General Principles of Taxation legislature to the executive or juridical departments of the

government.
 Territorial jurisdiction - The tax laws of a state are
Definition of Taxation enforceable only within its territorial limits
 This is the power by which the sovereign raises revenue to  International comity - The property of a foreign state or
defray the necessary expenses of government. government may not be taxed by another.
 The mode by which government make exactions for
revenue in order to support their existence and carry out Constitutional Limitation (DEO NUER) - are those which are
their legitimate objective. expressly found in the constitution or implied from its provisions
 The power of the state to collect revenue for public  Due process of law
purposes.  Equal protection of the laws
 Non-impairment of obligation of contract
Taxes – the enforced proportional contributions levied by the law  Non-imprisonment for non-payment of poll tax
making body of the state by virtue of its sovereignty upon the  Rule of taxation shall be uniform and equitable
persons or property within its jurisdiction for the support of the  Exemption from real property tax of charitable institutions,
government and all public needs. churches, parsonages or convents appurtenant thereto,
mosques, and non-profit institutions, and all lands,
Lifeblood Theory buildings and improvements actually, directly and
 Taxes are the lifeblood of the Government and their prompt exclusively used for religious or charitable purposes.
and certain availability are imperious (expecting obedience)  All revenues and assets of non-stock, non-profit educational
need institutions used actually, directly and exclusively for
 Upon taxation depends the government’s ability to serve the educational purposes shall be exempt from taxes and duties.
people for whose benefit taxes are collected Proprietary educational institutions, including those
 Manifestation of lifeblood theory: cooperatively owned, may likewise be entitled to such
 Imposition of tax even in the absence of exemptions subject to the limitations provided by law.
constitutional grant
Charitable, Non-stock, non-
 Right to select objects of taxation
Who are educational and profit educational
 No injunction to enjoin (or stop) tax collection
exempt? religious institutions institutions
Scope of Power of Taxation What taxes Property tax Income tax, property
 Comprehensive are exempt? tax, customs duties.
 Plenary
 Unlimited
 Supreme The Fundamental (Inherent) Power of the State
 Police power – to promote the general welfare. It is the
The power of taxation is subject to inherent and power to regulate liberty, public health and morals.
constitutional limitation.  Eminent Domain – it is also called as expropriation. The
power of the state to take the private property for public use
Essential Characteristic of Tax upon payment of just compensation.
 Enforced contribution  Power of taxation – the power of the state to collect
 Legislative authority revenue for the necessary expenses of government.
 Proportionate in character
 Generally payable in money
 Levied on persons and property within the jurisdiction of
the state
 Commonly required to be paid at regular intervals

Nature of Power of Taxation

 The power is inherent in the state. It may be exercises
although not expressly granted by the constitution.
 It is essentially a legislative function. Only the legislature
can impose taxes (high prerogative of sovereignty)
 Based ability to pay
 Subject to inherent and constitutional limitation. It is not an
absolute power than can be exercised by the legislature
anyway it pleases.
Similarities among the Fundamental Power of
State
 They are inherent in the state.
 They are independently exists of the constitution.
 They are not only necessary but indispensable, as the state
cannot continue or be effective unless it is able to exercise
them.
 They are methods by which the state interferes with private
rights.
 Each presupposes an equivalent compensation.
 They are legislative in nature.

Differences among the Fundamental power

a. As to authority which exercises the power
Inherent Limitation (PENTI) – are those which restrict the power Taxation Government only
although they are not embodied in the constitution. Police power Government only
 Public purpose - This is the purpose affecting the Power of eminent domain Government, public service
inhabitants of the State as a community and not merely as companies and public utilities
individuals
 Exemption from taxation of government entities - b. As to purpose
Government agencies performing governmental functions Taxation Support of government
are exempt from tax unless expressly taxed while those Police power Promote public welfare
performing proprietary functions are subject to tax unless Power of eminent domain Public purpose
expressly exempted
 Non-delegation of the power to tax - The power to tax is c. As to Affected
purely legislative, and it cannot be delegated by the Taxation Community or class of
 individuals
Police power Community or class of
individuals
Power of eminent domain Individuals as owner of a
particular property
d. As to Effect
Taxation Taxes become part of public
funds
Police power No transfer of title, there is
restraint on the injurious use of
property
Power of eminent domain There is transfer of the right to
property, either ownership or a
lesser right
e. As to Benefits Received
Taxation Equivalent of tax in the form of
protection and benefit
Police power No direct and immediate
benefit, only such as may arise
from the maintenance of a
healthy economic standard of
society (damnum absque injuria
or damage without injury)
Power of eminent domain Market value of the property
taken from him
f. As to Amount of Imposition
Taxation No Limit
Police power Limited to the cost of the
surveillance and regulation
Power of eminent domain No imposition, the owner is
paid the fair market value of his
property
No imposition, the owner is
paid the fair market value of his
property
No imposition, the owner is paid
the fair market value of his
property
g. As to Relationship to the Non-Impairment of Obligations
Clause of the Constitution
Taxation Inferior to the clause
Police power Superior to the clause
Power of eminent domain Inferior to the clause
h. As to Compensation
Taxation For the protection and benefits
received from the government
Police power The maintenance of a good
economic standard of society
Power of eminent domain Just compensation for the
property taken
Basis of Taxation
 The reciprocal duties of protection and support between the
state and inhabitants (benefits received theory).
 Necessity – that it cannot continue without means to pay its
expenses and that for this means it has a right to compel all
its citizen and property within its limits contribute
The Benefits-Protection Theory - Taxes are what we pay for
a civilized society. The government and the people have a
reciprocal and mutual duties of support and protection to
one another (symbiotic relationship between the
government and the taxpayer).
Purpose of Taxation
 Principal purpose – To raise revenue for governmental
needs.
 Secondary purpose
 To reduce excessive inequalities of wealth
 Protective tariff on imported goods may be
imposed to protect local produces against foreign
competitors
 To encourage the growth of home industries
through the proper use of tax exemptions and tax
incentives
 To implement the police power of the state in
promoting the general welfare
 To maintain high level of employment
 To control inflation
Aspect/Process/Phases/System of Taxation
(Embodied in the Term Taxation)
 Levying or imposition of the tax – Legislative act. This is
pertains to the passage of tax laws and tax ordinance
through legislature. (Impact of taxation / process of
determining)
 Assessment aspect – refers to the appraisal and valuation
process of the subject or object of taxation to arrive at total
amount of collectible tax.
 Collection of the tax – essentially administrative character
(BIR or BOC)
 Payment – an incidence of taxation. This is the compliance
phase.
 The impact of taxation corresponds to the imposition of the
tax, shifting refers to transfer of tax and incidence consist of
the payment of tax.
Matters within the Competence of the Legislature to
Determine
 The subject matter or object to be taxed
Subject Situs
Poll tax on persons Residence of the person
Real property tax State where the property is located
whether the owner is resident or not
Tax on tangible State where it is physically located
personal properties although the owner resides in another
jurisdiction (lexi rei sitae)
Tax on intangible Domicile of the owner (mobilia
personal properties sequntur pesonam)
Income Tax State where the taxpayer is a resident
or citizen
Business, occupation and Place where the business is done, or the
transaction tax occupation is engaged in or the
transaction took place
Gratuitous transfer of State where the transferor is/was a
property citizen or resident, or where the
property is located
 The purpose of the tax so long as it is a public purpose
 The amount or rate of the tax
 The manner, means and agencies of collection of the tax.
Tax Legislative Function
 Prescribe the general rules of taxation
 Selection of the object /subject to be taxed
 Determination of the purpose for which taxes shall be
imposed
 Fixing the amount of the tax to be imposed
 Fixing the amount of tax rate
Tax Administrative Function
 Valuation of property for taxation
 Equalization of assessment
 Collection of tax
Basic Principles of a Sound Tax System
(Canons of Taxation)
 Fiscal adequacy – the source of revenues must be adequate
to meet government expenditures.
  Theoretical Justice/Equality on theoretical Justice – based
on the ability to pay (Equity) and proportionate character.
 Administrative Feasibility – which means
 The tax law must be clear and concise
 Convenient
 Just and effective administration
Situs of Taxation
 Situs – place of taxation, the country that has the power and
jurisdiction to levy and collect the tax.
 The Situs will help in determining the source of an income,
whether from within the Philippines or from abroad or
sources outside the Philippines. For taxpayers other than
resident citizen and domestic corporation which are taxable
on incomes from all sources, this will serve to identify
income which are taxable in the Philippines.
Factors to Consider in Determining Situs of Taxation
 Subject matter (person, property, or activity)
 Nature of tax
 Citizenship
 Residence of the taxpayer
 Sources of income
 Place of exercise, business or occupation being taxed
Double Taxation
 Definition. Taxing twice, for the
1. same purpose,
2. in the same year or period,
3. the same subject by the same taxing jurisdiction,
4. same authority.
 Constitutionality of double taxation. – there is no provision
in the constitution specifically prohibiting double taxation.
It should, however, whenever possible, be avoided.
Kinds of Double Taxation
 Direct double taxation. This is prohibited by the
constitution as it violates the rule of uniformity
 Uniformity - that all properties or other taxable
subjects belonging to the same class be taxed at the
same rate or measure.
 Indirect double taxation.
Forms of Escape From Taxation
 Shifting – transfer of the tax burden by the person on whom
it is imposed by law to another who bears it. Kinds of
shifting
 Forward shifting – this takes place when the burden of the
tax is transferred from a factor or production through the
factors of distribution until it finally settles on the ultimate
purchaser or consumer.
 Backward shifting – this is effected when the burden of the
tax is transferred from the customer or purchaser through
the factors of distribution to the factor of production
 Onward shifting – this occurs when tax is shifted two or
more time either forward or backward
 Capitalization – Form of backward shifting whereby future
taxes on property sold are capitalized at the time of
purchase and deducted in lump sum from the selling price.
