CHAPTER 1: INTRODUCION TO TAXATION

TAXATION LIFEBLOOD DOCTRINE

a. State of power • Taxes are essential and indispensable to the
- inherent power of the state to enforce a continued subsistence of gov’t
proportional contribution from its subjects for • w/o taxes, gov’t will be paralyzed due to lack of
public purpose motive power to activate/operate it
b. Legislative process • Upon taxation depends the government ability to
- process of levying taxes by the legislature of the serve the people for whose benefit taxes are
State collected.
c. Mode of cost contribution
- State allocates its costs or burden to its subjects Implication of the Lifeblood Doctrine in Taxation:
who are benefited by its spending. 1. Tax is imposed even in absence of Constitutional
Grant
Theory of Taxation 2. Claims for tax exemption are construed AGAINST
• government necessity of funding TAXPAYERS
• A system of government is indispensable to every 3. Government reserved the RIGHT TO CHOOSE
society. OBJECTS OF TAXATION
• A government cannot exist without a system of 4. Courts are not allowed to interfere with COLLECTION
funding OF TAXES
5. In income taxation:
The Basis of Taxation a. Income RECEIVED IN ADVANCE – taxable upon
• mutuality of support between the people and the receipt
government b. Deduction for capital expenditures &
prepayments is not ALLOWED – because it
defers collection of tax
c. Lower amount of deduction is PREFERRED –
when claimable exp is subject to limit
d. Higher tax base is PREFERRED – when tax
object has MULTIPLE TAX BASES

INHERENT POWERS OF THE STATE

Receipt of benefits is CONCLSIVELY PRESUMED • has basic need and right that coexist upon creation
• thus, taxpayers cannot avoid payment of tax under • Rights to: sustenance, protection, and properties
the defense of absence of benefit received
• “Powers”: Natural, inseparable, and inherent
- no government can sustain or
THEORIES OF COST ALLOCATION
effectively operate without the
1. Benefit received theory
powers
- more benefit received, more taxes should pay
2. Ability to pay theory
1. Taxation Power
- required to contribute based on relative
- collect tax
capacity to sacrifice for the support of the
2. Police Power
government.
- enact laws to protect the well-being of the
people
Aspects of the Ability to Pay Theory
3. Eminent Power
a. Vertical Equity
- take private property for public use after
- directly proportional to the level of tax base
paying just compensation
- gross concept
b. Horizontal Equity
POINT OF
- requires consideration of the particular
DIFFERENC POLICE EMINENT
circumstance of taxpayer
E TAXATION POWER DOMAIN
- net concept
Exercising Gov’t Gov’t Gov’t
Authority
Purpose Support of Protect Public use
the gov’t the
 welfare of a. Gov’t do not tax the income and properties
the people of other governments
Persons Community Communit Owner of b. Governments give primacy to their treaty
affected y the prop. obligations over their own domestic tax laws.
Amount of Unlimited Limited No amount 3. Public Purpose
Imposition imposed • Taxation must be exercised absolutely for public
Importance Most Most Important purpose NOT TO ANY PRIVATE INTEREST
important superior
Relationshi Inferior to Superior to Superior to 4. Exemption of the Government
p with non- non- non- • Gov’t properties and income from essential
constitutio impairment impairment impairment public functions are not subject to taxation.
n
clause clause clause • Income of gov’t from its properties and activities
Limitation Constitution Public Public made for profit is TAXABLE.
al and interest purpose and
5. Non-delegation of the taxing power
inherent and due just
limitations compensatio • Taxing power is vested exclusively in CONGRESS
process • Non delegable to ensure checks and balances
n

Similarities of the 3 powers of state: Exception:

1. Necessary attributes of sovereignty.
2. Inherent to the State.
3. Legislative in nature.
4. Ways in which state interferes with private rights
and properties.
5. Exist independently of the constitution and
exercisable without constitutional grant
6. Presuppose an equivalent form of compensation
7. Limited by national legislature
SCOPE OF THE TAXATION POWER
• comprehensive
• plenary
• unlimited (not absolutely unlimited)
• supreme
THE LIMITATIONS OF THE TAXATION POWER
A. INHERENT LIMITATIONS
1. Territoriality of Taxation
• Gov’t can only demand tax obligation within its
territorial jurisdiction
• Extraterritorial taxation will amount to
encroachment of foreign sovereignty
Two-fold obligations of taxpayers:
a. Filing of returns and payment of taxes
b. Withholding of taxes in expenses and remittance
to the government
Exception:
✓ RESIDENT CITIZENS & DOMESTIC
CORPORATIONS – taxable both within and
outside the Philippines (income taxation)
✓ RESIDENTS/CITIZENS – taxable on transfers of
properties within or outside the Philippines
(transfer taxation)
2. International Comity
• Fundamental concept of co-equal sovereignty:
All nation are deemed equal with one another
regardless of race, religion, culture, economic
condition, or military power.
• No country is powerful than the other
- LGU allowed to exercise taxing power to exercise
their fiscal autonomy
- President is empowered to fix amount of tariffs
to be flexible to trade conditions
- Other cases that require expedient and effective
administration and assessment and collection of
tax
B. CONSTITUTIONAL LIMITATIONS
1. Due process of law
• No one should be deprived of his life, liberty or
property without due process of law
• Tax laws should neither be HARSH or OPPRESSIVE
Aspects of Due Process
a. Substantive Due Process (kailangan may basehan)
- For public purpose, under authority of a vlid
law and only by taxing power having
jurisdiction
b. Procedural Due Process (walang tax pag walang
due process)
- Law established procedures which must be
adhered to in making assessments and in
enforcing collections
ASSESSMENT – within 3 years from due date of
filing of return OR date of actual filing,
whichever is LATER
COLLECTION – within 5 years from date of
assessment
2. Equal protection of the law
• Taxpayers should be treated equally both in
terms and rights
• This rule applies under same circumstances
3. Uniformity rule in taxation
• uniform and equitable
• Dissimilar circumstances: should not be taxed
the same
• Uniformity is relative equality
4. Progressive system of taxation
• tax rates increase as the tax bases increase
(ability to pay theory)

