BAC 102 INCOME TAXATION 2. Claims for tax exemption are construed against taxpayers.

LECTURE NO. 1 3. The government reserves the right to choose the objects of taxation.
INTRODUCTION TO TAXATION
Taxation may be defined as a State power, a legislative process, and a mode of
government cost contribution
 State Power – one of the inherent power of the State, alongside police
power and power of eminent domain, to enforcer a proportional
contribution from its subjects for public purposes.
 Process – taxation is a process of levying taxes by the legislature of the
State to enforce proportional contribution from its subjects for public
purpose. (NIRC, TRAIN Law, CREATE Law)
 Cost Distribution – taxation is a mode by which the State allocates its costs
or burden to its subjects who are benefits by its spending.
Theory of Taxation
 The government’s necessity for public funds.
Basis of Taxation
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
1. Income received in advance is taxable upon receipt.
2. Deduction for capital expenditures and prepayments is not
allowed as effectively defers the collection of income tax.
3. A lower amount of deduction is preferred when a claimable
expense subject to limit.
4. A higher tax base is preferred when the tax object has multiple tax
bases.
Inherent Powers of the State
 Taxation Power – is the power of the State to enforce proportional
contribution from its subjects to sustain itself.
 Police Power – is the general power to the State to enact laws to protect
the well-being of the people.
 Eminent Domain – is the power of the State to take private property for
public use after paying just compensation.

 The mutuality support between the people and the government. Comparison of the three powers of the State 
 Government provides public services and in return the people will give Point of Taxation Police Power Eminent Domain
taxes to support the government. Difference
 Receipts of benefits is conclusively presumed. Exercising Government Government Government and
Theories of Cost Allocation Authority private utilities
Purpose For the support of To protect the For public use
a. Benefit Received Theory – The more benefit one receives from the
the government general welfare of
government, the more taxes he should pay.
the people
b. Ability to Pay Theory – Taxpayers should be required to contribute based
Person Community or Community or Owner of the
on their relative capacity to sacrifice for the support of the government.
affected class of individuals class of property
1. Vertical Equity – one’s ability to pay is directly proportional to the level
individuals
of his tax base.
Amount of Unlimited (Tax is Limited No amount
2. Horizontal Equity – consideration of the particular circumstances of
Imposition based on (Imposition is imposed. (The
the taxpayer.
government limited to cover government pay just
The Lifeblood Doctrine needs) cost of regulation) compensation)
Importance Most important Most superior Important
 Taxes are essential and indispensable to the continued subsistence of the Relationship Inferior to the Superior to the Superior to the
government. Without taxes, the government would be paralyzed for lack with the "Non-impairment "Non-impairment "Non-impairment
of motive power to activate or operate it. Constitution clause" of the clause" of the clause" of the
Implication of the lifeblood doctrine in taxation: Constitution Constitution Constitution
Limitation Constitutional and Public interest Public purpose and
1. Tax is imposed even in the absence of a Constitutional grant. inherent and due process just compensation
 limitations 2. Assessment and Collection – implemented by the administrative branch of
the government. Implementation involves assessment or the
Scope of the Taxation Power determination of the tax liabilities of taxpayers and collections.

 Widely regarded as comprehensive, plenary, unlimited and supreme. Situs of Taxation

 Situs is the place of taxation

The Limitations of the Taxation Power Sample of Situs Rules

A. Inherent Limitation of Taxation 1. Business Tax Situs – Businesses are subject to tax in the place where the
business is conducted.
1. Territoriality of Taxation 2. Income Tax Situs on Services – Service fees are subject to tax where they
2. International Comity are rendered.
3. Public Purpose 3. Income Tax Situs on Sale of Goods – The gain on sale is subject to tax in the
4. Exemption of the Government place of sale.
5. Non-delegation of the taxing power 4. Property Tax Situs – Properties are taxable in their location.
5. Personal Tax Situs – Persons are taxable in their place of residence.
B. Constitutional Limitations 
Other Fundamental Doctrines in Taxation
1. Due process of law
2. Equal protection of the law 1. Marshall Doctrine – The power to tax involves the power to destroy.
3. Uniformity rule in taxation 2. Holme’s Doctrine – Taxation power is not the power to destroy while the
4. Progressive system of taxation court sits.
5. Non-imprisonment for non-payment of debt or poll tax 3. Prospectivity of Tax Laws – Tax laws are generally prospective in operation.
6. Non-impairment of obligation and contract An ex post facto law or a law that retroacts is prohibited by the
7. Free worship rule Constitution.
8. Exemption of religious or charitable entities, non-profit cemetery churches 4. Non-Compensation or Set-Off – Taxes are not subject to automatic set-off
and mosque from property taxes or compensation.
9. Non-appropriation of public funds or property for the benefit of church, 5. Non-Assignment of Taxes – Tax obligations cannot be assigned or
sect or system of religion transferred to another entity by contract. Contracts executed by the
10. Exemption from taxes of the revenues and assets of non-profits, non-stock taxpayer to such effect shall not prejudice the right of the government to
educational institutions collect.
11. Concurrence of a majority of all members of Congress for the passage of al 6. Imprescriptibility in Taxation – When one sleep on his right over an
law granting tax exemption. unreasonable period of time, he is presumed to be waiving his right. The
12. Non-diversification of tax collections government’s right to collect taxes does not prescribed unless the law
13. Non-delegation of the power of taxation itself provides for such prescription.
14. Non-impairment of the jurisdiction of the Supreme Court to review tax 7. Doctrince of Estoppel – Any misrepresentation made by one party toward
cases. another who relied therein in good faith will be held true and binding
15. The requirement that appropriations, revenue, or tariff bills shall originate against that person who made the misrepresentation.
exclusively in the House of Representatives. 8. Judicial Non-Interference – Generally, courts are not allowed to issue
16. The delegation of taxing power to local government units. injunction against the government’s pursuit to collect tax as this would
unnecessarily defer tax collections.
Stages of the Exercise of Taxation Power 9. Strict Construction of Tax Laws – When the law clearly provides for
1. Levy or imposition – involves the enactment of a tax law by Congress taxatioin, taxation is the general rule unless there is a clear exemption.
Hence the maxim,” Taxation is the rule, exemption is the exception”.
Double Taxation ii. Backward Shifting
iii. Onward Shifting
 It occurs when the same taxpayer is taxed twice by the same tax b. Capitalization – this pertains to the adjustment of the value of an
jurisdiction for the same thing. asset caused by changes in tax rates.
Elements of Double Taxation c. Transformation – this pertains to the elimination of wastes of
losses by the taxpayer to form savings to compensate for the tax
1. Primary Element: Same Object imposition or increase in taxes.
2. Secondary Elements:
1. Same type of tax Tax Amnesty
2. Same purpose of tax  Amnesty is a general pardon granted by the governmentfor erring
3. Same taxing jurisdiction taxpayers to give them a chance to reform and enable them to have a
4. Same tax period fresh start to be part of a society with a clean slate. It is an asolute
Types of Double Taxation forgiveness or waiver by the government on its right to collect and is
retrospective in application.
1. Direct double taxation – all element of double taxation exists for both
impositions. Tax Condonation
2. Indirect double taxation – when at least one of the secondary elements of  Tax codonation is forgiveness of tax obligation of a certain taxpayer under
double taxation is not common for both impositions. certain justifiable grounds. This is also referred to as tax remission.
How can double taxation be minimized?  Because they deprive the government of revenues, tax exemption, tax
refund, tax amnesty, and tax condonation are construed against the
1. Provision of tax exemptions taxpayer and in favor of the government.
2. Allowing foreign tax credit
3. Allowing reciprocal tax treatment Tax Amnesty vs Tax Condonation
4. Entering into treaties or bilateral agreements
 Amnesty covers both civil and criminal liabilities, but condonation covers
Escapes from Taxation only civil liabilities of the taxpayer.
 Amnesty operates retrospectively by forgiving past violations. Condonation
 These are the means available to the taxpayer to limit or even avoid the applies prospectively to any unpaid balance of the tax; hence, the portion
impact of taxation. already paid by the taxpayer will not be refunded.
 Amnesty is also conditional upon the taxpayer paying the government a
Categories of Escapes from Taxation
portion of the tax whereas condonation requires no payment.
A. Those that result to loss of government revenue
a. Tax Evasion – refer to any act or trick that tends to illegally reduce
or avoid the payment of tax.
b. Tax Avoidance – refer to any act or trick that reduces or totally
escapes taxes by any legally permissible means.
c. Tax Exemption – refer to the immunity, privilege or freedom from
being a subject to a tax which others are subject to. It may be
granted by the Constitution, law, or contract.
B. Those that do not result to loss of government revenue
a. Shifting – this is the process of transferring tax burden to other
taxpayers
i. Forward Shifting
 BAC 102 INCOME TAXATION Types of Rulings
LECTURE NO. 2
TAXES, TAX LAWS, AND TAX ADMINISTRATION 1. Value Added Tax (VAT) Rulings
2. International Tax Affairs Divisions (ITAD) Rulings
TAXATION LAW 3. BIR Rulings
4. Delegated Authority (DA) Rulings
- It refers to any law that arises from the exercise of the taxation
power of the State.
Types of Taxation Laws GAAP vs. Tax Laws