 Transformation – The process of production.
 Evasion – known as tax dodging, is the use by the taxpayer
or illegally permissible methods in order to reduce tax
liability
 Avoidance – Known as tax minimization, is the used by the
taxpayer or legally permissible methods in order to reduce
tax liability
Exemption From Taxation
 Exemption from taxation – is a grant of immunity, express
or implied, to particular persons or corporations, or to
persons or corporation of a particular class, from a tax upon
property, or an excise tax which persons and corporations
generally within the same taxing district, are obliged to pay
Classification of exemptions
 Express or affirmatives – these are express provisions in the
constitution, statutes, treaties, ordinances, franchise or
contract.
 Implied or exemption by omission – these occurs when a
tax is levied on certain classes of persons, properties, or
transactions without mentioning other classes. Those not
mentioned are deemed exempted by omission
Classes of Taxes
 As to subject matter
 Personal, poll, capitation – tax of fixed amount
imposed on individuals residing within a specified
territory without regard to their property or the
occupation in which they may be engaged.
Example Residence tax (community tax)
 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 – tax imposed upon the performance of an
act, the enjoyment of a privilege or the engaging in
an occupation. Example income tax, privilege tax
on business or occupation, transfer tax, VAT and
Other percentage tax (Note this is different from
the excise tax which is a business tax imposed on
items such as cigars, cigarettes, wines, liquors,
frameworks, mineral products)
 As to who bears the burden
 Direct – tax which is demanded from the person
who is intended to pay it. Example: Income tax,
immigration tax, transfer tax (estate tax and
donor’s tax).
 Indirect – tax which is demanded from one person
in the expectation and intention that shall
indemnify himself at the expense of another or tax
which the taxpayer can shift to another. Example
Percentage tax, Value added tax (Tax on Business)
 As to Determination of amount
 Specific – tax of a fixed amount imposed by the
head or member, or by some standard of weight or
measurement; it requires no assessment other than
a listing or classification of the objects to be taxed.
Example: Excise tax on distilled spirits, excise tax
on cigar, cigarettes and liquors
 Ad-valorem – tax of a fixed proportion of the
amount or value of the property to which the tax is
assessed. It requires the intervention of assessors
or appraisers to estimate the value of such property
before the amount due from each taxpayer can be
determined Example: Excise tax on watches, Real
estate tax, VAT, Income tax, donors tax and estate
tax
 As to purpose
  General, fiscal or revenue – tax imposed for the
general purpose of the government or to raise
revenue for governmental needs Example- Sales
tax, Income tax, Donor’s tax , Estate tax
 Special or regulatory – tax imposed for a special
purpose or to achieve some social or economic
ends. Example: Tariff or customs duties.
 As to authority imposing the tax/ As to Scope
 National – tax imposed by the National
Government. Example Income tax, estate tax,
donor’s tax, valued added tax, other percentage
tax, documentary stamp tax
 Municipal or local – imposed by the municipal
governments. Example Real estate taxes,
Municipal licenses, community tax
 As to graduation or rate
 Proportional – tax based on fixed percentage of the
amount of property income or other basis to be
fixed. Example: VAT, Percentage Tax, and Real
Estate Tax
 Progressive or Graduated Tax– the rate increase as the tax
base increases. Example: income tax, estate tax, donors tax
 Regressive tax – the tax rate decreases as the tax base
increases. The Philippines is not practicing the Regressive
tax.
 Degressive tax – increase of rates is not proportionate to the
increase of tax base
Regressive System of Taxation
 A regressive tax must not be confused with regressive
system of taxation. In a society where the majority of the
people have low income, it exists when there are more
indirect taxes imposed that direct taxes
 The low – income sector of the population as a whole buys
more consumption goods on which indirect taxes are
collected. The burden of indirect taxes rests more on them
than on the more affluent groups.
 Studies reveal that progressive elements of the income and
other direct taxes have not sufficiently offset the regressive
effects of the indirect as a whole.
 License fee or permit – is a charged imposed under the
police power for the purpose of regulations
 Toll - is a sum of money collected for the use of something,
generally applied to the consideration which is paid for the
use of road, bridge or the like, of a public nature.
 Special assessment – is an enforced proportional
contribution from owners of land for special benefits
resulting from public improvements.
Other Charges / Related Terms
 Subsidy – is pecuniary and directly granted by the
government to an individual or private commercial
enterprise deemed beneficial to the public
 Revenue – refers to all the funds or income derived by the
government, whether from tax or any other sources. Internal
revenue – refers to taxes imposed by the legislature other
than duties on imports and exports
 Custom duties – are taxes imposed on goods exported to or
imported from a country. Custom duties are really taxes but
the latter is broader
 Tariff may be used in one of the following three senses:
 A book rates drawn usually in alphabetical order containing
the names of several kinds of merchandise with the
corresponding duties to be paid for the same
 The duties payable on goods imported or exported
 The systems of principles of imposing duties on the
importation or exportation goods.
Rules on Construction of income tax laws
 Legislative intention must be considered.
 Where there is doubt
 On a tax statute – they are constructed strictly
against the government and liberally in favor of the
taxpayers.
 On tax exemption – they are constructed strictly
against the taxpayer and liberally in favor of the
government.
 Where language is plain – if there is no doubt as to the
legislative intent, then the words employed are to be given
their ordinary meaning.
Power and Duties of the BIR in General (under
the supervision and control of the Department of
Finance)
 To assess and collect all national internal revenue taxes,
fees and charges;
 To enforce all forfeitures, penalties and fines connected
therewith;
 To give effect to and administer the police power conferred
to it by law;
 To recommend to the Secretary of Finance all needful rules
and regulations for the effective enforcement of the
provisions of the National Internal Revenue Code.
Powers of the Commissioner of Internal
Revenue
 Interpret tax laws and to decide tax cases
 Obtain information and to summon, examine, and take
testimony of persons
 Make assessment and prescribed additional requirements
for tax administration and enforcement.
Authority of the Commissioner
 Authority to delegate power
 Authority to conduct inventory taking
 Authority to terminate taxable period
 Authority to prescribe real property values
 Authority to inquire into Bank Deposit accounts
 Authority to accredit and register tax agents
 Authority to prescribe additional procedures or
documentary requirement
Power of the Commissioner Shall not
Delegated
 The power to recommend the promulgation of rules and
regulation by the secretary of finance
 The power to issue rulings of first impressions or to reverse,
revoke or modify any existing ruling of the Bureau
 The power to compromise or abate. Except deficiency taxes
P500,000 or less and minor criminal violations (secretary of
finance).
 The power to assign or reassign internal revenue officers to
establishment where articles subject to excise tax are
produced or kept.
 Commissioner of internal revenue
-The chief
Four deputy Commissioner
 Legal and inspection group
 Information systems group
 Operations group
 Resource management group
 Characteristic of National Internal Revenue:
 Generally prospective in application
The following taxes, fees and charges are deemed to be National
Internal Revenue Taxes:
 Income tax
 Percentage tax
 Value added tax
 Estate tax
  Excise tax
 Documentary stamp tax
 Other taxes may be imposed and collected by the BIR
National taxes imposed under Special Laws:
 Custom duties
 Sugar adjustment taxes
 Taxes on narcotic drugs
 Special educational fund tax
 Science fund taxes
 Energy taxes on aircraft; motorized watercraft and electrical
power consumption
 Travel tax
 Private motor vehicle tax
Sources of Tax Laws
 Constitution – The provisions of the constitution dealing on
taxation merely regulate the exercise of the power of
taxation. They are not actually grants of the power, because
of taxation can be exercised by the government; the power
of taxation is not a mere constitutional grant.
 Statutes or laws – This refers to the tax laws passed by the
Congress.
 Administrative rulings and regulation – Administrative
rulings are the less general interpretation of tax laws which
are issued from time to time by the Commissioner of
Internal Revenue. They are usually rendered on request of
taxpayers to clarify certain provisions of a tax law. They are
commonly known as “BIR Rulings”. Regulations are
intended to clarify or explain the law and carry into effect
its general provisions by providing the details of
administration and procedure. However, in case of conflict
between a regulation and a statute, the latter shall prevail.
 Revenue Regulations (RRs) are issuances signed
by the Secretary of Finance, upon recommendation
of the Commissioner of Internal Revenue, that
specify, prescribe or define rules and regulations
for the effective enforcement of the provisions of
the National Internal Revenue Code (NIRC) and
related statutes.
 Revenue Memorandum Orders (RMOs) are
issuances that provide directives or instructions;
prescribe guidelines; and outline processes,
operations, activities, workflows, methods and
procedures necessary in the implementation of
stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations,
except auditing.
 Revenue Memorandum Rulings (RMRs) are
rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to
the provisions of the Tax Code and other tax laws,
as applied to a specific set of facts, with or without
established precedents, and which the
Commissioner may issue from time to time for the
purpose of providing taxpayers guidance on the tax
consequences in specific situations. BIR Rulings,
therefore, cannot contravene duly issued RMRs;
otherwise, the Rulings are null and void ab initio.
 Revenue Memorandum Circular (RMCs) are
issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR and
other agencies/offices.
 BIR Rulings are the official position of the Bureau
to queries raised by taxpayers and other
stakeholders relative to clarification and
interpretation of tax laws.
 Judicial decisions – This refers to decisions of the Court of
Tax Appeals and the Supreme Court applying or
interpreting tax laws. They constitute major part of the
jurisprudence on taxation and form part of the legal system
of the Philippines. Decisions of the Court of Tax Appeals,
however, are still appealable to the Supreme Court of the
Philippines.
 Presidential decree
 Provincial, City, Municipal and barangay ordinance
 Treaties and international agreements
Basic Tax Laws of the Philippines
 National Internal Revenue Code
 Tariff and Custom Code
 The Local Tax Code
 The Real Property Tax Code
Rules on Set-Off of Taxes
 No set-off or compensation is admissible against demands
for taxes levied for general or local purposes.
