Income Taxation

A Presentation made by Atty Cabreros only for St.
Paul School of Professional Studies (Sept 9, 2017) 1
TAX LAW REVIEW:

A FOCUS ON GENERAL PRINCIPLES
& INCOME TAXATION
Presentation for
St. Paul School of Professional Studies
Palo, Leyte
Atty. Marissa O. Cabreros, CPA CESO IV

September 9, 2017
A Presentation made by Atty Cabreros only for St. Paul School of Professional Studies (Sept 9, 2017) 2
PART I:
GENERAL TAXATION
PRINCIPLES
TAXATION
Definition: Taxation
The power by which sovereign raises revenues to defray
necessary expense.
In its broadest and most general sense, taxation includes
every imposition of charge or burden by the sovereign
power upon persons, property, or property rights for the
use and support of the government and to enable it to
discharge its appropriate functions.
However, taxation can be used also for non-revenue
raising measures. e.g Health measures like curtail or
lessen consumption of vices (tobacco and alcohol)
Non-Revenue Raising Purposes

Taxation can strengthen anemic enterprises or provide incentive to
greater production through grant of tax exemption or creation of
conditions conducive to growth
Taxes may be increased to protect local industries against foreign
competition or decrease to encourage foreign trade
Used as a bargaining tool
To curb spending power and halt inflation or lowered in period of
slump to expand business and ward off depression
To reduce inequalities in wealth and incomes e.g. estate and donors
tax
To promote science and invention e.g. incentives law
To finance educational activities e.g. RA 5447
To improve the efficiency of local police forces e.g. RA 6141
As an implement of the police power to promote general welfare
Nature of Taxation
Internal revenue laws are not political in nature. It is the
laws of the occupied territory not the occupying territory
[Hilado vs. CIR, 100 Phil 288]
In the absence of constitutional restrictions and subject to
the will of the legislative bodies, with whom it is entrusted
and the discretion of the authorities which exercise it, the
power of taxation is regarded as Comprehensive,
Unlimited, Plenary and Supreme [CUPS]
Inherent in sovereignty
Essential to the existence of every government
Nature of Taxation
Power to tax is power to destroy. [1803 Dictum of Chief
Justice Marshall cited in Sison vs. Ancheta 130 SCRA
654]
The power to tax is not the power to destroy while this
Court sits. [Justice Holmes]
Underlying Theory and Basis

Inherent is the theory underlying general taxation is the
factor that for the contributions received, the government
renders not return or special benefit to any particular
property, but only secures to the citizens that general
benefit which results from protection to this person and
property and the promotion of those various schemes
which have for their object the welfare of all. [71 AM Jur
2nd 346-347]
Principles of Sound Tax System

Fiscal Adequacy: which means that the sources of
revenue should be sufficient to meet that demands of
public expenditures
Equality or theoretical justice: which means that the tax
imposed should be proportionate to the taxpayers ability
to pay
Administrative feasibility: which means that the tax laws
should be capable of convenient, just and effective
administration
Lifeblood Theory
CIR vs. Pineda
Tax authorities should be given the necessary discretion to avail itself
of the most expeditious way to collect the tax as may be envisioned in
the particular provision of the Tax Code because taxes are the
lifeblood of the government and their prompt and certain availability
is imperious need.
Sison vs. Ancheta

The power to tax, an inherent prerogative, has to be availed of to
assure the performance of vital state functions. It is the source of the
bulk of public funds. To paraphrase a recent decision, taxes being the
lifeblood of the government, their prompt and certain availability is of
the essence.
The power to tax is an attribute of sovereignty. It is the strongest of
all powers of government.
Necessity Theory
Phil Guaranty vs. CIR
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity.
It is a necessary burden to preserve the States sovereignty and as a

means to give the citizenry:
an army to resist an aggression,
a navy to defend its shores from invasion,
a corps of civil servants to serve,
public improvements designed for the enjoyment of the citizenry and those
which come within the States territory and
facilities and protection which a government is supposed to provide.
The Government is not estoped from collecting taxes by the mistakes

or errors of its agents.
Symbiotic Relationship / Benefits-received

Principle
CIR vs. Algue
It is said that taxes are what we pay for a civilized society. Without
taxes, the government would be paralyzed for lack of motive power to
activate and operate it.
Despite the natural reluctance to surrender ones hard earned income
to taxing authorities, every person who is able 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.
The basis of taxation is found in the reciprocal duties of protection
and support between the State and its inhabitants.
Police Power & Eminent Domain

Police Power
Referred to as the power of the state to enact such
laws in relation to persons and property as may promote
public health, public morals, public safety and general
prosperity and welfare of the its inhabitants
Eminent Domain
Referred to as the power of the state or those to
whom the power has been delegated to take private
property for public use upon paying to the owner a just
compensation to be ascertained according to law
Similarities: Taxation / Police Power /

Eminent Domain
They all rest upon necessity because there can be no
effective government without them
They all underlie and exist independently of the
Constitution
They are ways by which the state interferes with private
rights and property
They are legislative in nature and character
They all presuppose an equivalent compensation received
directly or indirectly by the persons affected by the
exercise of these powers by the government.
Distinctions: Taxation / Police Power /

Eminent Domain
As to authority who exercises the power
Taxation and police power may be exercised only by the government
or its political subdivisions
The exercise of the power of eminent domain may be granted to public
service companies or public utilities.
As to purpose
In taxation, the property (generally in the form of money ) is taken for
the support of the government
In eminent domain, the property is taken for public use; hence, it
must be compensated
In police power, the use of property is regulated for the purpose of
promoting the general welfare: hence, it is not compensable.

Eminent Domain
As to persons affected
Taxation and (usually) police power operate upon a community or a
class of individuals
Eminent domain operates on an individual as the owner of a particular
property
As to effect
In taxation, the money contributed in the concept of taxes becomes
part of the public funds
In eminent domain, there is a transfer of the right to property whether it
be of ownership or a lesser right (e.g. possession)
In police power, there is no transfer of title; at most there is restraint on
the injurious use of property. (see Tanada & Fernando)

Eminent Domain
As to benefits received
In taxation, it is assumed that the individual receives the equivalent
of the tax in the form of protection and benefits he receives from
the government as such
In eminent domain, he receives the market value of the property
taken from him
In police power, the person affected receives no direct and
immediate benefit but only such as may arise from the
maintenance of a healthy economic standard of society and is often
referred to as damnum absque injuria i.e. damage without injury
(Churchill & Tait vs. Rafferty, 32 Phil. 580)

Eminent Domain
As to amount of imposition
In taxation, there is generally no limit on the amount of tax that may
be imposed
In eminent domain, there is no amount imposed but rather the
owner is paid the market value of the property taken
In police power, the amount imposed should not be more than
sufficient to cover the cost of the license and the necessary
expenses of police surveillance and inspection, examination, or
regulation as nearly as the same can be estimated. (Cu-Unjieng vs.
Patstone, 42 Phil. 881; American Mail Line vs. City of Butuan,
L-12647, May 31, 1961.)

Eminent Domain
As to relationship to the Constitution
The taxing power is subject to certain constitutional limitations
including the prescription against the impairment of the obligation of
contracts
Eminent domain is also inferior to the impairment prohibition so that
the government cannot expropriate property which under a contract it
had previously bound itself to purchase from other contracting party
(see Noble vs. City of Manila, 67 Phil. 1)
Police power is relatively free from constitutional limitations and is
superior to the impairment provisions. In appropriate cases, the
constitutional injunction against impairment of the obligation of
contracts cannot be invoked as against the right of the state to
exercise its police power.
Constitutional Mandate
Art VI Sec 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 and other duties or imports within the
framework of the national development program of the Government.
(3) Charitable institutions, churches and parsonages or covents
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
concurrence of a majority of all Members of the Congress.
Prospectivity
Generally tax laws are applied prospectively and not
retroactive
Taxpayers should not be burdened with tax rules and
obligations not yet present at the time of occurrence of a
taxable event or transactions
Imprescriptibility
Borne out of the need to exist
Generally not subject to prescription
By legislation, it is subject to defined prescription rules in

the tax laws
Double Taxation
Strict sense or Narrow Sense or Direct Double Taxation
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)
Some of the property in the territory (where both taxes are imposed on
the same property or subject matter economic burden
Broad sense or Indirect Double Taxation
It extends to all cases in which there is burden of two or more
pecuniary impositions
Economic burden to taxpayer
Domestic / International Double Taxation

Domestic
Same person, property or right
Same authority
Same purpose
Same taxable period
Same jurisdiction / territory
Same kind of tax
International (CIR vs. SC Johnson June 1999)
Multiplicity of Situs
Avoidance
Credit, Exemption, Deduction
Escape from Taxation

Shifting of Tax Burden
Indirect taxation
Pricing factor
Taxes that can be shifted:
VAT, Excise Taxes, other business taxes
Impact of Taxation
Impact of a tax is on person from whom government collects
money in first instance.
Incidence of Taxation
While incidence of a tax is on person who finally bears burden of a
tax.
Comparison
Impact of Taxation Incidence of Taxation
Refers to the initial burden of Refers to the ultimate burden of
the tax the tax.
Impact is at the point of Incidence occurs at the point of
imposition settlement.
The impact of a tax falls upon The incidence rests on the
the person from whom the tax person who eventually pays it
is collected Incidence cannot be shifted.
Impact may be shifted For, incidence is the end of the
shifting process.
Tax Shift
Tax shift or Tax swap is a change in taxation that
eliminates or reduces one or several taxes and
establishes or increases others while keeping the overall
revenue the same.
Tax Exemption
Exemption from Taxation is a 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.
Tax Amnesty
A tax amnesty is a general pardon or the intentional
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of violation of a tax
law. It partakes of an absolute waiver by the government
of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean slate. A
tax amnesty, much like a tax exemption, is never favored
nor presumed in law. The grant of a tax amnesty, similar
to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.
[Philippine Banking Corporation vs. CIR, G.R. No.
170574. January 30, 2009 ]
Elements of Tax Evasion

Benigno vs. Toda (March 1990)
Elements of Fraud
End to be achieved
State of mind
Commission or Omission
Tax Avoidance
Tax avoidance is the tax saving device within the means
sanction by law. This method should be used by the
taxpayer in good faith and at arms length.
Tax Exemption vs. Tax Amnesty

Tax Exemption Tax Amnesty
Benefit Immunity from civil Immunity from civil,
liability (relief from criminal, administrative
paying taxes) liability arising from non-
payment of taxes
Coverage Future tax liability Past tax liability

