GENERAL PRINCIPLES OF TAXATION
governments.”
A. Taxation
a. Definition
i. It is the power by which the sovereign raises revenue to
defray the expenses of the government. It is a way of apportioning
the cost of government among those who in some measure are
privileged to enjoy its benefits and must bear its burden.
b. Nature of the Power of Taxation
i. The power to tax is an attribute of sovereignty. It is
inherent in the State. As an incident of sovereignty, the power to tax
has been described as “unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on
the constituency who are to pay it. (MCIAA v. Marcos)
ii. Taxes are the lifeblood of the government. Without
taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote public
interest and the common good. (CREBA v. Romulo)
iii. The power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the
people. (Pepsi Cola v. Municipality of Tanauan)
iv. It is legislative in character (Scope of Legislative Taxing
Power)
 Determination of the Purpose
 Determination of the Subjects and Objects of
Taxation
 Determination of the Amount and Rate of Tax
 Determination of the Kind of Tax to be Collected
 Determination of the Apportionment of Tax
 Determination of the Manner and Mode of
Enforcement and Collection
 Determination of the Situs of Taxation
v. It is subject to constitutional and inherent limitations
vi. It is generally not delegated to the executive or judicial
department.
EXCEPTIONS:
 Local Governments
Sec. 5, Art. X, Constitution: “Section 5. Each local
government unit shall have the power to create its
own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and
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charges shall accrue exclusively to the local
Pepsi Cola v. Municipality of Tanauan: “Legislative
powers may be delegated to local governments in
respect of matters of local concern. This is sanctioned
by immemorial practice. By necessary implication, the
legislative power to create political corporations for
purposes of local self-government carries with it the
power to confer on such local governmental agencies
the power to tax.”
Quezon City v. ABS-CBN: “Municipal Corporation has a
general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait for
the statutory grant for these powers. The taxing
power of the local government is limited in the sense
that Congress can enact legislation granting
exemptions.
 When allowed by the Constitution – Under the
Constitution, Congress may expressly authorize the
President to fix within specified limits, and subject to
such limitations and restrictions as it may impose,
tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within
the framework of the national development program
of the Government. (Sec 28[2], Art. VI, Constitution)
 When delegation merely relates to the administrative
implementation or implied from the policy and
purpose of the Act
c. Theory or Underlying Basis
i. Life-Blood Theory/Necessity Theory/Governmental
Necessity
 The power of taxation proceeds upon the theory that
the existence of government is a necessity; that it
cannot continue without means to pay its expenses;
and that for these means it has a right to compel all
its citizens and property within its limits to contribute.
(71 Am. Jur. 2d 346)
ii. Benefits Received Theory/Compensation
Theory/Symbiotic Relationship Theory
 According to this theory, the State demands and
receive taxes from the subjects of taxation within its
jurisdiction so that it may be enabled to carry its
mandate into effect and perform the functions of the
government, and the citizen pays from his property
the portion demanded in order that he may, by
means thereof, be secured in the enjoyment of the
benefits of organized society. (51 Am Jur. 42-43)
 Taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for the
lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender
part of their hard earned income to the government,
every person who is able to must contribute his share
in the running of the government. The government,
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. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by
those in the seat of power. (CIR v. Algue)
 The legislature, in adopting such measures in our tax
laws, only wanted to be assured that taxes are paid
and collected without delay. For taxes are the
lifeblood of government. Also such measures tend to
prevent collusion between the taxpayer and the tax
collector. By questioning a tax’s legality without first
paying it, a taxpayer, in collusion with Bureau of
Internal Revenue officials, can unduly delay, if not
totally evade, the payment of such tax. (Phil Guaranty
Co. v. CIR)
 The power to tax is the most potent instrument to
raise the needed revenues to finance and support
myriad activities of the local government units for the
delivery of basic services essential to the promotion
of the general welfare and the enhancement of
peace, progress, and prosperity of the people. (FELS
Energy, Inc. v. Province of Batangas)
d. Objectives
i. Revenue – Basically, the purpose of taxation is to
provide funds or property with which the State promotes the
general welfare and protection of its citizens. (51 Am. Jur. 71-73)
The conservative and pivotal distinction between police
power and power of taxation rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax. (Gerochi v.
DOE)
While it is true that the power of taxation can be used as
an implement of police power, the primary purpose of levy is
revenue generation. If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then
the exaction is properly called a tax. (Planters Products, Inc. v.
Fertiphil Corporation)
It is beyond serious question that a tax does not cease to
be valid merely because it regulates, discourages, or even definitely
deters the activities taxed. The tax imposed by the decree was
imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation
of pornographic video tapes. And while it was also an objective of
the decree to protect the movie industry, the tax remains a valid
imposition. (Tio v. Videogram)
ii. Non-Revenue
 Regulation. Taxes may also be imposed for a
regulatory purpose as, for instance, in the
rehabilitation of a threatened industry which is
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affected with public interest, like the oil industry.
(Caltex Phils. V. COA)
 Promotion of General Welfare. Taxation may be used
as an implement of the police power in order to
promote the general welfare of the people. Thus, in
the case of Lutz v. Aranea, the SC upheld the validity
of the Sugar Adjustment Act, which imposed a tax on
milled sugar since the purpose of the law was to
strengthen an industry that is so undeniably vital to
the economy – the sugar industry.
 Reduction of Social Inequality. This is made possible
throught the progressive system of taxation where
the object is to prevent the undue concentration of
wealth in the hands of a few individuals. Progressivity
is keystoned on the principle that those who are able
to pay should shoulder the bigger portion of the tax
burden.
 Encouragement of Economic Growth. Taxation does
not only raise public revenue, but in the realm of tax
exemptions and tax reliefs, for instance, the purpose
is to grant incentives or exemptions in order to
encourage investments and thereby promote the
country’s economic growth.
e. Aspects of Taxation
i. Levy – Levy is the imposition of the tax which is a
legislative act. It involves the determination of the persons, property
or excises to be taxes, the sums to be raised.
ii. Assessment – This involves the process where the tax
one is obligated to pay is being computed.
iii. Collection – This consists of the manner of
enforcement of the obligation on the part of those who are taxed.
Levy is taxation, strictly speaking, while the second and
third aspects may be referred to as tax administration. These
aspects together constitute the “taxation system.”
B. Taxes
a. Definition
Taxes are the enforced proportional contributions from
persons and property levied by the lawmaking body of the State by
virtue of its sovereignty for the support of the State and for all public
needs.
b. Nature of Taxes
i. It is a forced charge, imposition or burden. As such,
taxes operate in invitum, which means that it is in no way dependent
on the will or contractual assent, express or implied, of the person
taxed. They are not contracts but positive acts of the government.
 ii. It is based on the taxpayer’s ability to pay. It is assessed
in accordance with some reasonable rule of apportionment, which
means that conformably with the constitutional mandate on
progressivity of a taxing system (Sec 28[2], Art. VI, 1987
Constitution), taxes must be based on ability to pay.
iii. It is generally payable in money. Unless qualified by law
(e.g. backpay certificates under Sec. 2, RA No. 304, as amended), the
term “taxes” or “tax” is usually understood to be a pecuniary burden
– an exaction to be discharged alone in the form of money which
must be in legal tender.
A taxpayer may not offset taxes due from the claims that
he may have against the government. Taxes cannot be subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgmenst as is allowed to be
set off. (Caltex Phils. v. COA)
Taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a tax
and a debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign
capacity. (Philex Mining Corp. v. CIR)
A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a
lawsuit against the government. (Francia v. IAC)
A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action of any indebtedness of the state or
municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they
do not arise out of the contract or transaction sued on. The genereal
rule base on grounds of public policy is well settled that no set-off
admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the
party and party but grow out of duty to, and are the positive acts of
the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. (Republic v.
Mambulao Lumber Co.)
iv. It is imposed by the State on persons, property or
exercises within its territorial jurisdiction applying the principles of
territoriality. The object to be taxed must be subject to the
jurisdiction of the taxing state. This is necessary in order that the tax
can be enforced.
It’s laws may as to some persons found within its territory
no longer control. Nor does the matter end there. It is not precluded
from allowing another power to participate in the exercise of
jurisdictional right over certain portions of its territory. If it does so,
it by no means follows that such areas become impressed with an
alien character. They retain their status as native soil. They are still
subject to its authority. Its jurisdiction may be diminished, but it
does not disappear. So it is with the bases under lease to the
American armed forces by virtue of the military bases agreement of
1947. They are not and cannot be foreign territory. (Reagan v. CIR)
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v. It is levied by the lawmaking body. The power to tax is
a legislative power which under the Constitution only Congress can
exercise through the enactment of tax statutes.
Sec. 28, Art. VI, 1987 Constitution:
Section 28. (1) The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of
the national development program of the Government.
(3) Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes shall be exempt
from taxation.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
vi. It is levied for a public purpose. Taxation involves, and
a tax constitutes, a charge or burden imposed to provide income for
public purposes – the support of the government, the administration
of the law, or the payment of public expenses. For this reason,
revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private persons.
The term public purpose is not defined. Xxx Jurisprudence
states that public purpose should be given a broad interpretation. It
does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be
used for the relocation of illegal settlers, low-cost housing and urban
or agrarian reform.
While the categories of what may constitute a public
purpose are continually expanding in light of the expansion of
government functions, the inherent requirement that taxes can only
be exacted for public purpose still stands. Public purpose is the heart
of a tax law. When a tax law is only a mask to exact funds from the
public when its true intent is to give undue benefit and advantage to
a private enterprise, that law will not satisfy the requirement of
public purpose. (Planters Products v. Fertiphil Corporation)
The concept of public use is no longer confined to the
traditional notion of use by the public, but held synonymous with
public interest, public benefit, public welfare and public
convenience. The discount privilege to which our senior citizens are
entitled is actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding
to the taking of private property for public use or benefit. (CIR v.
Central Luzon Drug Corp.)
Once it is conceded, as it must, that the protection and promotion of
the sugar industry is a matter of public concern, it follows that the
legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. (Lutz v.
Araneta)
vii. It is personal to the taxpayer.
c. Tax distinguished from other fees/charges
i. Tax v. Debt
 A debt is generally based on contract, express or implied,
while a tax is based on law;
 A debt is assignable, while a tax cannot generally be
assigned;
 A debt may be paid in kind, while a tax is generally payable
in money;
 A debt may be the subject of set-off or compensation,
while a tax is generally not;
 A person cannot be imprisoned for non-payment of debt
(except when it arises from a crime), while imprisonment
is a sanction for non-payment of tax (except poll tax);
 A debt is governed by the ordinary periods of prescription,
while a tax is governed by the special prescriptive periods
provided for in the Tax Code; and
 A debt draws interest when it is so stipulated or when
there is default, while a tax does not draw interest except
only when delinquent.
 A tax, however, like a debt, is a liability or obligation.
ii. Tax v. Toll
 A toll is a demand of proprietorship, while a tax is a
demand of sovereignty;
 A toll is paid for the use of another’s property, while a tax
is paid for the support of the government;
 The amount of toll depends upon the cost of construction
or maintenance of the public improvement used, while
there is generally no limit on the amount of tax that may
be imposed; and
 A toll may be imposed by the government or private
individuals or entities, while a tax may be imposed only by
the government.
iii. Tax v. License Fee
 License or permit fee is a charge imposed under the police
power for purposes of regulation.
 License fee is the legal compensation or reward of an
officer for specified services, while tax is an enforced
contribution assessed by sovereign authority to defray
public expenses.
 It is imposed for regulation, while a tax is levied for
revenue;
 Its amount should be limited to the necessary expenses of
inspection and regulation, while there is generally no limit
on the amount of tax that may be imposed;
 It is imposed on the right to exercise a privilege, while a
tax is imposed also on persons and property; and
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 Failure to pay a license fee makes the act or business
illegal while failure to pay a tax does not necessarily make
the act or business illegal but may be a ground for
prosecution.
iv. Tax v. Special Assessment
 Special assessment is an enforced proportional
contribution from owners of lands especially or peculiarly
benefited by public improvements.
 A special assessment is levied only on land;
 It is not a personal liability of the person assessed, i.e., his
liability is limited only to the land involved;
 It is based wholly on benefits (not necessity); and
 It is exceptional both as to the time and place. A tax, on
the other hand, has general application.
v. Tax v. Penalty
 Penalty is any sanction imposed as a punishment for
violation of law or acts deemed injurious. Thus, the
violation of tax laws may give rise to imposition of penalty.
 A penalty is designed to regulate conduct, while a tax is
generally intended to raise revenue; and
 A penalty may be imposed by the government or private
individuals or entities, while a tax may be imposed only by
government.
C. INHERENT POWERS OF THE STATE, distinctions
i. Taxation v. Police Power
As to Purpose. Taxation is levied for the purpose of raising
revenue; police power is exercised to promote public welfare
through regulations.
As to Amount of Exaction. In taxation there is no limit; in
police power, the exaction should only be such as to cover the cost
of regulation, issuance of the license or surveillance.
As to Benefits Received. In taxation, no special or direct
benefit is received by the taxpayer other than the fact that the
Government only secures to the citizen that general benefit
resulting from the protection of his person and property and welfare
of all. As to police power, however, while no direct benefits are
received, a healthy economic standard of society known as
“damnum absque injuria” is attained.
As to Non-Impairment of Contracts. In taxation, the non-
impairment of contracts rule subsist. In the exercise of police power,
however, this limitation does not apply.
As to Transfer of Property Rights. In taxation, taxes paid
become part of the public funds; in police power, no transfer, but
only restraint on the exercise, of property rights exists.
 ii. Taxation v. Eminent Domain
As to Nature of the Power Exercised. Taxation is exercised
in order to raise public revenue; eminent domain or expropriation is
the taking of private property for public use.
As to Compensation Received. In taxation, payment of
taxes results in the general benefit of all citizens and inhabitants of a
State; in eminent domain, a direct benefit results in the form of just
compensation to the property owner.
As to Non-Impairment of Contracts. In taxation, a contract
may not be impaired; this is not so in eminent domain.
As to Persons Affected. Taxation applies to all persons,
property and excises that may be subject thereto; in eminent
domain, only a particular property is comprehended.
D. BASIC PRINCIPLES OF A SOUND TAX SYSTEM
a. Fiscal Adequacy
The sources of government revenue must be sufficient to
meet government expenditures and other public needs. This is
essential in order to avoid budgetary defisits and to minimize foreign
and local borrowings.
Fiscal adequacy, which is one of the characteristics of a
sound tax system, requires that sources of revenue must be
adequate to meet government expenditures and their variations.
(Chavez v. Ongpin)
b. Theoretical Justice or Equality
A good tax system must be based on the taxpayer’s ability
to pay. This suggests that taxation must be progressive conformably
with the constitutional mandate that Congress shall evolve a
progressive system of taxation. (Sec. 28[1], Art. VI, 1987
Constitution) It holds that similarly situated taxpayers should pay
equal taxes, while those who have more should pay more.
c. Administrative Feasibility
It means that tax laws should be capable of convenient,
just and effective administration or enforcement at a reasonable
cost.
d. Economic Efficiency
The system or power of collecting taxes should not exceed
the amount of tax collected.
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E. INHERENT AND CONSTITUTIONAL LIMITATIONS
a. Inherent Limitations – So called because they proceed from
the very nature of the taxing power itself.
i. Public Purpose
One test of determining the public purpose in a tax is
whether the thing to be furthered by the appropriation of public
revenue is something which is the duty of the State, as a
government, to provide. Another test is whether the proceeds of the
tax will directly promote the welfare of the community in equal
measure.
There is no power to tax an object which is not within the
purposes for which governments are established. Such purpose also
includes the promotion of social justice because it is the duty of the
State to protect those less in life; thus fulfilling the public purpose
requirement.
The term public purpose is not defined. Xxx It does not
only pertain to those purposes which are traditionally viewed as
essentially governmental functions, such as building roads and
delivery of basic services, but also includes those purposes designed
to promote social justice. Thus, public money may now be used for
the relocation of illegal settlers, low-cost housing and urban or
agrarian reform. (Planters Products v. Fertiphil Corp.)
The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to promote
public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public. (Pasucal v. Sec. of Public Works)
ii. Non Delegation of the Legislative Power to Tax
The power of taxation is exclusively legislative.
Consequently, the taxing power as a general rule may not be
delegated.
Exceptions:
1. Delegation to the President. Under the Constitution,
Congress may expressly authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the Government. (Sec. 28[2], Art.
VI, 1987 Constitution)
2. Delegation to Local Governments. Each local government
unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments. (Sec. 5, Art. X, 1987
Constitution)
3. Delegation to Administrative Agencies. Administrative
agencies like the BIR and Bureau of Customs may be
delegated with respect to administrative purposes – that
is, only for tax collection.
 Iii. Exemption of Government Entities
As a matter of public policy, property of the State and of
its municipal subdivisions devoted to government uses and purposes
is generally deemed to be exempt from taxation although no
express provision in the law is made therefor. Such exemption is
upheld as long as the said property is devoted to government uses
and purposes. Further, it may be said that it is absurd to tax entities
which is actually funded by the revenues raised through taxation.
GOCCs are exempted unless they are performing
proprietary functions in which case such income derived therefrom
should be properly subjected to tax.
Exempt Entities: PHIC, SSS, GSIS, PNR
iv. International Comity
The property of a foreign state or government may not be
taxed by another under the principle of sovereign equality among
states by virtue of which one state cannot exercise its sovereign
powers over another.
v. Territorial Jurisdiction
However broad the power of taxation may be as to its
character and no matter how searching it is in its extent, such power
is necessarily limited only to persons, property or businesses within
its jurisdiction.
b. Constitutional Limitations
i. Due Process of Law
Sec. 1, Art. III of the Constitution provides in part that
“(n)o person shall be deprived of life, liberty or property without due
process of law.”
Substantive Requirement. The tax law should be valid;
should not be harsh, oppressive or confiscatory; must be for a public
purpose and imposed within territorial jurisdiction.
Procedural Requirement. This involves the compliance
with the fair and reasonable methods of procedure prescribed by