 Reason: Taxes are not in the nature of contract between
parties; the government and the taxpayer are not mutually
creditors and debtors of each other and the claim for taxes is
not such a debt, demand, contract or judgment as is allowed
to be set-off.
 Exception: Where both the claims of the government and
the taxpayer against each other have already become due
and demandable as well as fully liquidated.
Global and Schedular System of Taxation
 Schedular – a system which itemizes the different incomes
and provides for varied percentages of taxes, to be applied
thereto.
 Global – a system employed where the tax system views
indifferently the tax base and generally treats in common all
categories of taxable income of the individual.
Other Doctrines in Taxation
 Taxpayer’s suit – this suit can only be allowed if the act
involves a direct and illegal disbursement of public funds
derived from taxation.
 Equitable recoupment – this states that a claim for refund
which is prevented by prescription may be allowed to be
used as payment for unsettled tax liabilities if both taxes
arise from the same transaction in which overpayment is
made and underpayment is due.
 Tax amnesty – it is a general pardon or the intention
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 bythe 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
Philippine Economic Zone Authority
Purpose of Creation
 Philippine Economic Zone Authority (PEZA) is a
government agency in the Philippines attached to the
Department of Trade and Industry created to help promote
investments in the export-oriented manufacturing industry
into the country by assisting investors in registering and
facilitating their business operations and providing tax
incentives.
 PEZA also assists investors who locate in service facilities
inside selected areas in the country (areas are called PEZA
Special Economic Zones) which are usually business
process outsourcing and knowledge process outsourcing
firms.
 Other activities also eligible for PEZA registration and
incentives include establishment and operation within
special economic zones for tourism, medical tourism,
logistics and warehousing services, economic zone
development and operation and facilities providers
Composition of PEZA Board
 PEZA was enacted under Republic Act 7916 and was
passed by the House of Representatives and the Senate and
approved by former Philippine President Fidel V. Ramos on
the 21st of February, 1995.
 As provided in the Special Economic Zone Act, the PEZA
Board is:
  chaired by the Secretary of the Department of Trade and
Industry.
 Vice-Chair is the Director General (Chief Executive
Officer) of PEZA.
  Earned within Earned outside
  the Philippines  the Philippines   A citizen of the Philippines residing therein is taxable on all
Resident Citizens  Taxable  Taxable  Philippines;
Non-Resident Citizens  Taxable  Non-Taxable   A nonresident citizen is taxable only on income derived
Resident Alien  Taxable  Non-Taxable  from sources within the Philippines;
Non-Resident Aliens Taxable  Non-Taxable  deriving income from abroad as an overseas contract
(whether engaged in trade
or business or not)  within the Philippines: Provided, That a seaman who is a
 Members of the Board are Undersecretaries representing
nine(9) key government Departments, to ensure efficient
coordination between PEZA and their respective
Departments on matters pertaining to
 investors’ operations inside the Special Economic Zones.
Incentives Offered by PEZA
 PEZA offers both fiscal and non-fiscal incentives as well as
ready-to-occupy business locations in world-class economic
zones and IT parks or buildings.
 Fiscal incentives include:
 Income tax holiday for a certain number of years, which
translates to 100% from corporate income tax;
 Tax and duty-free importation of raw materials, capital
equipment, machineries and spare parts;
 exemption from wharfage dues and export tax, impost or
fees;
 VAT zero-rating of local purchases subject to compliance
with BIR and PEZA requirements;
 Exemption from payment of any and all local government
imposts, fees, licenses or taxes; and
 Exemption from expanded withholding tax.
 Non-fiscal incentives, on the other hand include:
 Simplified import-export procedures, extended visa-
facilitation assistance to foreign nationals and spouses and
dependents; special visa multiple entry privileges; and
more.
INCOME TAX ON INDIVIDUALS
INCOME TAX
 Income Tax is a tax on a person's income, emoluments,
profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of
gross income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of
income, by the Tax Code, as amended, or other special
laws.
 A person means an individual, a trust, estate or corporation.
(Sec. 22[A] of the Tax Code)
 Relevant changes introduced by RA 11534 or most
commonly known as Corporate Recovery and Tax
Incentives for Enterprises Act (CREATE Act) in the
National Internal Revenue Code of 1997, as amended by
RA 10963 (TRAIN LAW):
 Limit on the tax exemption granted to nonresident alien
engaged in trade or business (NRAETB) within the
Philippines for winnings received from PCSO and Lotto.
 Only winnings amounting to TEN THOUSAND PESOS
(Php10,000.00) OR LESS from Philippine Charity
Sweepstakes Office (PCSO) games received by non-
resident alien engaged in trade or business within the
Philippines shall be EXEMPT from the final tax of 20%.
(Sec. 25 (A)(2) of the NIRC, as amended)
 Capital gains tax on sale of shares of stock not traded in the
stock exchange by foreign corporation, both resident and
non-resident, is fixed at 15%. (Sec. 28 (A)(5)(c) and Sec. 28
(B)(5)(c) of the NIRC, as amended)
GENERAL PRINCIPLES OF TAXATION
income derived from sources within and without the
 An individual citizen of the Philippines who is working and
worker is taxable only on income derived from sources
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;
 A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
 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.
Taxability of Individuals:
 For simplicity, resident citizens are taxable on their
worldwide income, while all the rest (Non-resident Citizen
and Aliens [whether resident or non-resident) are taxable
only on their income from sources within the Philippines.
Taxability of Corporations:
  Earned within the Earned outside the
  Philippines  Philippines 
Domestic Taxable  Taxable 
Corporations 
Resident Foreign Taxable  Non-Taxable 
Corporations 
Non-Resident Foreign Taxable  Non-Taxable 
Corporations 
RULES ON SITUS
 Interest – the situs of interest income is the residence of the
debtor. Thus, if the debtor is a resident of the Philippines, it
is considered earned within the Philippines.
 Dividends – received from:
 A domestic corporation;
 A foreign corporation, unless 50% of the gross
income of such foreign corporation for the 3-year
period ending with the close of its taxable year
preceding the declaration of such dividends was
derived from sources within the Philippines; but
only in an amount which bears the same ratio to
such dividends as the gross income of the
corporation for such period derived from sources
within the Philippines bears to its gross income
from all sources.
 Example: Z Corporation received P10,000
dividends from X Corporation, a Japanese firm,
which earned P200,000 from Philippine sources
and P300,000 from Japan. The amount of
dividends received by Z Corporation as from
 Philippine sources is only P4,000 (P10,000
*P200,000/P500,000).
 Services – where performed. Thus, if performed within the
Philippines, it is considered earned herein.
 Rentals and Royalties – where the property is located or the
place of use of the intangible. As such, if the property or
any interest in such is located in the Philippines, rentals and
royalties therefrom are considered earned within the
Philippines.
 Sale of real property – where the real property is located.
As such, gains, profits and income from the sale of real
property located in the Philippines are considered earned
herein.
 Purchase: where the property is sold. If the
personal property was purchased outside the
Philippines, but sold herein, the gains, profits and
income derived therefrom are considered earned
within the Philippines. On the other hand, even if it
was purchased in the Philippines and sold outside,
gains therefrom shall be treated earned from
outside the Philippines.
 Produced: if the personal property is produced in
the Philippines and sold outside, it shall be treated
as derived from sources partly within and partly
without the Philippines. Except: sale of shares of
stock of a domestic corporation, which shall be
considered entirely within the Philippines even if
sold outside.
 Income partly within and partly without the Philippines :
aside from sale of personal property produced in the
Philippines, income from transportation and other services
rendered partly within and partly without, is covered by this
number.
Requisites of Income:
 There must be gain or profit.
 Income tax only applies only when there is income, gain or
profit. Income, in its broad sense, means all wealth that
flows into the taxpayer other than as a mere return of
capital. Unless otherwise specified, it means cash or its
equivalent.
 The gain must be realized or received
 The gain must not be excluded by law or treaty from
taxation. (Commissioner of Internal Revenue vs. The Court
of Appeals, et.al., G.R. No. 108576, January 20, 1999 301
SCRA 152)
TAX ON INDIVIDUALS
 Resident Citizens – A citizen of the Philippines residing
therein. Under Sec. 1, Art. IV of the 1987 Constitution, the
following are citizens of the Philippines.
 Those who are citizens of the Philippines at the
time of the adoption of this Constitution;
 Those whose fathers or mothers are citizens of the
Philippines;
 Those born before January 17, 1973, of Filipino
Mothers, who elect Philippine citizenship upon
reaching the age of majority; and
 Those who are naturalized in accordance with law.
 Non-resident citizen
 A citizen of the Philippines whose physical
presence abroad is with a definite intention to
reside therein – to the satisfaction of the
Commissioner of Internal Revenue.
 A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for employment
on a permanent basis.
 A citizen of the Philippines who works and derives
income from abroad and whose employment
thereat requires him to be physically present
abroad most of the time during the taxable year.
“Most of the time” meaning at least 183 days.
 A citizen who has been previously considered as
non-resident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines shall
likewise be treated as a non-resident citizen for the
taxable year with respect to his income derived
from sources abroad until the date of his arrival in
the Philippines. (Sec. 22[E] of the Tax Code)
 So, if the taxpayer, who is previously considered a
non-resident citizen arrived in the Philippines on
July 1, 2016 with the intention of residing
permanently in the Philippines, shall be considered
a non-resident citizen for his income from January
1 to June 30, 2016 (prior to his date of arrival) and
a resident citizen for the rest of the year.
 Resident Alien
 An alien who lives in the Philippines with no
definite intention as to his stay (floating intention);
 One who comes to the Philippines for a definite
purpose which in its nature would require an
extended stay and to that end makes his home
temporarily in the Philippines;
 An alien who has acquired residence in the
Philippines and retains his status as such until he
abandons the same and actually departs from the
Philippines.