1. Tax Laws  GAAP are not laws, but are mere conventions of financial
 These are laws that provides for the assessment and collection reporting. GAAP accounting reports are intended to meet the
of taxes. common needs of a vast number of users in the general public.
 Examples: NIRC, The Tariff and Customs Code, The Local Tax  Tax laws including rules, regulations, and rulings prescribe the
Code, The Real Property Tax  criteria for tax reporting, a special form of financial reporting
2. Tax Exemption Laws which is intended to meet specific needs of tax authorities.
 These are laws that grant certain immunity from taxation.  In case of conflict between tax laws and GAAP, tax laws will
 Examples: The Minimum Wage Law, The Omnibus Investment prevail.
Code of 1987, Barangay Micro-Business Enterprise (BMBE) Law,
NATURE OF PHILIPPINE TAX LAWS
Cooperative Development Act
 Philippines tax laws are civil and not political in nature.
Sources of Taxation Laws
 Our internal revenue laws are not penal in nature because they
1. Constitution do not define crime.
2. Statutes and Presidential Decrees
TAX
3. Judicial Decisions or Case Laws
4. Executive Orders and Batas Pambansa  Tax is an enforced proportional contribution levied by the
5. Administrative Issuances lawmaking body of the State to raise revenue for public
6. Local Ordinances purposes.
7. Tax Treaties and Conventions with foreign countries
8. Revenue Regulations Elements of a Valid Tax

Types of Administrative Issuances 1. Tax must be levied by the taxing power having jurisdiction over the
object of taxation.
1. Revenue Regulations 2. Tax must not violate Constitutional and inherent limitations.
2. Revenue Memorandum Orders 3. Tax must be uniform and equitable.
3. Revenue Memorandum Rulings 4. Tax must be for public purpose.
4. Revenue Memorandum Circulars 5. Tax must be proportional in character.
5. Revenue Bulletins 6. Tax is general payable in money.
6. BIR Rulings

Classification of Taxes
A. As to purpose
1. Fiscal or Revenue Tax – a tax imposed for general purpose
2. Regulatory – a tax imposed to regulate business, conduct, acts
or transactions
3. Sumptuary – a tax levied to achieve some social or economic
objectives
B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents
of a particular territory
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the performance of
an act, enjoyment or a privilege or engagement in an
occupation
C. As to incidence
1. Direct tax – when both the impact and incidence of taxation rest
upon same taxpayer.
2. Indirect tax – when the tax is paid by any person other than the
one who is intended to pay the same
D. As to amount
1. Specific tax – a tax of a fixed amount imposed on a per unit
basis such as per kilo, liter or meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the
value of the tax object.
E. As to rate
1. Proportional tax – this is a flat or fixed rate tax
2. Progressive or graduated tax – this is a tax which imposes
increasing rates as the tax base increase
3. Regressive tax – this tax imposes decreasing tax rates as the tax
base increase
4. Mixed Tax – this tax manifest tax rates which is a combination
of any of the above types of tax.
F. As to Imposing Authority
1. National Tax – tax imposed by the national government
1. Income Tax – tax on annual income, gains or profits
2. Estate Tax – tax on gratuitous transfer of properties by a
decedent upon death
3. Donor’s Tax – tax on gratuitous transfer of properties by
a living donor
4. Value Added Tax – consumption tax collected by VAT
business taxpayers
5. Other Percentage Tax – consumption tax collected by
non-VAT business taxpayers
6. Excise Tax – tax on sin products and non-essential
commodities such as alcohol, cigarettes and metallic
minerals. This should be differentiated with the
privilege tax which is also called excise tax.
7. Documentary Stamp Tax – a tax on documents,
instruments, loan agreement, and papers evidencing
the acceptance, assignment, sale or transfer of an
obligation, right or property incident thereto
2. Local Tax
1. Real Property Tax
2. Professional Tax
3. Business Taxes, Fees, and Charges
4. Community Tax
5. Tax on Banks and Other Financial Institutions
DISTINCTION OF TAXES WITH SIMILAR ITEMS
Tax vs Revenue
 Tax refers to the amount imposed by the government for public
purposes while revenue refers to all income collections of the
government which includes taxes, tariff, licenses, toll, penalties
and others.
Tax vs. License Fee 
 Tax emanates from taxation power and is imposed upon any
object such as persons, properties or privileges to raise revenue
while license fee emanates from police power and is imposed to
regulate the exercise of a privilege such as the commencement
of a business or a profession.
Tax vs. Toll
  Tax is a levy of government; hence, it is a demand of A. Withholding System on Income Tax
sovereignty while toll is a charge for the use of other’s property; 1. Creditable Withholding Tax
hence, it is a demand of ownership. 1. Withholding Tax on Compensation
2. Expanded Withholding Tax
2. Final Withholding Tax
Tax vs. Debt B. Withholding System on Business Tax
C. Voluntary Compliance System
 Tax arises from law while debt arises from private contracts. D. Assessment or enforcement System
Tax vs Special Assessment PRINCIPLE OF A SOUND SYSTEM
 Tax is an amount imposed upon persons, properties or  According to Adam Smith, governments should adhere to the
privileges while Special Assessment is levied by the government following principles or canons to evolve a sound tax system:
on lands adjacent to a public improvement. o Fiscal Adequacy – requires that the sources of
Tax vs Tariff government funds must be sufficient to cover
government costs.
 Tax is an amount imposed upon persons, privilege, transactions, o Theoretical Justice – suggests that taxation should
or properties while tariff is the amount imposed on imported or consider the taxpayer’s ability to pay. Exercise of
exported commodities. taxation should not be oppressive, unjust or
confiscatory.
Tax vs Penalty
o Administrative Feasibility – suggests that tax laws
 Tax is an amount imposed for the support of the government should be capable of efficient and effective
while penalty is an amount imposed to discourage an act. administration to encourage compliance.