Actual Revenue None Yes
Loss
Tax Exemption vs. Tax Amnesty

Notes
Never presumed
Burden is upon the taxpayer to prove entitlement, thus, no estoppel
on government to question correct application
Personal defense that needs to be invoked by taxpayer and not for
government to present as a matter of fact
Tax Evasion vs. Tax Avoidance

Tax Evasion Tax Avoidance
Also called as -- Tax Dodging Tax Minimization
Means Illegal Legal
Outcome of tax fraud Outcome of tax
planning
Punishable? Yes No
Purpose Entirely escape Merely minimize
payment of taxes payment of taxes (tax
savings)
Sources of Tax Laws

Statues (NIRC, TCC, LGC)
Revenue Regulations
BIR/BOC Issuances
BIR/BOC Rulings
DOJ Opinions
Legislative Materials
Court Decisions
BIR Revenue Regulations

The Secretary of Finance, upon recommendation of the
Commissioner shall promulgate all needful rules and
regulations for the effective enforcement of the provisions
of the Tax Code (Sec 244 NIRC)
Scope & content (Sec 245 NIRC)
BIR Rulings
Power to interpret the tax provisions: exclusive and
original jurisdiction of the Commissioner, subject to review
by the Secretary of Finance (Sec 4 NIRC)
Rule on non-retroactivity of rulings (sec 246, NIRC)

General rule: no retroactivity
Exception:
Where the taxpayer deliberately misstates or omits material facts;
Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or
Where the taxpayer acted in bad faith.
Construction Rules: Tax Laws

When language is clear, apply the law as worded using its
plain language
When there is doubt, legislative intent must be considered
Take the interpretation of a word or phrase, taking into
consideration the entire context of a sentence, topic or the
entire law
Construction Rules: Tax Exemption / Refunds

General Rule:
Exemptions are not favored and are construed strictissimi juris
against the taxpayer
Same for claims for refund
Exception:
When the law itself expressly provides for a liberal construction,
then, it shall be resolved in favor of exemption
When the exemption is in favor of the government itself or its
agencies or of religious, charitable and educational institutions
because the general rule is that they are exempt.
Taxation : Inherent Limitations (PINGS)

Public Purpose
International Comity (in par parem, non habet imperium)
Non-delegable
Exemption of Government Agencies
Situs or Territoriality
Situs Rules (Territoriality)

Object Situs
Person Residence, Domicile, Citizenship
Real Property Location of property (Lex Rei Sitae)
Personal property (Tangible) Physical location
Personal property Domicile of owner (Mobilia sequntur

(Intangible) personam)
Income Citizenship, Residence, Source
Transfer or property Citizenship, Residence, Location
Business or Occupation Where performed
Taxation: Constitutional Limitations

Due Process Clause (Sec 1 Art III)
Substantive
Reasonable (not oppressive or confiscatory)
Valid authority
Public purpose
Territorial
Procedural
Not arbitrary
Notice & hearing
Constitutional Limitations
Equal Protection Clause (Sec 1, Art III)
All person treated alike under same circumstances
Valid classification
Rest on substantial difference
Germane to the purpose of the law
Not limited to existing condition only
Apply equally to all in the same class
Uniform & Equitable Clause (Sec 28(1), Art VI)
Uniform: all articles or properties of same class taxed at the same
rate
Equitable: must be more or less just ability to pay taxes /
shoulder the burden
Equal Protection Clause vs. Uniformity &

Equity Clause
Equal protection clause: refers more to like treatment in
like circumstances
e.g. VAT exemption - same treatment for those in the medical
profession (surgeon, dentist, ortho-dentist, pediatrician)
Uniformity & equity clause: proper relative treatment for

tax purposes of persons in unlike circumstances
e.g. VAT on services (exercise of profession, consultants,
construction, manpower services.)
Non impairment clause (Sec 10, Art III)
When government is a party (charter or special law)
EXCEPT (Sec 11, Art XII)
Franchise grant
Non-imprisonment clause (Sec 20, Art III)

For non-payment of poll tax
Prohibition against taxation of religious or charitable
entities (Sec 28 (3), Art VI)
Actually, Directly, Exclusively
Test: Use not ownership
Scope: Real estate taxes only
Prohibition against taxation of non-stock non-profit
educational institution (Sec 4 (3&4), Art XIV)
Actually, Directly, Exclusively
Test: educational purposes
Scope: exemption on all revenues and assets
Proprietary (Sec 27 NIRC)

Governmental (Sec 30(h) NIRC)
Freedom of religion (Sec 5, Art III)
Progressive System of Taxation (Sec 28(1) Art VI)
Passage of Tax Bills (Sec 26(2) Art III)
Granting of Exemption (Sec 28(4) Art VI)
Presidents Veto Power (Sec 27(2) Art VI)
SC review power (Sec 5 (2)(b) Art VIII)
Aspects of Taxation / Stages of Taxation

[LEGISLATIVE ACT]
Levy: which is the act of imposition by the legislature such as by its
enactment of the law
[EXECUTIVE ACT ]
Assessment and Collection: which is the act of administration and
implementation of the tax law by the executive through its
administrative agencies.
Process of Refund
[TAXPAYERS ACT]
Payment: which is the act of compliance by the taxpayer, including
such options, schemes or remedies as may be legally open or
available to him.
Claim of Refund
TAXES
Definition: Taxes
A tax is a forced burden, charge, exaction, imposition,
contribution assessed in accordance with some
reasonable rule of apportionment by authority of a
sovereign state upon the person or property within its
jurisdiction to provide public revenue for the support of the
government, the administration of the law or the payment
of public expenses.
Taxes: Essential Characteristics

It is an enforced contribution: It is not a voluntary
payment or donation and its imposition is in no way
dependent upon the will or assent open or implied of the
person taxed.
It is generally payable in money: Unless qualified by law,
taxes must be paid in money or legal tender.
It is proportionate in character: A tax is laid by some rule
of apportionment according to which a persons share in
the public burden. It is ordinarily based on ability to pay.

It is levied on persons or property: A tax may also be imposed
on acts, transactions, rights or privileges. In each case,
however, it is only a person who pays the tax. But not all who
pay a tax shoulder the burden of the tax .
It is levied by the state which has jurisdiction over the person or
property: The object to be taxed must be subject to the
jurisdiction of the taxing state.
It is levied by the law-making body of the state: The power to
tax is a legislative power which under the Constitution only
Congress can exercise through the enactment of the tax
statues. It is likewise granted to LGUs.

It is levied for public purpose or purposes: public purpose
such as the support the government, the administration of
the law, or the payment of public expenses.
It is commonly required to be paid at regular periods or
intervals.
Taxes vs. Tariffs / Customs Duties

Tariff and Customs Duties are taxes imposed on goods
exported from or imported into a country.
Taxes in a broad sense includes tariffs and customs
duties.
Taxes vs. Toll

A toll is a demand of proprietorship while a tax is demand
of sovereignty
A toll is paid for the use of another property while 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
A toll may be imposed by the government or private
individuals or entities while a tax may be imposed only by
the government
Taxes vs. License Fees

LF is the legal compensation or reward of an officer for specific
services while tax is enforced contribution assessed by sovereign
state
LF is imposed for regulation while tax is levied for revenue
LF involves an exercise of police power while tax involves the
exercise of taxing power
LF is limited to the necessary expenses of inspection and regulation
while there is generally no limit on the amount of tax that may be
imposed
LF is imposed on the right to exercise a privilege while tax is imposed
also on persons and property
Failure to pay LF makes the act or business illegal while failure to pay
tax does not necessarily makes a business or an act illegal.
Taxes vs. Special Assessments

Characteristics of special assessments:
a SA is levied only on land
It is not a personal liability of the person assessed
It is based wholly on benefits
It is exceptional both as to time and place
A charge imposed only on property owners benefited is a
special assessment rather than a tax notwithstanding that
the statute calls it a tax.
Taxes vs. Debt

A debt is generally based on contract, express or implied while tax is
based on law.
A debt is assignable while tax cannot generally be assigned.
A debt may be paid in kind while tax is generally paid in money.
A debt may be subject of set-off or compensation while tax is
generally not
A person cannot be imprisoned for non-payment of debt while
imprisonment is a sanction for non-payment of tax
A debt is governed by the ordinary periods of prescription while tax is
governed by special prescriptive periods
A debt draws interest when it is so stipulated or when there is default
while a tax does not draw interest except when delinquent.
A tax however, like a debt is a liability or obligation.

Classification of Taxes:
As to Object/Subject Matter
Personal, poll, or capitation Tax of a fixed amount imposed on
persons residing within a specified territory, whether citizens or not,
without regard to their property or the occupation or business in which
they may be engaged. Example: Residence Tax, Community tax
(LGC)
Property Tax imposed on property, whether real or personal, in
proportion either to its value, or in accordance with some other
reasonable method of apportionment. Example: Real estate tax
Excise Any tax which does not fall within the classification of a poll
tax or a property tax. Thus, it is said that an excise tax is a charge
imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in a occupation, profession or business.
The term excise tax is synonymous with privilege tax and the two
are often used interchangeably. Example : income tax, value added
tax, estate tax, donors tax
As to Burden or Incidence
Direct Tax which is demanded from the person who also
shoulders the burden of the tax; or tax which the taxpayer
cannot shift to another. Example: Corporate and individual
income taxes; residence taxes; estate tax; donors tax.
Indirect Tax which is demanded from one person in the
expectation and intention that he shall indemnify himself at the
expense of another. The person who absorbs or bears the
burden of the tax is other than the one on whom it is in imposed
and required by law to pay the tax. Most taxes are indirect.
Example: VAT; excise taxes on certain specific goods; custom
duties
As to Tax Rates / Determination of Amount
Specific Tax of a fixed amount imposed by the head or
number, or by some standard of weight or measurement.
Example : Taxes on distilled spirits, wines
Ad valorem Tax of a fixed proportion of the value of the
property with respect to which the tax is assessed. The
phrase ad valorem means literally, according to value.
Example: Real estate tax
Mixed combined features of a specific and ad valorem
system. Example: excise taxes on cigarettes
As to Purposes
General, fiscal, or revenue Tax imposed for the
general purposes of the government, i.e. to raise revenue
for the governmental needs Example: Income tax; VAT
and almost all taxes
Special or regulatory Tax imposed for a special
purpose, i.e. to achieve some social or economic ends
irrespective of whether revenue is actually raised or not.
Example: Protective tariffs or customs duties on imported
goods to enable similar products manufactured locally to
compete with such imports in the domestic market.
As to Scope or Authority to Impose
National Tax imposed by the national government.
Example: National internal revenue taxes; customs duties
and national taxes imposed by special laws
Local Tax imposed by municipal corporations or local
governments. Example: Real estate tax; occupation tax
or all taxes covered by the LGC
As to Graduation
Proportional Tax based on affixed percentage of the amount
of the property, receipts, or other basis to be taxed.. Example:
real estate taxes; VAT and other percentage taxes
Progressive or graduated Tax the rate of which increases
as the tax base or bracket increases. Example: Income tax;
estate tax; donors tax.
Regressive Tax rate of which decreases as the tax base or
bracket increases, i.e. the tax rate and the tax base move in
opposite directions. We have no regressive taxes.
Mixed or Degressive partly progressive and partly
proportional
Kinds of Tax Rates