 Non-resident alien (NRA)
 An alien who comes to the Philippines for a
definite purpose which in its nature may be
promptly accomplished.
 One who may either be a:
 NRA engaged in trade or business
(NRAETB) in the Philippines or
 NRA not engaged in trade or business
(NRANETB) in the Philippines.
 A NRA who shall come to the Philippines and stay
for an aggregate of more than 180 days shall be
deemed a NRAETB.
SOURCES OF INCOME FOR INDIVIDUAL
TAXPAYERS
 Compensation Income – all remuneration received for
services performed by an employee for his employer under
an employee-employer relationship. (Section 2.78.1 (A) of
RR No. 2-98)
 Business or Professional Income – income earned by an
individual from his sole proprietorship business, from the
practice of profession, or share in the income of a general
professional partnership subject to Income Tax and
Expanded Withholding Tax, whenever applicable.
 Income owned in common with the spouse: if there
is a disposal of an asset which is conjugally owned
by the spouses, the gain therefrom shall be divided
equally to both the husband and the wife. Same is
true with expenses incurred conjugally, which are
deductible, and it is not determinable who among
the spouses actually incurred the same, they shall
share in such deduction equally.
 Passive Income - income generated without any active
conduct. These are income generated by assets which can
be in the form of real properties that return rental income,
shares of stock in a corporation that earn dividends or
interest income received from savings. (Chamber of Real
Estate and Builders Associations, Inc. vs. the Hon.
Executive Secretary Alberto Romulo, et. Al)
 Specific rates of final withholding tax are provided
for certain passive incomes, such as interest from
deposits, dividends, royalties, etc. However, if they
are not covered by such rate, it will form part of
the taxpayer’s gross income subject to income tax.
 Capital Gains are those arising from the sale of capital
assets which may be subject to Capital Gains Tax, for sale
of real property and shares of stock not traded in a local
stock exchange; or as part of gross income subject to
income tax for all other types of capital assets.
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL
TAXPAYERS
 Compensation Income – for individuals earning purely
compensation income, there is no allowable deduction.
However, the first P250,000 of their income is exempt from
income tax.
 Business Income – for those earning business income or
income from the practice of profession, the individual is
allowed to claim itemized deductions or the optional
standard deduction. If they earn income purely from
business or practice of profession, the first P250,000 of
such income is exempt from income tax.
 Itemized Deductions (Sec. 34 of the Tax Code)
 Expenses incurred in conducting the business or in the
practice of profession are allowed as deductions for income
tax purposes provided that they meet all the requirements
for deductibility.
Optional Standard Deduction (OSD)
 In lieu of the itemized (per item) expenses mentioned
above, the Individual may opt to claim Optional Standard
Deduction. Accordingly, no other deductions for expenses,
such as Cost of Sales, Cost of Services, Rent, Selling or any
Administrative Expenses, or other business expenses or
those incurred in the practice of profession, shall be
allowed. Moreover, it is not available against compensation
income nor can it be claimed by an individual earning
purely compensation income or an individual who has gross
sales/receipts not exceeding P3,000,000 and opted to be
subject to the 8% income tax on gross sales/receipts.
 Basis of computation: The OSD is 40% of Gross Sales or
Receipts. If the individual has mixed income (from business
and compensation) the basis for the 40% will not include
compensation income. Note that the basis for the OSD is
gross sales or receipts which is the amount BEFORE any
deduction for cost of sales or cost of services.
 Non-resident aliens: The OSD cannot be claimed by Non-
Resident Aliens.
 Period to elect: as to the use of OSD or Itemized Expenses
shall be made on the first quarter of the taxable year, upon
filing of the first quarter return and shall be irrevocable for
the said year. (RR No. 2-10)
 Special Allowable Itemized Deductions
 In addition to the regular itemized deductions, these are the
deductions allowed by regular and special laws such as
Rooming-in and Breast-feeding Practices under RA 7600,
Adopt a School Program under RA 8525, Senior Citizen
Discount under RA 9257, etc.
 All of the above deductions are not available:
 Against compensation income and shall only be allowed
against business income or from the practice of profession.
Accordingly, the amount thereof cannot exceed the said
income and is not available to individuals earning purely
compensation income.
 If the taxpayer opted to avail the 8% income tax since the
tax base for this tax is gross sales/receipts (before the above
deductions, including costs of sales)
BASIC FORMAT OF COMPUTATIONS
 Pure Compensation Income
Gross Taxable Compensation Income P XXX
Less: Non-Taxable Compensation Income* (XXX)
Taxable Compensation Income XXX
Taxable Income XXX
Tax Due XXX
Less: Withholding Tax on Compensation (XXX)
Tax Payable (Refundable) XXXX
 non-taxable compensation income includes those benefits
provided for by the employer which are considered de
minimis or otherwise exempted from income tax such as
mandatory government and other contributions.
Pure Business or Professional Income
Availing of the Graduated Rates
Gross Taxable Business/professional Income P XXX
Less: ID or OSD (XXX)
Taxable Income xxx
Taxable Income XXX
Tax Due XXX
Less: Withholding Tax (XXX)
Creditable Withholding tax (XXX)
Tax Payable (Refundable) XXXX
 The amount reported as business/professional income shall
be gross of any applicable withholding taxes. Note that
creditable withholding taxes are deducted from the Tax
Due; not as reductions to gross income to arrive at Taxable
Income.
Pure Business or Profession Income availing of the 8% Income
Tax
 ***If the taxpayer also earns compensation income but
elected to avail of the 8% income tax rate, there is no longer
a first P250,000 non-taxable income; likewise, the
compensation income shall be subject to the graduated tax
rate.
 Gross Sales/Receipts  P XXX 
Other Non-Operating Income  XXX 
Less: First P250,000 exempt from(P250,000)*** 
Income Tax 
Taxable Sales/Receipts  XXX 
Tax Rate  8% 
Income Tax  XXX 
Less: Withholding Tax XXX   
        Creditable Tax             XXX  (XXX) 
Tax Payable (Refundable)   XXXX 
INCOME TAX RATES
 Graduated Income Tax Rate for Individuals (sometimes
referred to as basic income tax or schedular income tax or
regular income tax of individuals)
 The above rates shall apply to:
 Purely compensation income earners
 Mixed income earners as regards their compensation
income
 Those earning income from business or practice of
profession whose sales/receipts and other operating
income EXCEEDS P3,000,000
 Those earning income from business or practice of
profession whose sales/receipts and other operating
income DOES NOT exceed P3,000,000 and the
taxpayer opted to avail of the graduated income tax
rates.
 The 8% Income Tax Rate: this income tax rate applies
ONLY to income from business or practice of profession
where the gross sales or receipts do not exceed P3,000,000.
 Those earning mixed income (from compensation and
income from business or practice of profession) can be
taxable as follows:
 a. 8% income tax rate but only as to the income from Tax Rate *8%
business or practice of profession without the first Income Tax Due P88,000
P250,000 exempt (since this will be considered in the
application of the graduated rates for income from
compensation) On her compensation income:
b. Income from compensation is ALWAYS subject to the Compensation Income P1,000,000
graduated rights. Tax on the first P800,000 P130,000
 Rules applicable to the 8% income tax rate: On the excess (P1,000,000 – 800,000) * 30% 60,000
 It shall be based on gross sales/receipts including other Income Tax Due P190,000
non-operating income, unlike the graduated rates
which are based on taxable income;
 For those earning purely from business or practice of Income Tax on income from self-employment P88,000
profession, the tax base shall be that in excess of Income Tax on compensation income 190,000
P250,000 Total Income Tax Due P278,000
Tax Withheld (180,000)
ILLUSTRATION: Income Tax Still Payable P98,000
Ms. X operates a convenience store while she plays axie . In 2021,
her gross sales amounted to P800,000.00, in addition to her income  Ms. X’s gross sales/receipts from business and practice of
from selling SLP amounts to P300,000.00 and incurred costs and profession did not exceed P3,000,000. Thus, she can avail
expenses of P300,000 and P100,000, respectively. How much is her of the 8% income tax rate applicable only to such income.
tax due using the 8% tax rate?  The tax base is the gross sales/receipts. Thus, costs,
expenses or even the optional standard deduction is not
Gross Sales – convenience store P800,000 allowed as a deduction.
Gross Sales – Axie Income 300,000  Income from compensation is always subject to the
Total Sales/Receipts P1,100,000 graduated rates.
Less: Non-taxable portion (250,000)  Since she is a mixed-income earner there is no first
Taxable Income P850,000 P250,000 considered non-taxable as to her business income
Tax Rate * 8% and income from the practice of profession, since this
Income Tax Due P68,000 amount (the non-taxable P250,000) has already been
considered in the graduated rates.
1. Ms. X’s gross sales/receipts from business and practice of  Note that Ms. X will not qualify for substituted filing since
profession did not exceed P3,000,000. Thus, she can avail she has income other than compensation. Thus, she would
of the 8% income tax rate. need to file her individual income tax return using BIR
2. The tax base is the gross sales/receipts. Thus, cost of sales, Form No. 1701.
expenses or even the optional standard deduction is not  The 8% income tax shall be in lieu of the percentage tax
allowed as a deduction. under Sec. 116. Accordingly, the taxpayer shall not be
3. Since she is earning purely from such business and practice subject to the 3% other percentage tax on his gross
of profession, the first P250,000 is considered non-taxable. sales/receipts.

 Availment of the 8% income tax rate shall be made on the

1st quarter Income Tax Return or on the initial quarter
return of the taxable year after the commencement of a new
business or practice of profession. Such election shall be
irrevocable, and no amendment of option shall be made for
the said taxable year. Accordingly, the taxpayer shall
compute for the final annual income tax due using such
rate.
 Otherwise if the taxpayer failed to make such election, the
taxpayer shall be considered to have availed of the
graduated rates.

