximum amount of P400,000 (or later amount determined by the
HLURB) shall be subject to the corresponding income taxes;
 2) Capital gains tax on sale of raw lands for use in socialized housing project;
3) Value added tax for the project contractor/developer/ seller or owner of socialized
housing project;
4) Donor's tax for lands certified by the proper LGU to have been donated for socialized
housing purposes.

R.A. No. 8502 (Jewelry Industry Development Act of 1998)

Incentives available to Qualified Jewelry Enterprises:

1) (0%) duty on imported raw materials,

2) Exemption from excise tax on all
goods commonly or commercially known as jewelry
3) Deduction from taxable income of (50%) of expenses incurred in training schemes
approved by the appropriate agency. deductible during the financial year the
expenses were incurred.
4) Gold and silver sales by BSP under minimal margins;

R.A. No. 8525 (Adopt-a-School Act of 1998)

Following tax incentives are granted to a prequalified adopting private entity, which enters into
an Agreement with a public school:

1) Deduction from the gross income of the amount of contribution/

donation that were actually, directly and exclusively incurred for the Program,
subject to sect. 34(H) of the Tax Code plus (50%) of such contribution/ donation
subject to the following conditions:

a) deduction shall be availed of in the taxable year in which the expenses have
been paid or incurred
b) taxpayer can substantiate the following with sufficient evidence:

b.1 the expenses claimed as deduction,

b.2 relation of the expenses to the adopting private entity's participation in the
Adopt-a-School Program,
b.3 Proof of receipt of the contributed/donated property by the recipient public
school

c) Application with approved Agreement endorsed by the National Secretariat,

shall be filed with the (RDO) having jurisdiction over the place of business of the
donor/adopting private entity,

2) Exemption of the Assistance made by the donor from payment of donor's tax
pursuant to Section 101(A)(2) and (B)(1) of the Tax Code of 1997.
R.A. No. 7277, as amended by R.A. No. 9442, (Magna Carta for Persons with Disability)

Persons with disability shall be entitled to claim at least 20% discount from hotels and
restaurants, sports and recreation centers, all drugstores regarding purchase of medicines.

VAT computed after such deduction.

R.A. No. 9504 (July 6,2008),

"Statutory minimum wage" (SMW) paid to SMW earners shall be exempt from income tax.

R.A. No. 9576 (April 9, 2009)

PDIC will be exempt from income tax, final withholding tax, VAT on assessment
collections as well as local taxes.

Tax obligations of Philippine Deposit Insurance Corporation (PDIC) will be charged

against the Tax Expenditure Fund. Starting on the sixth year.

R.A. No. 6938 (Cooperative Code of the Philippines)

Agricultural multi-purpose cooperative registered with the CDA is exempt from ordinary income
tax on transactions with members and non-members for 10 years from registration. Thereafter
exemption applies only to transaction with members only.

R.A. No. 9178 (Barangay Micro Business Act of 2002)

Barangay Micro Business Enterprises BMBE are exempt from income tax from income arising
from operation of the enterprise.

BMBE are those entities engaged in production, processing or manufacturing of

products, whose total assets including those arising from loans but exclusive of the land where
their office, plant or equipment are situated, does not exceed 3 million.