law. There must be no arbitrariness in assessment and collection
and that the taxpayer is entitled to right to notice and hearing.
ii. Equal Protection of Laws
All persons subject to legislation shall be treated alike
under like circumstances and conditions both in the privileges
conferred and obligations imposed.
The Constitution prohibits class legislation which
discriminates against some and favors others. As long as there are
rational or reasonable grounds for so doing, Congress may,
therefore, group the persons or properties to be taxed and it is
sufficient “if all of the same class are subject to the same rate and
the tax is administered impartially upon them.
Classification to be valid must:
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- Rest on substantial distinctions
- Germane to the purposes of the law
- Not be limited to existing conditions only
- Equally apply to all members of the same class
The State has the inherent power to select the subject of
taxation ad inequalities which result from the singling out of one
particular class for taxation or tax exemption infringe no
constitutional limitation. (Sison v. Ancheta)
iii. Rule of Uniformity and Equity in Taxation
Uniformity in taxation means that all taxable articles or
properties of the same class shall be taxed at the same rate. This
means that there must be equality in burden and not necessarily
equality in amount. It does not signify an intrinsic, but simply a
geographic, uniformity.
A tax is uniform when it operates with the same force and
effect in every place where the subject of it is found. It does not
signify an intrinsic but simply geographic uniformity. A levy of tax is
not unconstitutional because it is not intrinsically equal and uniform
in its operation. The uniformity rule does not prohibit classification
for purposes of taxation. (British American Tobacco v. Camacho)
Equity in taxation involves the application of the ability to
pay principle. The concept of equity in taxation requires that such
apportionment be more or less just in the light of the taxpayer’s
ability to shoulder the tax burden (usually measured in terms of the
size of wealth or property and income, gross or net) and, if
warranted, on the basis of the benefits he receives from the
government.
Taxation may be uniform but inequitable when the
amount of tax imposed is excessive or unreasonable.
To insure and enhance the equity objective, the
Constitution enjoins Congress to “evolve a progressive system of
taxation.” This means that tax laws shall place emphasis on direct
rather than indirect taxation, with ability to pay as the principal
criterion.
On the basis of the foregoing discussions, it can safely be
said that while equal protection refers more to like treatment of
persons in like circumstances, uniformity and equity refers to the
proper relative treatment for tax purposes of persons in unlike
circumstances.
Absolute or perfect equality or uniformity and equity is, of
course, hardly attainable, if not impossible. No system has ever been
devised which has produced perfect equality and uniformity of
taxation as between persons or corporations or different classes of
property and such a result cannot reasonably be expected. (First
Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all that can
be had.
iv. Prohibition against impairment of obligation of
contracts
The above proceeds from the constitutional provision that
“No law impairing the obligation of contracts shall be passed.” (Sec.
10, Art. III)
 The obligation of a contract is impaired when its terms or
conditions are changed by law or by a party without the consent of
the other, thereby weakening the position or rights of the latter.
An exemption of impairment by law is when a tax
exemption based on a contract is revoked by a later taxing statute.
Note that when the government is a party to the contract granting
exemption, it cannot be withdrawn without violating the non-
impairment clause.
However, non-impairment may not be invoked in the case
of a public utility franchise grantee; the legislature can impair a
grantee’s franchise since a franchise is granted under the
Constitutional condition that it shall be subject to amendment,
alteration or repeal by Congress when the public interest so
requires. (See Sec. 11, Art. XII)
Thus in the case of PPI v. Chato, the SC said that since the
law granted the press a privilege, the law could take back the
privilege anytime without offense to the Constitution. The reason is
simple: by granting exemptions, the State does not forever waive
the exercise of its sovereign prerogative. Indeed, in withdrawing the
exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject.
In Tolentino v. Sec. of Finance, CREBA, one of the
petitioners, alleged that the imposition of the VAT on sales and
leases of real estate by virtue of contracts entered into prior to the
effectivity of the law would violate the non-impairment of contracts
rule. The Court ruled that it is not enough to say that the parties to a
contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are
existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of
the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which
retains adequate authority to secure the peace and good order of
society.
v. Prohibition against imprisonment for non-payment of
poll tax
This principle is based on the provision of the Constitution
that “No person shall be imprisoned for debt or non-payment of a
poll tax.” (Sec. 20, Art. III)
A poll tax refers to a personal or capitation tax; it is a tax of
a fixed amount on individuals residing within a specified territory,
whether citizen or not, without regard to their property or
occupation. Applying the said provision, no one may be sent to
prison for failure to pay the community tax. One should not be
punished on account of his poverty.
Under the LGC, the only penalty for delinquency is the
payment of a surcharge in the form of interest at the rate of 24% per
annum which shall be added to the unpaid amount, from the due
date until it is paid.
vi. Non-infringement of Religious Freedom
Sec. 5, Art. III of the Constitution provides that “(n)o law
shall be made respecting an establishment of religion or prohibiting
7 TAXATION MIDTERM NOTES|404 | marukoi.mhealler
the free exercise thereof. The free exercise and enjoyment of
religious profession and worship without discrimination or
preference shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.”
The general rule is that activities simply, purely and for
propagation of faith are exempt, as well as sales of bibles and
religious articles not for purposes of profit by a non-stock, non-profit
organization. However, as an exception, the Constitution does not
prohibit the imposition of a generally applicable tax on the sale of
religious materials when done by proprietary institution.
A municipal license tax on the sale of bibles and religious
articles by a non-stock, non-profit missionary organization at a little
profit constitutes curtailment of religious freedom and worship
which is guaranteed by the Constitution. The license tax is actually in
the nature of a condition or permit for the exercise of the right.
(American Bible Society v. City of Manila)
vii. Prohibition against appropriation for religious
purposes
Sec. 29(2) of Art. VI of the Constitution provides that “(n)o
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 religious
teacher or dignitary as such, except when such priest, preacher,
minister or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
The above limitation is based on the requirement that
taxes can only be levied for a public purpose. Note that what the
Constitution prohibits is the use of public money or property for the
benefit of any priest, etc. as such. When so employed in the armed
forces, any penal institution, or government orphanage or
leprosarium, they may receive their corresponding compensations
for services rendered in their non-religious capacity without
violating the constitutional prohibition.
viii. Exemption of religious, charitable and educational
entities, non-profit cemeteries, and churches from property
taxation
Sec. 28(3), Art. VI of the Constitution provides: “Charitable
institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.”
Note that the exemption covers only property taxes and
not other taxes. (LLadoc v. CIR) The test of exemption is the use of
the property and not ownership. Thus, a property leased by the
owner to another who uses it exclusively for religious purposes is
exempt from property tax but the owner is subject to income tax on
rents received. Likewise, that if a property, although actually owned
by a religious, charitable or educational institution, is actually used
for a non-exempt purpose, the exemption from tax vanishes.
The use of the word exclusively means primary rather than
solely. Such that the exemption is not wholly or partly lost because
on certain occasions the property exempted or part of it is used for
social purposes or let out to others for entertainment.
 What is exempted is not the institution itself, those
exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious,
charitable and educational purposes. Portions of the land leased to
private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions
of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes. (Lung Center of the Phils. v.
Quezon City)
ix. Origin of Appropriation, Revenue and Tariff Bills
Sec. 24, Art. VI of the Constitution provides that “(a)ll
appropriation, revenue or tariff bills, bills authorizing the increase of
the public debt, bills of local application and private bills shall
originate exclusively in the House of Representatives but the Senate
may propose or concur with amendments.”
In the “Tolentino E-VAT” case, the SC said that “(A) bill
originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. At this point,
what is important to note is that, as a result of the Senate action, a
distinct bill may be produced. To insist that a revenue statute – and
not only the bill which initiated the legislative process culminating in
the enactment of the law – must be substantially be the same as the
House bill would be to deny the Senate’s power not only to ‘only
concur with amendments’ but also ‘to propose amendments.’ It
would be to violate the co-equality of legislative power of the two
houses of Congress and in fact make the House superior to the
Senate.
x. Exemption of Non-stock, non-profit educational
institutions from taxation
The exemption covers (1) income tax, (2) property tax, (3)
donor’s taxes, and (4) custom duties.
To be exempt from tax or duty, the revenue, assets,
property or donations must be used actually, directly and exclusively
for educational purposes. In the case of religious and charitable
entities and non-profit cemeteries, the exemption is limited to
property tax.
Congress is authorized to grant similar exemption to
proprietary (for profit) educational institutions subject to limitations
provided by law including restrictions on dividends and provisions
for reinvestment. The restrictions are designed to insure that the tax
exemption benefits are used for educational purposes.
Lands, buildings, and improvements actually, directly, and
exclusively used for educational purposes are exempt from property
tax whether the educational institution is proprietary or non-profit.
Canteens and bookstores inside schools are exempt from
income tax as long as it operates within the school and is primarily
used by the school even if it caters to outsiders.
xi. Concurrence by a majority of all the members of
Congress for the passage of a law granting tax exemption
The requirement is obviously intended to prevent
indiscriminate grant of tax exemptions. The phrase “a majority of all
8 TAXATION MIDTERM NOTES|404 | marukoi.mhealler
the members of the Congress” means at least one-half plus one of
all the members thereof voting separately. Such rule also applies to
a law authorizing refund of a tax already collected.
xii. Power of the President to veto any particular item or
items in a revenue or tariff bill
As a general rule, under the Constitution, the President
may not veto a bill in part and approve it in part. The exception lies
in the case of revenue or tariff bills whereby the vetoed items shall
simply be not given effect.
xiii. Non-impairment of the jurisdiction of the Supreme
Court in tax cases
The Constitution prohibits Congress from taking away the
jurisdiction of the SC as the final arbiter of tax cases.
F. DOUBLE TAXATION
a. Prohibited sense v. Broad sense
(1) In its strict sense (referred to as direct duplicate taxation
or direct double taxation), double taxation means –
 taxing twice,
 by the same taxing authority,
 within the same jurisdiction or taxing district,
 for the same purpose
 in the same year (or taxing period),
 for some of the property in the territory.
Both taxes must be imposed on the same property or
subject matter.
(2) In its broad sense (referred to as indirect duplicate
taxation or indirect double taxation), double taxation is
taxation other than duplicate. It extends to all cases in
which there is a burden of two or more pecuniary
impositions. In other words, any of the elements in the
prohibited sense of double taxation is missing.
b. Concept applicable in this jurisdiction
There is no constitutional prohibition against double
taxation in the Philippines. It is something not favored but
nevertheless permissible. Such taxation should, whenever possible,
be avoided and prevented.
- Doubts as to whether double taxation has been
imposed should be resolved in favor of the taxpayer.
The reason obviously is to avoid injustice or
unfairness.
- When double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity
rule or the equal protection guarantee.
G. EXEMPTION FROM TAXATION
a. Definition
Exemption from taxation is the grant of immunity to
particular persons or corporations or to persons or corporations of a
particular class from a tax which persons and corporations generally
within the same state or taxing district are obliged to pay.
It is an immunity or privilege; it is freedom from a financial
charge or burden to which others are subjected.
b. Nature of Exemption
(1) An exemption from taxation is a mere personal privilege of
the grantee. Thus, an exemption granted to a corporation
does not apply to its stockholders, the former being
considered as a legal entity with a personality separate and
distinct from the latter. Being personal in nature, a tax
exemption cannot be assigned or transferred by the person
to whom it is granted without the consent of the legislature.
(2) It is generally revocable by the government unless the
exemption is founded on a contract which is protected from
impairment. An exemption provided for in a franchise,
however, may be repealed or amended pursuant to the
Constitution.
(3) It implies a waiver on the part of the government of its right
to collect what otherwise would be due to it, and, in this
sense, is prejudicial thereto. Hence, it exists only by virtue of
an express grant and must be strictly construed.
(4) It is not necessarily discriminatory so long as the exemption
has a reasonable foundation or rational basis. Where,
however, no valid distinction exists, the exemption may be
challenged as violative of the equal protection guarantee or
the uniformity rule.
c. Nature of power to grant exemption
(1) National Government. – Like the inherent power to tax, the
power to exempt from taxation is an attribute of sovereignty for the
power to prescribe who or what property shall be taxed implies the
power to prescribe who or what property shall not be taxed. Unless
restricted by the Constitution, the legislative power to exempt is as
broad as its power to tax.
(2) Local Governments. – Municipal corporations, however, unlike
a sovereign state, are clothed with no inherent power to tax. Hence,
they have also no inherent power to exempt from taxation. But the
moment the power to impose particular tax is granted, they have
also the power to grant exemption therefrom unless forbidden by
some provision of the Constitution or law.
d. Grounds
(1) Contract. – Tax exemption may be based on contract in
which case the public represented by the government is
supposed to receive a full equivalent therefor. Ordinarily, the
9 TAXATION MIDTERM NOTES|404 | marukoi.mhealler
provisions of a contract of exemption from taxation are
contained in the charter of the corporation (law under which
is organized) to which the exemption is granted.
(2) Public Policy. – It may be based on some ground of public
policy, such as, for example to encourage new and necessary
industries or to foster charitable and other benevolent
institutions. In this case, the government need not receive
any consideration in return for the tax exemption.
(3) Reciprocity. – It may be created in a treaty on grounds of
reciprocity, or to lessen the rigors of international double or
multiple taxation which occurs where there are many taxing
jurisdictions.
e. Construction and Interpretation
i. General Rule
In the construction of tax statutes, exemptions are not
favored and are construed strictissimi juris against the taxpayer. An
exemption from the common burden cannot be permitted to exist
upon vague implication or inference.
Taxation is the rule and exemption is the exception.
Therefore, he who claims must be able to justify his claim or right
thereto, by a grant expressed in terms “too plain to be mistaken and
too categorical to be misinterpreted.”
ii. Exceptions
In the following cases, however, the exemption statutes
are liberally construed:
(1) When the law itself expressly provides for a liberal
construction;
(2) When the exemption is in favor of the government itself or
its agencies;
(3) When the exemption is in favor of religious, charitable and
educational institutions because the general rule is that
they are exempt from tax.
H. CONSTRUCTION OF TAX LAWS
a. Nature of Tax Laws
Tax laws are civil in nature. Not political. Hence, even
during the period of enemy occupation (such as, for instance, during
the Japanese occupation of the Philippines in World War II), tax laws
are continually enforced as they are deemed to be the laws of the
occupied territory and not of the occupying power.
Neither are tax laws penal in nature. Not being penal in
character, the rule in the Constitution against the passage of ex post
facto laws cannot be invoked. The constitutional prohibition applies
only to criminal or penal matters, and not to laws which concern civil
matters or proceedings generally, or which affect or regulate civil or
private rights.
 b. Statutes imposing taxes are construed against the gov’t
No person or property is subject to taxation unless within
the terms or plain import of a taxing statute. In every case of doubt,
tax statutes are construed strictly against the government and
liberally in favor of the taxpayer.
The rule of strict construction as against the government is
not applicable where the language of the statute is plain and there is
no doubt as to the legislative intent. In such case, the words
employed are to be given their ordinary meaning.
c. Construction of Statute by Predecessors is not binding on the
Successors
The Secretary of Finance has the power to revoke, repeal
or abrogate the acts or previous rulings of his predecessors in office.
The reason for this is that the construction of the statute by those
administering it is not binding on their successors if thereafter the
latter becomes satisfied that a different construction should be
given. (Hilado v. Collector)
d. Tax statutes must be applied prospectively
i. General Rule
The general rule is that tax laws or amendments thereof
are prospective in operation. The reason is that the nature and
amount of the tax could not be foreseen and understood by the
taxpayer at the time of the transaction which the law seeks to tax
was completed.
ii. Exception
A statute may nevertheless operate retroactively provided
it is expressly declared or is clearly the legislative intent. As such,
increasing taxes on income already earned is not invalid.
iii. Exception to the Exception
A tax law should be given retroactive application when it
would be harsh and oppressive, for in such case, the constitutional
limitation on due process would be violated. Where the increase is
made to apply to income earned long before the enactment of the
law, the proper tax of which has already been paid, such increase is
a violation of due process.
e. Publication
Not all sources of tax laws require publication as required
in Art. 2 of the Civil Code.
Interpretative regulations and those which are merely
internal in nature, i.e., those which regulate only the personnel of
the administrative agency and not the public, need not be published.
When an administrative agency renders an opinion by
means of a circular or memorandum it merely interprets a pre-
10
existing law and no publication is required for its validity. In one
case, a BIR Memorandum Circular was ruled as one which is only for
the internal administration of the BIR and not a regulation within the
contemplation of Sec. 245 of the Tax Code, and therefore, needs no
publication in the Official Gazette. (La Suerte Cigar v. CTA)
f. Special laws prevail over general laws
Tax laws are special laws. The tax code, as a special law,
prevails over a general law such as the Civil Code. But in case the
provisions of a special law are found to be deficient in a particular
situation, the Civil code shall apply. (See Art. 18, NCC)
I. TAX EVASION v. TAX AVOIDANCE
a. Tax Evasion
Tax evasion is a term that connotes fraud thru the use of
pretenses and forbidden devices to lessen or defeat taxes. (Yutivo
Sons Hardware v. CTA)
It is the use by the taxpayer of illegal or fraudulent means
to defeat or lessen the payment of a tax. It is also known as “tax
dodging”. It is punishable by a law, subjecting the taxpayer to civil
and criminal liabilities.
Some tax evasion devices include the deliberate failure to
report taxable income or property and the deliberate reduction of
income that has been received.
Tax evasion connotes the integration of 3 factors:
- The end to be achieved, i.e., payment of less than
that known by the taxpayer to be legally due, or in
paying no tax when it is shown that a tax is due;
- An accompanying state of mind which is described as
being evil, in bad faith, willful or deliberate and not
accidental;
- A course of action (or failure of action) which is
unlawful.
b. Tax Avoidance
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. (CIR v. The Estate of Toda)
Tax avoidance, often called “tax planning” or “tax
minimization,” is the use by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property or
income, in order to avoid or reduce tax liability.
The term may be extended to include situations where a
person refrains from engaging in some activity or enjoying some
privilege in order to avoid the incidental taxation or to lower his tax
bracket for a taxable year. Thus, a man may change his residence to
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
avoid taxation or change the form of his property by putting his
money into non-taxable securities.

