TAXATION AS A POWER
- Power of taxation is inherent and the power of
the state to demand contributions for public
purpose. This, being an essential and inherent
attribute of sovereignty, belongs, as a matter of
right to every independent government and
needs no express conferment by the people
before it can be exercised.
NATURE OF THE POWER OF TAXATION
1) INHERENT – attribute of sovereignty, and inures
to the state. No constitution, enabling statute is
needed for the exercise thereof. Once a state
exists, the power of taxation exists. It is not true
for provinces, cities, municipalities and
barangays because such is not sovereign but
mere territorial or political subdivisions of the
Philippines.
SECTION 5, ART X OF THE 1987 CONSTITUTION
- “The power to tax is no longer vested in the
Congress but also to local legislative bodies. But
such authority is subject to the guidelines and
limitations as the case maybe”
- LGUs has no power to tax unless to the extent
that they are directly conferred by the above
provision of the constitution.
2) SUPREME, PLENARY, UNLIMITED AND
COMPREHENSIVE – the power of taxation is
unlimited in force and so searching in extent
subject only to restrictions which rests upon the
discretion of the authority exercising it.
3) BOUND BY LIMITATIONS – must see to it that it
is against abuse and bound by the constitutional
limitations and carries with it the presumption of
constitutionality and must be within the
responsibility of the legislative.
4) POWER TO DESTROY – it carries with it the
power to destroy or to embarrass and it must be
exercised with caution to minimize injury to the
property rights of the taxpayer.
IMPORTANCE OF THE LIFEBLOOD DOCTRINE
- The theory behind the power to tax emanates
from necessity. Without taxes, the government
cannot fulfill its mandate to promote the general
welfare and well-being of the people. There is a
need for more revenue to assure the
performance of vital state functions and to meet
the increasing social challenges of times because
the real purpose of taxation is to promote the
common good.
JUSTIFICATIONS ON THE EXERCISE OF THE TAXING
POWER
1) BENEFITS RECEIVED THEORY – citizens should
pay taxes in return for the benefits they are
receiving from the government
2) NECESSITY THEORY – the power emanates from
necessity, and to fulfill its mandate of promoting
the general welfare, and well-being of the
people
3) SYMBIOTIC RELATIONSHIP THEORY – citizens or
taxpayers contribute a part of their hard-earned
income to the government and the latter is
expected to improve the lives of the people and
to enhance the moral and material values.
REASON FOR THE IMPORTANCE OF KNOWING THE
NATURE OF EXACTION
1) EXEMPTION – to determine whether an entity
be exempt from taxation, but such does not
exempt one from the payment of fees because
taxes and fees are different.
2) APPLICABILITY OF TESTS OF VALIDITY – lawful
means test or lawful subject test are used, it is
circumscribed by inherent and constitutional
limitations
3) DOUBLE TAXATION – where one is exaction then
the other one is a fee.
POWER OF TAXATION USED AS AN IMPLEMENT OF
POLICE POWER
- May impose burden on private entities and it is
the regulatory power of the state but such does
not authorize the business destruction.
- The regulation must be reasonable and not
oppressive which already amount to arbitrary
interference
- Regulation only signifies control or restraint and
not suppression or absolute prohibition
OBJECTIVES OR PURPOSES OF TAXATION
1) REVENUE – to raise revenues
2) NON- REVENUE – some of them are:
a. IMPLEMENT OF POLICE POWER – using taxation
to kill business is counter-productive and
ultimately subversive of the nation’s trust for a
better economy. It is a power to protect, foster,
promote and preserve and control with due
regard to the interest of public, then of utility
and patrons.
 b. TOOL FOR REDUCTION OF SOCIAL INEQUITY –
by imposition of progressive taxes, which
alleviate the margin between the rich and the
poor. Higher taxes to those who has the capacity
to pay higher.
c. IMPLEMENT PROTECTIONIST POLICIES –
protectionism is the practice of shielding one
country’s domestic industries against foreign
competition.
d. IMPLEMENT POWER OF EMINENT DOMAIN –
for purpose of common good, and for the public
e. ENCOURAGES ECONOMIC GROWTH – the grant
of tax incentives or exemptions will encourage
direct investments.
POWER TO TAX COMPARED WITH OTHER POWERS OF
THE GOVERNMENT
1) POLICE POWER – the power to promote the
public welfare, by restraining and regulating the
use of liberty and it is exerted to merely regulate
the use or enjoyment of the property owner. If
such property was taken not for the purpose of
public use or public good then it is destroying in
order to promote the general welfare. The
owner does not recover from the injury he has
sustained by said government’s exercise of their
power. Such power does not involve taking or
confiscating unless on special cases where there
is necessity which is to take and destroy for the
public’s protection.
2) EMINENT DOMAIN – taking of private property
for public use which requires just compensation.
There is compensable taking when the property
is transferred to the expropriating authority but
neither the acquisition of the title, or total
destruction of the property’s value is essential to
taking. Where the title remains with the owner
that inquiry must be made whether impairment
of property’s merely for regulation, already
amounts to compensable taking. No
compensable taking when the property is merely
restricted because unrestricting causes injury or
damage to public.
TAXATION AS A PROCESS
- The expenses of the government, having for
their object, the interest of all, should be borne
by everyone, and the more man enjoys the
advantages of the society, the more he ought to
hold himself honored in contributing to those
expenses.
STAGES OR ASPECTS IN TAX PROCESS
1) LEVY – by the congress, in enacting a law for tax
impositions
2) ASSESSMENT – by the executive arm of the
state, the act of computing the tax liability or
determine value of the property and proportion
thereof
3) COLLECTION – by the executive branch, is the act
of satisfying the tax liability of each citizen by
collecting money.
CANONS OR PRINCIPLES OF SOUND TAX SYSTEM
- The non-observance of the said CANONS does
not render the tax imposition invalid, except to
the extent that certain specific constitutional or
statutory limitations are impaired.
A) FISCAL ADEQUACY – the sources of revenues
must be sufficient in order to meet the
governmental expenditures and their variations.
Every tax out to be so contrived should be both
to take out and keep out of the pockets of the
people over and above what it brings to the
public treasury.
B) ADMINISTRATIVE FEASIBILITY – tax systems
should be capable of being effectively
administered or enforced with least
inconvenience to the taxpayer.
C) THEORETICAL JUSTICE – in its kindred concept,
the imposition of taxes should be based on one’s
ability to pay. The higher the imposition of
burden on those who has more capacity to pay
higher taxes.
SECTION 28 (1), ARTICLE VI OF THE 1987 CONSTITUTION
- The congress shall have a progressive system of
taxation. The non-observance will not render the
tax imposition invalid except to the extent that
specific constitutional and statutory limitations
are impaired.
CONCEPT OF TAXES
- A tax is a financial obligation imposed by a state,
on persons, whether natural or juridical, within
its jurisdiction, for a property owned, income
earned or business or profession engaged in, or
any such activity analogous in character, for the
raising of necessary revenues to take care of the
responsibilities of the government.