In the above illustration, if Ms. X failed to signify her intention to

be subjected to the 8% income
tax rate, she shall be subject to the graduated tax and her income tax
liability shall be computed
as follows:

Total Sales/Receipts P1,100,000

if the taxpayer is a mixed-income earner, i.e., he earns Less: Cost of Sales (300,000)
compensation income too, the first Gross Income 800,000
P250,000 treated as non-taxable is not applicable Less: Operating Expenses (100,000)
Taxable Income P700,000
ILLUSTRATION:
In the above illustration, Ms. X likewise earned P1,000,000 from Income Tax Due
employment with XYZ Company for which P180,000 was tax On the first P400,000 P30,000
withheld and remitted to the BIR. How much is her income tax due On the excess (P700,00 – 400,000) * 25% 75,000
and payable? Income Tax Due P105,000

Answer: P278,000 and P98,0000 computed as follows:  Aside from being subjected to the graduated tax rates, Ms.
X shall likewise be liable for 3% percentage tax on her
On her business income and income from the practice of gross sales/receipts.
profession:
Gross Sales – convenience store P800,000
Gross Sales – bookkeeping services 300,000
Total Sales/Receipts P1,100,000
  The Financial Statements (FS) is not required to be attached
to the final income tax return. However, existing rules and
regulations on bookkeeping and invoicing/receipting shall
still apply.
 If the taxpayer’s gross sales/receipts and other non-
operating income exceeds P3,000,000, he/she shall be
automatically subjected to the graduated rates. In such case,
his/her income tax shall be computed under the graduated
income tax rates and shall be allowed a tax credit for the
previous quarter/s income tax payment/s under the 8%
income tax rate option.
ILLUSTRATION: Mr. ABC earned P3,000,000 on his practice of
profession for the first three quarters of 2018 for which he filed
quarterly income tax returns and availed of the 8% income tax rate,
and on the fourth quarter, he earned P3,500,000. For the taxable
year, he incurred cost of sales and operating expenses amounting to
P3,000,000 and P1,440,000, respectively. How much is his tax due
and tax still payable for taxable year 2018?
Answer: P509,200 and P289,200, computed as follows:
 Total Sales P6,500,000
Less: Cost of Sales (3,000,000)
Gross Income 3,500,000
Less: Operating Expenses (1,440,000)
Taxable Income P2,060,000
Income Tax Due
Tax Due based on graduated rates P509,200
Less: 8% Income Tax paid for the first three quarters
(P3,000,000 – P250,000) * 8% (220,000)
Income Tax Payable P289,200
 Since the gross receipts exceeded the P3,000,000 threshold,
Mr. ABC shall automatically be subject to the graduated
rates. However, he can claim the 8% income tax paid for
the first three quarters as tax credits.
 In addition, Mr. ABC shall be liable to business taxes, as
follows:
 Percentage Tax – on the gross sales/receipts up to
P3,000,000
 VAT – on gross sales/receipts after exceeding the
P3,000,000 threshold.
 However, there shall be no penalties for the percentage
taxes if timely paid on the due date immediately following
the month/quarter when the taxpayer ceased to be a non-
VAT taxpayer.
PASSIVE INCOME
 There are items of passive income which are specifically
enumerated in the Tax Code as subject to final withholding
tax and thus are not included in the Gross Income of the
Taxpayer for purposes of computing his taxable income
subject to the graduated/scheduler/basic income tax or the
8% tax rate.
 The final withholding tax is the amount of tax which
constitutes the full and final payment of the income tax due
from the payee of the said income.
 Remittance of the Tax:
 The liability for the payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of his failure
to withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the payor/withholding
agent. The payee is not required to include the income
subject to final withholding tax to his gross income subject
to income tax.
 The final tax is withheld at source; thus, the income earner
need not file a return for the income subjected to Final Tax.
 Example: A earned P100 interest from his deposits with X
Bank, X Bank withheld P20 final tax due on the interest.
 In this transaction:
 the P100 interest is the passive income of A
 X Bank will remit the P20 final tax on interest to
the BIR
 A will receive the interest net of the tax, P80.
 The P100 interest will no longer be included in A’s
taxable income subject to income tax.
Rates and Income Items Subject to Final Withholding Tax
20% Interest from any currency bank deposit; Yield or other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements.
20% Royalties, except on books and other literary works and
musical compositions.
20% Prizes (except prizes amounting to P10,000 or less)
20% Winnings (except Philippine Charity Sweepstakes and Lotto
winnings amounting to P10,000 or less) Note that prior to the
TRAIN: winnings from the PCSO and Lotto are exempt
regardless of amount.
10% Royalties from books and other literary works and musical
compositions
15% Interests from depository banks under the Foreign Currency
Deposit System (prior to the TRAIN, the rate banks under the
Foreign Currency Deposit System (prior to the TRAIN, the rate
applicable is 7.5%
10% Cash and/or property dividends*
5% Interest Income from LONG TERM deposit or investment are
generally exempt from tax, but if they are
PRETERMINATED before the 5th year the final tax would be:
4 years to less than 5 years
3 years to less than 4 years Less than 3 years
12%
20%
 Passive Income earned from outside the Philippines: if a
resident citizen earns any of the above income items from
abroad, the same is not subject to final withholding tax but
to the regular income tax and will thus form part of his
taxable income subject to the same. Note that the above
rates apply only for income earned from Philippine sources.
 The following rates shall apply on the income of Non-
Resident Alien ENGAGED in Trade or Business in the
Philippines (NRAETB):
 20%
 Interest from any currency bank deposit; Yield or
other monetary benefit from deposit substitutes
and from trust funds and similar arrangements.
 Royalties, except on books and other literary
works and musical compositions.
 Winnings (except Philippine Charity Sweepstakes
and Lotto winnings amounting to P10,000 or less)
 Prizes (except prizes amounting to P10,000 or less)
 Cash and/or property dividends
 Interest Income from LONG TERM deposit or
investment are generally exempt from tax, but if
they are
 PRETERMINATED before the 5th year the final
tax would be:
 5% 4 years to less than 5 years
 12% 3 years to less than 4 years
 20% Less than 3 years
 A NRAETB is subject to the same rates as that of a citizen
or resident alien, except for the following:
1. Dividend Income – 20%;
2. Interest Income from FCDUs – exempt.
 Non-Resident Aliens NOT engaged in trade or business are
subject to the 25% Final Tax on his entire income, save for
capital gains on shares of stocks not listed or traded in a
local stock exchange. The above rates do not apply.
 However still, a NRANETB’s income from an FCDU is
exempt because he is still a non-resident.
GAINS FROM DISPOSITION OF ASSET
 Capital Assets are those not falling within the definition of
an ordinary asset.
 Ordinary Assets, on the other hand, means:
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 trade or business of the taxpayer.
 Thus, "capital assets" refers to taxpayer’s property that is
NOT any of the following:
1. Stock in trade;
2. Property that should be included in the taxpayer’s
inventory at the close of the taxable year;
3. Property held for sale in the ordinary course of the
taxpayer’s business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business. (SMI-ED
Philippines Technology, Inc. vs. CIR)
 Determination of gain or loss: the gain shall be the excess
of the amount realized from the disposition of property over
the basis or adjusted basis for determining the gain; on the
other hand, the loss is the excess of the basis or adjusted
basis for determining loss over the amount realized.
 Amount realized: is the sum of the money plus the fair
market value of the property received.
 Amount of cost or basis or adjusted basis of computing gain
or loss:
1. Purchase – the cost;
2. Inheritance – fair market value as of the date of
acquisition;
3. Gift – the basis is the same as if it would be in the
hands of the donor or the last preceding owner who did
not acquire the property by gift; however, if the same
exceeds the fair market value at the time of the gift,
then for purposes of determining loss, the fair market
value.
4. Property acquired for less than an adequate
consideration in money or money’s worth – the amount
paid by the transferee;
 The above amounts are adjusted by amounts of
improvements that materially add to the value of the
property or appreciably prolong its life less accumulated
depreciation. (RR No. 6-08)
 No gain or loss: generally, upon the sale or exchange of
property, the entire amount of the gain or loss as the case
may be, shall be recognized. Except in the following
instances where no gain or loss shall be recognized in
pursuance of a plan of merger or consolidation:
a. A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or
consolidation; or
b. A shareholder exchanges stock in a corporation, which
is a party to the merger or consolidation, solely for the
stock of another corporation, also a party to the merger
or consolidation; or
c. A security holder of a corporation, which is a party to
the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in
another corporation, a party to the merger or
consolidation. (Sec. 40[C][2] of the Tax Code)
 Tax Free Exchange: no gain or loss shall also be recognized
if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a
corporation of which as a result of such exchange said
persons, alone or together with others, not exceeding four
(4) persons, gains control of the corporation: Provided, that
stocks issued for services shall not be considered as issued
in return for property. (Sec. 40[C], last par. of the Tax
Code)
 Treatment of Ordinary Gains: or those arising from the sale
of ordinary assets will form part of the taxable income
subject to the graduated/basic/regular income tax. Likewise,
losses arising from such sale may be claimed as deductible
expense, without any limitation as to amount, unlike in
capital losses. (see limitation on capital losses)
 Treatment of Capital Gains: depending on the nature of the
property, the gains derived from sale or disposition of
capital assets may be subject to:
1. Capital gains tax; or
2. Ordinary income tax.
 Capital Gains Tax: is applicable only to
1. sale of shares of stock of a domestic corporation NOT
listed or traded through a local stock exchange held as
capital assets; and
2. sale of real property located in the Philippines held as a
capital asset.
 All other capital gains are subjected to regular income tax.
 Sale of Shares of Stock of a Domestic Corporation
NOT listed and traded through a local stock
exchange
 Held as capital assets: means all stocks and securities held
by taxpayers other than dealers in securities. (Sec. 2[a] of
RR No. 6-2008)
 Not applicable: the Capital Gains Tax does not apply if the
sale of shares of stock was made by
a. A dealer in securities;
b. Investor in shares of stock in a mutual fund company;
and
c. Other persons exempt under special law. (Sec. 4 of RR
No. 6-2008)
 Capital Gains Tax Rate: is now 15%
 Tax base: is the net capital gain, which is the excess of the
selling price/fair market value (less cost to sell) over the
cost of the shares.