Where the tax evader breaks the law, the tax avoider
sidesteps it.

References:

Law of Basic Taxation by Aban

The Fundamentals of Taxation by De Leon

Atty. Bathan’s Taxation Reviewer on General Principles of Taxation

Notes from Previous Batches based on Atty. Tiu’s Syllabus

11 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 INTRODUCTION TO INCOME TAXATION Tax Rate %
Tax xx

Compensation Income xx
I. Income Tax Tax Rate %
Tax xx
“Income tax” is defined as a tax on all yearly profits arising
from property, professions, trades or offices, or as a tax on a
person’s income, emoluments, profits and the like. Income tax is a 3. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
direct tax on actual or presumed income (gross or net) of a taxpayer
received, accrued, or realized during the taxable year. Under this system, the compensation income,
business or professional income, capital gain and passive
income not subject to final withholding income tax, and
other income are added together to arrive at the gross
II. Income Tax Systems income, and after deducting the sum of allowable
deductions from business or professional income, capital
1. GLOBAL TAX SYSTEM gain, passive income and other income not subject to final
tax, in the case of corporations, as well as personal and
In a global tax system, all items of gross income, additional exemptions, in the case of individual taxpayers,
deductions and personal and additional exemptions, if the taxable income (i.e., gross income less allowable
any, are reported in one income tax return, and the deductions and exemptions) is subjected to one set of
applicable tax rate is applied on the tax base. graduated tax rates (if an individual) or normal corporate
income tax rate (if a corporation). With respect to the
This system treats indifferently the tax base and above incomes not subject to final withholding tax, the
generally treats in common all categories of taxable computation of income tax is “global.”
income of the taxpayer without any distinction as to their
type or nature, and subjects them to a single set of However, passive investment income subject to
graduated or fixed tax rates. final tax and capital gains from the sale or transfer of
shares of stocks of a domestic corporation and real
All income from whatever source is recorded in properties remain subject to different sets of tax rates and
one return and only one rate is applied to the taxable covered by different tax returns. The schedular tax system
income. thus applies to the capital gains and passive income
subject to final tax at preferential tax rates.
Ex.:
This system is applicable in PHILIPPINE
Business Income xx JURISDICTION.
Passive Income xx
Compensation Income xx Ex.:
Total Income xx Passive Income xx
Less: Deductions (xx) Tax Rate %
Taxable Income xx Tax xx
Tax Rate %
Tax xx Business Income xx
Compensation Income xx
Total Income xx
2. SCHEDULAR TAX SYSTEM Less: Deductions (xx)
Taxable Income xx
Under the schedular tax system, different types Tax Rate %
of incomes are subject to different sets of graduated or Tax xx
flat income tax rates. The applicable tax rate(s) will depend
on the classification of the taxable income. A separate tax *Some income are subject to global
return or computation is required for each type of income. tax system while some are schedular
tax system. (In short: mixed)
Each type of income is subjected to a different
rate and the taxpayer files different income tax returns.