 - COOLEY: taxes are enforced proportional
contribution, from persons and property, levied
by the state, by virtue of its sovereignty for the
support of government and for the all-public
needs.
CHARACTERISTICS OF TAXES
1) ENFORCED – payment of taxes is mandated by
law by means of distributing the burden of costs
of the government. The only benefit a taxpayer
is entitled is the one derived from the enjoyment
of the privileges of living in an organized society,
established and safeguarded by the devotion of
taxes to public purpose.
2) PROPORTIONATE – based on one’s ability to pay
3) PAYABLE IN MONEY - no constitutional
prohibition for the government to collect taxes
in kind, or other than money. But the present tax
system requires that the tax be paid in cash.
When the properties be distrained, or levied for
paying taxes, must be sold at a public auction
and the proceeds are used to satisfy tax liability
4) LEVIED BY THE LAW-MAKING AUTHORITY – the
imposition or collection of tax requires prior
enactment of a valid legislation by the congress.
It is inherently legislative, the power to tax.
5) LEVIED BY THE STATE HAVING TERRITORIAL
JURISDICTION – principle of territoriality. The
taxing power does not extend beyond its
territorial jurisdiction. The situs of either the
property or interest must be found within the
state.
6) PERSONAL IN NATURE - the tax liability cannot
be shifted. Only the incidence of tax or burden of
tax, can be shifted and not the burden of tax. Tax
liability remains with the person who earned the
income
7) PURPOSE IS TO RAISE REVENUES
REQUISITES OF A VALID TAX
1) Should be for public purpose
2) Must be uniform
3) Imposed by the state having territorial
jurisdiction upon persons or property being
levied upon
4) Must not contravene any inherent or
constitutional limitations on the power of
taxation
TAX DISTINGUISHED FROM OTHER FORMS OF
EXACTION
TARRIF V TAX
1. Subject of imposition
- TARRIF; imposed by the government on the
goods which are imported from another country
- TAX; imposed by the government on persons or
properties or transactions, rights and interests
TOLL V TAX
1. Nature
- TOLL – not a government exaction
- TAX – is a government exaction
2. Purpose of the collection
- TOLL – it is collected by private tollway operators
as reimbursement for the costs and expenses
incurred int the construction, maintenance or
operation of tollways as well as to assure them
of a reasonable margin of income
- TAX – imposed under the taxing power of the
government for the raising of the necessary
revenues to funds public expenditures
3. Proper party to collect
- TOLL – fees are collected either by the
government or private individuals or entities as
an attribute of ownership
- TAX - imposed only by the government under its
sovereign authority
LICENSE FEE V TAX
1. Purpose
- LICENSE FEE – are fees for exactions for the
purposes of regulation and inspection
- TAX – are for revenues
2. Amount to be collected
- LICENSE FEE – is limited to the amount necessary
to cover the costs of the service rendered in that
connection
- TAX – is the amount excess of the costs of the
services for inspection
SPECIAL ASESSMENT V TAX
1. Purpose
- SPECIAL ASSESSMENT – are levied on property
owners for paying a specific local infrastructure
project such as construction of roads and
maintenance of sewer lines
- TAX – they are for revenues
2. Amount to be collected
- SPECIAL ASSESSMENT – is charged to owners of
a property in the neighborhood that will benefit
from the project
 - TAX – is charged to property owners or income
earners without regard to any direct benefit
DEBT V TAX
1. Source of the obligation
- DEBT – is the contract
- TAX – is the law
2. Capacity to collect
- DEBT – due to the government in its corporate
capacity
- TAX – due to the government in its sovereign
capacity
KINDS OF TAXES
1) As to object
a. Personal capitation or poll tax – fixed
amount imposed on residents or persons of
certain class without regard to their property
or business
b. Property tax – assessed on the property or
things of certain class whether real or
personal, in proportion to their value or
other reasonable method of apportionment
c. Excise tax – imposed upon the performance
of an act or the enjoyment of a privilege or
the engaging in an occupation, profession or
business.
2) As to burden or incidence
a. Direct tax – demanded from a specific
person who is intended to be liable or
desired, to pay for the tax liability
b. Indirect tax – demanded from the first
instance from one person in the expectation
that he can shift the burden to another
3) As to tax rates
a. Specific tax – based on the weight, or the
volume, capacity and other physical unit of
measurement
b. Ad valorem tax – considers the selling price
or other specified value of the goods
c. Mixed
4) As to purposes
a. General or fiscal – raise revenue is the
purpose
b. Special, regulatory or sumptuary – for
regulation purpose or to discourage an
activity
5) As to scope and authority to impose
a. National – nationwide in tax scope
b. Local – local in tax scope
6) As to graduation
a. Progressive – takes a larger percentage of
income from high-income groups rather
than on lo-income groups
b. Regressive – takes a larger tax percentage
from low-income than high-income groups
c. Proportional – tax that takes the same
percentage of income from both high-
income and low-income groups.
LIMITATIONS ON THE EXERCISE OF THE TAXING POWER
1) Inherent limitations
2) Constitutional limitations
INHERENT LIMITATIONS
1) PUBLIC PURPOSE
- They cannot be levied for the improvement of a
private property or for the benefit and
promotion of private enterprises except where
the aid is incidental to public benefit
- A tax is not held void on the ground of want of
public interest unless the want of such interest is
clear
- Public use is equal to public welfare, benefit,
convenience and interest.
PLANTERS PRODUCTS V FERTIPHIL
- For a law to be valid, the tax must be for public
purpose and this means that the tax levied must
not be for the benefit of a single individual entity
LUTZ V ARANETA
- It may be for the benefit of a single large industry
if the protection thereof will directly or indirectly
affect the welfare of so great a portion of the
state’s population.
PASCUAL V SEC OF DPWH
- Public interest plays a major determining factor
in testing the constitutionality of a statute. If the
benefit granted to the public is merely incidental,
the validity of the statute will be struck down.
- TEST OF CONSTITUTIONALITY: whether the
statute is designed to promote the public
interest as opposed to the furtherance of the
advantage of individuals, although each
advantage to the individuals might accidentally
serve the public.
2) INTERNATIONAL COMITY
 - Refers to applying the foreign law or limiting
domestic jurisdiction out of respect for foreign
sovereignty
- It is the recognition which one nation allows
within its territory, to the legislative, executive
and judicial acts of another nation having due
regard to both the international comity, duty,
convenience and rights of its own citizens and
other persons under the protection of its laws.
3) INHERENTLY LEGISLATIVE
- It is lodged in the legislative, the discretion to
determine the kind, purpose, rate, subjects and
place of taxation. The authority to prescribe a
certain tax at a specific rate for a particular
purpose on persons and things within its
jurisdiction.