TAX SYSTEM TAX ADMINISTRATION

 It refers to the methods or schemes of imposing, assessing and  Refers to the management of the tax system. In the Philippines,
collecting taxes. BIR is entrusted for the tax administration. BIR is under the
supervision and administration of the Department of Finance.
Types of Tax Systems
POWER OF BUREAU OF INTERNAL REVENUE – a matter of reading
A. According to Imposition
1. Progressive – employed in the taxation of income of individuals, POWER OF COMMISSIONER OF INTERNAL REVENUE – a matter of reading
and certain local business taxes
OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES
2. Proportional – employed in taxation of corporate income and
RELATED FUNCTIONS
business
3. Regressive – not employed in the Philippines  1. Bureau of Customs (BOC)
B. According to Impact 2. Board of Investments (BOI)
1. Progressive System – is one that emphasized direct taxes 3. Philippine Economic Zone Authority (PEZA)
2. Regressive System – is one that emphasized indirect taxes. 4. Local Government Tax Collecting Unit
5. Fiscal Incentives Review Board
TAX COLLECTION SYSTEMS
TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION – a
matter of reading

   “THE END”  The return on capital that increases net worth is income subject to income
tax.
 The return of capital merely maintains net worth; hence, it is not taxable.
BAC 102 INCOME TAXATION  An improvement in net worth indicates an ability to pay tax.
LECTURE NO. 3
Capital items deemed with infinite value
INTRODUCTION TO INCOME TAXATION
1. Life
THE CONCEPT OF INCOME 2. Health
3. Human Reputation
Why is income subject to tax?
 Anything received as compensation for their loss is deemed a return of
 Income is regarded as the best measure of taxpayer’s ability to pay tax. It is capital.
an excellent object of taxation in the allocation of government costs.
Life
What is income for taxation purposes?
 The value of life is immeasurable by money. Generally, proceeds from life
 The tax concept of income is simply referred to as “gross income” under are exempted from income tax. 
the NIRC.
Health
 A taxable item of income is referred to as an “item of gross income” or
“inclusion in gross income”.  Any compensation received in consideration for the loss of health such as
 Under NIRC, “taxable income” refers to certain items of gross income less compensation for personal injuries or tortuous acts is deemed a return of
deductions and personal exemptions allowable by law. capital.
 Gross income is broadly defined as any inflow of wealth to the taxpayer
from whatever source, legal or illegal, that increases net worth. Human Reputation

ELEMENTS OF GROSS INCOME  The value of one’s reputation cannot be measured financially. Any
indemnity received as compensation for its impairment is deemed a return
1. It is a return on capital that increases net worth. of capital exempt from income tax.
2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty. Recovery of lost capital vs. Recovery of lost profits.

RETURN ON CAPITAL  The loss of capital results in decrease in net worth while the loss of profits
does not decrease net worth.
 Capital means any wealth or property. Gross income is a return on wealth  The recovery of lost capital merely maintains net worth while the recovery
or property that increases the taxpayer’s net worth. of lost profits increases net worth. The recovery of lost profits is a return
on capital.
Illustration
Examples of taxable recoveries of lost profits:
ABC purchased good for 300 and sold them for 500. The 500 consideration can be
analyzed as follows: 1. Proceeds of crop of livestock insurance
2. Guarantee payments
3. Indemnity received from patent infringement suit
REALIZED BENEFIT a. Increase in value investments in equity or debt securities
b. Increase in value of real properties held (revaluation increment)
 Benefits means any form of advantage derived by the taxpayer. c. Increase in value of foreign currencies held or receivable
 An increase occurs when one received income, donation or inheritance. d. Decrease in value of foreign currency denominated debt by virtue
 Receipt of loan, discovery of lost properties and receipt of money or of favorable fluctuation in exchange rates
property to be held in trust are not benefits. But, if the taxpayers is e. Birth of animal offspring, accruals of fruits in an orchard or growth
entitled to keep for his account portion of a receipt, only that portion is a of farm vegetables
benefit. f. Increase in value of land due to the discovery of mineral reserves.

The Realized Concept
 The term realized means earned. It requires that there is a degree of
undertaking or sacrifice from the taxpayer to be entitles of the benefit.
Requisites of a Realized Benefits
Rendering of services
The rendering of services for a consideration is an exchange but does not cause a
loss of capital. Hence, the entire consideration received from rendering of services
such as compensation income or service fees is an item of gross income.
Illustration