5. Non-imprisonment for non-payment of debt or poll
tax
• No one shall be imprisoned for his poverty and
for mere inability to pay debt
• Estafa – debt acquired in bad faith; criminal
offense punishable by law
TAX DEBT
Arises from law and Arises from private
is a demand of contracts
sovereignty
Compromises public Compromises private
interest interest
• Non-payment of tax is similar to a crime, except
poll tax
2 Components of Poll tax
a. Basic community tax – constitutional
guarantee of NON IMPRISONMENT
b. Additional community tax – non payment is
an act of TAX EVASION
6. Non-impairment of obligation and contract
• State should not set aside its obligation from
contracts
• Tax exemptions granted under contract should
not be cancelled by a unilateral gov’t action
7. Free worship rule
• Free exercise of religion not taxable
• Except to income from properties or activities
that are commercial in nature
8. Exemption of religious or charitable entities, non-
profit cemeteries, churches and mosque from
property taxes
• Exempt from property taxes from properties
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
charitable, religious and educational purposes
(doctrine of use)
• In the Doctrine of Ownership, whether used or
not used in primary operations are exempt from
property tax (not applied in PH)
9. Non-appropriation of public funds or property for the
benefit of any church, sect or any sector of religion
• Gov’t should not favor any particular system of
religion by appropriating public funds or
property in support thereof
• Compensation to priest, imam or religious
ministers working with military, penal
institutions or orphanages is not considered
religious appropriation
10. Exemption from taxes of the revenues and assets of
non-profit, non-stock educational institutions
• Applies only on revenues and assets that are
ACTUALLY, DIRECTLY, and EXCLUSIVELY devoted
for educational purposes
Gov’t Educ Ins – exempt from income tax
Private Educ Ins – minimal 10% income tax
11. Concurrence of a majority of all members of Congress
for the passage of a law granting tax exemption
• Constitution requires the vote of majority of all
members of Congress in grant of tax exemption
Absolute Majority – Majority of ALL
Relative Majority – quorum majority (minimum)
• Withdrawal of Tax exempt: Relative majority
12. Non-diversification of tax collections
• only for public purpose
• not diversifies or used for private purposes
13. Non-delegation of the power of taxation
• Vested exclusively in CONGRESS
Dept of Finance and BIR:
a. issues revenue regulation
b. rulings
c. orders
d. circulars to interpret and clarify the application
of law
e. interpret or clarify the proper application of the
law
*They are not allowed to introduce new legislations
within their quasi-legislative authority
14. Non-impairment of the jurisdiction of the Supreme
Court to review tax cases
• All cases involving taxes can be raised to and
finally decided by the SUPREME COURT OF THE
PHILIPPINES
15. The requirement that appropriations, revenue, or
tariff bills shall originate exclusively in the House of
Representatives
• Laws that add income to the national treasury
and those that allows spending must originate
from the House of Representatives
• Senate may concur with Amendments
16. The delegation of taxing power to local government
units
• Constitutional recognition of local autonomy of
local gov’t
• Express delegation of taxing power
STAGES OF THE EXERCISE OF TAXATION POWER
1. LEVY OR IMPOSITION
• process involves the enactment of a tax law by
Congress, and is called “impact of taxation”
• “legislative act” in taxation
Congress composed:
1. House of Representatives – where tax bills
originate
2. Senate
*Proposed law is approved by both bodies
Matters of Legislative discretion in the exercise of
taxation
1. Method of Collection
2. Appointment of the tax between nat’l and local
gov’t.
3. Setting tax rate/ amount to be collected
 4. Kind of tax imposed • Tax obligation cannot be assigned or
5. Determining the purpose (must be public transferred to another entity by contract.
purpose) • Contracts of such should not prejudice the right
of gov’t to claim
6. Determining object of taxation
7. Situs of taxation 6. Imprescriptibility in taxation
2. ASSESSMENT AND COLLECTION • Prescription: the lapsing of a right due to the
• Implemented by the administrative branch passage of time.
• Involves assessment of the determination of the • Gov’t right to collect taxes does not prescribe
tax liabilities of taxpayers and collection. unless the law itself provides for such
prescription
• “Incidence of taxation”, “Administrative act of
• Under NIRC, tax prescribes if not collected w/in 5
taxation”
yrs. from assessment. If no assessment, it
prescribed w/in 3 years. Taxes due to taxpayer
SITUS OF TAXATION
who did not file a return or those who filed
• Place of Taxation
fraudulent returns do not prescribe
• Whether tax object is within or outside tax law
7. Doctrine of estoppel
Example of Situs Rules:
• any misrepresentation made by one party
a. Business tax situs – where the business was
toward another who relied therein in good
conducted
faith will be held true and binding against that
b. Income tax situs on services – where they are
person who made the misrepresentation
rendered
• Gov’t is not subject to estoppel. Error of the
c. Income tax situs on sale of goods – place of sale
gov’t employee does not bind the gov’t
d. Property tax situs – their location
e. Personal tax situs – place of residence • Erroneous application of law by public officers
do not block subsequent correct of application
OTHER FUNDAMENTAL DOCTRINES IN TAXATION of the same.
1. Marshall Doctrine
8. Judicial Non-interference
• “The power to tax involves the power to
• Generally, courts are not allowed to issue
destroy.”
injunction against gov’t’s pursuits to collect tax
• used as an instrument of police power
because it is unnecessary. (Lifeblood doctrine)
• used to discourage undesirable act or
occupation
9. Strict Construction of tax laws
• does not include the power to destroy if it is
• “Taxation is the rule, exemption is the
used solely for the purpose of raising revenue
exception.”
• Example: excessive tax on cigarettes • When taxation law is vague, doctrine of strict
legal construction is observed.
2. Holme’s Doctrine
• “Taxation power is not the power to destroy Vague Tax Laws • Against: Government
while the court sits.”
In favor: Taxpayers
• used to build or encourage beneficial activities
• no tax laws
or industries (grant of incentives)
• Obligation arising from
• Example: creation of Eco zones with tax holiday
law is not presumes, law
should be clear and
3. Prospective of Tax Laws
express in constitutional
• generally prospective in operation
provisions.
• Ex post facto or law that retroacts is prohibited Vague Exemption Laws • Against: Tax Payers
(exemption: if intended by congress under
In favor: Government
justifiable conditions)
• no exemption laws
4. Non-compensation of set-off
• Accordance with
• not subject to automatic set-off or compensation
lifeblood doctrine
• Taxpayer cannot delay payment of tax.
Exceptions:
• To be exempted, must justify the claims by the
a. Taxpayer’s claim has already become due
clearest grant of organic or statue of law.
and demandable and gov’t recognize the
• When exemption is made, must be shown
same and an appropriation of fund was
indubitably to exist.
made
b. overpayment of tax • Tax exemption must be clear and equivocal
c. local taxes • Any doubt whether tax exemption exists is
resolved against taxpayer
5. Non-Assignment of taxes
DOUBLE TAXATION - All forms of tax exemption can be revoked
• Occurs when the same taxpayer taxed twice by the by congress except those granted by
same tax jurisdiction for the same thing constitution or under contracts.