- In order that a court, be justified in holding a
statute to be unconstitutional, it must appear
that the power involved is purely legislative in
nature.
PEPSI V MUNICIPALITY OF TANUAN
- There is no undue delegation. The Constitution
even allows such delegation. Legislative powers
may be delegated to local governments in
respect of matters of local concern.
- By necessary implication, the legislative power
to create political corporations for purposes of
local self-government carries with it the power
to confer on such local governmental agencies
the power to tax. Under the New Constitution,
local governments are granted the autonomous
authority to create their own sources of revenue
and to levy taxes.
- There is no double taxation. The argument of the
Municipality is well taken. Further, Pepsi Cola’s
assertion that the delegation of taxing power in
itself constitutes double taxation cannot be
merited. It must be observed that the delegating
authority specifies the limitations and
enumerates the taxes over which local taxation
may not be exercised.
LIMITATIONS OR EXEMPTIONS ON THE DELEGATION OF
LEGISLATIVE POWERS
1) Tariff powers
2) Emergency powers
3) People at large
4) Local governments
5) Administrative bodies
IN PERMISSIBLE DELEGATION, THERE MUST BE AS
SHOWING THAT THE DELEGATION IS VALID WHEN:
1) It is complete in itself, setting froth the policy to
be executed by the delegate;
2) It fixes a standard, and limits of which the
delegate must conform in the performance of its
functions.
FERRER V MAYOR HERBET BAUTISTA
- The LGC, under the general welfare clause,
provides local governments the power to enact
measure that will benefit the people. Moreover,
SHT has another basis in law: RA 7279 or the
Urban Development and Housing Act. Again, the
foundation is police power.
MANDANAS V OCHOA
- Limitations on the power of the congress.
- What the phrase "national internal revenue
taxes" as used in Section 284 of the LGC included
are all the taxes enumerated in Section 21 of the
National Internal Revenue Code (NIRC), as
amended by R.A. No. 8424, namely: income tax,
estate and donor's taxes, VAT, other percentage
taxes, excise taxes, documentary stamp taxes,
and such other taxes as may be imposed and
collected by the BIR.
- In view of the foregoing enumeration of what are
the national internal revenue taxes, Section 284
of the LGC has effectively deprived the LGUs
from deriving their just share from other national
taxes, like the customs duties.
- Moving forward, the BIR and the BOC are
directed certify all national tax collections. This
ruling, also known as the "Mandanas Ruling," is
to be applied prospectively.
4) PRINCIPLE OF TERRITORIALITY
- No state may tax anything not within its
jurisdiction without violating the due process
clause of the constitution. The taxing power does
not extend beyond its territorial limits but within
such, it may tax persons, property, income or
business.
PRINCIPLES IMPOSED:
1) Source principle – imposing tax on the source of
the income within the state
2) Citizenship principle – state of residence may
impose a tax
3) Residency principle – when the taxpayer is a
resident of the state, then he may be taxed.

PROPERTY TAX; LEX RAE SITAE
- The tax shall be imposed by the state having
jurisdiction where the property is located
NON-RESIDENT IN THE PH
- Only taxed for the income derived or sourced
from the PH
CITIZEN OF THE PH, BUT A RESIDENT OF ANOTHER
- Taxed under the citizenship principle
5) TAX EXEMPTION ON THE GOVERNMENT
- There is no constitutional prohibition for the
government to tax itself but it is not wise to do
so.
- While the instrumentalities of the government
enjoying tax exemption, on the NIRC, it is the
exemption that is statutory in nature, which
means that the congress may remove it at any
time. The tax exemption is not based on the
inherent limitation of the government as this
limitation only applies to the Republic of the PH.
SOME OF THE NATIONAL GOVT INSTRUMENTALITIES
VESTED BY LAW, JURIDICAL PERSONALITIES:
1) Bangko central ng pilipinas
2) PH rice research institute
3) Laguna lake development authority
4) Fisheries development authority
5) Bases conversion development authority
6) PH ports authority
7) Cagayan de Oro port authority
8) San Fernando port authority
9) Cebu port authority
10) PH national railways
LRTA V CBAA
- To determine the taxability of an income of a
juridical entity, it is important to determine
whether the entity is a GOCC or an
instrumentality.
- If a governmental instrumentality, then they
are exempt from paying real property tax, but if
it is a GOCC, then it is subject to tax unless its
charter provides for an exemption.
- LRTAA is a GOCC, thus, no grant of tax exemption
and is subject to real property tax.
MCIAA V CBAA
- Petitioner is an instrumentality of the
government; thus, its properties actually, solely
and exclusively used for public purposes,
consisting of the airport terminal building,
airfield, runway, taxiway and the lots on which
they are situated, are not subject to real
property tax and respondent City is not justified
in collecting taxes from petitioner over said
properties. MCIAA is vested with corporate
powers but it is not a stock or non-stock
corporation, which is a necessary condition
before an agency or instrumentality is deemed a
government-owned or controlled corporation.
MCIAA has capital under its charter but it is not
divided into shares of stock. It also has no
stockholders or voting shares.
- The airport lands and buildings of MCIAA are
properties of public dominion because they are
intended for public use. As properties of public
dominion, they indisputably belong to the State
or the Republic of the Philippines, and are
outside the commerce of man.
MIAA V PARANAQUE
- MIAA is a government instrumentality vested
with corporate powers to perform efficiently its
governmental functions. MIAA is like any other
government instrumentality; the only difference
is that MIAA is vested with corporate powers.
- When the law vests in a government
instrumentality corporate power, the
instrumentality does not become a corporation.
Unless the government instrumentality is
organized as a stock or non-stock corporation, it
remains a government instrumentality
exercising not only governmental but also
corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain, police
authority and the levying of fees and charges. At
the same time, MIAA exercises “all the powers of
a corporation under the Corporation Law, insofar
as these powers are not inconsistent with the
provisions of this Executive Order.”
MIAA V PASAY CITY
- MIAA is not a government-owned or controlled
corporation under Section 2(13) of the
Introductory Provisions of the Administrative
Code because it is not organized as a stock or
non-stock corporation. Neither is MIAA a
government-owned or controlled corporation
under Section 16, Article XII of the 1987
Constitution because MIAA is not required to
meet the test of economic viability.
 - MIAA is a government instrumentality vested
with corporate powers and performing essential
public services pursuant to Section 2(10) of the
Introductory Provisions of the Administrative
Code. As a government instrumentality, MIAA is
not subject to any kind of tax by local
governments under Section 133(o) of the Local
Government Code.
- The exception to the exemption in Section 234(a)
does not apply to MIAA because MIAA is not a
taxable entity under the Local Government
Code. Such exception applies only if the
beneficial use of real property owned by the
Republic is given to a taxable entity.