Ex.:
Passive Income xx III. Features of Income Tax
Tax Rate %
Tax xx
1. Direct Tax

The tax burden is borne by the income recipient

upon whom the tax is imposed. It is a tax demanded from
Business Income xx

12 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 the very person who, it is intended or desired, should pay
it.
In context, direct taxes are those that are
exacted from the very person who, it is intended or
desired, should pay them, they are impositions for which a
taxpayer is directly liable on the transaction or business he
is engaged in. (Silkair v. CIR)
On the other hand, indirect taxes are those that
are demanded, in the first instance, from, or are paid by,
one person in the expectation and intention that he can
shift the burden to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the
payment of the tax falls on one person but the burden
thereof can be shifted or passed on to another person,
such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it. When
the seller passes on the tax to his buyer, he, in effect,
shifts the tax burden, not the liability to pay it, to the
purchaser as part of the purchase price of goods sold or
services rendered. (Silkair v. CIR)
Direct tax vis-a-vis indirect tax, the difference lies
in the liability to pay the tax and the burden to pay the tax.
Income tax is a progressive tax, since the tax
base increases as the tax rate increases (i.e. graduated
income tax rates 5-32%). It is founded on the ability to pay
principle and is consistent with the Constitutional
provision that “Congress shall evolve a progressive system
of taxation.” (See Sec 28*1+, Art. III, 1987 Constitution)
On the other hand, in a regressive tax, fixed flat
rates are applied regardless of the ability to pay of
taxpayer or the lesser you earn the more your taxes. I.e.
Value Added Tax (VAT)].
In the case of Tolentino vs. SOF, the SC said that
direct taxes are to be preferred and as much as possible,
indirect taxes should be minimized. Resort to indirect
taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayer’s ability to
pay.
2. Basis of Income Tax Imposition
 Citizenship Principle
A citizen of the Philippines is subject to
Philippine income tax (a) on his worldwide income
from within and without the Philippines, if he resides
in the Philippines, or (b) only on his income from
sources within the Philippines, if he qualifies as a
nonresident citizen; hence, the income of a
nonresident citizen from sources outside the
Philippines shall be exempt from Philippine income
tax.
 Residence Principle
13
An alien was subject to Philippine income tax on
his worldwide income because of his residence in the
Philippines. Thus, a resident alien is now liable to pay
Philippine income tax only on his income from
sources within the Philippines and is exempt from tax
on his income from sources outside the Philippines.
 Source Principle
An alien is subject to Philippine income tax
because he derives income from sources within the
Philippines. Thus, a non-resident alien is liable to pay
Philippine income tax on his income from sources
within the Philippines, such as dividend, interest,
rent, or royalty, despite the fact that he has not set
foot in the Philippines.
3. System of income taxation in the Philippines
The Philippines follows the semi-schedular or
semi-global system of income taxation, although certain
passive investment incomes and capital gains from sale of
capital assets, namely: (a) shares of stock of domestic
corporations; and (b) real property are subject to final
taxes at preferential tax rates.
4. Origin of income taxation in the Philippines
The Philippine income tax law is a law of
American origin. Thus, the authoritative decision of the
American official charged with enforcing the U.S. Internal
Revenue Code has peculiar force and persuasive effect for
the Philippines. Great weight should be given to the
construction placed upon a revenue law, whose meaning
is doubtful, by the department charged with its execution.
5. When is income taxable? (personal note ^^, )
Income, gain or profit is subject to income tax,
when the following requisites are present:
a. There is income gain or profit;
b. The income, gain or profit is received, accrued, or
realized during the taxable year; and
c. The income, gain or profit is not exempt from income
tax.
Return of capital is not subject to income tax.
Thus, payment of loan principal is exempt from income
tax. Cost of sales of manufacturers and dealers of goods,
which represents return of capital, is not subject to income
tax.
Self-assessment tax system is followed in the
Philippines. You have to file your tax return without need
of assessment from administrative agencies (i.e. BIR). You
are only assessed usually when there is suspicion that you
are understating your revenues or overstating your
deductions (consequently under-declaring your tax
liability)
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
IV. Kinds of Individual Taxpayers [Section 25(A)(1), NIRC]

a. CITIZENS

 Resident Citizen (RC) V. Taxablity

RC is a citizen of the Philippines residing therein a. Kind of Taxpayer, Sources of Taxable Income, Tax Base,
Tax Rate
 Non-Resident Citizen (NRC)

NRC is a citizen of the Philippines who

established to the satisfaction of the CIR the fact of
his physical presence abroad with a definite intention
TAXPAYER SOURCES OF TAX BASE TAX RATE
to reside therein.
TAXABLE
INCOME
NRC is a citizen of the Philippines who leaves
the Philippines during the taxable year to reside RC Within and Net Income 5% - 32&
abroad, either as an immigrant or for employment on without
a permanent basis. NRC Within Net Income 5% - 32%
OCW Within Net Income 5% - 32%
NRC is a citizen of the Philippines who works RA Within Net Income 5% - 32%
and derives income abroad and whose employment NRA-ETB Within Net Income 5% - 32%
thereat requires him to be physically present abroad NRA-NETB Within Gross Income 25%
most of the time during the taxable year (not less *Special Treatment:
than 183 days during the taxable year).
- Resident citizens are the only taxpayers taxed for income
NRC is a citizen of the Philippines who has been from sources within and without
previously considered as non-resident citizen and
who arrives in the Philippines at any time during the - NRA-NETB are the only taxpayers subjected to a flat rate of
25% and tax base is gross income. The difference between net
taxable year to reside permanently in the Philippines
income and gross income is that in gross income, deductions
shall likewise be treated as a non-resident citizen for and personal exemption are not yet availed of.
the taxable year in which he arrives in the Philippines
with respect to his income derived from sources b. Relevant NIRC provisions:
abroad until the date of his arrival in the Philippines.
SEC. 24. Income Tax Rates. -
 Overseas Contract Worker (OCW)
(A) Rates of Income Tax on Individual Citizen and Individual Resident
A citizen of the Philippines who is working and Alien of the Philippines.
deriving income from abroad by virtue of an
employment contract with an employer without the (1) An income tax is hereby imposed:
Philippines (including a seaman who is a citizen of the
Philippines and who receives compensation as a (a) On the taxable income defined in Section 31
member of the compliment of a vessel engaged of this Code, other than income subject to tax
exclusively in international trade). under Subsections (B), (C) and (D) of this Section,
derived for each taxable year from all sources
b. ALIENS within and without the Philippines be every
individual citizen of the Philippines residing
 Resident Alien (RA) – An alien who resides in the therein;
Philippines on a more or less permanent basis (must
be actually present in the Philippines for more than (b) On the taxable income defined in Section 31
12 months from his arrival to the country). of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section,
 Non-Resident Alien Engaged in Trade or Business in derived for each taxable year from all sources
the Philippines (NRA-ETB) – An alien deriving income within the Philippines by an individual citizen of
in the Philippines and who stays therein for an the Philippines who is residing outside of the
aggregate period of more than 180 days during any Philippines including overseas contract workers
calendar year. referred to in Subsection(C) of Section 23 hereof;
and
 Non-Resident Alien Not Engaged in Trade or Business
in the Philippines (NRA-NETB) – An alien deriving (c) On the taxable income defined in Section 31
income in the Philippines and who stays therein for of this Code, other than income subject to tax
an aggregate period of 180 days or less during any under Subsections (b), (C) and (D) of this Section,
calendar year. derived for each taxable year from all sources

14 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 within the Philippines by an individual alien who
is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals – The tax
shall be computed in accordance with and at the rates
established in the following schedule:
Xxx
c. Gross Income vs. Net Income
“Gross income” means income, gain or profit subject to
tax. It includes compensation for personal and professional services,
business income, profits, and income derived from any source
whatever (whether legal or illegal), unless exempt from tax under
the Constitution, tax treaty or statute. In other words, gross income
is derived at without deducting expenses.

For married individuals, the husband and wife, “Net income” means gross income less statutory
subject to the provision of Section 51 (D) hereof, deductions and exemptions. It is referred to as “taxable income.”
shall compute separately their individual income Net income must be computed with respect to a fixed period. That
st
tax based on their respective total taxable period is twelve months ending December 31 of every year, except
income: Provided, That if any income cannot be in the case of a corporation filing returns on a fiscal year basis, in
definitely attributed to or identified as income which case net income will be computed on the basis of such fiscal
exclusively earned or realized by either of the year.
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income.
VI. Graduated Income Tax
Provided, That minimum wage earners as defined
in Section 22 (HH) of this Code shall be exempt Section 28(1)(c), NIRC
from the payment of income tax on their taxable
income; Provided, further, That the holiday pay, TAXABLE INCOME INCOME TAX
overtime pay, night shift differential pay and
hazard pay received by such minimum wage Not over P10,000 5%
earners shall likewise be exempt from income tax.
Over P10,000 but not over P500+10% of the excess over
xxx.” P30,000 P10,000

SEC. 25. Tax on Nonresident Alien Individual. - Over P30,000 but not over P2,500+15% of the excess over
P70,000 P30,000
(A) Nonresident Alien Engaged in trade or Business Within the
Philippines. - Over P70,000 but not over P8,500+20% of the excess over
P140,000 P70,000
(1) In General. - A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an Over P140,000 but not over 22,500+25% of the excess over
income tax in the same manner as an individual citizen and P250,000 P140,000
a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien Over P250,000 but not over 50,000+30% of the excess over
individual who shall come to the Philippines and stay P500,000 P250,000
therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be Over P500,000 P125,000+34% of the excess over
deemed a 'nonresident alien doing business in the P500,000
Philippines'. Section 22 (G) of this Code notwithstanding.

Xxx *Based on Ability to Pay Principle in that, the higher the taxable income, the
higher the tax rate
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. - There shall be levied, collected and paid for EXAMPLE: how to get the tax base for one engaged in selling of
each taxable year upon the entire income received from all sources merchandise/goods?
within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as interest, cash Gross Sales 200,000
and/or property dividends, rents, salaries, wages, premiums, Cost of Goods Sold 100,000)
annuities, compensation, remuneration, emoluments, or other fixed Gross Income 100,000
or determinable annual or periodic or casual gains, profits, and Less:
income, and capital gains, a tax equal to twenty-five percent (25%) Allowable Deductions/Operating Expense (40,000)
of such income. Capital gains realized by a nonresident alien Personal Exemptions (50,000)
individual not engaged in trade or business in the Philippines from Net Income [taxable net income / basis (5-32%)] 10,000
the sale of shares of stock in any domestic corporation and real
property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.