1. There must be an exchange transaction

2. The transaction involves another entity
3. It increases the net worth of the recipient.

Types of Transfers

1. Bilateral transfers or exchanges (onerous transactions), such as:

1. Sale
2. Barter
2. Unilateral transfers (gratuitous transactions), such as:
1. Succession – transfer of property upon death
2. Donation
3. Complex transactions – are partly gratuitous and party onerous.
Mode of Receipt/Realization Benefit
What is meant by another entity?
 Taxable items of income may be realized by the taxpayer in two ways:
 Every person, natural or judicial, is an entity.  1. Actual receipt – it involves actual physical taking of the income in the
 A taxable items of gross income arises from transactions which involve form of cash or property
another natural or juridical entity. 2. Constructive receipt – it involves no actual physical taking of the
income but the taxpayer is effectively benefited. 
Benefits in the absence of transfers  Inflow of wealth to a person that does not increase his net worth is not
income due to the total absence of benefit.
 The increase in wealth of the taxpayer in the form of appreciation or
increase in the value of his properties or decrease in the value of his NOT EXEMPTED BY LAW, CONTRACT OR TREATY
obligations in the absence of a sale or barter transaction is not taxable.
These are referred to as unrealized gains or holding gains because they  An item of gross income is not exempted by the Constitution, law,
have not yet materialized in an exchange transaction. contracts or treaties from taxation.
 The following items of income are exempted by law from taxation; hence,
Examples of unrealized gains or holding gains: they are not considered items of gross income:
1. Income of qualified employee trust fund
 2. Revenues of non-profit, non-stock educational institutions 1. A citizen of the Philippines who establishes to the satisfaction of
3. SSS, GSIS, Pag-IBIG, or PhilHealth benefits the Commissioner the fact of his physical presence abroad with a
4. Salaries and wages of minimum wage earners and qualified senior definite intention to reside therein;
citizen 2. A citizen of the Philippines who leaves the Philippines during the
5. Regular income of Barangay Micro-Business Enterprises (BMBEs) taxable year to reside abroad, either as an immigrant or for an
6. Income of foreign governments and foreign government-owned and employment on a permanent basis;
controlled corporations 3. A citizen of the Philippines who works and derives income from
7. Income of international missions and organizations with income tax abroad and whose employment thereat requires him to be
immunity. physically present abroad most of the time during the taxable
year;
TYPES OF INCOME TAXPAYERS 4. A citizen who has been previously considered as non-resident
A. Individuals citizen and who arrives in the Philippines at any time during the
1. Citizen taxable year to reside permanently in the Philippines shall likewise
1. Resident Citizen be treated as a non-resident citizen for the taxable year in which
2. Non-Resident Citizen he arrives in the Philippines with respect to his income derived
2. Alien from sources abroad until the date of his arrival in the Philippines.
1. Resident Alien Aliens
2. Non-Resident Alien
1. Engaged in trade or business 1. Resident alien – an individual who is residing in the Philippines but is  not a
2. Not engaged in trade or business citizen thereof, such as:
3. Taxable Estates and Trusts 1. An alien who lives in the Philippines without definite intention as
B. Corporations to his stay; or
1. Domestic Corporation 2. One who comes to the Philippines for a definite purpose which in
2. Foreign Corporation its nature would require and extended stay and to that end makes
1. Resident Foreign Corporation his home temporarily in the Philippines, although it may be his
2. Non-Resident Foreign Corporation intention at all times to return to his domicile abroad.
2. Non-resident alien – an individual who is not residing in the Philippines and
INDIVIDUAL INCOME TAXPAYERS who is not a citizen thereof
Citizens 1. Non-resident aliens engaged in business (NRA-ETB) – aliens who
stayed in the Philippines for an aggregate period of more than 180
 Under the Constitution, citizens are: days during the year.
a. Those who are citizens of the Philippines at the time of adoption 2. Non-resident aliens not engaged in business (NRA-NETB) –
of the Constitution on February 2, 1987 include:
b. Those whose fathers or mothers are citizen of the Philippines 1. Aliens who come to the Philippines for a definite purpose
c. Those born before January 17, 1973 of Filipino mothers who which in its nature may be promptly accomplished;
elected Filipino citizenship upon reaching the age of majority 2. Aliens who shall come to the Philippines and stay therein
d. Those who are naturalized in accordance with the law for an aggregate period of not more than 180 days
during the year
Classification of Citizens:
Illustration 1
1. Resident Citizen – a Filipino citizen residing in the Philippines
2. Non-resident citizen – it includes: Daniel Mario Aresmendi, a Mexican actor, was contracted by a Philippine television
company to do a project in the Philippines. He arrived in the country on February
29, 2021 and returned to Mexico three weeks later upon completion of the project.
Illustration 2 4. Co-ownership – it is a joint ownership of a property formed for the
purpose of preserving the same and/or dividing its income.
Mamoud Jibril, a Libyan national, arrived in the country on November 4, 2021. Mr.
Jibril stayed in the Philippines since then without any working visa or work permit.

Illustration 3

Without any definite intention as to the nature of his stay, Juan Miguel, a Filipino
citizen, left the Philippines and stayed abroad from March 15 2020 to April 1, 2021
before returning to the Philippines. THE GENERAL RULES IN INCOME TAXATION

Taxable Estates and Trusts

 Estate refers to the properties, rights and obligations of a deceased person

not extinguished by his death.
 Trust is an arrangement whereby one person (grantor or trustor) transfers
(donates) property to another person (beneficiary), which will be held
under the management of a third party (trustee or fiduciary).

CORPORATE INCOME TAXPAYERS

 Domestic Corporation is a corporation that is organized in accordance with

Philippine laws. It includes one-person corporations (OPC) owned and
registered by resident citizens in the Philippines.
 Foreign Corporation is one organized under the foreign law
The Residency and Citizenship Rules
Types of Foreign Corporations:
 Taxpayers who are residents and citizen of the Philippines are taxable on
1. Resident Foreign Corporations (RFC) – a foreign corporation which operates all income from sources within and without the Philippines. A corporation
and conducts business in the Philippines through a permanent is a citizen of the country of incorporation. Thuz, a domestic corporation is
establishment. a citizen of the Philippines.
2. Non-Resident Foreign Corporation (NRFC) – a foreign corporation which does
not operate or conduct business in the Philippines. SITUS OF INCOME

 The situs of income is the place of taxation of income. It is the jurisdiction

that has the authority to impose tax upon the income.
 Special Corporations are domestic or foreign corporations which are
subject to special tax rules or preferential tax rates. INCOME SITUS RULES