MCIAA V MARCOS
- MCIAA was classified as government owned and
controlled corporation, hence the real property
being administered by MCIAA is subject to tax
- In the case of MCIAA V LAPU-LAPU, the SC
modified the earlier decision and re-classified
MCIAA as a government instrumentality. This is
the prevailing rule that MCIAA now is no longer
liable for real property taxes because it is now a
government instrumentality.
CONSTITUTIONAL LIMITATIONS
1) DUE PROCESS CLAUSE
- Section 1, Article III of the 1987 Constitution; no
person shall be deprived of life, liberty and
property without due process of law. Nor shall
any person be denied of equal protection of the
laws.
(2) ASPECTS OF DUE PROCESS
A. Substantive due process
- requires prior enactment of a law mandating the
imposition of tax as well as its collection. When
there is no valid law, then the government
cannot impose or collect taxes.
- It may be invoked where a taxing statute is
arbitrary finding no support in the constitution
then there is clear abuse of power.
- REQUISITIES:
a. Interest of public generally as
distinguished from those of particular
class, requires intervention of the state;
b. Means employed be reasonably
necessary to the accomplishment of the
purpose which is not unduly oppressive
c. Deprivation was done under the
authority of a valid law, or the
constitution
d. Deprivation was done after compliance
with a fair and reasonable method of
procedure prescribed by the law.
B. Procedural due process
- Embodied in the basic requirement of notice and
real opportunity to be heard
- A taxpayer’s property cannot be levied or
distrained without providing the said taxpayer,
an opportunity to present his case and adduce
evidence thereof.
CREBA V EXEC SEC. ROMULO
- MCIT does not tax capital but only taxes income
as shown by the fact that the MCIT is arrived at
by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sales. Besides,
there are sufficient safeguards that exist for the
MCIT: (1) it is only imposed on the 4th year of
operations; (2) the law allows the carry forward
of any excess MCIT paid over the normal income
tax; and (3) the Secretary of Finance can suspend
the imposition of MCIT in justifiable instances.
- Neither is their violation of equal protection
even if the CWT is levied only on the real industry
as the real estate industry is, by itself, a class on
its own and can be validly treated different from
other businesses.
VILLEGAS V HIU CHONG TSAI PAO HO
- Mayor Villegas argues that Ordinance No. 6537
cannot be declared null and void on the ground
that it violated the rule on uniformity of taxation
because the rule on uniformity of taxation
applies only to purely tax or revenue measures
and that Ordinance No. 6537 is not a tax or
revenue measure but is an exercise of the police
power of the state, it being principally a
regulatory measure in nature.
CIR V CA AND FORTUNE
- The new law would have its amendatory
provisions applied to locally manufactured
cigarettes which at the time of its effectivity
were not so classified as bearing foreign brands.
Prior to the issuance of the questioned circular,
“Hope Luxury,” “Premium More,” and
“Champion” cigarettes were in the category of
 locally manufactured cigarettes not bearing
foreign brand subject to 45% ad valorem tax.
- In order that there shall be a just enforcement of
rules and regulations, in conformity with the
basic element of due process, the following
procedures are hereby prescribed for the
drafting, issuance and implementation of the
said Revenue Tax Issuances: (1) This Circular shall
apply only to (a) Revenue Regulations; (b)
Revenue Audit Memorandum Orders; and (c)
Revenue Memorandum Circulars and Revenue
Memorandum Orders bearing on internal
revenue tax rules and regulations. (2) Except
when the law otherwise expressly provides, the
aforesaid internal revenue tax issuances shall not
begin to be operative until after due notice
thereof may be fairly presumed.
2) EQUAL PROTECTION CLAUSE
- Section 1, Article III of the 1987 Constitution; no
person shall be deprived of life, liberty and
property without due process of law. Nor shall
any person be denied of equal protection of the
laws.
- Rule on uniformity of taxation
- Requires all persons and things similarly
situated, be treated alike or the same, both as
regard to the rights conferred and
responsibilities imposed.
- No unjust discrimination or treatment different
than others and no persons be deprived of the
same protection of law as the others.
REQUIREMENT TO RAISE VIOLATION OF EQUAL
PROTECTION CLAUSE:
- Presence of clear an intentional discrimination
- The unlawful administration by offices of a
statute fair on its face resulting from the unequal
application to those who should be implemented
the same, is not denial of equal protection of the
law unless there is a clear and intentional
showing of discrimination.
ABAKADA GURO V PURISIMA
- The completeness and sufficient standard test
determine if the delegation of legislative power
is valid. A law is complete when it sets forth the
policy to be executed, carried out or
implemented. It lays down a sufficient standard
when it provides adequate guidelines or
limitations in the law regarding the acts of the
delegate.
- Under RA9335, the yardstick for removal is when
the revenue collection falls short of the target by
at least 7.5% with due consideration of all
relevant factors affecting the level of collection.
This standard is similar to inefficiency and
incompetence in the performance of official
duties which is a ground for disciplinary action
under civil service laws. Besides, the removal
here is subject to civil service laws, rules and
regulations and compliance with substantive and
procedural due process.
RATIONAL BASIS TEST; LUTZ V ARANETA
- The equal protection clause recognizes a valid
classification which has a reasonable foundation
or rational basis and not arbitrary.
SHELL V RANO
- No violation of equal protection clause on the
fact that there is no other person in the locality
exercising the same profession, designation or
calling to which the tax is imposed. It does not
mean that the ordinance held is hostile and
discriminatory.
ORMOC SUGAR V ORMOC TREASURER
- There is violation of equal protection clause
because the tax imposition is only on Ormoc
sugar.
- Taxing ordinance should not be singular,
exclusive to exclude any established business of
the same class to those who will be taxed it
should be for all of the same classification.
PHILRECA V DILG
- To be a valid tax imposition, it must tax not only
a single entity but all of the same class, the
government cannot tax a particular entity when
the classification in the law should be in terms
applicable to future conditions.
3) UNIFORMITY, EQUITABILITY, AND
PROGRESSIVITY OF TAXES
- Section 28 (1) Article VI of the 1987
Constitution; the rule on taxation shall be
uniform and equitable. The congress shall evolve
a progressive system of taxation.
- A. UNIFORMITY – taxable articles or kinds of
property of the same class should be taxed at the
same rate. Where the differentiation that is
 complained of, conforms to the practical dictates
of justice and equity, it is not discriminatory
within the meaning of this clause, thus uniform.
- B. EQUITABILITY – it is equitable when the
burden falls on those better to pay. TRAIN LAW
imposed more tax to those businesses earning
200,000 per annum and exempt those of sari-sari
stores.
- C. PROGRESSIVITY – in proportion to the
revenue of the taxable entities, the rate goes up
when the income or revenue of person also goes
up.
TOLENTINO V SECRETARY OF FINANCE
- The law is not unconstitutional. No. In
withdrawing the exemption, the law merely
subjects the press to the same tax burden to
which other businesses have long ago been
subject. The VAT is not a license tax. It is imposed
purely for revenue purposes. Equality and
uniformity of taxation mean that all taxable
articles or kinds of property of the same class be
taxed at the same rate. It is enough that the
statute or ordinance applies equally to all
persons, firms, and corporations placed in similar
situation.