Income Taxes
An excise tax
A direct tax
An ad valorem tax
A general tax
A national tax
A progressive tax
PART II:
ORGANIZATION AND
FUNCTION OF THE BUREAU
OF INTERNAL REVENUE
Title I National Internal Revenue Code
Sections 1 to 21
Finance Bureaus
Bureau of
Internal
Revenue
Millennium
Challenge Bureau of
Account Customs
Philippines
DEPARTMENT
OF FINANCE
Bureau of
Local Bureau of
Government Treasury
Finance
Finance Agencies & GOCCs

Insurance
Commission
Privatization
and National Tax
Research
Management
Office Center
DEPARTMENT
OF FINANCE
Cooperative Central Board
Development of Assessment
Authority Appeal
Philippine
Philippine Deposit
Export-Import
Insurance
Credit Agency Corporation
Chiefs Officials of the BIR [Sec 2]

Deputy Commissioner
Operations Group
Deputy Commissioner Legal &

Inspection Group
Commissioner of
Internal Revenue
Deputy Commissioner
Resource Management Group
Deputy Commissioner
Information Systems Group
Regional & District Offices

[Sec 9 & 10]
DCIR - OG 1
Regions 20 + 1
District
Offices 119 + 7
Powers & Duties of the BIR [Sec 2]

Assess and collect of all internal revenue taxes, fees, and
charges, and
Enforce all forfeitures, penalties, and fines connected with
the assessment & collection function
Execute favorable judgments the Court of Tax Appeals
and the ordinary courts.
Powers of the Commissioner [Sec 4]

Interpret:
exclusive and original jurisdiction to interpret the provisions tax
laws (subject to review by the Secretary of Finance)
Decide:
To decide on, (subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals)
disputed assessments
refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto,
Powers of the Commissioner [Sec 5]

Purpose:
Ascertain correctness of any return
Making a return when none was prepared
Determining tax liability
Collection of tax liability
Evaluating tax compliance
Power of Commissioner [Sec 5]

Examination
Notice of Audit, Letters of Authority, Tax Verification Notice, Letter
Notice
Obtain information
Request for Third Party Information, Data-Linkage
Summon any person
Subpoena Duces Tecum
Take testimony
Subpoena Ad Testificandum
To order canvass [survey or surveillance]
Mission Orders
Power of the Commissioner [Sec 6]

(A) Examination of Returns
Absence of a return does not prelude examination [Sec 222]
Filed return cannot be withdrawn [Sec 255]
May be modified, changed or amended within the period of 3 years
from filing, provided no notice of audit or investigation has been
actually served upon the taxpayer

(B) Assess based on Best Evidence Obtainable
When taxpayer fails to file a return or document required
When there is reason to believe that the return filed is false,
incomplete or erroneous
RMC 23-2000
Rationale: unhampered assessment and collection function

Burden of proof is upon the taxpayer to show clearly that
the assessment is wrong and without basis or is
erroneous.
Failure to do so on the part of the taxpayer justify the
judicial affirmation of the assessment.

(C) Inventory Taking, Surveillance, Prescribe Presumptive
Gross Sales & Receipts
Inventory Stock-Taking
All taxpayer, excise
Surveillance
Spot-checking, open surveillance (covert or overt operations)
Presumptive Sales/Receipts
Sec 113 & 237
Benchmarking
Prima facie correct as basis to compute tax liability

(D) Terminate Taxable Period
Retirement of business
Intending to leave the country
Remove, hide or conceal property
Obstruction in collection activity
Calls for termination of taxable period with immediate payment of

tax liability

(E) Prescribe Real Property Values
Zonal valuations
Upon consultation with competent appraisers (private and public)
Purpose
Compute any internal revenue tax (higher of FMV of CIR or FMV of City
Assessors Office (Tax Declaration of Property)

(F) Inquire into Bank Accounts
Republic Act No. 10021
Exchange of Information on Tax Matters Act of 2009
Signed March 9, 2010
RR 10-2010 dated October 6, 2010
Amended the following Sections of the NIRC
Sec 6 (F)
Sec 71
Sec 270

(G) Accredit & Register Tax Agents
RR No. 4-2010 dated Feb 26, 2010
Amends RR No. 11-2006 & RR 15-99 relative to the accreditation
of tax practitioners/agents as a prerequisite to their practice or
representation before the Bureau of Internal Revenue
published in Manila Bulletin on February 27, 2010

(H) Prescribe Additional Procedural or Documentary
Requirements
Compliance requirements
In connection with submission of financial statements attached to
the returns
CIRs Power to Delegate [Sec 7]

Delegate to authorized/define officer certain actions
Except:
Revenue Regulations [Sec 244]
1st impression rulings
Revise, modify or revoke existing ruling
Compromise or Abate any tax liability [Sec 204(A)]
2 yr rule on assign/re-assign ROOPs [Sec 16, Sec 152, Sec 171]
Note: does not include 3 yr rule on assign of ROs [Sec 17]
Authorized Collection Agents of the BIR

[Sec 12]
(a) BOC
(b) DOE
(c) Accredited Banks
Others
Sec 10: Authority of a Regional Director
Sec 11: Authority of a Revenue District Officer
Sec 13: Authority of a Revenue Officer
Sec 14: Oaths
Sec 15: Arrest & Seizures
PART III:
INCOME TAXATION
Income Tax Systems

A global system is a system where the tax treatment views
indifferently the tax base and generally treats in common all
categories of taxable income of the taxpayer. In a global or unitary
system, single tax is imposed on all income received or earned by a
person irrespective of the activities which produced the income.
A schedular system is a system employed where the income tax
treatment varies and made to depend on the kind or category of
taxable income of the taxpayer. In a schedular system income items
are categorized into schedules according to the types of activity which
produced them. Different tax rates are applied for each types of
income, e.g. one set of tax rates for salaries and wages, another set
of rates for business income and so on. Its main thrust is the type of
income rather than the characteristic of the taxpayer.
What is Income Tax?

A tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on a persons
income, emoluments, profits and the life. Income tax is a
direct tax
Feature of Philippine Taxation

Direct
Progressive
Comprehensive
Semi-schedular or semi-global
Mostly American Origin
Types of Philippine Income Tax

Net Income Tax/Taxable Income (GI Deductions Exemptions)
Gross Income Tax
Final Income Tax (On passive income and capital gains)
Fringe Benefits Tax (amount of benefits to Managerial and
Supervisory Employee paid by Employer; employee is taxed but
burden is on employer)
Capital Gains Tax (Real property and stocks not traded in stock
market)
Optional Corporate Income Tax
Minimum Corporate Income Tax (2% of gross income)
Improperly Accumulated Earnings Tax
Preferential Rates (for special corporations)
Branch Profit Remittance Tax
Title II Tax on Income [Sec 22 83]

Chapter I Definition
Chapter II General Principles
Chapter III Tax on Individuals
Chapter IV Tax on Corporation
Chapter V Computation of Taxable Income
Chapter VI Computation of Gross Income
Chapter VII Allowable Deductions
Chapter VIII Accounting Periods and Methods of Accounting
Chapter IX Returns & Payment of Tax
Chapter X Estate & Trusts
Chapter XI Other Income Tax Requirements
Chapter XII Quarterly Corporate Income Tax Annual Declarations and
Quarterly Income Payments of Income Tax
Chapter XIII Withholding on Wages
Study Guide for Income Taxation

WHO are covered by income taxation?
HOW are they taxed
WHAT is the tax base?
WHAT is the tax rate?
HOW do we compute for the tax base?
WHAT is gross income?
WHAT are exclusions from gross income?
WHAT are capital /ordinary gains/loss?
HOW do we determine sourcing of income?
WHAT are allowable deductions?
WHAT is taxable income?
WHAT is a Partnership
WHAT us an Estates and Trusts
WHAT are the administrative requirements?
Study Aide
Study Aide
Codal Mapping for Income Tax (1 page)
Persons Matrix (4 pages)
GPP vs. GPP
Persons Matrix
Deductions Matrix depending on Types of Person
TYPES OF TAXPAYERS
Title II of the National Internal Revenue Code
Sec 22, Sec 23
Sec 23 General Principles in Income Taxation

Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources
within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income from sources
within the Philippines: Provided, That a seaman who is a citizen of the Philippines
and who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated
as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
Criteria in Imposing Income Taxation

Nationality or Citizenship Test
A rule which taxes citizens of a sovereign state regardless where there
located. Nationality rule is the legal basis for taxing Filipino citizen and
domestic corporations for its income from all sources i.e. from within
and without the Philippines
Residence Test
A rule, which taxes all those who are residing in the sovereign state.
Residence rule is the legal basis for taxing Philippine residents for
income earnings from within the Philippines e.g. taxation of resident
aliens of all its income from within the Philippines.
Source Test
A tax situs rule which taxes an income depending on the where it was
sourced. Source rule enables the country to tax income earnings from
within the Philippines for activities conducted within the country.
Types of Taxpayers: Individuals

(1) Citizens
(a) Resident Citizen citizen of the Philippines residing
therein is taxable on all income derived from sources within
and without the Philippines.
(b) Nonresident Citizen citizen of the Philippines who
are taxable only on his income from sources within the
Philippines if he:
i. Establishes the fact of his physical presence
abroad with a definite intention to reside therein.

ii. Leaves the Philippines during the taxable year to
reside abroad, as immigrant or for employment on a
permanent basis.
iii. Works & derives income from abroad & whose
employment requires him to be physically present abroad
most of the time (i.e. not less than 183 days) during the
taxable year.
iv. Was previously considered as nonresident citizen
& arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines.