OTHER CORPORATE TAXPAYERS

1. One-Person Corporation – it is a corporation with a single stockholder who

may be a natural person, trust or an estate
2. Partnership – it is a business organization owned by two or more persons
who contribute their industry or resources to a common fund for the
purpose of dividing the profits from the venture.
3. Joint Venture – it is a business undertaking for a particular purpose. It may “THE END”
be organized as a partnership or a corporation.
 BAC 102 INCOME TAXATION CAPITAL GAINS TAXATION
LECTURE NO. 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND  Capital gains tax is imposed on the gain realized on the sale, exchange and
REPORTING other disposition of certain capital assets.
 Capital assets are assets not used in business, trade or profession.
INCOME TAXATION SCHEMES  Ordinary assets are assets used in business, trade or profession such as
inventory, supplies or property, plant and equipment.
 There are three (3) income taxation schemes under the NIRC:  Not all capital assets are subject to capital gains tax
a. Final Income Taxation  Capital assets which are subject to capital gains tax:
b. Capital Gains Taxation o Domestic Stocks
c. Regular Income Taxation o Real Property
 The tax schemes are mutually exclusive. This is an exclusive list
CLASSIFICATION OF ITEMS OF GROSS INCOME REGULAR INCOME TAXATION
 Because of the difference tax schemes, items of gross income can be  The regular income tax is the general rule in income taxation and covers all
classified as follows: other income such as:
1. Gross income subject to final tax 1. Active income
2. Gross income subject to capital gains tax 2. Other income
3. Gross income subject to regular tax 1. Gains from dealings in properties, not subject to capital gains
tax
FINAL INCOME TAXATION
2. Other passive income not subject to final tax
 Final income taxation is characterized by final taxes wherein full taxes are  Gross income from these sources are valued or measured using an
withheld by the income payor at source. accounting method, accumulated over an accounting period, and reported
 Final withholding tax system is where the recipient income taxpayer does to the government through an income tax return.
not need to file income tax return because the payor is the one required by
ACCOUNTING PERIOD
law to remit the tax to the government.
 Final taxation is applicable only to certain passive income (Ex. Interest  It is the length of time over which income is measured and reported
income) listed by the law. Not all items of passive income are subject to  Types of Accounting Period
final tax. 1. Regular accounting period – 12 months in length
 Passive incomes are earned with very minimal or even without active 1. Calendar – available to individual and corporation
involvement of the taxpayer in the earning proves. Examples of passive 2. Fiscal – available only to corporation
income: 2. Short accounting period – less than 12 months
o Interest income from the banks  Deadline of filing the income tax return is due on the fifteenth day of the
o Dividends from domestic corporations fourth month following the close of the taxable year of the taxpayer.
o Royalties
 Active or regular income arises from transactions requiring a considerable INSTANCES OF SHORT ACCOUNTING PERIOD
degree of effort or undertaking from the taxpayer. It is direct opposite of 1. Newly commenced business
passive income. Examples of active income: 2. Dissolution of business
o Compensation income 3. Change of accounting period by corporate taxpayers
o Business income 4. Death of the taxpayer
o Professional income 5. Termination of the accounting period of the taxpayer by the
Commissioner of Internal Revenue
ACCOUNTING METHODS Tax Cash Basis

 These are techniques used to measure income

 Types of accounting methods:
1. The general methods
1. Accrual basis
2. Cash basis
2. Installment and deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis

Hybrid Basis
 Accrual and cash basis is similar to financial accounting concept except:
o Advanced income is taxable upon receipt  It is any combination of accrual basis, cash basis, and/or other methods of
o Prepaid expense is non-deductible accounting.
o Special tax accounting requirement must be followed  It is used when the taxpayer has several business which employ different
accounting methods.
Illustration
Installment Method

 Gross income is recognized and reported in proportion to the collection

from the installment sales
 Installment method is available to the following taxpayers
1. Dealers of personal property on the sale of properties they regularly
sell
2. Dealers of real properties, only if their initial payment does not exceed
25% of the selling price
3. Casual sales of non-dealer in property, real or personal, when their
Tax Accrual Basis selling price exceeds 1,000 and their initial payment does not exceed
25% of the selling price
 Initial payment means total payment by the buyer, in cash or property, in
the taxable year the sale was made.
 Selling price means the entire amount for which the buyer is obligated to
the seller. It is a combination of cash, receivable, fair value of property
received/receivable, or any mortgage assumed by the buyer
 Contract price is the amount receivable in cash or other property from the
buyer

Illustration

Malaybay Company, a car dealer, sold a machine with a tax basis of 1,200,000 on
installment on January 3, 2021. Malaybay received a 200,000 cash down payment
and a 1,800,000 promissory note for the balance payable in six installments of
300,000 every July 3 and January 3 thereafter.

The selling price and gross profit on the sale is computed as follows:

The Percentage of Completion Method for Construction Contracts

 Estimated gross income from construction is reported based on the

percentage of completion of construction project
 Output method based on engineering survey is prescribed by the NIRC

Illustrations

In 2021, Cagayan De Oro Construction Company accepted a 5,000,000 fixed-price

construction contract. The following shows the details of its construction activities:
To get the gross income to be recognized:

(Collection/Contract Price) x Gross Profit = Gross Profit to be recognized for the   2021   2022
taxable year Construction expenses 3,000,000   1,200,000
Engineer's estimate of completion 70%   100%
Deferred Payment Method

 It is a variant of the accrual basis and is used in reporting income when a The reportable gross income on construction will simply be computed as follows:
non-interest bearing note is received as a consideration in a sale
 Gross income is computed based on the present value (discounted value)
of a note receivable from the contract. The discount interest on the note is
amortized as interest income over the installment term.

Illustration

On December 31, 2021, a taxpayer sold an office building costing 1,400,000 for
2,000,000. The buyer made 1,000,000 down payment and the balance, evidenced
by a note, is due in 2 annual installments of 500,000 every December 31 starting
December 31, 2022

Assume the note is non-interest bearing but can be discounted at a local bank for
900,000. Under the deferred payment method, the reportable gross income for
each year shall be:
Income from Leasehold Improvement  Same as accounting for accrual basis or cash basis

 These are tangible improvements made by the lessee to the property of

the lessor.
 Improvement will benefit the lessor when their useful life extends beyond
the lease term. This benefit is referred as income from leasehold
improvement.
 Leasehold improvement can be reported using the following method:
1. Outright Method – the lessor may report as income the FMV of such
building or improvements subject to the lease at the time when such
buildings or improvements are completed
2. Spread-Out Method – the lessor may spread over the life of the lease
the estimated depreciated value of such buildings or improvements at
the termination of the lease and report as income for each year of the
lease an aliquot part thereof.
Crop Year Basis
 Farming income is recognized as the difference between the proceeds of
harvest and expenses of the particular crop harvested.
 The expenses of each crop are accumulated and deducted upon the
harvest of the crop.
Illustration
John de la Cruz, a farmer, plants a certain crop that takes more than a year to
harvest. Juan had the following data on his farming operations:

The depreciated value of the leasehold improvement is computed as

The reportable farming income using crop year method would be:
Illustration

On January 1, 2021, Ivan leased a vacant lot to Greg under a 20-year lease contract.
Greg immediately constructed a building on the lot at a total cost of 4,500,000. The
building has useful life of 30 years.

Outright method

The 4,500,000 fair value of the improvement shall be recognized as gross income
upon completion of the improvement in 2021.

Spread-out method
TAX REPORTING
The depreciated value of the property at the termination of the lease is the value of
the years of usage of the lessor.  
Types of returns to the government:
1. Income tax returns – provide details of the taxpayer’s income,
expense, tax due, tax credit and tax still due to the government.
2. Withholding tax returns – provide reports of income payments
subjected to withholding tax by the taxpayer-withholding agent
3. Information returns – these do not involve any payment or
withholding of tax but are essential to the government in its tax
mapping efforts and in its evaluation of tax compliance.