 Shares listed or traded through the stock exchange: if the
shares are disposed through the stock exchange, the same is
not subject to CGT but to the Stock Transaction Tax of 6/10
of 1% of the selling price (prior to the TRAIN, the rate was
½ of 1%), which is a business tax (this is part of the
discussion in Percentage Taxes). However, this tax
constitutes the final tax on such sale since the Tax Code
provides that the same shall be exempt from income tax.
Thus, any gain resulting from such disposition will no
longer be included in the taxpayer’s gross income subject to
regular income tax.
 However, if the shares, although listed in the stock
exchange, are sold over-the-counter, or directly to the
buyer, and not through such stock exchange, then it will
still be subject to the CGT.
 Not subject to the Capital Gains Tax:
a. The sale is made through the local stock exchange;
b. The shares of stock are of a foreign corporation (not
domestic corporations);
c. The shares are NOT held as capital assets, e.g., the
seller is a dealer in securities.
d. The sale resulted in a capital loss.
 Sale of Real Property located in the Philippines
 A 6% Capital Gains Tax of 6% is imposed on the presumed
gain from sale of real property, based on the gross selling
price or the fair market value, whichever is higher.
 Fair Market Value: shall be the higher between:
a. Zonal Value as determined by the BIR;
b. Fair Market Value per local assessor.
 Note: for individuals, real property subject to CGT consists
of ALL real properties (classified as capital assets); whereas
for domestic corporations, the only real property subject to
capital gains tax are LANDS and BUILDINGS. Sale of
machineries, even though classified as a capital asset, shall
be subject to the regular corporate income tax.
 Sale of real property to government or any of its political
subdivisions or agencies or GOCCs may be treated as
subject to capital gains tax or ordinary income tax, at the
option of the taxpayer. (Sec. 22[D] of the Tax Code)
 Sale of Principal Residence: sale of principal residence of
natural persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence within
18 calendar months from the date of sale or disposition is
 not subject to the 6% CGT. Subject to the following
requirements:
a. The historical cost or adjusted basis of real property
sold or disposed is carried over to the new principal
residence;
b. The exemption can only be availed once every 10
years;
c. The BIR is notified by the taxpayer within 30 days
from the date of sale or disposition of his intention to
avail of the tax exemption.
 If there is no full utilization of the proceeds, the portion of
the gain presumed to have been realized from the sale or
disposition shall be subject to the 6% CGT, as follows:
Taxable Amount = Unutilized Portion
CGT base* x Gross Selling Price
 *CGT base is the higher between the FMV and the Selling
Price.
 The CGT then would be 6% of the Taxable Amount
computed above.
ILLUSTRATION: Mr. F sold his principal residence which he
acquired for P1,000,000 for P3,000,000. At the time of sale, the fair
market value is P2,500,000. After 1 year, Mr. F bought a house and
lot for P3,200,000.
Assuming all other requisites are present, how much is the CGT due
on the sale?
Answer: P0. The proceeds of P3,000,000 was fully utilized to
acquire a new principal residence.
If, however, the new principal residence was acquired for only
P2,000,000, how much is the CGT?
Answer: P60,000, computed as follows:
1,000,000 / 3,000,000 x 3,000,000 = 1,000,000 x 6% = 60,000
1. Unutilized Portion is 1,000,000 (3,000,000 selling price less the
utilized portion of 2,000,000)
2. CGT Base is P3,000,000 (the higher between the selling price and
fair market value)
3. Taxable Amount is P1,000,000, the ratio of unitilized portion over
the selling price multiplied by the CGT base
4. CGT, therefore, is P60,000, 6% of the taxable amount.
 If, however, fair market value of the principal residence was
P3,300,000, how much is the CGT?
Answer: P66,000, computed as follows:
1,000,000/3,000,000 x 3,300,000 = 1,100,000 * 6% = 66,000
1.Unutilized Portion is P1,000,000 (3,000,000 selling price less the
utilized portion of 2,000,000)
2.CGT Base is P3,300,000 (the higher between the selling price and
fair market value)
3. Taxable Amount is P1,100,000, the ratio of the unutilized portion
(P1,000,000) over the selling price (P3,000,000). Note that the
denominator is ALWAYS the selling price (and not the fair market
value) because this is the total
amount which can possibly be utilized for the acquisition or
construction of a new principal residence considering that this will
be the total amount of proceeds that
will be collected from the buyer.
4. CGT, therefore, is P66,000, 6% of the taxable amount.
 Real Property located abroad: is not subject to CGT. Note
that what is subject to the 6% CGT is sale of real property
LOCATED IN THE PHILIPPINES. Thus, if the property is
located abroad, gain from such disposal, if taxable in the
Philippines, is subject to regular income tax.
 Forced Sale of Real Property: the fact that the sale is
involuntary, e.g., from a court order of foreclosure sale,
does not affect the classification of the property in the
hands of the seller, either as capital asset or ordinary asset,
and are thus subject to the rules applied therefor.
 Capital Gains not subject to CGT; subject to
regular/graduated income tax: All gains resulting from sales
not subject to capital gains tax, are subject to
ordinary/regular income tax.
Rules applicable to capital gains:
1. Percentage taken into account:
The following percentages of the gain or loss recognized upon the
sale or exchange of capital assets shall be taken into account in
computing net capital gain, loss or net income:
This rule is not applicable to corporations
Percentage Applicability
If the capital asset has been held for NOT more
100%
than 12 months;
If the capital asset has been held for MORE than
50%
12 months.
2. Limitation on Capital Losses:
The capital losses realized during the taxable year are deductible
only to the extent of capital gains from the same type of transaction
during the same period. This rule likewise applies to sales of shares
of stock subject to 15% CGT.
 Exception: banks and trust companies whose business is the
receipt of deposits, sells any bond, debenture, note or
certificate or other evidence of indebtedness. Any loss
resulting from such sale shall not be subject to the
foregoing limitation and not included in determining the
applicability of such limitation to other losses. (Sec. 39[C]
of the Tax Code)
3. Net Capital Loss Carry-Over
If the individual sustains in any taxable year a net capital loss, such
loss, in an amount not to exceed the net income of such year, shall be
treated in the succeeding taxable year as a loss from the sale or
exchange of asset held for not more than 12 months. (Sec. 39[D] of
the Tax Code)
 This rule is likewise not applicable to a corporation.
4. Corporations
Based on the above, only the rule on limitation on capital losses
apply to corporations; and if the corporation sustains a net capital
loss, the same cannot be carried over in the succeeding taxable year.
5. Sale of shares of stock subject to 15% CGT
For sale, barter, exchange or other forms of disposition of shares of
stock subject to the 15% capital gains tax, if the transferor of the
capital asset is an individual, the rule on holding period and capital
loss carry-over will not apply.
FRINGE BENEFITS
 Fringe Benefit means any good, service or other benefit
furnished or granted by an employer in cash or in kind, in
addition to basic salaries, to an individual (Sec. 33[B]).
 Fringe benefits given to non-rank-and-file employees are
generally subject to fringe benefits tax; while fringe benefits
received by rank-and-file employees are subject to
withholding tax on compensation.
 Fringe Benefits Tax is 35% effective January 1, 2018 (32%
from Jan. 31, 2000 to December 31, 2017). Fringe benefits
tax is paid by the employer and is considered a final tax.
Accordingly, the fringe benefits received by the employee
is no longer included in his taxable income subject to
income tax.
 DIFFERENT KINDS OF EMPLOYEES
• Rank and File Employees are those who are not
holding managerial or supervisory positions
• Managerial Employees are those who are vested
with powers or prerogatives to lay down and
execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign
or discipline employees.
• Supervisory Employees are those who, in the
interest of the employer, effectively recommend
 such managerial actions if the exercise of such  For loans with no or less interest than that of the market
authority is not merely routinary or clerical in rate (12%), the monetary value would be the difference
nature but requires the use of independent between the market interest and the interest paid, if any.
judgment.
ILLUSTRATION: If the employee extends a loan to an employee
Fringe Benefits SUBJECT to Fringe Benefit Tax with a 7% interest rate in the amount of P100,000, the annual
 Housing; monetary value would be 5% (12%-7%) of P100,000 or P5,000 for
 Expense account; FBT purposes.
 Vehicle of any kind;
 Household personnel such as maid, driver and others; Monetary value for VEHICLES of any kind
 Interest on loan at less than market rate to the extent of the Value of the Monetary value of
difference between the market rate and the actual rate benefit the benefit
granted (12% benchmark rate);
 Membership fees, dues and other expenses borne by the Employer OWNS and Acquisition cost of 50% of the value
employer for the employee in social and athletic clubs and maintains a fleet of all motor vehicles of the benefit
similar organizations; motor vehicles for the not normally used
 Expenses for foreign travel; use of the business and for business
 Holiday and vacation expenses; employees divided by 5 years
 Educational assistance to the employee or hid dependents;
 Life or health insurance and other non-life insurance Employer LEASES Amount of rental 50% of the value
premiums or similar amounts in excess of what the law motor vehicles for the payments for of the benefit
allows. use of the business and motor vehicles not
the employees normally used for
MONETARY VALUE AND EXEMPTIONS FROM FBT business purposes
 In case of housing privilege and motor vehicle: Employer Acquisition cost Entire value of the
 If there is NO transfer of ownership, the monetary value of PURCHASES the benefit
the benefit is 50% of the value of the benefit. motor vehicle in the
 If there is transfer of ownership, the monetary value shall be name of the employee
the same as the value of the benefit, or 100% thereof.