(2) Aliens
(a) Resident Alien an individual whose residence is within the
Philippines and who is not a citizen thereof is taxable only on
income derived from sources within the Philippines.
(b) Nonresident Alien an individual whose residence is not
within the Philippines and who is not a citizen thereof but dong
business therein is taxable only on income from sources within.
(1) Engaged in trade or business an alien who
comes and stays in the Philippines for an aggregate period of
more than 180 days during any calendar year.
(2) Not engaged in trade or business an alien whose
stay in the Philippines is 180 days or less.

(3) Special Class of Individual Employees
(a) Aliens employed by regional or area headquarters and
regional operating headquarters of multinational companies
in the Philippines.
(b) Aliens employed by offshore banking units.
(c) Aliens employed by petroleum contractors and
subcontractors.

(3) Special Class of Individual Employees
(d) Minimum Wage Earner
A worker who paid the statutory minimum wage
Holiday, overtime, night shift differential and hazard pay
are exempt from income tax pursuant to the provisions of
this Code and other laws, general or special.
Types of Taxpayers: Corporations

A corporation shall include partnerships, no matter
how created or organized. Joint stock companies, joint
accounts, associations, and insurance companies
But does not include, for the purpose of imposing ordinary
30% (starting 2009; 35% 2006 - 2008) corporate income
tax:
General professional partnerships
Joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal &
other energy operations pursuant to an operating or consortium
agreement under a service contract with the government
Types of Taxpayers: Corporations

(1) Domestic Corporation created or organized in the
Philippines or under its laws and is liable for income
derived from sources within and without.
(2) Foreign Corporation organized and existing under
the laws of a foreign country, which includes:
(a) Resident foreign corporation foreign
corporation engaged in trade or business within the
Philippines and is liable from sources within.
(b) Nonresident foreign corporation foreign
corporation not engaged in trade or business within the
Philippines
Types of Taxpayers: Partnership

(1) General Professional Partnerships
Established solely for purpose of exercising common
profession and no part of income derived from engaging in trade
or business.
As an entity, it is not subject to income tax.
Partners are liable for income tax on their distributive share
(computed by dividing net income of GPP).
Each partner shall report his distributive share as part of his
gross income.
Individual partners are subject to regular income tax rate on
their taxable income.

(2) Taxable/Business/Ordinary/General Partnership
All other partnerships no matter how created or organized.
Includes unregistered joint ventures and business
partnerships.
Taxable as an entity ordinary corporate income tax.

(2) Taxable/Business/Ordinary/General Partnership
Joint ventures are not taxable as corporations when its
purpose is: a) undertaking construction projects; b)
engaged in petroleum, coal and other energy operation
under a service contract with the government.
Partners are considered stockholders; therefore, their
distributive share is taxed as dividends, thus subject to
final income tax on their gross distributive share.
Types of Taxpayers: Estates and Trusts

(1) Estate: property, rights and obligations of a person which are
not extinguished by his death and those that accrues thereto;
taxed in the same way as an individual provided it is irrevocable
and earns income; what is taxed is not the property that
constitutes the trust (this was already subject to donors tax) but
the income of such property.
(2) Trust: arrangement created by agreement under which title to
property is passed to another for conservation or investment with
the income and the corpus/principal distributed in accordance
with the directions of the creator; to be taxable as a separate
entity, grantor must have absolutely and irrevocably given up
control and benefit over the trust.
Co-ownership
Exists whenever the ownership of an undivided thing or right
belongs to different persons. For income tax purposes, the
individual co-owners are liable for the taxes due on their
respective shares and the co-ownership itself is not considered
as a separate taxable entity.
There is co-ownership in the following instances:
Two or more heirs inherit an undivided property from a decedent;
A donor makes a gift of an undivided property in favor of two or more
donees.
It is not taxable when the activities are limited merely to
preservation of the co-owned property but the co-owners are
liable for income tax in their separate and individual capacities.
It is taxable when the income of the co-ownership is invested
by the co-owners in business creating a partnership.
TAXABLE INCOME
GROSS INCOME AND FBT
Title II National Internal Revenue Code
Sections 31, 32, 33
GENERAL PRINCIPLES
Income
Income, in its broad sense, means all wealth which flows
into the taxpayer other than as a mere return on capital.
[Section 36, Revenue Regulations 2]
Income means accession to wealth, gain or flow of wealth.
Conwi v. CTA [213 SCRA 83]: Income may be defined as
an amount of money coming to a person or corporation
within a specified time, whether as payment for services,
interest, or profit from investment.
Income
Fisher v. Trinidad [43 Phil 973]: Stock dividend is not an
income. It merely evidences the interest of the stockholder in
the increased capital of the corporation. An income may be
defined as the amount of money coming to a person or
corporation within a specified time, whether as payment for
services, interest, or profit for investment. A mere advance in
the value of property of a person or corporation in no sense
constitutes the income specified in the revenue law. Such
advance constitutes and can be treated merely as an increase
of capital. An income means cash received or its equivalent. It
does not mean choses in action or unrealized increments in the
value of the property.
Income vs. Capital

Capital is a fund or property existing at one distinct point
of time while income denotes a flow of wealth during a
definite period of time.
The essential difference between capital and income is
that capital is a fund or property existing at one distinct
point of time; income is a flow of services rendered by that
capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such
fund through a period of time. Capital is wealth, income is
the service of wealth. [Madrigal v. Rafferty, 38 Phil 414].
Capital is the tree while income is the fruit.
Sec 31 Taxable Income

Taxable income = Gross income less the deduction and/
or personal and additional exemptions, if any.
Computation of Taxable Income
Accounting Period and Accounting Method [Secs 43 -50)
Source Rules [Sec 42]
When is income Taxable

Requisites for income to be taxable
There must be a gain or profit.
The gain must be realized or received.
The gain must not be excluded by law or treaty from taxation.
Gain must be realized or received

This implies that not all economic gains constitute taxable
income. Thus, a mere increase in the value of property is not
income but merely an unrealized increase in capital.
Actual vs. Constructive Receipt

When is income considered received?
actual receipt
constructive receipt

Income constructively received
Income which is credited to the account of or set apart for
a taxpayer and which may be drawn upon by him at any
time is subject to tax for the year during which so credited
or set apart, although not then actually reduced to
possession.
To constitute receipt in such a case, the income must be credited to
the taxpayer without any substantial limitation or restriction as to
the time or manner of payment or condition upon which payment is
to be made. [Section 52, Revenue Regulations 2]

Income constructively received
Limpan Investment Company deemed to have
constructively received rental payments in 1957 when
they were deposited in court due to its refusal to receive
them. [Limpan v. CIR, 17 SCRA 703]
Defaulted coupons are income for the year in which paid.
Partners distributive share in the profits of a general
professional partnership is regarded as received by the
partner, although not yet distributed.
Realization of Income
Tests to determine realization of income
1. Severance test
2. Substantial alteration of interest test
3. Flow of wealth test
Severance test
As capital or investment is not income subject to tax, the gain or
profit derived from the exchange or transaction of said capital
by the taxpayer for his separate use, benefit and disposal is
income subject to tax.
Substantial alteration of interest test
Income is earned when there is a substantial alteration of
the interest of a taxpayer, i.e. increase in proportionate
share of a stockholder in a corporation Income to be
returnable for taxation must be fully and completely
realized. Where there is no separation of gain or profit, or
separation of increase in value from capital, there is no
income subject to tax.
Thus, stock dividends are not income subject to tax on the
part of the shareholder for he had the same proportionate
interest in the assets of the corporation as he had before,
and the stockholder was no richer and the corporation no
poorer after the declaration of the dividend. However, if
the pre-existing proportionate interest of the stockholder is
substantially altered, the income is considered derived to
the extent of the benefit received.
Moreover, if as a result of an exchange of stocks, the
person received something of value which are essentially
and fundamentally different from what he had before the
exchange, income is realized within the meaning of the
revenue law.
Flow of wealth test
The essential difference between capital and income is
that capital is a fund whereas income is the flow of wealth
coming from such fund; capital is the tree, income is the
fruit. Income is the flow of wealth other than as a mere
return of capital.
Forgiveness of indebtedness
The cancellation and forgiveness of indebtedness may, dependent
upon the circumstances, amount to:
a payment of income;
a gift; or
a capital transaction.
If, for example, an individual performs services for a creditor who, in
consideration thereof cancels the debt, income to that amount is
realized by the debtor as compensation for his service.
If, however, a creditor merely desires to benefit a debtor and without
any consideration thereof cancels the debt, the amount of the debt is
a gift from the creditor to the debtor and need not be included in the
latters gross income.
If a corporation to which a stockholder is indebted forgives the debt,
the transaction has the effect of payment of a dividend. [Section 50,
Revenue Regulations 2]
Tax Benefit Rule

Recovery of amount previously written off or claimed as
deduction should be considered as income
Taxes [ Sec 34(C)(1)]

Abandonment Losses [Sec 34 (D)(7)(b)]
Bad Debts [Sec 34(E)(1)]
Guiding Rule
Guide Questions in Determining Taxable Income
1. Is there a gain or income?
2. Is the gain or income taxable? Is it excluded or exempt?
3. What type of income is it: income includible in the gross income,

passive income, capital gains, income derived from other source?
4. To what class does the taxpayer belong: individual or corporate,

citizen or not or domestic or foreign, resident or not, engaged in trade
or business or not?
SEC 32 (A) GROSS

INCOME
Gross Income [Sec 32(A)] CG2IR2DAP3

Gross Income means all income derived from whatever source, including (but not limited to)
the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
Sec 32 (A)(1)
Sec 32 (A)(1)
Compensation for services in whatever form paid,
including, but not limited to, fees, salaries, wages,
commissions, and similar items;
Sec 32(A)(1)
Compensation for services
This means all remuneration for services performed by an
employee for his employer under an employer-employee
relationship.
Compensation paid in kind