1,500,000 / 20 years = 75,000 annual income to be recognized

Agricultural or Farming Income

MODE OF FILING INCOME TAX RETURNS BASIC COMPARISON OF FILING AND PAYMENT SYSTEMS

1. Manual Filing System

The traditional manual system of filing income tax return is by paper

documents where taxpayers fill up BIR forms to report income, expenses,
or any declaration required to be filed with the BIR.
PENALTIES FOR LATE FILING OR PAYMENT OF TAX

 The late filing and payment of taxes is subject to the following additional
2. E-BIR Forms charges:
1. Surcharges
Taxpayers fill up their income tax returns in electronic spreadsheets 1. 25% of the basic tax for failure to file or pay deficiency tax on time
without the need of writing on papers returns. 2. 50% for willful neglect to file and pay taxes
2. Interest – Double of the legal interest rate for loans or forbearance of
any money in the absences of any express stipulation. 
3. Electronic Filing and Payment System (eFPS) 1. January 1, 2018 onwards – 6% legal interest, so penalty is 12%
since it is double of the legal interest
The eFPS is a paperless tax filing system developed and maintained by the 2. December 31, 2017 and later – interest is 20% per annum
BIR. Taxpayers file tax returns including attachments in electronic format
and pay the tax through the Internet. Interest period shall be computed based on actual days divided by
365 days. The additional day in February during a leap year will be
 Taxpayers mandated to use the eFPS counted.
a. Large taxpayers duly notified by the BIR
b. Top 20,000 private corporations duly notified by the BIR
c. Top 5,000 individual taxpayers duly notified by the BIR “THE END”
d. Taxpayers who wish to enter into contracts with government
offices
e. Corporations with paid-up capital of 10,000,000
f. Government offices, in so far as remittance of withheld VAT
and business tax are concerned
g. Taxpayers included in the Taxpayer Account Management
Program (TAMP)
h. Accredited importers, including prospective importes
required to secure the Importers Clearance Certificate (ICC)
and Custom brokers Clearance Certificate (BCC)
 In case of unavailability of the eFPS during maintenance or instances of
technical errors, eFPS enrolled taxpayers may file manually.

PAYMENT OF INCOME TAXES

 The general rule is “pay as you file”

 The CGT and regular income tax are paid as the taxpayer files his return
 Installment payment of income tax is allowed on certain conditions.
 Taxpayers under eFPS shall e-pay their tax online through internet banking
services
 BAC 102 INCOME TAXATION
LECTURE NO. 5
FINAL INCOME TAXATION
PASSIVE INCOME SUBJECT TO FINAL TAX
FEATURES OF FINAL INCOME TAXATION 1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
1. Final tax
3. Dividend income from a Real Estate Investment Trust
2. Tax withholding at source
4. Share in the net income of a business partnership, taxable associations,
3. Territorial imposition
joint ventures, joint accounts, or co-ownership
4. Imposed on certain passive income and persons not engaged in business in
5. Royalties, in general
the Philippines
6. Prizes exceeding 10,000
The Final Withholding System 7. Winnings
8. Informer’s tax reward
 The final withholding system imposes upon the person making income 9. Interest income on tax-free corporate covenant bonds
payment (ex. The bank as to the interest earned) the responsibility to
withhold the tax. INTEREST INCOME OR YIELD
 The taxpayer receives the income net of tax and there would be no need
 Interest income or yield from local currency bank deposits, deposit
for him to file an income tax return to report the same.
substitutes, trust funds and similar arrangement are subject to final tax as
 The final withholding system is inherently territorial. It applies only to
follows:
certain passive income earned from sources within the Philippines.
Local currency deposits
Rationale of Final Income Taxation

 The final withholding tax is built upon taxpayer and government

convenience. 
 Under the NIRC, final income tax is imposed on certain passive income and
upon non-resident persons not engaged in business in the Philippines.

Passive Income

 Items of passive income are earned with very minimal involvement from
the taxpayer and are general irregular in timing and amount.

Non-Resident Persons Not Engaged in Business in the Philippines

Note:
 Non-resident person not engaged in trade or business in the Philippines,
such as NRA-NETBs and NRFCs, have high risk of non-compliance. 1. Per Section 3 of RR 14-2012 and reiterated under RMC 7 -2015
 The Philippine government cannot impose upon them the obligation to file 2. The final tax on deposit applies only to those made with banks.
return due to territorial consideration. 3. NRA-NETBs and NRFCs are subject to the 25% general final tax on their
interest income.
 The law subjects them to final income tax wherein Philippines residents
paying them income, passive or active, are obligated to withhold the
following final tax:
 Short term deposits are those made for a period of less than five(5) years.
  Long-term deposits or investment certificates refer to certificate of time
deposit or investment in the form of savings, common or individual trust
funds, deposit, substitutes, investment management accounts, and other
investments with a maturity of not less than five(5) years, the form of
which shall be prescribed by the BSP and issued by bank only to individuals
in denominations of 10,000 and other denominations as may be prescribed
by the BSP.
of receivables and other obligations, or financing their own needs or the
needs of their  agent or dealer
 Public means 20 or more corporate lenders at any one time.
 The 19-lender rule does not apply to government securities
Classification of debt instrument

Illustration

A taxpayer earned the following interest income from various time deposits:

Timing of withholding of final tax

1. Zero coupon instruments or securities – upon origination

2. Interest-bearing instruments or securities – upon payment of interest

Summary of tax rules on interest on debt instruments

Illustration 2

A resident taxpayer received a 16,000 interest income from a bank. Determine the
final ta withheld at source.

Illustration 3

Banko Negro incurs the following interest in its savings and time deposit accounts
from the following depositors: Illustration

John earns interest income from the following investment placements in various
debt instruments:

 Savings or time deposits with cooperatives are not subject to final tax.

Deposit Substitute
Trust Funds or Investment Management Accounts
 It means an alternative form of obtaining funds from the public other than
deposits through issuance, endorsement, acceptance of debt instruments  Investment in trust fund of banks are subject to the same final tax rules.
for the borrowers own account, for the purpose of relending or purchasing
  However, in order to claim tax exemption on long term investment, it is 1. Cash dividends
also mandatory that: 2. Property dividends
a. It must be held/managed by the bank for at least 5 years. 3. Scrip dividends
b. It must qualify as a deposit substitute issued by a bank. 4. Stock dividends – not subject to final tax
c. It must hold on to such underlying investment for at least 5 years. 5. Liquidating dividends – not subject to final tax

Pre-Termination of Long-Term Deposits or Investment of Individual Dividend Tax Rules

 If the deposit or investment placement of individual taxpayers is pre-

terminated before 5 years, any previously untaxed or exempted interest
income will be subjected to the following final taxes upon-termination:

Note:

Foreign Currency Deposit with Foreign Currency Depositary Banks
 The interest income from foreign currency deposits under the foreign
currency deposit system or expanded foreign currency deposit system by
residents is subject to a final tax of 15%.
1. A NRA-ETB is subject to 20% final tax. NRA-NETB subject to a 25% final tax
2. A NRFC is not exempt but is subject to the 25% general final tax rate.
However, the imposable dividend tax shall be 15% when the tax sparing
rule applies.
3. With conditional exemption for reinvestment
 Any distribution made to the shareholders or member of a corporation
shall be deemed to have been made from the most recently accumulated
profits or surplus, and shall constitute part of the annual income of the
distribute for the year in which received.