4) TAX EXEMPT OF TRADITIONALLY EXEMPT
TAXPAYERS
- Section 28 (3), Article VI of the 1987
Constitution; Charitable institutions, churches
and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually,
directly, and exclusively used for religious,
charitable, or educational purposes shall be
exempt from taxation.
- REQUISITES FOR TAX EXEMPTION:
- Subject matter: charitable institutions, churches
and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements
- Usage: all lands, buildings, and improvements,
actually, directly, and exclusively used for
religious, charitable, or educational purposes
- Ownership: immaterial, only USAGE is relevant
- Coverage: exemption of REAL PROPERTY TAXES
only. Thus, excise tax, local business taxes and
donor’s tax are not covered by this exemption.
“ACTUALLY, DIRECTLY AND EXCLUSIVELY”
- The petitioner is burdened to prove that by
clear and unequivocal proof:
- That it is a charitable institution;
- That real properties actually, directly and
exclusively used for religious, charitable and
educational purposes
- EXCLUSIVE: with the exclusion of others, or
exclusive privilege
- DIRECT: immediate
- ACTUALLY: actual application of such
purpose prescribed by the law.
CHARITABLE INSTITUTIONS
- To be exempt, they must pass the TEST OF
CHARITY
- CHARITY is an act of gratitude by the said
institutions in a tangible thing like food,
necessities being rendered to those who needs
it, making the obligation of the government
lessened, and the latter in exchange, makes
these charitable institutions, be exempt from
real property tax.
- NOTE: a charitable institution does not lose its
character as such when it receives payment from
patients, whether out-patient or confined, so
long as the proceeds or the income earned, is
devoted or used all together for charitable
purpose ought to be achieved, and no money
inures to the benefit of private persons
operating or managing such.
- TEST OF EXEMPTION: it is not a strict
requirement but requires that the institution be
used in a certain way
LLADOC V CIR
- In the present case, what the Collector assessed
was a donee’s gift tax; the assessment was not
on the properties themselves. It did not rest
upon general ownership; it was an excise upon
the use made of the properties, upon the
exercise of the privilege of receiving the
properties
- A gift tax is not a property tax, but an excise tax
imposed on the transfer of property by way of
gift inter vivos, the imposition of which on
property used exclusively for religious purposes,
does not constitute an impairment of the
Constitution. As well observed by the learned
respondent Court, the phrase “exempt from
taxation,” as employed in the Constitution
(supra) should not be interpreted to mean
exemption from all kinds of taxes. And there
being no clear, positive or express grant of such
 privilege by law, in favor of petitioner, the
exemption herein must be denied.
LUNG CANCER OF THE PHILIPPINES
- Does not lose its character as a charitable
institution, when it leased a portion of it for
commercial purposes. The court ruled that, that
portion used for commercial purposes shall be
the only one taxed for real property tax, and not
those portions covered by tax exemption, like
buildings they use for charitable purposes.
SECTION 30. Exemptions from Tax on Corporations. -
The following organizations shall not be taxed under this
Title in respect to income received by them as such:
"(A) Labor, agricultural or horticultural organization not
organized principally for profit;
"(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit;
"(C) A beneficiary society, order or association,
operating for the exclusive benefit of the members such
as a fraternal organization operating under the lodge
system, or a mutual aid association or a nonstock
corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or
association, or nonstock corporation or their
dependents;
"(D) Cemetery company owned and operated
exclusively for the benefit of its members;
"(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer,
officer or any specific person;
"(F) Business league, chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stockholder or individual;
"(G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
"(H) A nonstock and nonprofit educational institution;
"(I) Government educational institution;
"(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of
a purely local character, the income of which consists
solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses;
and
"(K) Farmers', fruit growers', or like association
organized and operated as a sales agent for the purpose
of marketing the products of its members and turning
back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce
finished by them.
"Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code.
SECTION 30 OF THE NIRC
(2) TESTS TO DETERMINE TAX EXEMPTION:
1) Organizational test – corporation or association
is a non-stock, non-profit or a government
educational institution, in which the primary
purpose is described in Section 30 of the NIRC
only.
2) Operational test – the regular activities of the
corporation or association shall be exclusively
devoted to the accomplishment of the purpose
specified in Section 30 of the NIRC.
- It failed to meet the test, when substantial part
of it be for profit, then it is NOT EXEMPT.
5) TAX EXEMPT ON NON-STOCK, NON-PROFIT
EDUCATIONAL INSTITUTIONS
- Section 4 (3), Article XVI of the 1987
Constitution; All revenues and assets of non-
stock, non-profit educational institutions, used
actually, directly and exclusively for educational
purposes, shall be exempt from taxes and duties.
(INCOME TAX)
- Proprietary educational institutions including
those cooperatively-owned may likewise be
entitled to such exemption, subject to limitations
provided by the law, including restrictions on
dividends, or provisions for reinvestment.
- REQUISITES TO BE EXEMPT:
a. Subject matter: revenue or asset
b. Entity to be exempt: classified as non-stock,
non-profit educational institution
c. Income: used ACTUALLY, DIRECTLY AND
EXCLUSIVELY for educational purposes
d. Form of execution: taxes and not fees
REVENUES AND ASSETS:
- REVENUES: amounts earned by a person or
entity in conduction a business (sale of goods,
rendered services or return of investments)
- ASSETS: tangible or intangible properties owned
by a person or entity (real estate, cash deposit,
invested stocks on corporation)
NOTE:
A. REVENUES: When the non-stock, non-profit
educational institution proves that it uses its
revenues and assets actually, directly and
exclusively for educational purposes, it shall be
EXEMPT from INCOME TAX, VAT and LOCAL
BUSINESS TAX.
B. ASSETS: Meanwhile, when it uses its real
property for educational purposes, then it is
exempt from REAL PROPERTY TAX.
EDUCATIONAL INSTITUTION
- CIR V YMCA: Refers to schools, meaning the
formal education, hierarchically structured, and
chronologically graded learnings, organized and
provided by a formal school system for which
certification is required, in order for the learner
to progress through grades or move to higher
levels.
PROOF OF BEING AN EDUCATIONAL ENTITY:
1) It is an educational institution
2) Such is non-stock, non-profit educational
institution, meaning no part of the net income or
asset belong or inures to the benefit of private
persons or members
3) Review centers and tutorial centers are not
included.
DEPT OF FINANCE: ORDER NO. 137-87
- Tax exemption of the income tax is not limited to
revenue and assets derived from school
operations but extended to incidental income
like canteens, bookstore or dormitories.
- INCIDENTAL INCOME – must not only be
OWNED OR OPERATED by the school, nut must
be LOCATED within the school premises of the
school. Those operated by mere concessionaires
are TAXABLE.