 In case of other fringe benefits, the monetary value shall Employer PROVIDES Cash received by Entire value of the
be the same as the value of the benefit. CASH to the employee employee benefit
Monetary value of HOUSING PRIVILEGE: for the purchase of a
vehicle in the name of
ILLUSTRATIONS: the employee Value of the Monetary value
 If an employer rents a house for an employee for benefit of the benefit
Employer SHOULDER Amount Entire value of the
P10,000 a month, the P10,000 is the value of the A PORTION of the shouldered by benefit
benefit. For purposes of computing the FBT, P5,000 Employer leases
purchase residential
price Rental paid
of the employer 50% of the value
would be the monetary value, or 50% of the value of property
motorforvehicle
the useinof the of the benefits
the benefit, since there is no transfer of ownership. employee
name of the employee
 If an employer owns the house with a FMV of
Employer OWNS the 5%* of the 50% of the value
P1,000,000 and allows the employee to use the same as Employer purchases the Acquisition cost Entire value of the
residential property which FMV of the of the benefits
residence, the value of the benefit would be P50,000 (5% car on instalment in the exclusive
is assigned to the employee land andof benefit
of P1,000,000) and the monetary value for FBT would be name of the employee interest
for his use improvements by
divided
P25,000 (50% of the value of the benefit, since there is 5 years
no transfer of ownership). Employer PURCHASES 5% of the 50% of the value
 If an employer purchased a house for P1,200,000 on an residential property on the acquisition cost of the benefits
instalment basis where the P200,000 is for the interest instalment basis and allows exclusive of
throughout the instalment period, and allows the employee to use the same interest
employee to use the same, the value of the benefit would as his residence
be P1,000,000*5% (without the interests) or P50,000. For
FBT, the monetary value would be P25,000, or 50% of Employer PURCHASES a Employer’s Entire value of
the value since there is no transfer of ownership. residential property and acquisition cost the benefit
 If an employer purchased a house for P1,000,000 with a TRANSFERS ownership or FMV,
FMV of P800,000, and transfers the same to the to the employee whichever is
employee, the value of the benefit would be P1,000,000 higher
(Higher acquisition cost) and the monetary value for FBT Employer PURCHASES a The difference Entire value of
would be the same, or 100% of the value since there was residential property and of the FMV and the benefit
transfer of ownership. TRANSFERS ownership the payment of
 If in (d) above, the employee is required to pay half of the to the employee at a the employee
purchase price (P500,000), the value of the benefit would PRICE LOWER than the
only be P300,000 which is the difference between the acquisition cost
FMV (P800,000) and the amount paid by the employee
(P500,000), the monetary value would be the same since
there as transfer of ownership.

Exempt housing privileges

 If the house is within the maximum of 50 meters from the
perimeter of the business premises;
 Housing privilege of military officials of Armed Forces of
the Philippines;
 Note:
 Temporary housing for an employee who stays in a housing
 Treatment of the above for FBT purposes is similar to that
unit for 3 months or less.
of the housing privilege except that the presumptive
FORGONE INTEREST
 economic useful life of the vehicles is 5 years (20 years for
housing privileges).
 The same rule applies, the monetary value is 50% of the
benefit if there is no transfer of ownership
 The vehicles owned by the company used for business
purposes although provided to a managerial or supervisory
employee is not subject to FBT.
 Use of an aircraft and helicopters owned and maintained by
the employer is treated as business expense and is not
subject to FBT.
EXPENSE ACCOUNTS
 which are personal to the employee (such as groceries for
personal consumption) are subject to FBT based on the
amount reimbursed to the employee. If, however, they are
not personal (such as food expensed for a meeting with a
client) and duly receipted in the name of the EMPLOYER,
they will be treated as valid reimbursable expenses and is
not subject to FBT.
 Fixed amounts: if the amounts are given regularly on a
monthly basis, this will not be considered as fringe benefits
subject to FBT. They will form part of the regular
compensation of the employee subject to withholding tax
on compensation.
EDUCATIONAL ASSISTANCE
 provided to an employee is generally subject to FBT, except
if the study is directly related with the trade or business or
profession or if there is a “bond” where the employee is
required to stay in the employ of the employer for some
period after finishing.
 EDUCATIONAL ASSISTANCE PROVIDED TO A
DEPENDENT of an employee is generally subject to FBT,
except if awarded through a competitive scheme under a
scholarship program.
 INSURANCE PREMIUMS paid by the employer for the
employee is generally subject to FBT, except those exempt
under the law (SSS, GSIS, etc.) and those which are for the
group insurance of the employee.
 EXPENSES FOR FOREIGN TRAVEL are generally
subject to FBT, except if in connection with attending
business meetings or conventions at an average of $300 a
day (excluding lodging costs). For all others, the cost of
economy and business class airplane tickets shall NOT be
subject to FBT and 70% of the cost of first class tickets
shall likewise be exempt.
TAX BASE AND TAX RATE
1. The Fringe Benefit Tax (FBT) is computed as follows:
Monetary Value XXX
Divided by 65%
Grossed Up Monetary Value XXX
Tax Rate 35%
Fringe Benefit Tax XXX
2. For Non-Resident Aliens NOT Engaged in Trade or
Business, the gross up rate is 75% and the FBT rate is 25%.
ITEMS EXEMPT FROM WITHHODING TAX ON
COMPENSATION/FRINGE BENEFITS TAX
1. Remunerations received as an incident of employment
(Sec. 2.78.1 (B)(1) of RR No. 2-98)
A. Retirement benefits received under Republic Act (RA) No.
7641 AND those received by officials and employees of
private firms, whether individual or corporate, under a
reasonable private benefit plan.
 Those received under a reasonable private benefit plan: is
exempt subject to the following requisites:
 Plan is reasonable;
 Plan is approved by the BIR;
 Retiring employee must have been in the service of the
same employer for at least 10 years
 Retiring employee is 50 years old or older at the time of
retirement; and
 Retiring employee has not previously availed of the
privilege under the retirement benefit plan of the same or
another employer
 Retirement benefits under R.A. 7641 (amendment to the
Labor Code granting retirement pay under Art. 287 thereof)
where:
• No private retirement plan or retirement plan under
the CBA/employment contract.
• Must have served the company for at least 5 years
iii. Retiree at least 60 years old but not more
than 65 years of age at the time of retirement.
 “CBA is a retirement plan”
B. Any amount received by an employee or by his heirs from
the employer due to death, sickness, or other physical
disability or for the cause beyond the control of the said
employee such as retrenchment, redundancy, or cessation of
business.
 The cause of separation by the employee from the service
was beyond his control.
 Amounts received by involuntary separation remain exempt
from income tax even if the employee, at the time of
separation, had rendered less than 10 years of service and/or
is below 50 years old;
 However, any payment made by an employer to an
employee on account of dismissal constitutes compensation
regardless of legal contract, statute, or otherwise to make
such payment - thus not exempted.
C. Social security benefits, retirement gratuities, pensions and
other similar benefits received by resident and non-resident
citizens of the Philippines or aliens who reside permanently
in the Philippines from foreign entities whether private or
public
D. Payments of benefits due or to become due to any person
residing in the Philippines under the law of the US
administered by the US Veterans Administration e.
Payments of benefits made under the Social Security
System Act of 1954, as amended
 Benefits received from the GSIS Act of 1937, as amended,
and the retirement gratuity received by government officials
and employees
2. Remuneration for casual labor not in the course of an
employer's trade or business (Sec. 2.78.1 (B)(4) of RR No.
2-98)
 Remuneration paid for labor which is occasional, incidental,
or irregular AND does not promote or advance the
employer's trade or business;
 The above is exempt from withholding tax on compensation
because there may be no employer-employee relationship
between the employer and the casual laborer. However, the
remuneration received by the laborer is part of his taxable
income for income tax purposes.
 Note: The following remunerations constitutes
compensation income, thus taxable:
• Remuneration paid for labor which is occasional,
incidental, or irregular but is in the course of the
employer's trade or business; and
• Remuneration paid for casual labor performed for
another corporation
3. Compensation for services by a citizen or resident of the
Philippines performed for a foreign government or
international organization. (Sec. 2.78.1 (B)(5) of RR No. 2-
98)
 Includes remuneration paid for services performed by
ambassadors, ministers, and other diplomatic officers and
employees;
  Includes remuneration paid for services performed as
consular or other employee of a foreign government or a
non-diplomatic representative of such government
 Damages (Sec. 2.78.1 (B)(6) of RR No. 2-98): Actual,
moral, exemplary and nominal damages received by an
employee or his heirs pursuant to a final judgment or
compromise agreement.
 Life Insurance (Sec. 2.78.1 (B)(7) of RR No. 2-98):
proceeds of life insurance policies paid to heirs or
beneficiaries upon death of the insured, whether single sum
or otherwise; Provided that interest payments agreed under
the policy for the amounts which are held by the insured
shall be included in gross income.
 Amount received by the insured as a return of premium.
(Sec. 2.78.1 (B)(8) of RR No. 2-98): the amount received
by the insured, as a return of premiums paid by him under
life insurance, endowment, or annuity contracts either
during the term or at the maturity of the term mentioned in
the contract or upon surrender.
 Compensation for injuries or sickness (Sec. 2.78.1 (B)(9)
of RR No. 2-98): Amounts received through Accident or
Health Insurance or under Workmen's Compensation Act,
as compensation for personal injuries or sickness. It
likewise includes the amount of any damages received
whether by suit or agreement on account of injuries or
sickness.
 Income exempt under treaty (Sec. 2.78.1 (B)(10) of RR
No. 2-98): income required by any treaty obligation binding
on the Government of the Philippines.
 Thirteenth (13th) month pay or other benefits (Sec.
2.78.1 (B)(11) of RR No. 2-98; RR No. 3-2015): 13th
month pay and other benefits such as Christmas bonus,
loyalty awards, gifts in cash or kind, and other benefits of
similar nature; Provided that the total amount shall not
exceed ₱90,000 (as amended by RR No. 11-18, previously
₱82,000).