Exempt Dividends
 If the bank account is jointly in the name of a non-resident and a resident
1. Inter-corporate dividends from domestic corporations – exempt from final
taxpayer, 50% of the interest shall be exempt while the other 50% shall be
tax
subject to the 15% final tax.
2. Dividends from cooperatives – exempt from final tax
Interest Income Subject to Regular Tax 3. Qualified foreign-sourced dividends – exempt from regular tax

1. Lending activities, whether or not in the course of business ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX
2. Investment in corporate bonds
 The 10% final withholding tax also applies to dividends or share in the net
3. Promissory notes
income of entities considered corporations under the NIRC and special
4. Foreign sources, whether bank or non-bank
laws, such as:
5. Penalty for legal delay or default
1. Real Estate Investment Trusts (REIT)
DIVIDENDS 2. Business Partnerships
3. Taxable associations
 Dividends is any distribution made by a corporation to its shareholders out 4. Taxable Joint Ventures, Joint Accounts or Consortia
of its earnings or profits and payable to its shareholders, whether in money 5. Taxable Co-ownership
or in other property.
 Types of dividends:
  REIT is a publicly listed corporation established principally for the purpose
of owning income-generating real estate assets.
 The following recipient of REIT dividends are not exempt from the final tax:
a. NRA or NRFC entitled to claim preferential tax rate pursuant to
applicable tax treaty.
b. Domestic corporations or RFC
c. Overseas Filipino investors – exempt from REIT dividend tax until
August 12, 2018.
 Business partnership, taxable associations, joint venture, joint accounts or
co-ownerships, the net income of these entities is deemed constructively
received by the partners, member or ventures, respectively, in the same
year the net income is reported. Hence, the 10% final tax applies at the
point of determination of the income, not at the point of actual
contribution.
ROYALTIES
 Passive royalty income received from sources within the Philippines is
subject to the following final tax rates:
Note:
1. Under the regulations, the 10% preferential royalty final tax on books
and literary works pertain to printed literatures. Royalties on books
sold on e-copies or CDs such as e-books are subject to the 20% final
tax.
2. Royalties on cinematographic films and similar works paid to NRA-
ETBs, NRA-NETBs or NRFCs is subject to a final tax of 25%.
 Royalties of a passive nature such as royalties of claim owners or land
owners of mining properties, royalties of investors from companies that
manufacture and sell their invention, and royalty from licensing
agreements that transfers the use of trademark or technology are subject
to 20%. (Passive Royalty)
 When royalties accrue from an undertaking where the taxpayer has active
involvement, it is an active income subject to the regular income tax.
(Active Royalty)
 Royalties, active or passive, earned from sources abroad are subject to
regular income tax
PRIZES
 The taxation of prizes varies. Prizes may be exempt from income tax or
subject to either final tax or regular income tax.
 Exempt Prizes:
1. Prizes received by a recipient without any effort on his part to join a
contest.
2. Prizes from sports competitions that are sanctioned by their respective
national sports organizations.
 Requisites of exemption:
1. The recipient was selected without any action on his part to enter the
contest
2. The recipient is not required to render substantial future services as
condition to receiving the price or reward.
 Taxable prizes
WINNINGS (A game of luck)
 For individual income taxpayers, winnings received from sources within the
Philippines are generally subject to 20% final tax, except winnings from
PCSO games amounting to 10,000 or less.
Note: PCSO winnings of NRA-NETBs and NRFC, regardless of amount, are
subject to 25% final tax.
 The tax rules on PCSO winnings shall be applied on a per ticket basis.
TAX INFORMER’S REWARD
 A cash reward may be given to any person instrumental in the discovery of
violations of the NIRC or discovery and seizure of smuggled goods. The tax
informer’s reward is subject to 10% final tax.
 Requisites of Tax Informer’s Reward
 1. Definite sworn information which is not yet in the possession of the
BIR
2. The information furnished lead to the discovery of fraud upon internal
revenue laws or provisions thereof
3. Enforcement results in recovery or revenues, surcharges, and feeds
and/or conviction of the guilty party or imposition of any fine or
penalty.
4. The informer must not be a:
1. BIR official or employee
2. Other public official or employee
3. Relative within the 6th degree of consanguinity of those
officials or employee in a and b. The Tax Sparing Rule
 Amount of Cash reward – whichever is the lower of the following per case:
1. 10% of revenue, surcharges, or fees recovered and or fine or penalty  NRFCs shall be subject to a 15% final tax on dividend income instead of the
imposed and collected or 25% general final tax if the country domicile of the NRFC credits against the
2. 1,000,000 tax due of such NRFC taxes presumed to have been paid by such NFRC
 The amount of cash reward subject to 10% final withholding tax which from the Philippines equivalent to 10% of the dividends.
shall be withheld by the government
OTHER FINAL INCOME TAXES
TAX FREE CORPORATE COVENANT BONDS
1. Fringe benefits of managerial or supervisory employees.
 Interest income of non-resident aliens, citizens or residents of the 2. Income payments of residents other than deposit banks under the
Philippines on bonds, mortgages, deeds of trust, or other similar expanded foreign currency deposit system (EFCDS) and expanded foreign
obligations of domestic or resident foreign corporations with tax-free or currency deposit units (EFCDUs)
tax-reduction provision where the obligor shoulders in whole or in part any 3. Income payments to oil exploration service contractors or sub-contractors
tax on the interest shall be subject to a final withholding tax of 30%.
FINAL WITHHOLDING TAX RETURN

 Monthly Filing - Form 0619-F

 Deadline is 10th day of the following month
 Quarterly Filing – Form 0601-FQ
Note:  Deadline is on or before the last day of the month of after each quarter
1. The final tax applies to all individuals, regardless of classification.
2. There is no similar final tax provision for corporate recipients of “tax- ENTITIES EXEMPT FROM FINAL INCOME TAX
free” interest; hence, the regular income tax shall apply.
1. Foreign government and foreign government –owned and controlled
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT corporations
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES 2. International missions or organizations with tax immunity
3. General professional partnership
4. Qualified employee trust fund