- Income unrelated to school operations like
income from banks, trust funds, they are taxable.
- The use of the school’s income or asset is in
consonance to which, the school is created, must
be school-related. (Library expansion, etc.)
DEPT OF FINANCE: ORDER 149-95
- Interest income from banks, currency deposits
that are actually, directly and exclusively used for
educational purposes shall be exempt from
taxes, provided that requirements be fulfilled,
together with the annual information return,
audited financial statements
REVENUE MEMORANDUM CIRCULAR NO. 76-2003
- Revenues that are derived from assets used in
cafeterias, canteens, bookstores be EXEMPT
from taxation, but must be OWNED AND
OPERATED by educational institutions and
LOCATED within the educational premises
- They may be subject to internal revenue tax,
when the income on trade or business or other
activity, the conduct of which is NOT related to
the exercise of educational institutions of their
educational purpose.
NOTE:
1. REVENUE: When the non-stock, non-profit
educational institutions actually, directly and
exclusively use, for educational purposes,
revenues earned from leasing of its building,
revenues earned be EXEMPT FROM INCOME
TAX. This exemption no longer hinges on the
asset, but on revenue that was used for
educational purpose.
2. ASSET: When the non-stock, non-profit
educational institution show that it uses its
assets in the form of a real property for
educational purpose, then it shall be EXEMPT
FROM REAL PROPERTY TAX.
NOTE: When a school leases a portion to a school
cafeteria, bookstore, then it is not actually, directly and
exclusively used for educational purposes. Thus, the
LEASED PORTION be subject to REAL PROPERTY TAX.
Such exemption extends to facilities incidental or
reasonably necessary for the accomplishment of the
main purpose.
6) TAX EXEMPT ON DONATIONS GIVEN TO NON-
STOCK, NON-PROFIT EDUCATIONAL
INSTITUTIONS
- Section 4 (4), Article XVI of the 1987
Constitution: Subject to the conditions
prescribed by the Congress. All grants,
endowments, donations or contributions used
 actually, directly or exclusively for educational Section 1. Sectio enjoys a
purposes, shall be EXEMPT FROM TAX. 30 of n 28 preferential
- Section 101 (A) (3) of the NIRC: Donation is the (3) tax rate of
exempt from DONOR’S TAX when the recipient NIRC Article 10% of the
is a non-stock, non-profit educational institution VI taxable
and not more than 30% of the said donation or 2. Sectio income
gift is used for administrative purposes. n 30,
NIRC
SECTION 28 (3) ARTICLE VI & SECTION 4 (3) ARTICLE XVI
7) TAX ON LGUs
SEC. 28 (3) SECTION 4 (3) - Section 5, Article X of the 1987 Constitution:
ARTICLE VI ARTICLE XVI Each local government unit shall have a power to
OWNERSHIP Ownership is Property or create its own sources of revenues to levy taxes
immaterial in income must and charges and subject to such guidelines and
determining tax be owned by a limitations, the congress may provide, consistent
exemption non-stock, with the basic policy of local autonomy. Such
non-profit taxes, fees and charges shall accrue exclusively
educational to the local governments
institution - The congress, not only one has the power to tax.
USAGE OF Used ADE for Used ADE for
THE religious, educational 8) NON-IMPRISONMENT FOR NON-PAYMENT OF
PROPERTY charitable and purposes POLL TAXES
educational - Section 20, Article III of the 1987 Constitution:
purposes No person shall be imprisoned for debt, or non-
SOURCE OF Immaterial in Immaterial in payment of tac.
THE INCOME determining tax determining - The inhibition was never meant to include
exemption tax exemption damages arising from actions ex-contractu or
SUBJECT Covers only Covers BOTH contractual obligations
MATTER OF PROPERTY, LAND, PROPERTIES, - The taxpayer cannot be imprisoned for non-
TAXATION BUILDING, assets and payment of poll tax, but may be imprisoned
IMPROVEMENTS revenues when he has done a wrong constituting a
*REAL PROPERTY *INCOME TAX criminal act.
TAX EXEMPT AND REAL
PROPERTY TAX 9) NON-IMPAIRMENT CLAUSE
EXEMPT - Section 10, Article III of the 1987 Constitution:
No law impairing the obligation of contracts shall
be passed.
OTHER ENTITIES OF SEC 30 NIRC / NON-STOCK, NON- - The limited application to laws that derogate
PROFIT EDUC / PROPRIETARY EDUC INSTITUTION from prior acts, or contracts, enlarging abridging
in any manner, changing the terms of a contract
OTHER NON-STOCK, PROPRIETAR - Impairment only when the subsequent law
ENTITIE NON-PROFIT Y EDUC changes the terms of a contract
S ON EDUC INSTITUTION
SEC 30, INSTITUTION CITY GOVERNMENT OF QUEZON V BAYANTEL
NIRC - Since RA 7633 amended Bayantel’s original
REAL Exempt Exempt under Exempt franchise and granted it real property tax
PROPERT under Section 28 (3) under exemption from its real properties that is directly
Y TAX Section Article VI Section 28 (3) used in its operations, the Quezon City
28 (3) Article VI government cannot levy real property taxes on
Article the real properties of Bayantel that are in
VI Quezon City area.
INCOME Exempt Exempt under NOT - Indeed, the grant of taxing powers to local
TAX under EXEMPT, but government units under the Constitution and
 the LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to
a declared national policy. The legal effect of the
constitutional grant to local governments simply
means that in interpreting statutory provisions
on municipal taxing powers, doubts must be
resolved in favor of municipal corporations.
10) FREEDON OF RELIGION
- Section 5, Article III of the 1987 Constitution: No
law shall be made respecting an establishment of
a religion or prohibiting the free exercise
thereof. The free exercise and enjoyment of
religious profession and worship without
discrimination shall forever be allowed. No
religious test shall be required for the exercise of
civil and political rights.
(2) CONCEPTS MUST BE NOTED:
A. FREE EXERCISE CLAUSE – freedom to believe and
freedom to act. The first is absolute and the
second cannot be. Regulation on the protection
of society not to infringe on the protection of
freedom.
B. NON-ESTABLIHSMENT CLAUSE – separation of
the church and state. Non-forcing to join one
religion and not on the other. No influence and
bias or preference by which the state enforces
laws. No tax, big or small shall be used or levied
upon people to support a particular religion.
ACCOMODATION
- Recognition of the reality that some government
measures may not be imposed on certain
portions of the population for the reason that
these measures are contrary to their religious
belief. THE STATE IS NOT INVOLVED.
AMERICAN BIBLE SOCIETY V CITY OF MANILA
- A tax on the income of one who engages in
religious activities is different from a tax on
property used or employed in connection with
those activities. It is one thing to impose a tax on
the income or property of a preacher.