Elements of double taxation B. THOSE THAT DO NOT RESULT TO LOSS OF

1. Primary Element: Same object GOVERNMENT REVENUE
2. Secondary Elements: 1. Shifting
a. Same type of tax - process of transferring tax burden to other
b. Same purpose of tax taxpayer
c. Same taxing jurisdiction - common with business taxes imposed on
d. Same tax period business revenue can be shifted to
customers
Types of double taxation Forms:
1. Direct double taxation a. Forward shifting
- all element of double taxation exists for both • follows normal contribution
impositions • common with essential
2. Indirect double taxation commodities and services such as
- at least one secondary elements of double food and fuel
taxation is not common for both impositions • i.e. manufactrers to wholsalers
b. Backward shifting
Note: • reverse of forward
Double taxation is not prohibited, indirect double taxation • common with non-essential
is in practice, but direct double taxation is discouraged commodities
because it is oppressive and burdensome. • where buyer have market power
and commodities with numerous
How can double taxation be minimized? substitute
1 or a combination of: c. Onward shifting
a. Provision of tax exemption • tax shifting in distribution channel
- 1 tax law is allowed to apply to the object while that exhibits forward and backward
other tax laws exempts the same tax object shifting
b. Allowing foreign tax credit
- Both tax laws of domestic and foreign country *Shifting is common with business where taxes
tax the tax object BUT tax payments by foreign imposed on business revenue can be shifted or
tax is deductible against the tax due of the passed on to customers
domestic tax law
c. Allowing reciprocal tax treatment 2. Capitalization
- provisions imposing tax rates or even exemption
- adjustment in value of taxes cause by
if the country of foreign taxpayer also give the changes of tax rates
same treatment to Filipino non-residents, - Example: mining company
d. Entering into treaties or bilateral agreements 3. Transformation
- countries may stipulate lower tax rate if engage - elimination of wastes or losses by taxpayer
in transactions that are taxable by both of them. to form savings to compensate for the tax
imposition or increase in tax rate
ESCAPES FROM TAXATION
Tax amnesty
• the means available to the taxpayers to limit or
• amnesty
even avoid the impact of taxation
• general pardon granted to taxpayer to enable them to
Categories of Escapes from taxation have a fresh start with a clean slate.
• Absolute forgives or waiver by government’s right to
A. THOSE THAT RESULTS TO LOSS OF GOV’T REVENUE
1. Tax evasion collect and is retrospective in application.
- “tax dodging” Tax condonation
- illegally reduces or avoids payment of tax • tax remission
• forgiveness of tax obligation of taxpayer under
2. Tax avoidance certain grounds.
- “tax minimization” Tax exemption, tax refund, tax amnesty and tax
- reduces or totally escapes taxes by any condonation are construed against taxpayer, and in favor
legally permissible means of gov’t because they deprived gov’t of revenues
3. Tax exemption
- “tax holiday” Tax amnesty Tax condonation
- immunity, privilege, or freedom from being Civil and criminal liabilities Civil liabilities
subject to a tax which others are subject to Retrospectively, forgiving Prospectively to unpaid
- Granted by the Constitution, law, or past violations balances, he portion paid
contract cannot be refunded
 CHAPTER 2: TAXES, TAX LAW, AND TAX ADMINISTRATION
TAXATION LAW 5. Revenue bulletins
• any law arises from exercise of taxation power of the • periodic issuance, notices and official
state announcements of the CIR that consolidate the
BIR’s position on certain issues pf law.
Types of taxation laws 6. BIR rulings
1. Tax laws - laws that provides assessment and • official positions of Bureau to queries raised by
collections of taxes; taxpayers and stakeholders relative to
Example clarification and interpretation of tax laws
a. National Internal revenue Code (NIRC) • rulings are merely advisory, not binding except
b. Tarif and customs code to addressee and may reverse by BIR anytime.
c. Local Tax code
d. Real Property Tax Code Types of Rulings
1. VAT rulings
2. Tax exemption laws – grant certain immunity from 2. International Tax Affairs Division (ITAD) rulings
taxation 3. BIR rulings
Example: 4. Delegated Authority rulings
a. Minimum wage law
b. Omnibus Investment Code of 1987 GAAP vs Tax Laws
c. Brgy. Micro Business Enterprise Law
GAAP Tax Laws
d. Cooperative Development Act
Not law; mere Including rules,
conventions of financial regulations, and rulings
Sources of Taxation (ALERT C SJ)
reporting prescribe the criteria for
1. Administrative issuances
tax reporting
2. Local ordinances
Intended to meet Tax reporting – special
3. Executive orders and Batas Pambansa
common need form of financial reporting
4. Revenue regulations
intended to meet specific
5. Tax treaties and conventions with foreign countries
need of tax authorities
6. Constitution
7. Statute and presidential decrees For recording transaction
8. Judicial decisions or case laws to their books
*In the preparation and filing of tax returns, taxpayers are
TYPES OF ADMINISTRATIVE ISSUANCES mandated to follow the tax law in cases of conflict in GAAP.
1. Revenue regulations
• issuances sign by Secretary of Finance upon NATURE OF PHILIPPINE TAX
recommendation of Commissioner of Internal • Civil and not political in nature
Revenue (CIR) • Tax payments made during occupations of foreign
• defining rules and regulation for effective enemies are valid
enforcement of provisions of National Internal • Internal revenue laws are not penal, because they do
Revenue Code (NIRC) not define crime. Penalty provisions is intended to
• Formal pronouncement to clarify or explain the secure taxpayer compliance