15 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

VII. Income vs. Capital the Philippines.
Rent Income Location of Property
The essential differences between capital and income are Royalty Income Place of use of intangible
as follows: Gain on Sale of Real Location of Real Property
Property - If the real property sold is
1. Capital is a fund, while income is a flow; located within the Philippines,
the gain is considered as
2. A fund of property existing at an instant of time is called income from the Philippines
capital, while a flow of services rendered by that capital by Gain on Sale of Personal Purchase of personal property within
the payment of money from it or any other benefit Property and its sale without the Philippines, or
rendered by a fund of capital in relation to such fund purchase of personal property without
through a period of time is called income; and its sale within the Philippines:
- Any gain, profit or income
3. Capital is wealth, while income is the service of wealth; shall be treated as derived
entirely from sources within
4. Capital is the tree, while income is the fruit; labor is a tree,
the country in which sold.
income the fruit; property is a tree, income the fruit.
Accordingly, if the goods are
(Madrigal vs. Rafferty);
shipped in a foreign port
under “Free-on-Board (FOB)
5. Return of capital is not subject to income tax, while
shipping point” arrangement,
income is subject to tax.
title to the goods is
transferred at the foreign port
and any gain from the sale of
such goods to a Philippine
VIII. Situs of Taxation
importer shall be treated as
The source rules to determine whether the income shall income from sources outside
the Philippines
be treated as income from within or outside the Philippines can be
found in Section 42 of the 1997 Tax Code. Determining the situs or Personal property produced (in whole
or in part) by the taxpayer within the
incidence or place of taxation leads to the determination on
whether the income is taxable or not. Philippines and sold without the
Philippines, or produced (in whole or in
TYPE OF INCOME SITUS part) by the taxpayer without and sold
Interest Income Residence of the Debtor within the Philippines:
- Any gain, profit or income
- If the obligor or debtor is a
resident of the Philippines, the shall be treated as derived
partly from sources within and
interest income is treated as
income within the Philippines. partly from sources without
the Philippines
It does not matter whether
the loan agreement is signed Gain on Sale of Income within
in the Philippines or abroad or Domestic Shares of - Gain, profit or income is
the loan proceeds will be used Stock treated as derived entirely
in a project inside or outside from sources within the
the country. Philippines, regardless of
Dividend Income from Income within where the said shares are
sold. Thus, a NRA who owns
Domestic Corporation
shares of stocks of a domestic
Dividend Income from a. Income within, if 50% or more
corporation acquired through
Foreign Corporation of the GI of the FC for the
a foreign stock exchange is still
preceding 3 years prior to the
liable to the Philippine income
declaration of the dividend
tax even if such shares are
was derived from sources
sold also through a foreign
within the Philippines.
stock exchange.
b. Income without, if less than
50% of the GI of the FC for the
EXAMPLES:
preceding 3 years prior to the
declaration of the dividend
1. INTEREST INCOME
was derived from sources
within the Philippines Q: Mr. AAA (Non-Resident Citizen) lent money to Mr. BBB (resident
Service Income Place of Performance of the Service of Germany). Is the interest an income in the Phils? Taxable?
- If the service is performed in
the Philippines, the income is A: NO. Source of income is Germany (for interest income, situs of
treated as from sources within taxation is the residence of the debtor)

16 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

Mr. AAA is the income earner (a Non-resident citizen). The source
of income is outside the Phils. NRC can only be taxed for income
within the Phils. Since situs of taxation is Germany, then such
interest income is not taxable in the Philippines.
Q: What if AAA is a Resident Citizen?
A: Then he is taxable. The income earner is a resident citizen and
thus, is taxed for income within and without the Philippines. Source
of income is Germany. Mr. X is taxed for worldwide income. Hence,
such interest income is taxable.
2. DIVIDEND INCOME
Q: Shareholder of San Miguel, San Miguel now distributes
dividends to Mr. X (NRC), taxable?
A: YES. NRC is taxable for income within. Dividend income received
from San Miguel is an income within. Situs is within the Phils. Then
dividend income is taxable.
Q: Mr. X (NRC) has shares in Coca Cola, will X be taxable for
dividends received?
A: First, determine if Coca Cola is domestic or not. It is foreign.
Hence, it is income without the Phils. Since Mr. X, being an NRC is
only taxed for income within, then the dividend from a foreign
corporation is not taxable in the Phils.
Q: if X is a Resident Citizen, will he be taxed for Coca Cola’s
dividend?
A: YES. Taxable for income from all sources. GLOBAL.
3. DIVIDEND INCOME FROM FOREIGN CORPORATION
Ex.: If Coca Cola declared dividends in 2011, for it to be considered
as income within, dapat ang Gross Income from 2008, 2009, 2010
derived from Phils is 50% or more sa iyang Global Income kay
majority of its income is derived from Phils. But if it’s less than 50%,
it will not be considered as within but without.
Problem: Total Global Income of Coca Cola for the preceding 3
years prior to the declaration of dividends is 1B dollars; income
derived from Phils within that preceding 3 years is 501M. Income
within?
YES, because it is more than 50%.
4. SERVICE INCOME
Q: Mr. B (NRA-ETB) is a singer hired by Mr. X (NRC) in party held in
the Phils. Will Mr. B be taxed for income he receives for singing?
A: YES. Mr. B is the income earner; Since an NRA-ETB is taxed for
income within and the situs of service income is where B sang
which is in the Phils., then income from the singing is taxable.
Q: if he sang in Hong Kong, will he be subject to tax?
A; NO, because he is an NRA-ETB and performing the service
outside the Phils and we said NRA-ETB will be tax only for sources
within.
17
5. RENT INCOME
Q: Mr. X (RC) has properties in Australia and rents it out, will he be
taxed for such income?
A: Yes. Although situs is outside, he is a resident citizen. Hence, he
is taxed for income from within and without.
Q: if Mr. X (NRC, RA, NRA-ETB, NRA-NETB)?
A: No. Only taxed for income within.
6. ROYALTY INCOME
Q: Haruki Murakami (NRA-NETB) will now be receiving royalties for
the books sold in the Phils, will he be taxed for the royalties income
derived here?
A: YES, within. Situs is place of the intangibles (as in this case,
where he receives the royalties – Phils.)
Another example is franchise.
Q: Bo’s Coffee will expand in US, earnings there will now give
royalties to Bo’s in Phils. If owner is RC, will he be taxed for
royalties?
A: Yes. RC taxed for global income.
Q: if the owner is a Filipino Citizen residing in Canada for 185 days,
will he be taxed for US royalties?
A: NO. He is a now a Non Resident Citizen and only taxed for
income within.
7. GAIN ON SALE OF REAL PROPERTY
Q: RC having properties abroad and sold it for a profit. Taxable?
A: YES. He is a RC.
Q: NRC having properties abroad and sold it for a profit. Taxable for
that profit?
A: NO. NRC will be tax only for sources derived within the Phils.
8. GAIN ON SALE OF PERSONAL PROPERTY – where it was
purchased (location of sale)
Q: bought laptop in the US and sell it in Phils, RC will be tax?
A: YES. Doesn’t matter, worldwide income.
Q: if NRC?
A: YES.
9. GAIN ON SALE OF PERSONAL PROPERTY
Q: bought laptop in the US and sold it in the Phils, RC will be tax?
A: YES. Doesn’t matter, worldwide income.
Q: if NRC?
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
 A: YES. Place of sale is in the Phils. i. COMPENSATION for services (including fees,
commissions, and similar items);
NOTE: You must analyze what kind of taxpayer he is and where ii. GAINS derived from dealings in property;
that income is derived. iii. INTEREST;
iv. RENTS;
CIR v. Callejo v. ROYALTIES;
vi. DIVIDENDS;
President (German) asking for a refund because her alleged vii. ANNUITIES;
income derived from abroad was withheld with tax. She’s saying viii. PRIZES and winnings;
that since she’s not a Resident Citizen, she should only be paying ix. PENSIONS;
taxes from source derived in the Phils. We said if it’s a service, x. PARTNER’s distributive share of the gross income
situs is where the service is performed. She said she performed of GPPs.
the service in Germany, why should the company withhold? I
should not pay tax! SC said, yes you are correct that if performed MEMORY TEASER: C.G.I.R.R.D.A.P.P.P.
outside, individuals other than RC will not be taxed as a rule. The
problem was that she could not prove that the services she *The enumeration is not exclusive
performed were indeed made in Germany. Court denied the
refund. Had she proven it, she should be entitled to the refund. Special treatment:
Why need to be proved? Because tax refund is similar to tax a. Forgiveness of indebtedness – subject to donor’s tax not
exemptions (construed strictissimi juris) income tax since the debt is forgiven without you doing
something in return [it now becomes an act of liberality.

However, if forgiveness of debt is due to the performance

IX. Taxable Income of service, then it now becomes subject to income tax [it
now becomes Compensation income]
a. Meaning
b. Recovery of amounts previously written off
“Taxable income” means the pertinent items of
gross income specified in the Tax Code, less the
deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the Tax Code XI. Basic Types/Characters of Income; Filing of
or other special laws.” (Sec. 31, NIRC)
ITRs and Payment of Tax
b. All Sources Of Income (whether legal or illegal)
In general, it is important to know the types of income
realized by the taxpayer, since the Philippines has adopted the semi-
 Wilcox Doctrine – Embezzled money does not
global or semi-schedular tax system. Under this tax system,
constitute taxable income to the embezzler in
compensation income, business and professional income, capital
the year of embezzlement for the reason that
gains and passive income not subject to final income tax, and other
the money embezzled does not belong to the
incomer are added together to arrive at the amount of gross income
embezzler.
of an individual, and after deducting the allowable deductions from
business and professional income, capital gains and passive income
 James Doctrine – Embezzled money is a taxable
not subject to final income tax, and other income as well as personal
income of the embezzler. The rule is founded on
and additional exemptions, if qualified, the graduated income tax
the reason that the embezzler has no intention
rates ranging from 5% to 32% are applied on the resulting net
of returning the money.
taxable income to arrive at the income tax due and payable.
 Claim of Right Doctrine – A taxable gain is
The basic types of income are:
conditioned upon the presence of a claim of
right to the alleged gain and the absence of a
 Compensation income (or wages);
definite unconditional obligation to return or
repay that which would otherwise constitute a
 Gross income from business, trade and profession;
gain. To collect a tax would give the government
an unjustified preference as to the part of the  Passive income;
money that rightfully and completely belongs to
the victim. The embezzler’s title is void.  Capital gains; and

 Other income

X. Gross Income (Section 32, NIRC)

a. Means all income from whatever source derived including
(but not limited to):

18 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

1. COMPENSATION INCOME (OR WAGES)
a. Meaning
The terms “compensation income” and “gross
compensation income” refer to all income payments, in
money or in kind, “arising from personal (not corporate)
services under an employer-employee relationship.”
Compensation income means all remuneration
for services performed by an Ee for his Er, including the
cash value of all remuneration paid in any medium other
than cash.
Existence of Er-Ee relationship is essential.
b. Income Tax Return
It is a statement or declaration of the taxpayer’s
income and the allowable deductions for the taxable year.
c. Filing of ITRs and Payment of Tax
WHO FILES THE ITR’S?
= Resident Citizen
= NRA
= Resident Alien
= NRAETB
The State requires the Er to withhold the tax upon
payment of the compensation income, such that at the end of the
calendar year, the Ee needs only to file a tax return and no tax is
paid because his total withholding tax during the year is equal to his
income tax liability. Beginning 2002, qualified Ee’s need not file their
income tax returns and the Er must file a substituted return for its
Ee’s.
In other words, the tax code requires that Er should
withhold the taxes owing the Ee and that Er shall pay the taxes.
(substituted filing of ITR) This is so since it would be very
inconvenient and inefficient is all the Ee’s will have to file and pay
their taxes individually.
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.
Except: RC, NRC and RA deriving income from
business or practice of profession in the
Philippines regardless of amount [they are
required to file income tax returns because it is
easier for them to conceal their income unlike
employees / purely compensation earners]
*Total Personal [fixed at 50,000 per individual]
and additional [25,000 for every child]
19
exemption is equal to or greater than the gross
income
Ex.: Gross Income is 100,000 and you have 3
children. Total personal and additional
exemption is 125,000 (50k + 75k). Hence no
need to file a return.
(b) An individual with respect to pure compensation
income from sources within the Phils. where income tax
on which has been correctly withheld by employer. [single
employer and does not exceed 60k]
Except:
a. Individual deriving compensation concurrently
from two or more employers
b. Individual whose compensation income
exceeds Sixty thousand pesos (P60,000)
(c) Regardless of the amount of income, the following
individuals are not also required to file an ITR since the
final income tax imposed thereon is to be withheld by the
payor-corporation and/or person and paid to the BIR:
a. Individuals whose income consists solely of
royalties, interests, prizes, winnings, dividends, etc.
and share of an individual person in a (business)
partnership or association, joint venture, or
consortium taxable as corporation. (See Sec.
24[B]);
b. Aliens employed by regional or area headquarters
and regional operating headquarters of
multinational corporations with respect to
compensation income;
c. Aliens employed by offshore banking units with
respect to compensation income; and
d. Aliens employed by foreign service contractors and
subcontractors engaged in petroleum corporation
in the Philippines with respect to compensation
income.
*Letter “a” refers to income subject to final withholding
tax. No need to file income tax return anymore since you
already filed final withholding tax return every month.
You already paid the taxes therefore, no need to file
Income Tax return at the end of the year.
(d) A minimum wage earner or an individual who is
exempt from an income tax, pursuant to the provisions of
the Tax Code and other general or special laws. (Sec.
51[A,2]).
WHEN TO FILE?
The return shall be filed in triplicate, two (2) copies for the
Bank/BIR Office and one (1) copy for the taxpayer Except in cases
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
where the Commissioner otherwise permits, the return shall be filed 5. TAX LIABILITY OF THE EE Amount of tax liability
with: PAID BY THE ER IN
CONSIDERATION OF SERVICES
1. An authorized agent bank (AAB), RENDERED
2. Revenue District Officer (RDO),
3. Revenue Collection Agent or 6. PREMIUMS PAID BY THE If the beneficiaries designated
4. Duly authorized Treasurer (of the city or EMPLOYER ON THE LIFE are the heirs of the Ee or his
municipality in which such person has his legal INSURANCE POLICY OF THE EE family, THE PREMIUMS ARE
residence or principal place of business in the TAXABLE COMPENSATION
Philippines), or INCOME.
5. Office of the Commissioner of Internal Revenue (if
there be no legal residence or place of business in the On the other hand, if the
Philippines) beneficiary designated is the
Er himself, THE PREMIUMS
WHEN TO FILE? ARE NOT TAXABLE
COMPENSATION INCOME.
The return, covering income of the preceding taxable year,
7. FRINGE BENEFITS
shall be filed on or before April 15 of each year (Sec. 51[C]) or in
meritorious cases, within the extension which may be granted by
the Commissioner of Internal Revenue. (Sec 53)
f. Fringe Benefits
On or before April 15 means Jan 1 – Apr 15. You cannot file at an
FRINGE BENEFIT means any good, service or other benefit
earlier date than Jan 1 since the taxpayer may still earn income.
furnished or granted in cash or in kind by an Er to an individual Ee
(except rank and file Ee) such as but not limited to the following
d. Requisites of Taxability
(Memory Teaser – HEVHIMEHEL [HIM and ME thru HEVen and
1. There must be services rendered under an Er-Ee HEL]) :
relationship;
2. Payment must be for the services rendered; 1. Housing (i.e. as benefits given to expats);
3. The compensation for services rendered must be 2. Expense account;
3. Vehicle of any kind;
reasonable.
4. Household personnel, such as maid, driver and others;
e. Forms of Compensation Income 5. Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
FORM BASIS granted;
Ex. If the supposed interest expense from a loan
1. PROPERTY Fair market value (FMV) of the was 100,000 but since you loaned from the
property
employer, you were given a lesser rate and now
*If there is a price stipulated, only have to pay an interest of 70,000, then the
it is the price stipulated that amount of the benefit is 30,000.
will be followed in the 6. Membership fees, dues and other expenses borne by the
absence of contrary evidence Er for the Ee in social and athletic clubs or other similar
organizations;
2. PROMISSORY NOTE OR a. If discounted, it is the fair
7. Expenses in foreign travel;
OTHER EVIDENCE OF discounted value of the
INDEBTEDNESS promissory note. 8. Holiday and vacation expenses;
9. Educational assistance to the Ee or his dependents; and
b. If not discounted, it is the 10. Life or health insurance and other non-life insurance
face value of the promissory premiums or similar amounts in excess of what the law
note allows.