- The power to tax the exercise of a privilege is the
power to control or suppress its enjoyment. The
power to impose a license tax on the exercise of
these freedoms is indeed as potent as the power
of censorship which this Court has repeatedly
struck down. It is not a nominal fee imposed as a
regulatory measure to defray the expenses of
policing the activities in question. It is in no way
apportioned.
- The requirement that the obtention of the
Mayor's permit before any person can engage in
any of the businesses, trades or occupations
enumerated therein, is not applicable to the
Society, as its business, trade or occupation is
not particularly mentioned in Section 3 of the
Ordinance, and the record does not show that a
permit is required therefor under existing laws
and ordinances for the proper supervision and
enforcement of their provisions governing the
sanitation, security and welfare of the public and
the health of the employees engaged in the
business of the Society.
11) ORIGIN OF REVENUE, APPRIOPRIATION AND
TARRIFF BILLS
- Section 24, Article VI of the 1987 Constitution: All
appropriations, revenues, tariff bills, bills with
increase of public debt and bills of local
application, and private bills, shall originate
exclusively in the House of Representatives, but
the SENATE may concur with amendments.
- Members of the house are expected to be more
sensitive in local needs and problems, the senate
is expected to approach the same problems of
national perspective.
- The SENATE MAY PROPOSE THEIR OWN
VERSION OF THE House of Representative’s
prior bill.
12) FLEXIBLE TARRIF CLAUSE
- Section 28 (2) Article VI of the 1987
Constitution: The congress, may by law,
authorize the president to fix the specified limits
and subject to such limitations, restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues and other
duties, imposts within the framework of the
national development programs of the
government.
13) VOTING REQUIREMENT FOR THE GRANT OF TAX
EXEMPTION
- Section 28 (4) Article VI of the 1987
Constitution: No law granting any tax exemption
shall be passed without the CONCURRENCE OF
MAJORITY OF ALL THE MEMBERS OF THE
CONGRESS.
- The provision does not apply to the grant or
revocation of tax amnesty and revocation of tax
exemption. Bill becomes a law when approved
by both houses and by the president of the PH.
MAJORITY OF ALL THE MEMBERS PRESENT

14) NON-IMPAIRMENT OF THE SC’s JURISIDICTION
- Section 2, Article VIII of the 1987 Constitution:
The congress shall have the power to define,
prescribe and apportion the jurisdiction of
various courts, but may not deprive the SC of its
jurisdiction over cases enumerated under
Section 5. No law shall be passed re-organizing
the judiciary when it undermines the security of
tenure of its members.
- Section 3, Article VIII of the 1987 Constitution:
The judiciary shall enjoy fiscal autonomy.
Appropriations from the judiciary may not be
reduced by the legislature below the amount
appropriated for the previous year and after
approval, be automatically and regularly
released.
DOCTRINE OF JUDICIAL NON-INTERFERENCE
- Courts cannot determine the wisdom of the law;
hence, courts cannot interfere with the laws
enacted unless they are arbitrary or issued with
grave abuse of discretion
TAXPAYER’S SUIT
- Taxpayers are allowed to sue where there is a
claim that public funds are illegally disbursed or
that the money is being deflected to any
improper purpose or that public funds are
wasted through enforcement of an invalid or
unconstitutional law.
- The party must prove that he has a sufficient
interest in preventing illegal expenditure of
money raised in taxation. Personal or substantial
interest and that he will sustain an injury as a
result of its enforcement or be benefited by the
judgement of the case.
LEGISLATIVE APPROVAL BY RE-ENACTMENT
- Where the statute is susceptible of meaning
placed upon it by a ruling of the government
agency charged with its enforcement, and the
legislative thereafter, re-enacts the provisions
without substantial change, such action sis to
some extent confirmatory, that the ruling carries
out the legislative purpose.
CITIZEN’S SUIT
- Rule whereby any Filipino citizen in
representation of others, including minors or
generations yet unborn, may file an action to
enforce the rights or obligations under
environmental laws
REQUISITIES OF TAXPAYER’S SUIT FOR CHALLENGING
THE CONSTITUTIONALITY OF A TAX MEASURE OR
TAXING AUTHORITY: SAGUISAG V EXECUTIVE
SECRETARY PACQUITO
1. Character of the funds or other assets involved
in the case
2. Presence of clear case of disregard to the
constitutional or statutory prohibition by public
respondent agency or instrumentality of the
government
3. Lack of other party that has a more direct or
specific interest in raising present questions.
FORMS OF ESCAPE FROM TAXATION
I. RESULTING TO LOSSES:
1) TAX EVASION
- Also known as TAX DODGING
- A scheme used outside lawful means, and when
the availed of, usually subjects the taxpayer to
further additional civil and criminal liabilities.
- Connotes (3) factors:
a. End to be achieved. There is payment of less
than what is known by the taxpayer to be
legally due; and there is non-payment of tax
when it is shown that the tax is due
b. Evil state of mind. The accompanying state
of mind which is described as being evil, in
bad faith, willful, deliberate and not
accidental
c. Unlawful course of action. There is failure to
do a lawful action
LIABILITY FOR TAX EVASION
- persons guilty shall be liable for:
a. Deficiency taxes
b. Surcharges
c. Interests
d. Penalties
- Individual taxpayers: shall be prosecuted for
their own acts
- Corporate taxpayers: it shall be the partners,
presidents, general managers, and those liable
or responsible for the company be prosecuted
CIR V ESTATE OF TODA
- Separate sales were established making it
believe that such sales were valid and used as an
aid for fraud. The elements of tax evasion are all
present.
 - There was finding to be a mitigation of the tax
liabilities and such was not for the main purpose
of the business, but it was for tax evasion.
- General Rule: The corporation has a juridical
personality that is distinct from its officers, but
the officers may be liable when:
- Exception:
1. He assents to the:
a. Patently unlawful act of the corporation;
b. there was bad faith or gross negligence in
directing the affairs
c. there was conflict of interest resulting to
damages to the corporation
2. He consents to the issuance of watered-down
stocks having knowledge thereof, and did not file
with the corporate secretary, his written
objection thereto
3. He agrees to hold himself liable personally or
solidarily with the corporation
4. He is made, by special provision of the law, to
answer personally for his corporate actions
2) TAX AVOIDANCE
- Also called TAX MINIMIZATION
- Is a tax-saving device within the means
sanctioned by the law, and used by the taxpayer
in good faith and at arms-length
- Example: the property transferred to a place
with low tax imposed.
- The tax option is a tax-saving scheme where the
law grants the taxpayer the option to choose
between 2 schemes.
3) TAX EXEMPTION
- Immunity or the freedom from the charge or
burden to which others are subjected.
- It is the waiver of the government’s right to
collect the amounts that it could have collected
under tax laws.
- There is freedom from the imposition and
payment of taxes.