law and to carry into effect
• has force and effect of a law but it is intended to TAX – enforced proportional contribution levied by
expand or limit the application of law, otherwise lawmaking body of state to raise revenue for public
it is void. purpose.
2. Revenue Memorandum Orders (RMOs)
• issuance that provides directives or instruction Elements of Valid Tax (Tax must be)
• prescribe guidelines Levied by taxing power having jurisdiction over the object
• outline processes, operations, blah blah… taxation
necessary in implementation of stated policies,
goals, objectives, plans and programs of bureau
1. Not violate constitutional and inherent limitations
except audit 2. Uniform and equitable
3. RM rulings 3. For public purpose
• rulings, opinions, interpretation by CIR to 4. Proportional in character
provisions of Tax code 5. Generally payable in money
• BIR rulings cannot contravene duly issued RMR;
otherwise it is void ab initio. CLASSIFICATION OF TAXES
4. RM circulars A. As to Purpose (FRS)
• issued by BIR and other agencies/offices. 1. Fiscal or revenue tax – imposed for general
• Publish pertinent and applicable portion as well purpose
as amplifications of laws, rules and regulations.
 2. Regulatory – Imposed to regulate business, f. Documentary stamp tax – on documents,
conduct, acts or transactions instruments, loan agreements and papers
3. Sumptuary – levied to achieve some social or evidencing the acceptance, assignment,
economic objective sale or transfer of an obligation, right or
property incident thereto.
B. Subject matter (PPE) g. Excise tax – on sin products and
1. Personal, poll or capitation – on persons who nonessential products, diferent from
are residents of particular territories privilege tax. Ex. Alcohol, cigarettes
2. Property tax – real or personal
3. Excise or privilege tax – imposed upon 2. Local Tax – Tax imposed by municipal or local
performance of act, enjoyment of privilege or gov’t
engagements in an occupation. Examples: real property tax, professional tax,
business taxes, fees and charges, community
C. As to incidence tax, tax on banks and other financial
1. Direct Tax – both impact and incidence of institutions.
taxation rest upon the same taxpayer. Tax is
collected from the person who is intended to DISTINCTION OF TAXES WITH SIMILAR ITEMS
pay the same. Statutory taxpayer is the
TAX REVENUE
economic taxpayer
amount imposed by the all income collections of
2. Indirect tax – tax paid by another person that
government for public the gov’t w/c includes
one who is intended to pay. Occurs in business
purpose; AMOUNT taxes, tarif, licenses,
taxes, the statutory taxpayer is not the
IMPOSED toll, penalties and
economic taxpayer
others; AMOUNT
• Statutory taxpayer – person named by
COLLECTED
law to pay tax
TAX LICENSE FEE
• Economic taxpayer – who actually pays
emanates from taxation emanates from police
the tax
power; post-activity power; pre-activity
D. As to amount
imposition imposition
1. Specific Tax - fixed amount imposed on per unit
TAX TOLL
basis, example per kilo, liter etc.
2. Ad valorem – fixed proportion imposed upon levy of gov’t; it is a demand charge for the use of
the value of tax object. of sovereignty; depends other’s property; it is a
upon the needs of the gov’t demand of ownership;
E. As to rate depends upon the value
1. Proportional tax – flat r fixed rate. Proportional of the property leased
tax emphasized equality as it subjects all TAX DEBT
taxpayers the same rate regardless of their arise from law; arises from private
ability to pay nonpayment=imprisonment; contracts; subject to
2. Progressive or graduated tax –increase rates as Generally payable in money; set-of Payable in kind;
the tax base increase. Use of progressive tax interest – taxpayer is interest – stipulated &
rates results in equitable taxation because it delinquent by delay
taxes who’s more capable and to lessen gap TAX SPECIAL ASSESSMENT
between poor and rich. amount imposed upon levied by the gov’t on
3. Regressive tax – decrease tax rates as tax base persons, properties, or lands only that is
increases. Regressive is anti-poor. Directly privileges adjacent to a public
violates constitutional guarantee of progressive improvement
taxation. TAX TARIFF
4. Mixed rates – combination of above. amount imposed upon amount imposed on
persons, privileges, imported or exported
F. As to imposing Authority transaction or properties commodities
1. National tax – imposed by the national gov’t TAX PENALTY
amount imposed for the amount imposed to
Examples: (DIE VODE)
support of gov’t; law discourage an act; law
a. Donor’s tax –on gratuitous transfer of
or contract
properties by living donor
b. Income tax - on annual income, gains or
TAX SYSTEM
profits
• refers to the methods or schemes of imposing,
c. Estate tax - on gratuitous transfer of
assessing, and collecting taxes;
properties by decedent upon death
• includes tax laws and regulations;
d. VAT – consumption tax collected by VAT
business taxpayers • NATIONAL AND LOCAL TAX SYSTEM
e. Other percentage tax – consumption tax
collected by non-VAT taxpayer
Types of Tax System 3. Administrative feasibility – suggests that tax laws
According to IMPOSITION According to IMPACT should be capable of efficient and efective
PROGRESSIVE PROGRESSIVE SYSTEM administration to encourage compliance.
Employed in the taxation Emphasizes direct taxes;
of income of individuals, impact rich TAX ADMINISTRATION
and transfers of • management of the tax system: BIR – Department
properties of individual of Finance
REGRESSIVE REGRESSIVE SYSTEM
not employed in the Emphasizes indirect taxes; Chief officials of BIR
Philippines anti-poor ✓ 1 Commissioner
PROPORTIONAL ✓ 4 Deputy Commissioners – (operations, legal
Employed in taxation of
corporate income and - enforcement, information systems, resource mngt)