3. STOCKS Fair market value (FMV) of the These benefits are extended to SUPERVISORY and
shares of stock
MANAGERIAL EE’S. Whatever the supervisory or managerial Ee’s
4. CANCELLATION OF Value of the debt received on top of his salary which are of monetary value and given
INDEBTEDNESS IN FAVOR OF as an incidence of his employment, are taxable income.
SERVICES RENDERED
It is the Er who shall pay the taxes (tax liability) in regards
to the managerial Ee’s fringe benefits. However, the burden still falls

20 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

on the said Ee since the same benefits form part of his taxable
income.
ARE BENEFITS GIVEN TO RANK AND FILE EMPLOYEES SUBJECT TO
FBT?
NO. Their salary is usually lower, therefore, any benefit
given to them by the employer is a social welfare consideration,
hence, no need to tax those benefits.
WHAT IS THE SIGNIFICANCE OF KNOWING THAT SUCH BENEFITS
ARE FRINGE BENEFITS OR NOT?
Usually, income is subject to 5% - 32% depending on the amount.
However, Fringe benefits are subject only a fixed rate of 32%.
WHAT ARE EXEMPT FRINGE BENEFITS?
The following fringe benefits are NOT TAXABLE:
1. Contributions of the Er for the benefit of the Ee to
retirement, insurance and hospitalization benefit plans;
2. Benefits given to the rank and file Ees, whether granted
under a CBA or not; and
3. De minimis benefits as may be defined by the Secretary of
Finance;
4. Fringe benefits which are exempted from tax under special
laws;
5. Fringe benefit that is required by the nature of, or
necessary to the trade, business or profession of the Er;
and
6. Fringe benefit that is for the convenience and advantage
of the Er.
WHAT ARE THE REQUISITES OF THE “CONVENIENCE OF THE
EMPLOYER RULE”?
 They must be furnished within the premises of the Er; and
 The Ee is required to accept the same as a condition of
employment.
WHAT ARE DE MINIMIS BENEFITS?
DE MINIMIS BENEFITS are limited to facilities or privileges furnished
or offered by the Er to his Ee’s merely as a means of promoting
health, goodwill, contentment or efficiency of Ee’s.
WHAT ARE EXAMPLES OF DE MINIMIS BENEFITS?
 Monetized unused vacation leave credits of Ee’s not
exceeding ten (10) days during the year and the monetized
value of leave credits paid to government officials and Ee’s
 Medical cash allowance to dependents of Ees not
exceeding P750.00 per Ee per semester or P125.00 a
month
 Rice subsidy of P1,500.00 or one (1) sack of 50kg rice per
month amounting to not more than P1,500
21
 Uniforms and clothing allowance not exceeding P4,000 per
annum
 Actual yearly medical benefits not exceeding P10,000 per
annum
 Laundry allowance not exceeding P300 a month
 Ee’s achievement awards, e.g. for length of service or
safety achievement, which must be in the form of tangible
personal property other than cash or gift certificate, with
an annual monetary value not exceeding P10,000 received
by the Ee under an established written plan which does
not discriminate in favor of highly paid Ees;
 Gifts during Christmas and major anniversary celebrations
not exceeding P5,000 per Ee per annum;
 Flowers, fruits, books or similar items given to Ees
circumstances, e.g. on account of illness, marriage, birth of
a baby, etc.; and
 Daily meal allowance for overtime work not exceeding
25% of the basic minimum wage.
NOTE: The importance of de minimis benefits is that it is
not considered taxable fringe benefit. You should know
the limits because amounts in excess of the limits are
taxable while those within the limits are not
WHAT IS THE NATURE OF A FRINGE BENFIT TAX?
The fringe benefit tax is a final income tax imposed on the
managerial or supervisory Ee and withheld by the Er who files the
return and remits the tax withheld to the BIR within 25 days from
the close of each calendar quarter each calendar quarter.
HOW IS A FRINGE BENEFIT TAX COMPUTED?
 Get the Grossed-Up monetary value which is [Monetary
value of fringe benefit/68%].
Provided that:
1. If ownership of property is transferred to the Ee, the
net monetary value is the FMV of the property (as
determined by the BIR Commissioner [zonal] or as
determined by the Local Assessor, whichever is
higher.
2. If ownership of the property is not transferred to the
Ee, the net monetary value is the depreciation value
of the property.
 Get the fringe benefit tax which is [GUMV x 32%]
Grossed-up Monetary Value is simply a figure meant to
represent the entire income earned by the employee. This includes
the net amount of money received, the net monetary value of any
property received, and the amount of FBT received by the employee
from the employer.
EXAMPLE:
You are given an expense account of P68,000. It is presumed
that the amount given to you is already net of the Fringe
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
 Benefits Tax (FBT), hence, you still have to get the grossed-up
monetary value (GUMV) of the P68,000. GUMV is equal to
P100,000 (68,000 / 68%). To get the FBT, just multiply the GUMV
with 32% or simply deduct the amount received from the GUMV.
The FBT is 32,000 (100k – 68k or 100k x 32%)
Why assume that the Monetary Value of 68,000 is net of tax
already?
Look at the ordinary salary of employees. You signed in the
contract the gross amount of salary but it is not the amount you
actually receive but an amount which is net of tax. Such that
whatever the employer gives to the managerial/supervisory
employees should also be presumed net of tax. That’s why you
still have to compute for the GUMV since the amount being
received by the employee is still the net amount.
HOW IS 68% DERIVED AT?
It is derived from subtracting from 100% the applicable
rates of income tax under Sec. 25 which is€ in this case, 32%. The
tax code assumes that when EE received the fringe benefit, it is
already net of tax.
EXAMPLES:
Q: Employee X applying for ABC Company and ABC is offering, upon
being hired, free board and lodging within the premises of the
employer ABC. X was given an option whether or not to stay in the
place where he is offered free board and lodging. X chose to avail of
that benefit. Will the monetary value of that benefit be considered
as FBT?
A: There is here an option whether to avail of that benefit or not. If
you look at the convenience of the employer rule, the 2nd condition
is no longer present because employee must be required to accept
as a condition for employment. In the example, option man. Dili na
siya under sa convenience of the employer rule. [kay if under ta cya
sa “RuLE”, then exempt fringe benefit ta cya]
Now, you have to check if X is a managerial/supervisory employee or
rank and file. If managerial, taxable as Fringe benefit. If rank and file,
not taxable. Why? Even if wala siya na-fall sa convenience of
employer rule, there is another exception: benefits given to rank and
file employees. [fringe benefits are those given exclusively to
supervisory and managerial employees]
TREATMENT OF THE FOLLOWING:
 Terminal leave – NOT subject to income tax
Commutation of leave credits, more commonly
known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the
service through no fault of his own. In the exercise of
sound personnel policy, the Government encourages
unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement pay is
always less than generous if not meager and scrimpy. A
modest nest egg which the senior citizen may look forward
to is thus avoided. Terminal leave payments are given not
only at the same time but also for the same policy
22
considerations governing retirement benefits. (Borromeo
v. CSC GR No. 96032)
In fine, not being part of the gross salary or
income of a government official or employee but a
retirement benefit, terminal leave pay is NOT subject to
income tax. (CIR v. CA, G. R. No. 96016)
NOTE: Terminal leave pay is not taxable; it is a social
welfare consideration.
 Representation and Transportation allowance
(RATA)
G.R. : RATA is taxable (private entity)
- Not subject to income tax provided:
a. they are liquidated (supported by official
receipts)
b. in the ordinary course of business
 Personal Emergency relief Allowance
 Additional Compensation Allowance
2. GROSS INCOME FROM BUSINESS, TRADE AND
PROFESSION
a. TRADE/BUSINESS INCOME
 Manufacturing concern
 Merchandising
 Services
b. PROFESSIONAL INCOME
- Refers to the fees received by a professional in the
practice of his profession, provided that there is no
Er-Ee relationship between him and his clients.
- If Er-Ee is present, it becomes COMPENSATION
INCOME. As a consequence, there shall be no
allowable deductions except for personal exemptions.
c. FILING OF ITRs AND PAYMENT OF TAX
- See XI(1)(c) above (p. 8)
3. PASSIVE INCOME
PASSIVE INCOME is an income received on a regular
basis, with little effort required to maintain it. It is also the income
from "trade or business activities in which you do not materially
participate or Earnings from a business that does not require direct
involvement from the owner or merchant. [DM]
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
 RC, NRC, NRA-ETB NRA-
Passive income must be sourced in the Philippines. RA NETB
RATIONALE: if the income is earned abroad, there will be no Royalties (i.e. franchise), 20% 20% 25%
withholding agent to speak of. If the payor is from abroad who is not general
registered under our own tax revenue then we will not have any Royalties, specific items 10% 10%
hold ever him whether he will withhold or not. only (literary (literary
works, works,
i. Subject to final withholding tax books and books and
musical musical
compositio compositio
- do not include passive income in the income of your
ns) ns)
business or profession or in your compensation income, because
Prizes exceeding 20% 20% 25%
when you receive this income, the final tax has already been
Php10,000 (if it is 10,000 or
imposed and deducted.
less, it NOT subject to final
tax but the same must be
What is final withholding tax (FWT)?
included in other income)
Winnings derived from 20% 20% 25%
FWT is a kind of withholding tax which is prescribed only
sources within the
for certain payors and is not creditable against the income tax due of
Philippines (except PCSO &
the payee for the taxable year. Income Tax withheld constitutes the
Lotto)
full and final payment of the Income Tax due from the payee on the
said income. Interest on Bank Deposit 20% 20% 25%
Substitutes, Trust Funds,
FWT is an amount of income withheld by the payor and other similar
(withholding agent) from the payee. The payor pays this amount to arrangements***
the government as an income tax due from the payee. The payee Interest from Foreign 7.5% (N/A
need not file an income tax return for that particularly income Currency Deposit Units to NRC)
anymore, since the payor already paid it on his behalf. Dividends received from a 10% 20% 25%
Domestic Corporation
Ex. Interest you receive from your bank deposits is net of Share of a partner in the NI 10% 20% 25%
final withholding tax. (FWT Rate is 20%) If your interest income was after tax of a taxable
supposedly P1,000 for the month, you would only receive P800 partnership
because the bank would withhold the P200 and pay it to Cash Reward to Informers 10% 10% 10%
government on your behalf. (Sec. 282, NIRC) 10% of tax
discovered or 1,000,000
Note: Withholding of taxes is pursuant to the Lifeblood whichever is lower
doctrine *** However, if the depositor is an EE trust fund or accredited
retirement plan, such interest income, yield or other monetary benefit is
exempt from FWT.
ii. Types:
*** If the foreign currency deposit is with a bank located outside
1. Royalties (i.e. franchises, books, musical and the Philippines, the interest income is subjected to graduated income tax
literary compositions) rates.
2. Prizes
3. Winnings *** Interest income on foreign currency deposits with a bank
4. Interest on bank deposits, deposit substitutes, located outside the Philippines by a NRC, alien individual and foreign
trust funds and other similar arrangements corporation is exempt from income tax.
5. Dividend received from domestic corporation,
iv. Problem Areas:
mutual fund insurance company, regional
headquarters of multi-national corporation and
o Income tax treatment of royalties received by resident citizens
other corporations
from sources without the Philippines
6. Share of a partner in the net income after tax of
Not subject to final tax but subjected to the graduated
a taxable partnership, joint account, joint
income tax rate as part of Gross Income
venture or concessions
(note that this now involves a taxable
o Income tax treatment of prizes and winnings received by
partnership as distinguished from a general
resident citizens from sources without the Philippines
professional partnership in which the income
therein forms part of the gross income)
NOT subjected to final tax but subjected to the graduated
income tax rate as part of Gross Income.
iii. Rates
o Income tax treatment of tournament prizes won by local and
foreign players or participants