Compensation may be paid in money or in some medium
other than money.
Sec 32(A)(1)
Living quarters or meals
If a person receives a salary as a remuneration for services
rendered and, in addition thereto, living quarters or meals are
provided, the value to such person of the quarters and meals so
furnished shall be added to the remuneration paid for the
purpose of determining the amount of compensation subject to
withholding.
However, if living quarters or meals are furnished to an

employee for the convenience of the employer, the value
thereof need not be included as part of compensation income.
[Section 2.78.1, Revenue Regulations 2-98]
Sec 32(A)(1)
Convenience of the employer rule
Under this rule, allowances furnished to the employee for, and

as a necessary incident to, the performance of his duties are
not taxable.
Thus, the value of meals and living quarters given to a driver

who is available any hour of the day when needed by his
doctor-employer is not considered income of the said driver.
Sec 32(A)(1)
Facilities and privileges of a relatively small value
Facilities are not considered as compensation subject to
withholding if such facilities or privileges are of relatively
small value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. [Section
2.78.1, Revenue Regulations 2-98]
Sec 32(A)(1)
Tips and gratuities
Tips or gratuities paid directly to an employee by a
customer of the employer which are not accounted for by
the employee to the employer are considered as taxable
income but not subject to withholding.
Sec 32(A)(1)
Fixed or variable transportation, representation and
other allowances
In general, fixed or variable transportation, representation
and other allowances which are received by a public
officer or employee or officer or employee of a private
entity, in addition to the regular compensation fixed for his
position or office, is compensation subject to withholding.
Sec 32(A)(1)
Fixed or variable transportation, representation and other allowances
Any amount paid specifically, either as advancements or reimbursements, for
traveling, representation and other bona fide ordinary and necessary expenses
incurred or reasonably expected to be incurred by the employee in the
performance of his duties are not compensation subject to withholding, if the
following conditions are satisfied:
It is for ordinary and necessary traveling and representation or entertainment

expenses paid or incurred by the employee in the pursuit of the trade, business or
profession; and
The employee is required to account or liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category of
expenses. The excess of actual expenses over advances made shall constitute
taxable income if such amount is not returned to the employer.
Sec 32(A)(1)
Vacation and sick leave allowances
Amounts of vacation allowances or leave credits which are paid
to an employee constitutes compensation. Thus, the salary of
an employee on vacation or on sick leave, which are paid
notwithstanding his absence from work constitutes
compensation.
De minimis benefits
However, the monetized value of unutilized leave credits of ten
(10) days or less which were paid to the employee during the
year are not subject to income tax.
Sec 33 Fringe Benefits Tax (FBT)

Imposition of fringe benefit tax
A final tax of 32% effective 01 January 2000 is imposed on the

grossed-up monetary value of fringe benefit furnished or granted to
the employee, except rank and file, by the employer, whether an
individual or a corporation.
The fringe benefit tax is paid by the employer.
Grossed-up monetary value is acquired by dividing the actual

monetary value of the fringe benefit by 68% effective 01 January
2000.
Sec 33
Fringe benefit
Fringe benefit means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee,
except rank and file employees, such as, but not limited to, the
following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
Sec 33
Fringe benefit
Fringe benefit means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee,
except rank and file employees, such as, but not limited to, the following:
6. Membership fees, dues and other expenses borne by the employer

for the employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.
Sec 33
Fringe benefits which are not subject to FBT
Fringe benefits which are authorized and exempted from tax
under special laws.
Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans.
Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not.
De minimis benefits.
Fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer.
It is for the convenience or advantage of the employer.
De Minimis Benefits
(RR 5-2011 / RR 8-2012 / RR 1-2015)
1. Monetized unused vacation leave credits of private employees
not exceeding ten days;
2. Monetized value of vacation and sick leave credits paid to
government employees;
3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester of P125 per month;
4. Rice Subsidy of P1,500 or one(1) sack of 50kg of rice per month
amounting to not more than P1,500;
5. Uniform and clothing allowance not exceeding P5,000 per annum;
6. Actual medical expenses not exceeding P10,000 per annum;
De Minimis Benefits (11)

7. Laundry allowance not exceeding P300 per month;
8. Annual achievement awards with an annual monetary value
not exceeding P10,000;
9. Gifts during Christmas and major anniversaries not
exceeding P5,000 per annum;
10. Daily meal allowance for overtime work and night shift not
exceeding 25% of the basic minimum wage.
11. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive
schemes provided that the total monetary value received
from both CBA and productivity incentive schemes
combined do not exceed P10,000 per employee per taxable
year
Pure Compensation Earner
(MWE, R&F, Executive)
Minimum Wage Rank and File Managerial or
Earner Supervisory
Basic Compensation Exempt Taxable Taxable
Compensation Compensation
Holiday Pay, OT, Exempt Taxable Taxable
Nightshift Pay, Compensation Compensation
Hazard Pay
13th Month Pay up to Exempt Exempt Exempt
P82,000
Other Benefit in n/a (with caveat) Taxable Taxable
Excess of P82,000 Compensation Compensation
Fringe Benefit n/a Taxable Subject to Fringe

Compensation Benefit Tax
De Minimis Benefit Exempt Exempt Exempt
Sec 32 (A)(2)
Sec 32 (A)(2)
Gross income derived from the conduct of trade or
business or the exercise of a profession;
Sec 32 (A)(2)
Professional Income
Income earned from the practice of profession provided there is no
employer-employee relationship between him and his clients. Profession
is primarily any endeavor or work requiring specialized training in the field
of learning, art, or science engaged in as a means of livelihood or profit of
an individual or group of individuals.
Income from Business
In the case of manufacturing, merchandising, or mining business, gross
income means the total sales, less cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In
determining gross income, deductions should not be made for
depreciation, depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of goods sold.
In the case of sellers of services, their gross income is computed by
deducting all direct costs and expenses as prescribed in RMC Nos. 04-03
and 30- 08.
Sec 32 (A)(3)
Sec 32(A)(3)
Gains derived from dealings in property;
Types of Properties
Capital Asset or
Ordinary Assets
Real Property / Shares of Stock / Other Properties
Types of Gains
Capital Gains
Ordinary Gains
Sec 32 (A)(3)
Ordinary assets assets that are used primarily in the ordinary course of trade or
business, such as
Stock in trade of taxpayer
Property which would properly be included in an inventory of the taxpayer, if on
hand
Merchandise inventory
Depreciable assets used in the trade/business
Real property used in trade/business
Capital Assets properties of a taxpayer other than ordinary assets, such as

Stock and securities held by taxpayers other than dealers in securities
Interest in partnership and joint venture
Goodwill
Real property not used in trade or business like residential house and lot
Investment property
Sec 32 (A)(3)
Real Property
Article 415 of the Civil Code
Individuals Sec 24 / Sec 25 real property
- principal residence exemption
Corporations Sec 27 / Sec 28 land and building
Shares of Stock
Traded and listed
Not listed and traded
Others
Sec 39
Sec 32 (A)(4)
Sec 32(A)(4)
Interests;
Sources of interest income

interest on bank deposit/deposit substitutes/trust fund and similar
arrangement
interest from lending/interest income from bonds
interest on uncollected salary
interest on foreign bonds/government bonds
interest on treasury bills
interest earned from deposits maintained under the foreign currency
deposit system
interest income of pawnshop operators
Sec 32 (A)(4)
Sec 32(A)(4)
Interests;
Interest income earned by non-stock, non-profit

educational institutions
Interest income shall be exempt only when used directly and
exclusively for educational purposes. To substantiate this claim,
the institution must submit an annual information return and
duly audited financial statement. A certification of actual
utilization and the Board resolution on the proposed project to
be funded out of the money deposited in banks must also be
submitted. [Department of Finance Order 149-95]
Sec 32(A)(5) to (11)

Sec 32(A)(5)
Rents - Use of property
Sec 32(A)(6)
Royalties for right to use intangibles
Sec 32(A)(7)
Dividends return on investment
Sec 32(A)(8)
Annuities installment payments for life, or for a guaranteed fixed
period of time, whichever is longer.
Sec 32(A)(5) to (11)

Sec 32(A)(9)
Prizes and Winnings
Sec 32(A)(10)
Pensions
Sec 32(A)(11)
Partners distributive share from the net income of the general
professional partnership.
SEC 32 (B) EXCLUSIONS

FROM GROSS INCOME
Sec 32 (B) Exclusions from Gross Income

Exclusions from gross income
1. Proceeds from life insurance
2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty

6. Retirement benefits, pensions, gratuities, etc.
7. Income derived by foreign government
8. Income derived by the Philippine Government or its
political subdivisions
9. Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary
or civic achievement
10. Prizes and awards in sports competitions
sanctioned by the national sports associations

11. 13th month pay and other benefits not exceeding
P82,000.00 (effective Jan 1, 2015)
12. GSIS, SSS, Medicare and other contributions
13. Gains from the sale of bonds, debentures or other
certificate of indebtedness
14. Gains from redemption of shares in mutual fund
Sec 31 Taxable Income

Taxable income = Gross income less the deduction and/
or personal and additional exemptions, if any.
Computation of Taxable Income
Accounting Period and Accounting Method [Secs 43 -50)
Source Rules [Sec 42]
DEDUCTIONS
Sections 34, 35, 36, 37, 38, 39
Deductions and Exemptions Allowed to

Taxpayers
Types of Taxpayer Allowable Deduction
Individuals: Earning purely - Personal and Additional Exemption [Sec 35 (A) and
compensation (except non-resident (B)]
aliens) - Premiums [Sec 34 (M)]
Individuals: Deriving Income from - Itemized deductions [Sec 34(A) to (J)] or Optional
trade or business or exercise of Standard Deduction (OSD) [Sec 34(L)]
profession - Premiums [Sec 34 (M)]
- Personal and Additional Exemption [Sec 35(A) and
(B)] but by reason of Reciprocity, Only for Non-
resident alien - Personal Exemption [Sec 35(D)]
Corporations (except non-resident - Itemized deductions [Sec 34(A) to (J)] or Optional

foreign corporations) Standard Deduction (OSD) [Sec 34(L)]
- Optional Deductions for Private Educational
Institutions [Sec 34 (A)(2)]
- Special Deductions for Insurance Cos. [Sec 37]
Deductions vs. Exclusions