 GSIS, SSS, Medicare and Other Contributions (Sec.
2.78.1 (B)(12) of RR No. 2-98): GSIS, SSS, Medicare, Pag-
ibig contributions and union dues of individual employees.
For purposes of computing taxable income subject to
Income Tax and Withholding Tax on Compensation, the
said contributions are deducted to arrive at taxable income.
However, for employees, the amount considered not taxable
shall only pertain to the maximum required by law. Any
amount in excess of the mandatory amounts, voluntarily
given as contribution by the employee, shall be taxable.
 Facilities and privileges of relatively small value or “de
minimis” benefits (Sec. 2.78 (A)(3)(c) of RR No. 2-98, as
amended by RR No. 10-2008, as further amended by RR
No.5-2011) are facilities or privileges furnished or offered
by an employer to his employees that are of relatively
small value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill,
contentment or efficiency of his employees, including:
De Minimis Benefits
De Minimis Benefits Maximum Value Per Year per
Employee
Monetized unused vacation Equivalent to 10 days VL
leave (VL) credits
Medical cash allowance to ₱3,000 (₱1,500 per employee per
dependents, per employee semester or ₱250 per month) (as
amended by RR No. 11-18)
Rice subsidy ₱24,000 (₱2,400 or 1 sack of 50kg
rice per month) (as amended by RR
No. 11-18)
Uniform and clothing ₱6,000 (as amended by RR No. 11-
allowance 18)
Actual medical ₱10,000
assistance/allowance
Laundry allowance ₱3,600 (₱300 per month)
Employees achievement ₱10,000 (Must be in the form of
awards tangible personal property other than
cash or gift certificate, received by
employees under an established
written plan which does not
discriminate in favor of highly paid
employees)
Gifts given during Christmas ₱5,000
and major anniversaries
Daily meal allowance for 25% of basic minimum pay on a per
overtime or night/graveyard region basis
work
10. Benefits received by an ₱10,000  
employee by virtue of a
collective bargaining
agreement (CBA) and
productivity incentive
schemes (RR No. 1-2015)
 Treatment: De Minimis benefits are considered non-taxable
and are not included in the computation of taxable income
and withholding tax on compensation, as well as fringe
benefits tax.
 Amounts in excess of the above-mentioned ceiling will
form part of OTHER BENEFITS, which is non-taxable
only up to P90,000 together with other benefits received by
the employee including 13th month pay and other bonuses,
etc. (BIR Ruling No. 030-2013)
ITEMS EXEMPT FROM WITHHODING TAX ON
COMPENSATION/FRINGE BENEFITS TAX
 COMPENSATION INCOME OF MINIMUM WAGE
EARNERS (MWES) who work in the private sector and
being paid the Statutory Minimum Wage (SMW) (Sec.
2.78.1 (B)(13) of RR No. 2-98, as amended).
 Coverage: No income tax and consequently, withholding of
tax, shall be required on: a. The SMW
 Holiday pay
 Overtime pay
 Night shift differential; and
 Hazard pay
COMPENSATION INCOME OF MINIMUM WAGE
EARNERS (MWES)
 Other Income earned by MWEs: Additional
compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory
amount to P90,000, taxable allowances and other taxable
income given to an MWE by the same employer other than
those which are expressly exempt above shall be subject to
income tax and consequently, withholding tax on
compensation.
 Likewise, MWEs receiving other income from other
sources in addition to compensation income, such as
income from other concurrent employers, from the conduct
of trade, business, or practice of profession except income
subject to final tax, are subject to income tax only to the
extent of income other than SMW, holiday pay, overtime
pay, night shift differential pay, and hazard pay earned
during the taxable year.
 The same shall still be not subject to income tax if it does
not exceed P250,000 (not considering those which are
exempt as enumerated above)
ILLUSTRATION: Mr. Brent Quito is employed by ABC
Corporation. He received the SMW for 2018 in the total amount of
₱100,000 and 13th month pay amounting to ₱75,000. In the same
year, he also received overtime pay of ₱40,000 and nightshift
differential of ₱25,000. He also received commission income from
the same employer of ₱20,000, thus, total income received
amounted to ₱260,000. How much is his income tax due, if any?
Total Income Received P260,000
Less: Income Exempt SMW P100,000
13th month pay (not exceeding P90,000) 75,000
Night shift differential 25,000
Overtime pay 40,000(240,000)
Taxable Income – Commission P 20,000
WITHHOLDING TAX SYSTEM
 Concept: the concept of a withholding tax on income
obviously and necessarily implies that the amount of the tax
withheld comes from the income earned by the taxpayer.
Since the amount of the tax withheld constitutes income
earned by the taxpayer, then that amount manifestly forms
part the taxpayer’s gross receipt. Because the amount
withheld belongs to the taxpayer, he can transfer its
ownership to the government in payment of his tax liability.
The amount withheld indubitably comes from income of the
taxpayer, and thus forms part of his gross receipts (China
Banking Corporation v. CA, 403 SCRA 634, 2003).
 A manner of collection: A withholding tax on income is not
a new kind of tax but simply a manner or system by which
income taxes may be collected when the income is paid or
received. It is in the nature of advance tax payment by a
taxpayer on the annual tax which may be due at the end of
the taxable year.
 Reason for the system: the withholding tax system was
devised for three primary reasons:
• To provide the taxpayer a convenient manner to
meet his probable income tax liability;
• To ensure the collection of income tax which can
otherwise be lost or substantially reduced through
failure to file the corresponding returns; and
• To improve the government’s cash flow.
 Kinds:
 Withholding tax at source (Secs. 34K, 57-59);
• Withholding tax on quarterly corporate income
(Secs 75-76);
• Withholding tax on quarterly individual income
(Secs 74);
 Withholding tax on employee’s compensation or wages
(Secs. 78-83);
 Withholding of value-added tax (Sec 114c); and 4.
Withholding of percentage tax (Secs 116-128).
 Withholding of Final Tax of Certain Income Payments:
The amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the
income tax due from the payee on the said income. The
liability for payment of the tax rests primarily on the payor
as a withholding agent. (see Final Tax Rates on Passive
Income)
 Withholding of Creditable Tax at Source: Taxes
withheld on certain income payments are intended to equal
or at least approximate the tax due from the payee on said
income. The income recipient is still required to file an
income tax return, as prescribed in Sec. 51 and 52 of the
Tax Code, to report the income and/or pay the difference
between the tax withheld and the tax due on the income.
This is otherwise known as Expanded Withholding Tax
(EWT) or the Creditable Withholding Tax (CWT)
FILING OF RETURNS FOR INDIVIDUALS
 A. INCOME TAX RETURN
 Annual Income Tax Return:
• BIR Form No. 1700 – for individuals earning
purely compensation income.
• BIR Form No. 1701 – for self-employed
individuals.
 The deadline for either is May 15 (previously April 15) of
the succeeding year.
 SUBSTITUTED FILING OF INCOME TAX RETURN:
under this rule, individual income taxpayers need not file
their own ITR, provided the following requisites are met:
• The individual is receiving purely compensation
income;
• The amount of income tax has been correctly
withheld by the employer;
• There is only one employer during the taxable
year.
 The substituted filing of income tax return rule is now
embodied under Sec. 52(A) of the Tax Code, as amended
by the TRAIN.
WHO ARE REQUIRED TO FILE AN INCOME TAX
RETURN:
• Individuals deriving compensation from two or
more employers concurrently or successively at
any time during the taxable year.
• Employees deriving compensation income,
regardless of the amount, whether from a single or
several employers during the calendar year, the
income tax of which has not been withheld
correctly.
• Individuals deriving income other than
compensation, such as business income or income
from the practice of profession. d. Individuals
whose spouse is required to file an ITR.
• Non-resident alien engaged in trade or business in
the Philippines.
 2. Quarterly Income Tax Return (BIR Form No. 1701Q) –
applicable only to individuals who earn business income or
income from the practice of profession, the deadline of
which is 60 days following the close of the quarter, except
for the first quarter return which should be filed on May 15
of the year.
CAPITAL GAINS TAX
1. Shares of stock – 30 days after each transaction using BIR
Form No. 1707; the consolidated return shall be filed on or
before April 15 of the following year.
2. Real Property – 30 days following each sale or other
disposition using BIR Form No. 1706.
 Real Property subject to regular income tax: If the sale
of real property is subject to regular income tax, the same
shall likewise be subject to CREDITABLE
WITHHOLDING TAX, and such withholding tax shall be
remitted on the 10th day following the month of transaction
using BIR Form No. 1606.
WITHHOLDING TAX RETURNS
 (Withholding tax on compensation, Final Withholding
Taxes, Expanded Withholding Taxes) – end of the month
following the close of the taxable quarter using the
following returns:
Tax Type BIR Return
Expanded (Creditable) Withholding BIR Form No. 1601EQ
 Tax
Final Withholding Tax on Interest on BIR Form No. 1602
Bank Deposits
Fringe Benefits Tax BIR Form No. 1603
All other Final Withholding Taxes BIR Form No. 1601FQ
 Withholding Tax Statement at Source: Every payor
required to deduct and withhold taxes under this subsection
shall furnish each payee, a withholding tax statement, in
triplicate, within twenty (20) days from the close of the
quarter.
 The prescribed form (BIR Form No, 2307 for creditable
withholding tax and BIR Form 2306 for final withholding
tax) shall be used, showing the monthly income payments
made, the quarterly total, and the amount of taxes withheld.
Provided, however, that upon request of the payee, the
payor must furnish such statement, simultaneously with the
income payment.
 D. MANNER OF FILING: the returns can be filed (1)
manually; (2) through electronic filing and payment system
(EFPS); or (3) through the use of eBIR Forms.
 In case of filing through the eFPS, the deadlines are
extended by 1 to 5 days depending on the industry
classification of the taxpayer.