23 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 2. Property must be a capital asset; and
Cash prizes won by local players or participants in 3. Property must be located in the Philippines.
tournaments shall form part of their gross income subject to
the graduated income tax rates. The same is not passive i. Sale of Shares of Stock
income subject to final tax since the players or participants are
engaged in the exercise of their profession or occupation. WHAT IS THE RATE OF CAPITAL GAINS TAX ON SALES OF SHARES
OF STOCK?
Note: Distinguish if the person who won acquires such as a
result of his profession/occupation or not. If it is a result of his The capital gain is subjected to income tax under the
profession/occupation, then it is part of his professional following rates (applies to ALL individual taxpayers):
income or compensation income, otherwise, it is considered
passive income. Example: one who plays tennis as a profession
a. Not over Php 100,000.00 - 5%
wins P100,000 from a sports tournament. Then the 100,000
will be part of his gross income subject to 5%-32% rate and not b. Amount over Php 100,000.00 - 10%
considered a passive income subject to 20% FWT.
EXAMPLES:
 Those won by foreign players or participants shall be subject
to 30% final tax withheld, being considered as non-resident  If property bought at Php 100T (original price) and sold at
aliens not engaged in trade or business in the Philippines. Php 200T (selling price), there is capital gain of Php 100T.
Example: In a billiards tournament sponsored by San Miguel in Apply 5% if share is not listed and traded through local
the Philippines, if Earl Strickland will win, his earnings will be stock exchange.
subject to 30% FWT.
 If original price is at Php 100T and sold at Php 300T, there
v. Additional Notes is a capital gain of 200T.
- Apply 5% to the 100T and 10% for the excess of such
 Any income or gain derived on which a final tax is imposed amount, which is, in this case, 100T
shall no longer be included in the taxable net income of the  If you have a capital gain of P120,000, your capital gains
taxpayer. The final tax is imposed without any deduction. The tax (CGT) will be P7,000.
provisions on personal and additional exemptions are likewise Not over 100,000 100,000 x 5% = 5,000
inapplicable. Amount over 100,000 20,000 x 10% = 2,000
7,000
 Atty. Tiu’s Notes: Fringe Benefit is not a passive income since
it is an incident of employment.
Usually refers to close corporations – not more than 20
shareholders.
 If you are earning a royalty income in the habit or in the
ordinary course of extending franchises, then it becomes an ARE THESE RATES APPLICABLE TO ALL TYPES OF SHARES?
ordinary income which is already subject to 5-32% or if the
one earning interest is a bank or a financial institution, it is
NO. The rates apply only to those NOT LISTED AND
subject to the ordinary rate of 5-32%. Here, the income is not
TRADED THROUGH THE LOCAL STOCK EXCHANGE
considered a passive income since passive income refers to
such income in which you do not materially participate and
not to those part of the ordinary course of your business. SHARES OF STOCK LISTED AND TRADED THROUGH LOCAL STOCK
EXCHANGE:
 Reason why prizes and winnings are part of passive income
because you are not in the in the habit of joining raffle draws o EXEMPT from income tax (Sec. 24(c), NIRC) but subject to
and making business out of it. stock transaction tax of ½ of 1% (or 0.005%) of the Gross
Selling Price (GSP)
 Dividends from Non-resident foreign corporation:
*When we say traded through the local stock exchange, it should
(Check example under situs of taxation) not be over the counter.

Example:
Here it is based on GSP and not on the capital gain only.
4. CAPITAL GAINS Hence, if you own shares in Jollibee Foods Corp. valued at
P50,000 and you sold it for P100,000, your basis for the stock
Two types: transaction tax is the P100,000 and not the P50,000. You will
now pay a stock transaction tax of P500 (100,000 x .005).
a. Capital Gains on sale of shares of stock
b. Capital Gains on sale of real property (capital assets) WHAT IF THERE ARE SEVERAL TRANSACTIONS INVOLVED? SOME
RESULTING TO GAIN, SOME RESULTING TO LOSS; HOW DO WE
Requisites of Capital Gains Tax: APPLY THE RATES?

1. Property must be a real asset;

24 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 The rate must be applied to the NET CAPITAL GAIN. In
other words, the losses and gains of each transaction must be
considered. Such that if in three transactions, the GROSS CAPITAL
GAIN is 300T and the GROSS CAPITAL LOSSES amount to 100T, the
(Assets under 1 to 4 are known as ordinary assets)
NET CAPITAL GAIN IS 200T. Apply the rates as in the first set of
examples.
WHAT HAPPENS IF THE GROSS CAPITAL LOSSES EXCEED THE GROSS
CAPITAL GAIN?
Losses to be deducted from the gain should only be up to
the extent of the latter. Such that, the result is a ZERO NET CAPITAL
GAIN. It can never be reported as a loss, in which case the taxpayer
absorbs the loss and could not claim it as a deduction.
EXAMPLE:
If you have gross capital gain of Php 200T and the gross
capital losses amount to Php 400T, the result is ZERO NET CAPITAL
NOTE: This rate is applicable only for real property situated in the
GAIN. The taxpayer cannot report such as losses nor claim for it to
Philippines (sec. 24(D), NIRC).
be deductible from taxable income.
Note that in obtaining the net capital gain, the losses
should be deducted from the gain, but the former should only be up
to the extent of the latter.
WHEN IS CAPITAL GAINS TAX PAID?
30 days from date of transaction
Note: At the end of the taxable year, you are required to
file a final adjusted return for all your stock transactions to get your
net capital gain for the end of the year
ii. Sale of Real Property
 Conditions:
It must be considered as a CAPITAL ASSET.
Capital assets means property held by the taxpayer
whether or not connected with his trade or business but does not
include:
1. Stock in trade of the taxpayer or other property of a kind in
which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year; or
2. Property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business; or
3. Property used in trade or business, of a character which is
subject to the allowance for depreciation [ex. Sales
warehouse]; or
4. Real property used in trade or business of the taxpayer [ex.
Printing press]
25
Note: The definition of capital assets is residual. Meaning all
assets other than those mentioned above are considered as
capital assets.
Ex. of Capital asset: Idle land not used for business; House not
used for business and does not fall under the exception below
 Tax Rate:
 6% of the Gross Selling Price or Zonal Value (as
determined by the BIR), whichever is higher
Example: You bought a land worth P300,000 in 2009. You sold it in
2011 for P800,000. The zonal value of the land is P1,000,000.
For the sale, you will pay CGT of P60,000 (1,000,000 x 6%).
NOTE: CGT on sale of capital asset is computed even if you incur a
loss in such sale
- With respect to sales of real property outside the
Philippines, the graduated income tax rate (5% to 32%)
shall apply for individuals and the normal corporate tax
rate of 30% for corporations.
 Exceptions
o If the sale is made to the government or any of its political
subdivisions, or agencies or to GOCCs, the taxpayer has the
option to choose from the ff.:
- Final tax of 6% based on GSP; or
- Graduated Income Tax Rates under Section 24(a)
based on taxable NET income.
o Sale or dispositions of principal RESIDENCE of natural persons
- EXEMPT under certain conditions:
1. Proceeds are fully utilized in acquiring or construction
a new principal residence within 18 months from the
date of sale or disposition;
2. Historical Cost or Adjustment Basis of the real property
sold or disposed shall be carried over to the new
principal residence built or acquired;
3. Notice to the CIR shall be given within 30 days from
the date of sale or disposition; and
4. Exemption can be availed of once every 10 years.
 If the proceeds of the sale were not fully utilized, the
portion of the gain presumed to have been realized
from the sale or disposition shall be subject to CAPITAL
GAINS TAX.
TAXABLE PORTION = GSP or FMV, whichever is higher x
[Unutilized Proceeds/GSP]
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
 Example: You sold your family home in Cebu for P1,000,000
because you want to build a new house in Mandaue. For the
amount not to be subjected to CGT, the above conditions (1 to
4) shall be met. Note that if the newly constructed house will
only require P800,000, you will have to pay CGT of P12,000
(for the unutilized portion of 200,000 x 6%).

 Sale of ORDINARY GAINS

- Shall be reported as part of ordinary income (part of

Gross Income) and subjected to graduated income tax
rates (5% to 32%).

- So if the property you sold is an ordinary asset and

not a capital asset, then the gain from such sale is
considered an ordinary gain not subjected to CGT but
forms part of your gross income.

5. OTHER INCOME
1. Rent Income other than Royalties
2. Interest Income other than interest Income on bank
deposit
3. Dividend Income
4. Income from other sources
a. Bad debts recovered
b. Illegal gains derived from gambling
c. Tax refunds
d. Compensation for private property expropriated
by the government for public use
e. Damages
f. Cancellation of indebtedness

Addendum:

Preferential Tax Rates to Certain NRA-BETB:

Aliens employed by regional or 15% on the Gross Income

are headquarters of MNCs
Aliens employed by offshore 15% on the Gross Income
banking units
Aliens employed by petroleum 15% on salaries, wages,
service contractors and annuities, compensation,
subcontractors remuneration, and other
emoluments, such as honoraria
and allowances, received from
such contractors or
subcontractors

NOTE:
The same tax treatment shall apply to Filipino employees occupying
the same position as an alien employed in the following above-
mentioned MNCs (Multi National Corporations).
References:
The Fundamentals of Taxation by De Leon
Tax Law and Jurisprudence by Vitug and Acosta

Any income earned from all other sources within the Philippines Reviewer on Taxation by Mamalateo
shall be subject to pertinent income tax, as the case may be,
imposed under the NIRC Notes from previous batches based on Atty. Tiu’s Syllabus

Atty. Bathan’s Taxation Reviewer

26 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 EXCLUSIONS FROM GROSS INCOME fundamental law;

b. It is exempted by a
statute; and
I. PRELIMINARY CONSIDERATIONS – EXCLUSIONS c. It does not fall within
the definition of
a. Legal Basis
income.
See Section 32(B), NIRC

b. Nature
II. Exclusions from Gross Income, In General
i. Smart vs. City of Davao (G.R. No. 155491, September 16,
2008) Reasons for granting Exclusions from Gross Income

“An exclusion is, thus, also an immunity or privilege which
frees a taxpayer from a charge to which others are subjected.
Consequently, the rule that a tax exemption should be applied
in strictissimi juris against the taxpayer and liberally in favor of
the government applies equally to tax exclusions.
ii. Commissioner v. Mitsubishi (181 SCRA 214)
a. Items representing return of capital
b. Items subjected to another internal revenue tax
To minimize the effect of double taxation,
certain flow of income is being removed from the gross
income.