business POWERS OF BIR

1. Assessment and collection of taxes
TAX COLLECTION SYSTEM 2. Enforcement of all forfeitures, penalties and fines,
A. WITHHOLDING SYSTEM ON INCOME TAX and judgments in all cases decided in its favor by
• the payor of the income withholds or deducts the courts
the tax on the income before releasing same to 3. Giving effect to, and administering the supervisory
the payee and remits the same to the gov’t and police powers conferred to it by the NIRC and
1. Credible Withholding Tax other laws
a. Withholding tax on compensation – to 4. Assignment of IR officers and other employees to
be withheld by employers against other duties
compensation 5. Provision and distribution of forms, receipts,
b. Expanded withholding tax – to be certificates, stamps, etc. To proper officials
deducted on certain income payments; 6. Issuance of receipts and clearances
business taxpayers 7. Submission of annual report, pertinent information
2. Final Withholding Tax to congress and reports to the congressional
oversight committee in matters of taxation
FWT CWT
Income tax Full Only a portion POWERS OF CIR – pp. 45-48
withheld
OTHER AGENCIES
Coverage of Certain passive Certain passive
1. BUREAU OF CUSTOMS (BOC)
withholding income and active
- administer collection of tariffs (imported
income
articles) and VAT (importation)
Who remits the Income payor Income payor
- under the supervision of Dept of Finance
actual tax for CWT and the
- Headed by: Customs Commissioner
taxpayer for the
- Assisted by: 5 Deputy Commissioners
balance
14 District Collectors
Necessity of Not required Required
income tax 2. BOARD OF INVESTMENTS (BOI)
return for - lead the promotion of investments in the
taxpayer Philippines by assisting Filipinos and foreign
investors
B. WITHHOLDING SYSTEM ON BUSINESS TAX - attached agency of DTI
• VAT or percentage tax - Composed of: 5 full-time governors
(excluding DTI Secretary as
C. VOLUNTARY COMPLIANCE SYSTEM chairman)
• self-assessment method; taxpayer himself - Pres of PH assigned VP of the board (BOI
identify tax managing head)
3. PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA)
D. ASSESSMENT OF ENFORCEMENT SYSTEM
- promote investments in export-oriented
• gov’t identifies non-compliant taxpayers
manufacturing industries in the Philippine,
myriads of functions, supervise the grant of
PRINCIPLES OF A SOUND SYSTEM
both fiscal and non-fiscal incentives
1. Fiscal adequacy – sources that the government funds - Headed by: Director general
must be sufficient to cover government costs - Assisted by: 3 deputy directors

2. Theoretical justice or equity – suggests that taxation

should consider the taxpayer’s ability to pay
 4. LOCAL GOVERNMENT TAX COLLECTING UNITS 10. Corporate taxpayers engaged in the production of
- impose and collect various local taxes, fee metallic minerals
and charges to rationalize their fiscal
autonomy
5. FISCAL INCENTIVE REVIEW BOARD
- has oversight function on the administration
and grant of tax incentives
- approves or disapproves grant of tax
incentives

TAXPAYER CLASSIFICATION
1. LARGE TAXPAYER – under supervision of large
taxpayer service of the BIR National Office
2. NON-LARGE TAXPAYER – under supervision of
revenue district offices where buss, trade or
profession of taxpayer is situated.