Deductions are allowable reduction from gross income to
arrive at taxable income
Exclusions are income but are not considered as taxable
by reason of law thus not part of gross income
Kinds of Deductions
Itemized Deductions [Sec 34 (A) t0 (J)]
Optional Standard Deductions (OSD) [Sec 34 (L)]
Special Deductions
Private Educational Institutions [Sec 34(A)(2)]
Insurance Cos [Sec 37]
Losses from Wash Sales [Sec 38]
Special Rule on Capital Losses [Sec 39]
Deduction and Exemptions only for Individuals
Premiums [Sec 34(M)]
Personal and Additional Exemption [Sec 35(A)]
Personal Exemption [Sec 35(D)]
Itemized Deductions
A. Expenses, in general
B. Interest
C. Taxes
D. Losses
E. Bad Debts
F. Depreciation
G. Depletion of oil and gas wells and mines
H. Charitable and other contributions
I. Research and development
J. Pension trusts
M. Premium payments on health and/or hospitalizations
Sec 34 (A)
Ordinary and Necessary Trade, Business or Professional
Expenses
Business expense versus capital expenses
Business expenses refer to all the ordinary and

necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the
development, management, operation and/or conduct of the
trade, business or the exercise of a profession.
Capital expenses are expenditures for extraordinary

repairs which are capitalized and subject to depreciation. These
are expenses which tend to increase the value or prolong the
life of the taxpayers property.
Sec 34 (A)
Ordinary and Necessary Trade, Business or
Professional Expenses
Ordinary and necessary expenses
An expense is ordinary when it is commonly incurred in

the trade or business of the taxpayer as distinguished from
capital expenditures. The payments, however, need not be
normal or habitual in the sense that the taxpayer will have to
make them often. The payment may be unique or non-recurring
to the particular taxpayer affected.
An expense is necessary when it is appropriate and

helpful to the taxpayers business or if it is intended to realize a
profit or to minimize a loss.
Sec 34 (A)
Requisites for deductibility
The expenses must be ordinary and necessary.
It must be paid or incurred during the taxable year.
It must be paid or incurred in carrying on any trade or
business or profession.
It must be reasonable in amount.
It must be substantiated by sufficient evidence such as official
receipts and other official records. (substantiation requirement)
It must not be against law, morals, public policy or public order.
Withholding taxes should have properly been withheld and
remitted when required. [Sec 34(K)]
Sec 34 (A)
Substantiation requirement for expenses

Taxpayer need to substantiate with sufficient evidence,
such as official receipts or other adequate records:
the amount of the expense being deducted; and
the direct connection or relation of the expense being
deducted to the development, management, operation and/or
conduct of the trade, business or profession of the taxpayer.
Sec 34 (A)
Salaries, wages and other forms of compensation for personal
services actually rendered, including the grossed-up monetary
value of fringe benefit granted provided the fringe benefit tax
has been paid.
Travel expenses, here and abroad, while away from home.
Rentals and/or other payments of property to which the
taxpayer has not taken or is not taking title or in which he has
no equity other than that of a lessee, user or possessor.
Entertainment, amusement and recreation expenses, subject to
limitation under RR 10-2002.
Sec 34 (A)
Other business expenses
Repairs
Cost of materials and supplies
Advertising expenses
Professional services
Insurance
Management expenses
Training expenses
Communication
Light and Water and other Utilities
.
Sec 34 (B) Interest

Payment for the use or forbearance or detention of
money.
Requisites for deductibility of interest expense

There must be an indebtedness incurred by the taxpayer
in connection with the taxpayers trade, business or
profession.
The interest must have been paid or incurred within the
taxable year.
The interest must have been stipulated in writing.
Sec 34 (B) Interest

Interest subject to limitation (Tax arbitrage)
The taxpayers allowable deduction for interest expense shall
be reduced by an amount equal to 33% (effective Jan 1, 2009)
of the interest income earned subjected to final tax.
Optional treatment for interest

Interest incurred to acquire property used in trade, business or
exercise of a profession may be allowed as a deduction or
treated as a capital expenditure
Sec 34 (B) Interest

Interest which cannot be deducted
Interest is paid in advance through discount or otherwise by an
individual taxpayer reporting income on the cash basis. Such interest
shall be allowed as a deduction in the year the indebtedness is paid.
Interest between related taxpayers. [Sec 36(B)]
If the indebtedness is incurred to finance petroleum exploration.
Delinquency interest on tax liability

The term indebtedness has been defined as an unconditional and
legally enforceable obligation for the payment of money. Within the
meaning of that definition, a tax may be considered as an
indebtedness. Hence, interest paid for late payment of the donors tax
is deductible from gross income. [Commissioner v. Prieto, 109 Phil
592]
Sec 34(C) Taxes

Deductible Taxes
As a general rule, all taxes, national or local, paid or
incurred with the taxable year in connection with the
taxpayers trade, business or profession are deductible
from gross income.
Taxes means taxes proper and, therefore, no deductions

are allowed for amounts representing interest, surcharges
and fines or penalties incident to delinquency.
Sec 34(C) Taxes

Non-deductible Taxes
Philippine income tax
Income taxes imposed by the authority of any foreign
country but deduction is allowed only in the case of a
taxpayer who is entitled to tax credit for taxes of foreign
countries but does not avail of the same
Estate and donors taxes
Special assessments or levies assessed against local
benefits of a kind tending to increase the value of the
property assessed
Sec 34(C) Taxes

Tax subsequently refunded or credited
Taxes previously allowed as deductions, when refunded or
credited, shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction.
Limitations on deductions for non-resident alien engaged

in trade or business and resident foreign corporation
In the case of a non-resident alien individual engaged in trade
or business in the Philippines and a resident foreign
corporation, deductions for taxes shall be allowed only if and to
the extent that they are connected with income from sources
within the Philippines.
Sec 34(C) Taxes

Tax credit
Tax credit refers to the taxpayers right to deduct from the income tax
due the amount of tax he has paid to a foreign country subject to
limitations.
Tax deduction v. tax credit

Tax Deduction, the taxes are deducted from the gross income in
computing the net income, while in Tax Credit, the taxes are deducted
from Philippine income tax itself.
Tax Deduction, all taxes as a general rule, are allowed as deductions

with some exemptions (enumerated above), while Tax Credit, only
foreign income taxes may be claimed as credits against Philippine
income tax.
Sec 34(C) Taxes

Proof of credits
The credits shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
The total amount of income from sources without the Philippines;

The amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit; and
All other information necessary for the verification and computation of
such credits.
Sec 34(C) Taxes

Credit against tax for taxes of foreign countries
Credit may be claimed by a citizen, domestic corporation, members of
general professional partnerships, and beneficiaries of estates and
trusts.
An alien individual and a foreign corporation are not allowed to claim

credits against the tax for taxes of foreign countries.
Sec 34(C) Taxes

Limitations on credit
The amount of the credit taken shall be subject to each of the
following limitations:
The amount of the credit in respect to the tax paid or incurred to any
country shall not exceed the same proportion of the tax against which
such credit is taken, which the taxpayers taxable income from
sources within such country bears to his entire taxable income for the
same taxable year; and
The total amount of the credit shall not exceed the same proportion of
the tax against which such credit is taken, which the taxpayers
taxable income from sources without the Philippines taxable under
this Title bears to his entire taxable income for the same taxable year.
Sec 34(D) Losses

Requisites for deductibility of losses
The loss must be incurred in the trade, business or profession
of the taxpayer.
It must be actually sustained and charged off within the taxable
year.
It must be evidenced by a closed and completed transaction.
It must not be compensated for by insurance or other forms of
indemnity.
If it is a casualty loss, the taxpayer has filed a sworn
declaration of loss within 45 days after the date of the discovery
of the casualty or robbery, theft, or embezzlement.
Sec 34(D) Losses

Ordinary losses / business losses
Casualty losses
Loss arises from fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement
Sec 34(D) Losses

Net operating loss carry-over (NOLCO)
NOLCO shall be carried over as a deduction from the gross income
for the next three (3) consecutive taxable years immediately
following the year of loss.
Such loss shall be allowed as a deduction if it had not been
previously offset as deduction from gross income.
However, any net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed as a
deduction.
Sec 34(D) Losses

Net operating loss carry-over (NOLCO)
NOLCO shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise.
There is no substantial change when:
Not less than 75% in nominal value of outstanding issued shares, if the
business is in the name of a corporation, is held by or on behalf of the
same persons; or
Not less than 75% of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the
same persons.
Sec 34(D) Losses

Capital losses
Losses from sales or exchanges of capital assets shall be allowed
only to the extent of the gains from such sales or exchanges.
Capital losses and securities becoming worthless are governed by
rules on loss from the sale or exchange of capital assets
Securities becoming worthless
Sec 34(D) Losses

Losses from wash sales or stock or securities
A wash sale occurs where it appears that within a period beginning
thirty (30) days before the date of the sale or disposition of shares
of stock or securities and ending thirty (30) days after such date,
the taxpayer has acquired (by purchase or exchange) or has
entered into a contract or option to so acquire, substantially
identical stock or securities. No deduction for loss shall be allowed
for wash sales unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in the ordinary
course of the business of such dealer.
Sec 34(D) Losses

Wagering losses
Losses from wagering shall be allowed only to the extent of gains from
such transactions.
Abandonment losses
In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures pertaining thereto shall be
allowed as a deduction
In case a producing well is subsequently abandoned, the unamortized
costs thereof, as well as the undepreciated costs of equipment directly
used therein, shall be allowed as a deduction in the year such well,
equipment or facilitiy is abandoned by the contractor.
Sec 34(E) Bad Debts

Requisites for deductibility of bad debts
There must be a valid and subsisting debt.
The debt must be actually ascertained to be worthless
and uncollectible during the taxable year.
The debt must be charged off during the taxable year.
The debt must be connected with the trade, business or
profession of the taxpayer, and not sustained in a
transaction entered into between related taxpayers [Sec
36(B)].
Sec 34(E) Bad Debts

Diligent efforts to collect
In addition to the four requisites, the taxpayer must show
that the debt is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by
the taxpayer to prove that he exerted diligent efforts to
collect the debts, via: a) sending of statement of accounts;
b) sending of collection letters; c) giving the account to a
lawyer for collection; and d) filing a collection case in
court. [Philippine Refining Co. v. Court of Appeals, 256
SCRA 667]
Sec 34(E) Bad Debts

Equitable doctrine of tax benefit
This doctrine holds that a recovery of bad debt previously
deducted from gross income constitutes taxable income if
in the year the account was written off, the deduction
resulted in a tax benefit, that is, in the reduction of taxable
income of the taxpayer.
Sec 34 (F) Depreciation

Depreciation is the gradual diminution in the useful value of tangible
property used in trade, business or profession resulting form
exhaustion, wear and tear, and obsolescence.
The term is also applied to amortization of the value of intangible
assets, the use of which in trade or business is definitely limited in
duration.
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above the
cost cannot be claimed and allowed. [Basilan v. CIR, 21 SCRA 17]
Depreciation is a question of fact and is not measured by theoretical
yardstick, but should be determined by a consideration of actual facts.
[Limpan v. CIR, 17 SCRA 703]
Sec 34 (G) Depletion

Depletion is the exhaustion of natural resources like mines and oil and
gas wells as a result of production or severance from such mines or
wells.
Determination of amount of depletion cost