“The exclusions are in the nature of tax exemptions, and it Example:

behooves the taxpayer to establish them convincingly.”

c. Rationale If a taxpayer receives a donation, he need not declare such

as part of his taxable income. Remember that the same
Some receipts are excluded from gross income because donation had already been taxed in the nature of a donor’s
they are not income. Even if they are definitionally income, the tax.
exclusions are not subject to tax because of policy
considerations such as to avoid the effects of double taxation, c. Items expressly exempt from income tax
or to provide incentives for certain socially desirable activities.
i. Under the Constitution
d. Exclusion vs. Deduction
1. Sec 4(3), Art. XIV, 1987 Constitution
While they may differ in the definition, the effect is the
same – both reduce the actual gross income, both All revenues and assets of non-stock, non-profit
contemplates a removal of an object of income from computing educational institutions used actually, directly, and
the totality of taxable income. exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
But for purposes of academic discussion, the differences of the corporate existence of such institutions, their
lie in the following: assets shall be disposed of in the manner provided by
law.
EXCLUSION DEDUCTION
Proprietary educational institutions, including
Pertains to the computation Pertain to computation of Net those cooperatively owned, may likewise be entitled to
of Gross Income Income such exemptions, subject to the limitations provided by
law, including restrictions on dividends and provisions for
Something received or earned Something spent or paid in reinvestment.
by the taxpayer which do not earning gross income.
form part of gross income ii. Under a Tax Treaty

Flow of wealth to the
taxpayer which are not
treated as part of gross
income for purposes of
computing the taxpayer’s
taxable income due to the
following reasons:
a. It is exempted by the
The amounts which the law
allows to be subtracted from
gross income in order to arrive at
net income
Note that deductions are outflow
of income since they represent
money spent or the taxpayer’s
expenses.
iii. Under Special Laws
1. RA 6938 (Cooperative Code of the Philippines)
Agricultural multi-purpose cooperative
registered with the Cooperative Development Authority
is exempt from ordinary income tax on its transactions
with members and non-members for a period of ten
years from the date of registration. Thereafter, the

27 TAXATION MIDTERM NOTES|404 | marukoi.mhealler

 income tax exemption shall be limited to business
transactions with members only.
2. RA 7279 (Urban Development Housing Act of 1992)
The National Housing Authority is exempt from
all fees and charges of any kind, whether local or national
such as income and realty taxes, while the private sector
participating in socialized housing shall be exempt from
the following taxes:
a. Project-related corporate or individual income
taxes on income directly realized from the development
and/or improvement of socialized housing sites, slum
areas, resettlement areas, and/or construction and sale
of socialized housing units to qualified beneficiaries as
approved by the HLURB or LGU concerned. The
exemption shall be issued by the BIR on a per project
basis, and separate books of account shall be kept by the
contractor, developer, owner or seller of socialized
housing units.
b. Capital gains tax on sale of raw lands for use in
socialized housing project
3. RA 7653 (New Central Bank Act)
The BSP is exempt from all national, provincial,
municipal and city taxes for a period of five years. It is
exempt from documentary stamp tax under RA 9243
(2003).
4. RA 7916 (PEZA Law)
PEZA-registered enterprises are given income tax
holidays of six or four years from the date of commercial
operation, depending on whether their activities are
consider as pioneer or non-pioneer.
5. RA 9178 (Barangay Micro Business Enterprise Act of
2002)
Barangay Micro Business Enterprise shall be
exempt from income tax for income arising from the
operation of the enterprise. BMBE refers to any business
entity or enterprise engaged in the production,
processing or manufacturing of products or commodities,
including agro-processing, trading and services, whose
total assets including those arising from loans but
exclusive of the land on which the particular business
entity’s office plant and equipment are situated, shall not
be more than P3 million.
III. Exclusions from Gross Income Under the NIRC
1. Life Insurance proceeds
Proceeds of life insurance policies, paid by reason of the
death of an insured to his estate or to any beneficiary (individual,
partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross
28
income of the beneficiary. It is immaterial whether the proceeds are
received in a single sum or in installments.
ii. Conditions for exclusion
1. Paid to heirs or beneficiaries
2. Paid upon the death of the insured
3. Paid in a single sum or in installments.
iii. Reason for Exclusion
Sec. 62, RR No. 2: Proceeds of life insurance are excluded from gross
income because they partake more of indemnity or compensation
rather than gain to the recipient.
iv. Treatment of Interest
1. If proceeds are held by insurer under an agreement to pay
interest thereon, the interest payments must be included
in income. The interest income shall be taxed at the
graduated income tax rates.
2. Interests do not form part of the indemnity but are
earnings or income from use of capital (the insurance
proceeds which were not taken) which are taxable.
v. Effect of Revocability or Irrevocability of Beneficiary
- No effect (Sec. 85 [E] NIRC) [it is immaterial
vi. Life insurance proceeds that are to be included in Gross income
1. Where the life insurance policy is used to secure a money
obligation
- IF DEBTOR INSURES HIS LIFE AND DESIGNATES
CREDITOR AS BENEFICIARY TO ENSURE
PAYMENT OF OBLIGATION – The proceeds
should NOT be included in the taxable income of
creditor. But only to the extent of satisfying the
monetary obligation. In this case, there is only a
RETURN OF CAPITAL. If proceeds exceed that of
the obligation, only the excess is subjected to
tax.
2. Where the life insurance policy was transferred for a
valuable consideration.
a. Sec. 62, RR No. 2
“In 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 shall be tax-
exempt.”
2. Amounts received by the insured as a return of
premiums paid under life insurance endowment or
annuity contracts
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
 The premiums paid are return of capital. If the premiums
paid gain interest, the excess of such premiums shall form part of
taxable gross income.
ii. Conditions for Exclusion (Section 32[B][2]; NIRC)
1. Received by the Insured
2. As a return of premiums paid by him
3. Under life insurance, endowment or annuity of
contracts
4. Either:
a. During the term
b. At maturity of the term mentioned in the
contract or
c. Upon surrender of the contract
iii. Reason for Exclusion
- Premiums paid are return of capital
iii. Treatment of Interest
- Taxable
3. Gifts, Bequests, Devises, Descent
- gifts (donation), bequests (same as legacy – personal
property through a will), devises (real property
through a will)
ii. Taxability:
1. Not subjected to INCOME TAX if the payments/transfers of
property were made to show goodwill or kindness towards
the recipients (act of liberality). The gift is, however,
subjected to transfer tax. (ie. Donor’s tax, Estate tax)
2. Subjected to INCOME TAX if the payments/transfers of
property were made as a recompense of services rendered
in the past, present or future (would tantamount to
compensation income).
3. Pirovano v. CIR (G.R. No. L-19365, July 31, 1965)
A company was made beneficiary of insurance proceeds.
Proceeds were later assigned to heirs of the insured. SC
said that there was already a donation of the proceeds.
Had the company received the proceeds, it would’ve been
excluded from taxable income since the proceeds are
merely indemnification for a loss sustained. But since the
rights to the proceeds were assigned, the transfer from
company to heirs should be subjected to tax since what
transpired was donation.
From Vitug: If the amount received is on account of services
rendered, whether constituting a demandable debt or not (such as
remuneratory donations) or the use or opportunity to uses of
capital, the receipt is income.
29
4. Compensation or amounts of damage received for
personal injuries or sickness
This includes amounts received through accidents 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.
ii. Sources:
a. compensation paid by virtue of suit
b. paid by virtue of health insurance, accident insurance or
Workmen’s compensation act
iii. Reason for Exclusion
- Amounts received are designed to compensate
the claimant for the actual injury suffered and not to
impose a penalty on the wrongdoer. The award is not
meant to enrich the complainant at the expense of
the defendant, but to enable the injured party to
obtain means, diversion or amusement that will serve
to obviate the moral suffering he has undergone.
(compensatory in nature)
iv. Exception
- Lucrum cessans (damages or compensation or
consideration recovered for loss of profit) in loss or
damage to property (not for death or injury) is taxable
income.
a. Thus, damages paid for loss of income during the
period of victim’s treatment or recuperation shall be
excluded from gross income.
b. Employer giving to employee-victim the cash
equivalent of earned vacation or sick leave credits is
subject to income tax except the money
equivalent of ten days unutilized vacation leave
credits. Amounts of vacation allowances or sick
leave credits which are paid to an employee
constitutes compensation (sec. 2.78[A][7], RR 2-98, as
amended by RR 10-2000 –de minimis benefit)
Example:
Taxpayer X figured in an accident whereby he suffered
injuries. To avoid litigation, he was paid the following:
HOSPITAL EXPENSES – excluded, not taxable
LOST SALARY FOR DURATION OF HOSPITALIZATION –
excluded, not taxable
MORAL DAMAGES – excluded, not taxable
PAYMENT FOR DAMAGED PROPERTY – Included! Taxable!
The damages excluded are only those which are personal
to the taxpayer.
TAXATION MIDTERM NOTES|404 | marukoi.mhealler

5. Income exempt under treaty
Income of any kind, to the extent required by any treaty
obligation upon the Government of the Philippines, is exempt from
income tax.
Example:
1. Interest income from foreign currency loan
extended by Asian Finance and Investment
Corporation of Singapore is exempt from the 20%
final withholding tax under the tax treaty.
2. Treaty of Vienna accords diplomatic privileges to
ambassadors of other countries such as tax
exemptions on their incomes, as well as, courtesies
of the port exempting their importation of
household and personal effects.
ii. Reason for Exclusion:
- Principle of Reciprocity and Comity among Nations.
6. Retirement Benefits, Gratuities, Pensions, Etc.
i. Rationale
- Social Welfare Consideration
ii. Items for Exclusion
1. Retirement benefits under RA 7641 or under a reasonable
private benefit plan
2. Separation Pay (due to death, sickness or other physical
disability or for any cause beyond the control of the said
official or employee) – also includes terminal leave pays
- this exemption holds regardless of the employee’s
age and length of service and unlike the rule on
retirement, it does not require that the exclusion be
enjoyed only once
3. Social Security benefits; retirement gratuities, pensions and
other similar benefits received by resident or non-resident
citizens or resident aliens from foreign institutions, whether
public or private.
4. US veteran’s benefits of persons residing in the Phils.
5. Benefits received from or enjoyed under the SSS
6. Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government
officials and employees
Recipient: Private employees or official of such private firm
iii. Conditions for Exclusion
a. The private employer or official must be at least 50
years of age at the time of his retirement;
30
b. He must have rendered at least 10 years of service to
the employer at the time of his retirement;
c. There must be a reasonable private benefit plan
established by the employer;
d. The reasonable private benefit plan must be approved
by the BIR;
e. Reasonable private benefit plan must be in a nature of a
pension plan, profit-sharing plan, stock bonus plan or
gratuity;
f. The employer must give the contributions and no
amount shall inure to the benefit of a particular
employee or official. This must be established for the
common benefit of the employees or officials; and
g. This can be availed of only once. The subsequent
retirement benefits received from another private
employer is no longer exempt but subject to tax.
NOTE: If the second employer is the government – EXEMPT
From Vitug: Reasonable private benefit plan means a pension,
gratuity, stock bonus or profit sharing plan maintained by an
employer for officials and employees, wherein contributions are
made by such employer for officials and employees, or both, for the
purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees
(the income of the trust itself may be exempt under the conditions
expressed in Sec. 60 NIRC)
*Interest earned and other income of the pension trust is, likewise
exempted from income tax (CIR v. CA GR No. 95022)
7. Miscellaneous Items
a. Income of foreign governments - Income derived from
investments in the Philippines in loans, stocks, bonds or other
domestic securities or from interest on deposits in banks in the
Philippines by:
 Foreign governments;
 Financing institutions owned, controlled or enjoying
refinancing from foreign governments;
 International or regional financial institutions
established by foreign governments.
b. Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision
thereof.
c. Prizes and Awards in recognition of religious and
charitable accomplishments
Conditions:
TAXATION MIDTERM NOTES|404 | marukoi.mhealler
  The recipient was selected without any action on his ii. Treatment of Interest
part to enter the contest or proceeding; and
– not exempted
 The recipient is NOT required to render substantial
future services as a condition to receiving prize or iii. Nippon Life Insurance Co. of the Philippines Inc. v. CIR
award. (G.R. No. 159612, Nov. 19 2003)

d. Prizes and awards for sports competitions
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.
In the Phils. the National Sport Association is the
Philippine Olympic Committee
th
e. 13 month pay and other gross benefit
th
13 month pay and other gross benefits
received by officials and employees of public and private
entities, to the extent of P30, 000.
Recently, the Supreme Court declared that the
tax exemption on long-term gains realized from the
exchange or retirement of banks, debentures and other
Certificate of Indebtedness under the provision of law
does not include interest earned on these transactions.
h. Gains realized by the investor upon redemption of shares
of stock in a mutual fund company as defined in Section 22 (BB)
or RA 8424.
(BB) The term 'mutual fund company' shall mean an open-
end and close-end investment company as defined under
the Investment Company Act

Sec 32(b)(7)(e) - Gross benefits received by officials and - END -

employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph
shall not exceed Thirty thousand pesos (P30,000) which
shall cover:

(i) Benefits received by officials and employees of

the national and local government pursuant to Republic
Act No. 6686 (Annual Christmas Bonus);

(ii) Benefits received by employees pursuant to

Presidential Decree No. 851, as amended by
th
Memorandum Order No. 28, dated August 13, 1986 (13
Month Pay Law);

(iii) Benefits received by officials and employees

not covered by Presidential decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986;
and

(iv) Other benefits such as productivity incentives

and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through
rules and regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after
considering among others, the effect on the same of the
inflation rate at the end of the taxable year.

f. GSIS, SSS, Medicare and Pag-ibig Contributions

GSIS, SSS, Medicare and PAG-IBIG Contributions

and union dues of individuals.

g. Gains realized from the sale or exchange or retirement of

bonds

Gains realized from the sale or exchange or

retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than 5 years.

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