CRITERIA FOR LARGE TAXPAYER

As to payment
1 Value Added Tax ≥ P200,000/quarter
2 Excise Tax ≥ P1,000,000/year
3 Income Tax ≥ P1,000,000/year
4 Withholding Tax ≥ P1,000,000/year
5 Percentage Tax ≥ P1,000,000/year
6 Documentary Stamp Tax ≥ P1,000,000/year

As to financial condition and results of operations

≥ P1,000,000,000 in a
1 Gross Receipts of sales
year
≥ P300,000,000 at year
2 Net worth
end
≥ P800,000,000 in the
3 Gross purchases
preceding year
Top corporate taxpayer listed and published by the
4
SEC

Automatic classification of taxpayers as large taxpayers

1. All branches of taxpayers under the Large Taxpayer's

Service
2. Subsidiaries, affiliates, and entities of conglomerates or
group of companies of a large taxpayer
3. Surviving company in case of merger or consolidation
of a large taxpayer
4. A corporation that absorbs the operation or business in
case of spin-off of any large taxpayer
5. Corporation with an authorized capitalization of at
least P300,000,000 registered with the SEC
6. Multinational enterprises with an authorized
capitalization or assigned capital of at least
P300,000,000
7. Publicly listed corporations
8. Universal, commercial, and foreign banks (the regular
business unit and foreign currency deposit unit shall be
considered one taxpayer for purposes of classifying
them as large taxpayer)
9. Corporate taxpayers with at least P100,000,000
authorized capital in banking, Insurance,
telecommunication, utilities, petroleum, tobacco, and
alcohol Industries
 CHAPTER 3: INTRODUCTION TO INCOME TAXATION
THE CONCEPT OF INCOME
Why is income subject to tax?
• Income is regarded as the best measure of taxpayer’s
ability to pay.
• Excellent object of taxation in the allocation of
government costs
• all wealth that flows into the taxpayer other than as
a mere return of capital.
What is income for taxation purposes?
GROSS INCOME = taxable income
• any inflow of wealth to the taxpayer from
whatever source, legal or illegal, that increases net
worth
TAXABLE INCOME
• certain items of gross income less deductions
and personal exemptions allowable by law
tax concept of income (gross income)
taxable item of income (item of gross income; inclusion in
gross income)
a. Any excess amount received over premiums paid
by the insured upon surrender of maturity of the
policy (the insured outlived the policy)
b. Gain realized by the insured from the assignment
or sale of his insurance policy
c. Interest income from the unpaid balance of the
proceeds of the policy
d. Any excess of the proceeds received over the
acquisition costs and premium payments by an
assignee of a life insurance policy.
HEALTH
• any compensation received in consideration for the
loss of health (personal injuries, tortuous acts) is
deemed a RETURN OF CAPITAL
HUMAN REPUTATION
• value of one’s reputation cannot be measured
financially
• any indemnity received as compensation for its
impairment is deemed a RETURN OF CAPITAL exempt
from income tax