“THE END”
 BAC 102 INCOME TAXATION
LECTURE NO. 6
CAPITAL GAINS TAXATION Asset Classification Rules
a. A property purchased for future use in business is an
CLASSIFICATION OF TAXPAYER’S PROPERTIES ordinary asset even though this purpose is later thwarted by
1. Ordinary Assets – these are assets used in business circumstances beyond the taxpayer’s control.
 Business is habitual engagement in a commercial activity b. Discontinuance of the active use of the property does not
involving the regular sale of goods or services for a profit. change its character previously established as a business
 Ordinary assets are property.
o Assets held for sale c. Real properties used, being used, or have been previously
o Assets held for use used, in trade of the taxpayer shall be considered ordinary
2. Capital Assets – any asset other than ordinary assets assets.
 Capital assets are d. Properties classified as ordinary assets for being used in
o Personal (non-business) assets of individual taxpayers business by a taxpayer not engaged in the real estate
o Business assets of any taxpayers which are: business are automatically converted to capital assets upon
 Financial assets showing of proof that the same have not been used in
 Intangible assets business for more than 2 years prior to the consummation
of the taxable transaction involving such property.
ANALYSIS OF PROPERTIES HELD BY TAX PAYERS e. A depreciable asset is an ordinary asset even if it is fully
depreciated, or there is a failure to take depreciation during
the period of ownership.
f. Real properties used by an exempt corporation in its
exempt operations are considered capital assets. Exempt
corporations are not business.
g. The classification of property transferred by sale, barter or
exchange inheritance, donation, or declaration of property
dividends shall depend on whether or not the acquirer uses
it in business.
h. For real properties subject of involuntary transfer such as
expropriation and foreclosure sale, the involuntariness of
such sale shall have no effect on the classification of such
real property.
i. Change in business from real estate to non-real estate
business shall not change the classification of ordinary
assets previously held.

 Asset classification is relative. The classification of assets or

properties as ordinary asset or capital asset does not depend
upon the nature of the property but upon the nature of the
taxpayer’s business and its usage by the business.
TYPES OF GAINS ON DEALINGS IN PROPERTIES
1. Ordinary gain – arises from the sale, exchange and other disposition
including pacto de retro sales and other conditional sales of
ordinary assets
2. Capital gain – arises from the sale, exchange and other disposition
including pacto de retro sales and other conditional sales of capital
assets
Taxation of Gains on Dealings in Properties
CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX
 There are two (2) types of capital gains subject to capital gains
tax:
1. Capital gains on the sale of domestic stocks sold directly to
buyer
2. Capital gains on the sale of real properties not used in
business
SCOPE OF CAPITAL GAINS TAXATION
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSTION OF
DOMESTIC STOCKS DIRECTLY TO BUYER
 Domestic stock are evidence of ownership or rights to
ownership in a domestic corporation regardless of its features.
 The capital gains tax covers not only sales of domestic stocks for
cash but also exchange of domestic stocks in kind and other
dispositions such as:
1. Foreclosure of property in settlement of debt
2. Pacto de retro sales – sale with buy back agreement
3. Conditional sales – sales which will be perfected upon
completion of certain specified conditions
4. Voluntary buy back of shares by the issuing corporation –
redemption of shares which may be re-issued and not
intended for cancellation.
 The term other disposition does not include:
1. Issuance of stocks by a corporation
2. Exchange of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks for cancellation by the issuing
corporation
6. Gratuitous transfer of stocks
MODES OF DISPOSING DOMESTIC STOCKS
 Shares of stocks may be sold, exchanged or disposed:
1. Through the Philippine Stock Exchange (PSE)
2. Directly to buyer
 Basis of stocks:
1. If acquired by purchase, tax basis is the cost of the property
which will be determined by the following methods in
descending order of priority:
1. Specific Identification
2. Moving Average Method
 3. First-In, First-Out Method a. Presumption of capital gains – The 6% CGT applies even if the sale
2. If acquired by devise, bequest, or inheritance transaction resulted to a loss. Gains is always presumed to exist. The
3. If acquired by gift basis of taxation is the selling price or FV whichever is higher, not
4. If acquired for inadequate consideration the actual gain.
5. If acquired under tax-free exchanges b. Non-consideration to the involuntariness of the sale – The CGT
applies even if the sale is involuntary or is forced by circumstances
INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX such as in the case of expropriation sale, foreclosure sale,
dispositions by judicial order, and other forms of forced disposition.
It also applies to conditional sales and pacto de retro sales.
 Same as the Final Income Taxations, 25% c. Final tax – The CGT shall be withheld by the buyer against the selling
price of the seller and remit the same to the government.
SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENTS

SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

1. Wash sales of stocks
2. Tax-free exchanges

TAX FREE EXCHANGES

A. Corporate Reorganization EXCEPTIONS TO THE 6% CAPITAL GAINS TAX

B. Initial Acquisition of Control

SALES, EXCHANGE, AND OTHER DISPOSITION OF REAL PROPERTY 1. Alternative taxation rule
CLASSIFIED AS CAPITAL ASSET LOCATED IN THE PHILIPPINES 2. Exemption rules
a. Exemption under the NIRC
b. Exemption under special laws
 The sale, exchange, and other disposition of real property
capital assets in the Philippines is subject to a tax of 6% of the ALTERNATIVE TAXATION
selling price or the fair value, whichever is higher.
 Fair value of real property is whichever is higher of the:
a. Zonal Value – value prescribed by the Commissioner  An individual seller of real property capital assets has the option
of Internal Revenue for real properties for purposes to be taxed at either:
of enforcement of internal revenue laws. a. 6% capital gains tax or
b. Fair Market Value – as shown in the schedule of b. The regular income tax
market values of the Provincial and City Assessors.  It should be noted that this is permissible only when:
1. The seller is an individual taxpayer, and
NATURE OF THE 6% CAPITAL GAINS TAX 2. The buyer is the government, its instrumentalities or
agencies including government-owned and controlled
corporations.
EXEMPTION TO THE 6% CAPITAL GAINS TAX UNDER THE NIRC

COMPARISION OF THE 6% CGT AND 15% CGT

 The sale, exchange and other disposition of a principal
residence for the re-acquisition of a new principal residence by
individual taxpayers is exempt from the 6% CGT.
 Principal residence means the house and lot which is the
primary domicile of the taxpayer. If the taxpayer has multiple
residences, his principal residence is deemed that one shown in
his latest tax declaration.

CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS

“THE END”

1. Sale of land pursuant to the Comprehensive Agrarian Reform

Program
2. Sale of socialized housing units by the National Housing Authority

PAYMENT OF THE 6% CAPITAL GAINS TAX IN INSTALLMENT

 The CGT may be paid in installment if, under the payment

terms, the initial payment does not exceed 25% of the selling
price.

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

 DST on the sale, exchange, and other dispositions of domestic

stocks directly to a buyer is subject to a documentary stamp tax
of 1.50 for every 200 of the par value of the stocks sold.
 DST on the sale of real properties is subject to a documentary
stamp tax on the gross selling price or fair market value
whichever is higher, DST tax is 15 for every 1,000 and fractional
parts of the tax basis thereof. However, if the government is a
party to the sale, the basis shall be the consideration paid.