In determining the amount of depletion cost allowable, the following
three factors are essential, namely:
the basis of the property; [Basis means the amount of the taxpayers
capital or investment in the property which he is entitled to recover
tax-free during the period he is removing the mineral in the deposit.]
the estimated total recoverable units in the property; and
the number of units recovered during the taxable year in question.
[Consolidated Mines v. CTA, 58 SCRA 618]
Sec 34(H) Charitable Contributions

Requisite for deductibility of charitable contributions
The contribution must actually be paid or made to the Philippine
government or any political subdivision thereof or to any of the
domestic corporations or associations specified by the NIRC.
No part of the net income of the beneficiary must inure to the benefit
of any private stockholder or individual.
It must be made within the taxable year.
It must not exceed 10% in the case of an individual and 5% in the
case of a corporation of the taxpayers taxable income (except where
the donation is deductible in full) to be determined without the benefit
of the contribution.
It must be evidenced by adequate records or receipts.
Sec 34(H) Charitable Contributions

Contributions deductible in full
Donations to the Philippine government or to any of its
political subdivisions according to a national priority plan
determined by NEDA.
Donations to foreign institutions or international
organizations which are fully deductible in pursuance of or
in compliance with agreements, treaties or commitments
entered into by the Philippines or in pursuance of special
laws.
Donation to accredited non-governmental organization.
Sec 34 (I) Research and Development

A taxpayer may treat research or development expenditures which are
paid or incurred by him during the taxable year in connection with his
trade, business or profession as ordinary and necessary expenses which
are not chargeable to capital account. The expenditures so treated shall
be allowed as deduction during the taxable year when paid or incurred.
Amortization of certain research and development expenditures

Taxpayer may also elect to treat the following research and development
expenditures as deferred expenses:
Paid or incurred by the taxpayer in connection with his trade, business or
profession;
Not treated as expenses; and
Chargeable to capital account but not chargeable to property of a
character which is subject to depreciation or depletion.
Sec 34 (I) Research and Development

Research and development expenses deductions shall
not apply to:
Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a character
which is subject to depreciation or depletion.
Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent or quality of
any deposit of ore or other mineral, including oil or gas.
Sec 34 (J) Pension Trusts

Requisites for deductibility of payments to pension trusts
The employer must have established a pension or retirement plan to
provide for the payment of reasonable pensions to his employees.
The pension plan is reasonable and actuarially sound.
It must be funded by the employer.
The amount contributed must no longer be subject to the control or
disposition of the employer.
The payment has not yet been allowed as a deduction.
The deduction is apportioned in equal parts over a period of ten (10)
consecutive years beginning with the year in which the transfer or
payment is made.
Past Service Cost vs. Present Service Cost

Sec 34 (L): Optional Standard Deduction

(OSD)
In lieu of the deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a nonresident
alien, may elect a standard deduction in an amount not exceeding
forty percent (40%) of his gross sales or gross receipts, as the case
may be. In the case of a corporation subject to tax under section
27(A) and 28(A)(1), it may elect a standard deduction in an amount
not exceeding forty percent (40%) of it gross income as defined in
Section 32 of this Code. x x x
Sec 34 (M) Premiums

Premium payment on health and/or hospitalization
insurance of an individual taxpayer
Premium payments should not exceed P2,400 per family or

P200 a month for a taxable year
Family has a gross income of not more than P250,000 for the
taxable year
In the case of married taxpayers, only the spouse claiming the
additional exemption for dependents shall be entitled to this
deduction.
Special Deductions
For Private Educational Institutions [Sec 34 (A)(2)]
Optional treatment for capital outlays for expansion of school
facilities
For Insurance Companies [Sec 37]
Retention for reserve funds
Losses from Wash Sales [Sec 38]
Capital Gains / Capital Losses [ Sec 39]
Sec 39 Capital Gains and Losses

Ordinary asset
1. Stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year.
2. Property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business.
3. Property used in the trade or business, of a character which is
subject to the allowance for depreciation.
4. Real property used in the trade or business of the taxpayer.
Capital asset
Property held by the taxpayer, whether or not connected with his trade
or business, which is not an ordinary asset.

Ordinary gain or income
Ordinary income or gain includes any gain from the sale or exchange of property
which is not a capital asset.
Capital gain or income

Capital gain or income is any gain from the sale or exchange of a capital asset.
Net capital gain

Net capital gain means the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges.
Net capital loss

Net capital loss means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.

Three rules on the recognition of capital gains and
losses
Holding rule
Loss limitation rule
Net capital loss carry-over rule
Note: The holding and net capital loss carry-over rules

apply only to individual taxpayers and not to corporate
taxpayers.

Holding rule (Percentage taken into account)
In the case of an individual taxpayer, only the following
percentages of the gain or loss recognized upon the sale
or exchange of a capital asset shall be taken into account
in computing net capital gain, net capital loss, and net
income:
100% - if the capital asset has been held for not
more than 12 months
50% - if the capital asset has been held for more
than 12 months

Loss limitation rule
Losses from sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or
exchanges.
Net capital loss carry-over rule

If any taxpayer, other than a corporation, sustains in any taxable
year a net capital loss, such loss (in an amount not in excess of
the net income for such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a capital
asset held for not more than 12 months.
Sec 35 Personal and Additional

Exemptions
Personal exemption amounting to Php50,000 is an
arbitrary amount allowed, in the nature of a deduction from
taxable income, for personal, living or family expenses of
an individual taxpayer. They are considered to be the
equivalent of the minimum of subsistence of the taxpayer.

Exemptions
Who are allowed personal exemption?
Citizens
Resident aliens
Non-resident aliens engaged in trade or business in the
Philippines under certain condition (Amount allowed is limited
to exemptions granted to Filipino citizens who are not residents
in the aliens domicile country but not to exceed the amount
allowed to citizens or residents of the Philippines in the NIRC)
Estates and trusts, which are treated for purposes of personal
exemptions, as a single individual

Exemptions
Additional exemption amounting to Php25,000 allowed
for each legitimate, illegitimate and legally adopted child
not exceeding four (4) who are living and dependent upon
the parent.
Who are allowed additional exemptions?

Citizens (married or unmarried)
Resident aliens (married or unmarried)

Exemptions
Dependent
Refers only to the legitimate, illegitimate or legally adopted child
of the taxpayer
The child is:

living with the taxpayer;
chiefly dependent upon the taxpayer for support;
not more than 21 years of age;
not married; and
not gainfully employed or, even though over 21 years old,
incapable of self support because of mental or physical defect.
213
Sec 35 and RA 10754 on Additional

Exemptions
RR 5-2017
Effective taxable year 2016, a Benefactor of a qualified PWD
may claim the additional exemption of Twenty-Five Thousand
Pesos (P 25,000) for each PWD, if such PWD, regardless of
age, satisfies all of the following:
Filipino citizen;
Within the fourth (4th) civil degree of consanguinity or affinity to
the
Taxpayer/benefactor;
Not gainfully employed; and
Chiefly dependent upon and living with the taxpayer/benefactor.

Exemptions
Change of status
Taxpayer marries or have additional dependents
Taxpayer dies during the taxable year
If the spouse or any of the dependents dies or if any of
such dependent marries, becomes 21 years old, or
becomes gainfully employed
Sec 36 Items not Deductible

Items not deductible
A. General Rule
1. Personal, living or family expenses
2. Capital expenditures: Any amount paid out for new buildings or
for permanent improvements, or betterments made to increase the
value of any property or estate
3. Capital expenditures: Any amount expended in restoring property
or in making good the exhaustion thereof for which an allowance is
or has been made
4. Premiums paid on any life insurance policy covering the life of any
officer or employee, or of any person financially interested in any
trade or business carried on by the taxpayer, individually or
corporate, when the taxpayer is directly or indirectly a beneficiary
under such policy [Section 36, NIRC]
Sec 36 Items not Deductible

Items not deductible
B. Losses between related taxpayers [Sec 36(B)]
C. Losses on wash sales [Sec 38]
D. Illegal expense i.e. bribes, kickbacks, and other similar
payments [Section 34(A)(1)(c), NIRC]
Sec 36(B) Related Parties

Related Parties
1. Between members of a family (which shall include only
his brothers and sisters, spouse, ancestors and lineal
descendants)
2. Between an individual and a corporation more than
50% in value of the outstanding stock of which is
owned, directly or indirectly, by or for such individual
except in the case of distributions in liquidation
3. Between two corporations more than 50% in value of
the outstanding stock of each of which is owned,
directly or indirectly by or for the same individual

Related Parties
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust
6. Between the fiduciary of a trust and a beneficiary of
such trust [Section 36(B), NIRC]

Relevant points regarding related taxpayers
Payment of interest is not deductible.
Bad debts are not deductible.
Losses from sales or exchanges of property are not
deductible.
MCIT, IAET, EXEMPT

CORPORATIONS
Sections 28 (MCIT), 29 (IAET), 30 (Exempt Corp)
MCIT
Sec 27 (E) [Domestic Corporation] and
Sec 28 (A)(2) [Resident Foreign Corporation]
RR 9-98 / RR 12-2007
A minimum corporate income tax of two percent (2%) of
the gross income as of the end of the taxable year is
hereby imposed on a corporation subject to income tax,
beginning on the fourth (4th) taxable year immediately
following the year in which such corporation commenced
its business operations, when the minimum income tax is
greater than the regular corporate income tax for the
taxable year.
Carry forward of excess MCIT

Any excess of the minimum corporate income tax over the
normal income tax shall be carried forward and credited
against the normal income tax payable for the next three
(3) years immediately succeeding the taxable year in
which the minimum corporate income tax was paid.
Relief from MCIT

The Secretary of Finance may suspend the imposition of
the minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of
legitimate business reverses.
See Sample Computation
Corporations Not Covered by MCIT
Subject to gross taxation
Subject to preferential tax rate
Exempt from taxation
Sec 29 IAET / RR 2-2001

Imposition of the tax
In addition to the other income taxes, there is hereby
imposed for each taxable year on the improperly
accumulated taxable income of each corporation an
improperly accumulated earnings tax equal to ten percent
(10%) of the improperly accumulated taxable income.
[Section 29, NIRC]
Sec 29 IAET / RR 2-2001

Corporations subject to improperly accumulated earnings
tax
Applies to every corporation formed or availed for the purpose
of avoiding the income tax with respect to shareholders or the
shareholders of any other corporation, by permitting earnings
and profits to accumulate instead of being divided or distributed
Rationale of IAET: Dividends Tax of 10%