ELEMENTS OF GROSS INCOME RECOVERY OF RECOVERY OF

1. Return on capital (that increases net worth) LOST CAPITAL LOST PROFITS
2. Realized benefit Results in decrease in net Does not decrease net
3. Not exempted by law, contract or treaty worth worth
Recovery maintains net Recovery increases net
RETURN ON CAPITAL worth worth
CAPITAL – any wealth or property Not taxable Taxable
GROSS INCOME – return on wealth or property that
increases the taxpayer’s net worth Taxable Recovery of Lost Profits
a. Proceed of crop or livestock insurance
Selling price b. Guarantee payments
(total consideration received) Total return c. Indemnity received from patent infringement
Cost (value of inventory foregone) Return OF capital
Return ON REALIZED BENEFIT
Mark-up (gross income)
capital BENEFITS
• any form of advantage derived by the taxpayer;
RETURN ON CAPITAL RETURN OF CAPITAL there is an increase in the net worth of the taxpayer
Increases net worth Maintains net worth
Income subject to tax No taxable NOT BENEFITS, NOT TAXABLE:
Total consideration Total consideration a. Receipt of a loan (property increase, obligations
received from the sale of received from the sale of increase)
service goods at a loss b. Discovery of lost properties (finder has an obligation
Total consideration received from to return the same to the owner)
the sale of goods at a gain c. Receipt of money/property to be held in trust/to be
remitted to another person
CAPITAL ITEMS DEEMED WITH INFINITE VALUE
LIFE Note:
• value of life is immeasurable by money If taxpayer is entitled for his account portion of a receipt,
• PROCEEDS OF LIFE INSURANCE POLICIES PAID UPON only that portion is a BENEFIT.
DEATH – exempt from income tax
• PROCEEDS OF A LIFE INSURANCE CONTRACTS REALIZED
COLLECTED BY AN EMPLOYER FROM THE LIFE • means earned; requires that there is a degree of
INSURANCE OF AN OFFICER – exempt from income undertaking or sacrifice from the taxpayer
tax (viewed as advance recovery of future losses)
Requisites of a realized benefit
Taxable return on capital from insurance policies 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
a. sale
b. barter
c. “onerous transactions” – earned or realized
• subject to income tax
2. UNILATERAL TRANSFERS
a. succession – transfer of property upon death
b. donation
c. “gratuitous transactions” – absence of earning
process
• subject to transfer tax, not income tax
3. COMPLEX TRANSACTIONS
• partly gratuitous – subject to transfer tax
• partly onerous – subject to income tax
• “transfers for less than full and adequate
consideration”
Excess of Fair Value & Selling price = gratuity
excess of Selling price & Cost = item of gross income
Benefits in the Absence of Transfers
UNREALIZED GAINS OR HOLDING GAINS
• Increase in wealth of a taxpayer in the form of
appreciation or income in the value of his
properties; or
• Decrease in the value of his obligations in the
absence of a sale or barter transaction
• NOT TAXABLE
Examples:
a. Increase in value of investments in equity or debt
securities
b. Increase in value of real properties held
(revaluation increment)
c. Increase in value of foreign currencies held or
receivable
d. Decrease in value of foreign currency
denominated debt by virtue of favorable
fluctuation
e. Birth of animal offspring, accruals of fruits in an
orchard or growth of farm vegetables
f. Increase in value of land due to the discovery of
mineral reserves
Basis of Exemption of Unrealized Income
• Income received in non-cash considerations is
taxable at the fair value of the property received.
• Exempting income realized in non-cash
considerations would open a wide avenue for tax
evasion since taxpayers can easily divert their
income in the form of non-cash consideration.
Mode of Receipt (realization of benefits)
1. ACTUAL RECEIPT
• involves actual physical taking of the income
in the form of cash or property
2. CONSTRUCTIVE RECEIPT
• involves no actual physical taking of the
income but the taxpayer is effectively
benefited
Examples:
a. Offset of the income of the taxpayer in consideration
for the sale of goods or service
b. Deposit of the income to the taxpayer’s checking
account
c. Matured detachable interest coupons on coupon
bonds not yet encashed by the taxpayer
d. Increase in the capital of a partner from the profit of
the partnership
Inflow of Wealth without Increase in Net Worth
INFLOW OF WEALTH TO A PERSON – that does not
increase his net worth is not equal to income = due to total
absence of benefit
Examples:
receipt of property in trust
borrowing of money under an obligation to return
NOT EXEMPTED BY LAW, CONTRACT OR TREATY
Items of income exempted by Law from taxation
a. Income of qualified employee trust fund
b. Revenues of non-profit non-stock educational
institutions
c. Sss, gsis, pag-ibig, philhealth benefits
d. Salaries and wages of minimum wage earners and
qualified senior citizen
e. Regular income of barangay micro-business
enterprises (bmbes)
f. Income of foreign governments and foreign
government-owned and controlled corporations
g. Income of international missions and organizations
with income tax immunity.
TYPES OF INCOME TAXPAYERS
A. INDIVIDUALS
1. Citizen
a. Resident citizen
b. Non-resident citizen
2. Alien
a. Resident alien
b. Non-resident alien
- engaged in trade or business
- not engaged in trade or business
3. Taxable estates and trusts
B. CORPORATIONS
1. Domestic corporation
2. Foreign corporation
a. Resident foreign corporation
b. Non-resident foreign corporation
INDIVIDUAL INCOME TAXPAYERS
CITIZENS
• citizens of the Philippines at the time of the adoption
of the Constitution of Feb 2, 1987
• whose fathers or mothers are citizens of the
Philippines
• those born before Jan. 17, 1973 of Filipino mothers
who elected Filipino citizenship (age of majority)
• naturalized in accordance with the law
Classifications of citizens 2. LENGTH OF STAY
A. Resident Citizen Citizen Staying abroad NON-RESIDENT
• a Filipino citizen residing in the Philippines (at least 183 days)
Alien Stayed in PH RESIDENT
B. Non-Resident Citizens includes: (more than 1 year as of
1. Citizen of the PH who establishes to the the end of taxable year)
satisfaction of the Commissioner the fact of his Alien Stayed in PH NON-RESIDENT
physical presence abroad w/ a definite intention (not more than 1 year, ALIEN Engaged
to reside but more than 180 days) in business
2. Citizen of the PH who leaves the PH during Alien Stayed in Ph NON-RESIDENT
taxable year to reside abroad (immigrant or (not more than 180 ALIEN NOT
permanent employment) days) Engaged in
3. Citizen of the PH who works and derives income business
from abroad, employment requires him to be
physical present abroad Taxable Estates and Trusts
4. Citizen who has been previously considered as 1. ESTATE
non-resident citizen; arrives in the PH anytime • properties, rights and obligations of a deceased
during the taxable year to reside permanently in person not extinguished by his death
the PH = treated as a nonresident citizen for the • Estates under judicial settlement: treated as
taxable year in w/c he arrived individual taxpayers; taxable on the income of
the properties left by the decedent
Filipinos working in PH embassies or consulate offices are • Estates under extrajudicial settlement: exempt
NOT CONSIDERED NON-RESIDENT CITIZEN. entities; income of the properties of the estate is
taxable to the heirs
ALIEN
A. RESIDENT ALIEN – an individual residing in the PH but 2. TRUST
is not a citizen, such as: • an arrangement whereby one person
1. An alien who lives in the PH without definite (grantor/trustor) transfers (donates) property to
intention as to his stay; or another person (beneficiary), which will be
2. One who comes to the PH for a definite purpose under the management of a third party (trustee
in which in nature would require an extended stay or fiduciary)
in the PH • Trust irrevocably designated by the grantor:
- treated as an individual taxpayer
Note: - income of the property held in trust
An alien who has acquired residence in the PH retains (taxable to the trust )
his status as such until he abandons the same or
• Trust designated as revocable:
actually departs from the PH
- income of properties held = taxable to the
grantor not to the trust
B. NON-RESIDENT ALIEN – an individual who is not
residing in the PH and who is not a citizen thereof:
Note:
1. Non-resident aliens engaged in trade or business
When trust agreement is silent as to revocability
• aliens who stayed for an aggregate period (trust presumed to be revocable)
of more than 180 days
2. Non-resident aliens not engaged in trade or CORPORATE INCOME TAXPAYERS
business include:
a. Aliens who come to the PH for a definite Corporation INCLUDES: EXCEPTION
purpose (nature may be promptly a. Partnerships a. general professional
accomplished) b. Joint-stock companies partnership and joint
b. Aliens who shall come to the PH and stay c. Joint accounts venture
therein for aggregate period of not more d. Association b. consortium formed
than 180 days during the year e. Insurance companies (purpose: construction
f. Charitable institutions projects) or engaging
THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS g. Cooperatives in petroleum, coal,
h. Government agencies geothermal, and other
1. INTENTION
and instrumentalities energy operations
• nature of his stay within or outside the
i. Associations (under service contract
Philippines
j. Leagues with government)
• Taxpayer shall submit to the CIR of the BIR
k. Civic or religious and
documentary proofs: Visa, Work contracts
other organization
• Tourist visa: shall not result to reclassification
• Immigrant or working visa: automatic
reclassification of residency
DOMESTIC CORPORATION – organized in accordance with 4. CO-OWNERSHIP
Philippine laws • joint ownership of a property formed for the
purpose of preserving the same and/or dividing
FOREIGN COPORATION – organized under a foreign law its income
• Co-ownership limited to property reservation or
Types of foreign corporations: income collection: not a taxable entity; co-
1. Resident foreign corporation (RFC) owners are taxable on their share on the income
- operates and conducts business in the of the co-owned property
Philippines through permanent establishment • Co-ownership that reinvests the income of the
(branch) co-owned property to other income-producing
2. Non-resident foreign corporation (NRFC) properties/ventures = unregistered partnership,
- does not operate or conduct business in the taxable as a corporation
Philippines
THE GENERAL RULES IN INCOME TAXATION
SPECIAL CORPORATIONS
Taxable on income earned
• domestic or foreign corporations
Individual Taxpayers Within Without
• subject to special tax rules or preferential tax
Resident citizen ✓ ✓
rates
Non-resident citizen ✓
Resident alien ✓
OTHER CORPORATE TAXPAYERS
Non-resident alien ✓
1. ONE-PERSON CORPORATION
• with single stockholder (natural person, trust, Corporate Taxpayers
estate) Domestic
✓ ✓
corporation
2. PARTNERSHIP Resident foreign ✓