Sec 29 IAET
Exceptions to improperly accumulated earnings tax
The improperly accumulated earnings tax shall not apply

to:
Publicly-held corporations
Banks and other non-bank financial intermediaries
Insurance companies
Sec 29 IAET
Evidence of purpose to avoid income tax
Prima Facie Evidence: The fact that any corporation is a

mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its
shareholders or members.
Sec 29 IAET
Evidence Determinative of Purpose: The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by
clear preponderance of evidence, shall prove to the
contrary.
The term reasonable needs of the business includes the

reasonably anticipated needs of the business.
Sec 29 IAET
Computation of improperly accumulated taxable income
Taxable income adjusted by:
1. Income exempt from tax;

2. Income excluded from gross income;
3. Income subject to final tax; and
4. Amount of net operating loss carry-over deducted;
And reduced by the sum of:
1. Dividends actually or constructively paid; and

2. Income tax paid for the taxable year.
Sec 30 Exempt Corporations

RR 2-40
Labor, agricultural or horticultural organization not

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

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

Cemetery company owned and operated exclusively for the
benefit of its members;
Non-stock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of
any member, organizers, officer or any specific person;
Business league, chamber of commerce, or board of trade not
organized for profit and no part of the net income of which
inures to the benefit of any private stockholder or individual;

Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
A non-stock, non-profit educational institution;
Government educational institution;

Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meetings its expenses; and
Farmers, fruit growers, or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of
the quantity of products finished by them. [Section 30, NIRC]
Sec 30 last paragraph

Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code. [2nd paragraph, Section 30, NIRC]
Thus, the following income of the exempted organizations shall

not be exempted:
1. Income of whatever kind and character from any of their
properties, real or personal
2. Income from any of their activities conducted for profit
HO-BRANCH VS. PARENT-

SUBSIDIARY
BPRT vs. Dividends Tax
Comparative
Home Oce-Branch Parent-Subsidiary
Relationship Home Oce and Branch Parent Co. and Subsidiary
are considered one and the Co. are considered as two
same corporate en3ty s e p a r a t e a n d d i s 3 n c t
corporate en3ty
Tax Code Classica3on [S28(A)][S22(H)]Branch is [S27][S22(C)] Subsidiaries
c l a s s i e d a s R e s i d e n t are classied as Domes3c
Foreign Corpora3on Corpora3on
[S28(A)] Home Oce is [S28(B) Parent Co. is
c l a s s i e d a s R e s i d e n t classied as Non-Resident
Foreign Corpora3on Foreign Corpora3on
Comparative
Taxable Base [S23(F)] As resident foreign [S23(E)] As domes3c corpora3on
PH Based En3ty corpora3on they are taxed on they are taxed on taxable income
taxable income within the within and without the Philippines
Philippines
Taxable Base: [ S 2 8 ( A ) ( 5 ) ] I n c o m e [S28(B)(5)(b)] Income repatria3on
Foreign Based En3ty repatria3on to its Home Oce to its Parent Co. is subject to Inter-
is subject to Branch Prot corporate Dividends Tax of 15%
RemiUance Tax of 15% subject to certain condi3ons
[S28(A)(5)] Tax base of 15% [S28(B)(5)(b)][S73(A)] Tax base of
BPRT is all branch prots 15% Inter-corporate dividends tax
eec0vely connected with the is all distribu0on of earnings or
conduct of Branchs trade or prots declared by the Subsidiary
business in the Philippines Co.
Comparative
Rela3onship Home Oce and Branch are Parent Co. and Subsidiary Co. are
considered one and the considered as two separate and
same corporate en3ty dis3nct corporate en3ty
Extent of Liability Tax and other liability of Tax and other liability of
Exposure Branch opera3ng in the Subsidiary Co. opera3ng in the
Philippines can be collected Philippines cannot be collected
against Home Oce in against the Parent Co. in foreign
foreign country as they are country as they are two separate
considered one and the and dis3nct en3ty
same
Rela3onship Home Oce and Branch are Parent Co. and Subsidiary Co. are
considered one and the considered as two separate and
same corporate en3ty dis3nct corporate en3ty
ACCOUNTING PERIODS
AND METHODS
Section 43 -50
Taxable Year (Accounting Period)

GENERAL RULE: The accounting period of a taxpayer is a period of twelve (12)
months.
1. Calendar Year accounting period from January 1 to December 31 which is
allowed if the:
Taxpayer is an individual
Taxpayer is a partnership
Accounting period is other than a fiscal year
Taxpayer has no accounting period
Taxpayer does not keep books.
2. Fiscal Year accounting period of twelve (12) months ending on the last day of
any month other than December which is allowed ONLY to corporations.
3. Short Period a taxpayer may have a taxable period of less than twelve (12)
months when:
Taxpayer dies
Corporation is newly organized
Corporation changes its accounting period
Corporation is dissolved.
Change in Accoun3ng Period

Only allowed on taxpayers other than individual
Requires ling of short return
FY to CY e.g. (FY ending Mar 31 to Dec 31)
Last 1 yr return Apr 1, 2007 to Mar 31, 2008
New 1 yr return Jan 1, 2009 to Dec 31, 2009
Short return Apr 1, 2008 to Dec 31, 2008 (9)

CY to FY e.g. (CY to scal ending Mar 31)
Last 1 yr return Jan 1, 2007 to Dec 31, 2007
New 1 yr return Apr 1 2008 to Mar 31 2009
Short return Jan 1, 2008 to Mar 31, 2008 (3)

FY to FY e.g. (FY Mar 31 to FY Sep 30)
Last 1 yr return Apr 1, 2007 to Mar 31, 2008
New 1 yr return Oct 1, 2008 to Sep 30, 2009
Short return Apr 1, 2008 to Sep 30, 2008 (6)
Accounting Methods
Cash Basis
Accrual Basis
Long term Contracts (more than 1 yr)
% of comple3on
Completed contract
Installment Basis
Personal Property (sale of goods)
Realty & Casual Sales
Accoun3ng Methods
Installment Basis
Dealers in Personal Property (sale of goods)
Realty & Casual Sales in Personal Property
Casual sales (other than inventory) > P1,000
Real property where ini3al payments do not exceed 25% of SP
'ini3al payments' means the payments received in cash or property other than
evidences of indebtedness of the purchaser during the taxable period in which the
sale or other disposi3on is made.
Allocation of Income and Deduction

Sec 50
Power of the Commissioner to determine correct income or
prot
OTHER ADMINISTRATIVE
COMPLIANCE
REQUIREMENTS
Sec 51 - 83
Annual Returns
Individuals (Sec 51)
Not required to le
Required to le - on or before Apr 15
Capital gains on shares - within 30 days following
each transac3on
- consolidated: on or
before Apr 15

Capital gains on real property within 30 days
following each
transac3on
Annual Returns
Husband & Wife
One return (but two separate computa3on)

Children
File with parents

Persons Under Disability
To be led by agents/representa3ves
Annual Returns
Corpora3ons (Sec 52)
on or before Apr 15
on or before the 15th day of the 4th month following the close of the
taxable year
To be led by Pres, VP or principal ocer

Estates & Trusts (Sec 54)
General Professional Partnership (Sec 55)
IAET (Sec 33) on or before Jan 15
Payments
On of before April 15
Second Installment: July 15
each transac3on
before Apr 15

following each
transac3on
Payments
Corpora3on (Sec 56)
On of before April 15
on or before the 15th day of the 4th month following the close of the
taxable year
each transac3on
before Apr 15 or 15th
day of the 4 month
th

following each
transac3on
Quarterly Returns
April 15
August 15
November 15

Corpora3ons (Sec 75, 76, 77)
60 days from the close of each quarter
May
August
November
Withholding Taxes
On Wages (Sec 78-83)
Monthly on or before the 10th day of the following month (15th for LT)
Creditable Withholding Taxes (Sec 57B)
Final Withholding Taxes (Sec 57A)
THE END
www.bir.gov.ph
marissa.cabreros@bir.gov.ph

Income Taxation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Income Taxation

Uploaded by

Copyright:

Available Formats

A Presentation made by Atty Cabreros only for St.

Paul School of Professional Studies (Sept 9, 2017) 1

TAX LAW REVIEW:

Atty. Marissa O. Cabreros, CPA CESO IV

Non-Revenue Raising Purposes

Underlying Theory and Basis

Principles of Sound Tax System

Sison vs. Ancheta

It is a necessary burden to preserve the States sovereignty and as a

The Government is not estoped from collecting taxes by the mistakes

Symbiotic Relationship / Benefits-received

Police Power & Eminent Domain

Similarities: Taxation / Police Power /

Distinctions: Taxation / Police Power /

Distinctions: Taxation / Police Power /

Distinctions: Taxation / Police Power /

Distinctions: Taxation / Police Power /

Distinctions: Taxation / Police Power /

By legislation, it is subject to defined prescription rules in

Domestic / International Double Taxation

Escape from Taxation

Elements of Tax Evasion

Tax Exemption vs. Tax Amnesty

Coverage Future tax liability Past tax liability

Tax Exemption vs. Tax Amnesty

Tax Evasion vs. Tax Avoidance

Sources of Tax Laws

BIR Revenue Regulations

Rule on non-retroactivity of rulings (sec 246, NIRC)

Construction Rules: Tax Laws

Construction Rules: Tax Exemption / Refunds

Taxation : Inherent Limitations (PINGS)

Situs Rules (Territoriality)

Personal property (Tangible) Physical location

Personal property Domicile of owner (Mobilia sequntur

Taxation: Constitutional Limitations

Equal Protection Clause vs. Uniformity &

Uniformity & equity clause: proper relative treatment for

Non-imprisonment clause (Sec 20, Art III)

Proprietary (Sec 27 NIRC)

Aspects of Taxation / Stages of Taxation

Taxes: Essential Characteristics

Taxes: Essential Characteristics

Taxes: Essential Characteristics

Taxes vs. Tariffs / Customs Duties

Taxes vs. Toll

Taxes vs. License Fees

Taxes vs. Special Assessments

Taxes vs. Debt

A tax however, like a debt is a liability or obligation.

Kinds of Tax Rates

Finance Agencies & GOCCs

Chiefs Officials of the BIR [Sec 2]

Deputy Commissioner Legal &

Regional & District Offices

Powers & Duties of the BIR [Sec 2]

Powers of the Commissioner [Sec 4]

Powers of the Commissioner [Sec 5]

Power of Commissioner [Sec 5]

Power of the Commissioner [Sec 6]

Power of the Commissioner [Sec 6]

Power of the Commissioner [Sec 6]

Power of the Commissioner [Sec 6]

Power of the Commissioner [Sec 6]