• business organization owned by two or more Non-resident foreign ✓

persons, who contribute their industry or
resources to a common fund, purpose: divide the
profits from the venture
Types of partnership
a. General professional partnership (GPP)
✓ formed for the exercise of profession
✓ ALL partners must belong to the SAME
profession
✓ GPP – not a taxable entity = exempt from
income tax
✓ PARTNERS are taxable in their individual
capacity w/ respect to their share in the
partnership)
b. Business partnership
✓ formed for profit
✓ taxable as a corporation
3. JOINT VENTURE
• business undertaking for a particular purpose
• may be organized as partnership or corporation
The Residency and Citizenship Rule
• Taxpayers who are residents AND citizens of the PH
such as resident citizens and domestic corporations
are taxable on all income from sources within and
without the PH. A corporation is a citizen of the
country of incorporation.
Basis of the Extraterritorial Taxation
• Resident citizens and domestic corporations derive
most of the benefits from the PH government
compared to all other classes of taxpayers by virtue
of their proximity to the PH government
SITUS OF INCOME
• Place of taxation of income.
• It is the jurisdiction that has the authority to impose
a tax upon the income
• determine whether or not an income is taxable in PH
• particularly important to taxpayers taxable only on
income within

Types of joint ventures Source of Income

a. Exempt joint ventures • Activity or property that produces the income
✓ formed for purpose: undertaking
construction projects or engaging in Types of Income Place of Taxation (Situs)
petroleum, coal, geothermal, and other 1. Interest Debtor’s residence
energy operations (under service contract Income
with government 2. Royalties Where the intangible is
✓ EJV is not treated as a corporation = tax employed
exempt 3. Rent Income Location of the property
✓ Venturers are taxable to their share in the 4. Service Income Place where the service is
net income of the joint venture rendered

b. Taxable joint ventures

✓ taxable as corporations
OTHER INCOME SITUS RULES
A. Gain on sale or properties
1. Personal Property
a. Domestic Securities – presumed earned
w/in the PH
b. Other Personal Properties – earned in the
place where the property is sold

2. Real Property – earned in the place where the

property is sold

B. Dividend income from

1. Domestic Corporation – presumed earned
within
2. Foreign Corporation
a. Resident Foreign Corporation – depends
on the predominance test

Predominance Test
• If the ratio of the PH gross income over the
world gross income of the resident foreign
corporation in the three-year period in the
preceding year of dividend declaration is:
✓ At least 50% - the portion of the
dividend corresponding to the
philippine gross income ratio is earned
within
✓ Less than 50% - the entire dividends
received are earned abroad

𝑇𝑜𝑡𝑎𝑙 (𝑤𝑖𝑡ℎ𝑖𝑛)
Gross income ratio =
𝑇𝑂𝑇𝐴𝐿

Earned w/in PH = 𝐺𝐼𝑅 𝑥 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

Earned w/o PH = 100% − (𝑤/𝑖𝑛)

b. Non-resident Foreign Corporation –

Earned abroad

C. Merchandising Income – Earned where the property

is sold

D. Manufacturing Income – Earned where the goods

are manufactured and sold

Operations
Production Distribution Remark
Total income from P&D is
Within Within
earned within the PH
Total income from P&D is
Without Without
earned within the PH
Production: within
Within Without
Distribution: without
Distribution: within
Without Within
Production: without
 CHAPTER 4: INTRODUCTION TO INCOME TAXATION
INCOME TAXATION SCHEMES