- General Rule: It is not allowed or applicable in
the PH
- Exception: Unless there is a grant of a clear and
unequivocal provision of the law, on the basis of
language that is too plain to be mistaken and
cannot be extended by mere implication or
interference.
TYPES OF TAX EXEMPTION
A. EXPRESS – granted by the explicit language of
the state
B. IMPLIED – granted by mere application or
implication
C. CONTRACTUAL – those agreed to, by the taxing
authorities, in contracts such as those lawfully
entered into by the government in bonds,
debentures and agreements, in its private
capacity, sheds cloak on authority waiving
governmental immunity.
TAX AMNESTY
- General pardon or intentional overlooking by the
state, of its authority to impose taxes and
penalties on person otherwise guilty of evasion
or violation of revenue or tax laws.
TAX AMNESTY V TAX EXEMPTION
- Tax amnesty is the condonation of an existing
tax liability
- Tax exemption is immunity from any tax liability
COMPROMISE V TAX AMNESTY
- Compromise can be applied when there is
reasonable doubt in the assessment or when the
taxpayer has the financial liability to pay the tax
and applied anytime
- Tax amnesty means that the applications
depend on the grounds provided in special law
and it is availed of only during the period
specified by the law. Special provisions which
normally involve a one-time opportunity offered
to errand taxpayers to settle their previously
unpaid taxes without need of further payment of
penalties or facing prosecution
TAX ASSUMPTION V TAX EXEMPTION
- To assume means to take on or to become bound
by another, or to put oneself to the place of
another, is an obligation or a liability
- Tax assumption is a freedom from a duty or the
liability or a privilege that is given to judgement
debtor by law, to retain a certain property
without liability. Liability accrues but the tax
liability can be shifted to another.
- Tax exemption is immunity from any liability,
and no tax will accrue.
II. NOT RESULTING TO LOSSES
1) SHIFTING
- Transfer of a burden or incidence of taxation
- VAT: The seller shifts the burden of paying the
tax to the buyer, despite the absence of an
agreement between the seller and the buyer.
- In the event that the seller fails to shift the
burden or fails to remit the VAT to the BIR, the
 latter must collect the tax from the seller and not
the buyer.
- The tax liability remains with the seller. The only
thing that is passed on or shifted is the
incidence of tax or burden of tax and not the tax
liability.
IMPACT OF TAXATION
- Impact of taxation is on the person it had
imposed the tax first, to which, such person is
liable to pay or bears the impact of paying the
said tax to the government.
INCIDENCE OF TAXATION
- is the ultimate result of shifting tax liability when
buying something
- tax burden is divided among the buyers or sellers
- business to the consumers
2) CAPITALIZATION
- Reduction of the price in order to reduce the
amount of taxes.
3) TRANSFORMATION
- A scheme where the producer absorbs the
payment of tax in order to reduce the prices and
maintain a market share.
- He recovers his share by imposing additional tax
expenses and improving the process of
production
- Tax is transformed into a gain, through the
medium of production
RULE ON THE CONSTRUCTION OF TAX LAWS
A) STRICT INTERPRETATION RULE
- A tax cannot be imposed without a clear and
express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter
in construing statutes implies with peculiar
strictness to the tax laws and the provisions of
taxing act are not to be extended by implication.
- In case of doubt, statutes are to be construed
most strongly against the government and in
favor of the people or the taxpayers because tax
liability as a burden, cannot be presumed to be
imposed beyond what the statutes clearly
import.
B) STRICTISSIMI JURIS
- Laws granting tax exemption are construed
against the taxpayer and in favor of the taxing
authority or the government.
- He who seeks to be privileged in exemption must
prove that the terms of the words are too plain
to be mistaken because the state cannot strip
itself of the authority to tax, which is the most
essential power, just by doubtful words
- Applies to tax exemptions, exclusions, and
deductions, also to amnesties, and refund of
taxes.
EXCEPTIONS TO THE RULE ON STRICTISSIMI JURIS:
1. when the statute granting tax exemption
expressly provides for a liberal interpretation
2. refers to special taxes governed by special laws
3. exemption is in favor of traditionally exempt
taxpayers
4. exemption is granted in favor of the
government, and its political subdivisions and
instrumentalities
5. exemption refers to public properties owned
and controlled by the state or its political
subdivisions
6. taxpayer falls within the purview of exemption
by clear legislative intent.
C) RULE IN GRANT OF TAX POWER
- Any ambiguity shall be resolved in favor of the
grant of the taxing power of the state which is
inherent.
- No enabling law is necessary for such grant and
does not apply to LGUs, municipal corporations
because they are not clothed with the inherent
power of taxation
- Any doubt and ambiguity shall be resolved not in
favor of the municipality
CIR V ATENEO
- Those who are covered by the said tax
exemption shall first be determined, and only
after such determination, the rule on the
construction of tax laws shall be strictly
construed against taxpayers, come into play
- ADMU is not subject to contractor’s tax in being
included, as one who is engaged in selling ist
services.
TAX LAWS AND DOCTRINES IN TAX
TAX LAW
- Body of rules, under which a public authority has
acclaim on the taxpayers, requiring them to
transfer the authority, part of their income or
property
 - It falls within the domain of public law – rules stated policies, goals, objectives, plans and
that determine and limit the activities and programs of the Bureau of all areas of
reciprocal interests of the political community operation except the auditing.
and the members composing it, as distinguished b. Revenue memorandum circulars – publish
in the relationship between individuals which is pertinent and applicable portions as well as
within the sphere of private law. amplifications of laws, rules and regulations
TAX EXEMPTION AND TAX EXCLUSION and precedents issued by the Bureau of
- Exemption is the immunity and privilege, the Internal revenue and other offices and
freedom of charge or burden which others are agencies.
subjected c. Revenue administrative orders –
- Exclusion is the removal of otherwise taxable promulgate and deal strictly with pertinent
items from the reach of taxation. It is also administrative set up of the bureau, more
immunity or privilege which frees the taxpayer specifically the RAO’s prescribed
from charge to which others are subjected. organizational structure and statement of
PROSPECTIVITY OF TAX LAWS: functions and responsibilities of the BIR
- GENERAL RULE: Prospective in application, offices, definitions, delegations of authority,
unless the language of the statute clearly staffing and personnel requirements as well
provides otherwise as standards of performance.
- EXCEPTION: May be applied retroactively if d. Revenue delegation of authority orders –
there is a clear provision in the law, providing for refers to the functions delegated by the
the said retroactive application. commissioner to revenue the officials in
- EXCEPTION TO THE EXCEPTION: If it will result accordance with the law.
into a harsh and oppressive imposition of taxes, e. Rulings – official interpretations of the CIR
must not be retroactively applied because it will on the inquiries of a taxpayer who requests
violate the due process clause. a clarification or confirmation on certain
provisions of the tax code, other tax laws, or
their implementing rules and regulations
SOURCES OF TAX LAWS:
1) CONSTITUTION REVENUE REGULATION V ADMINISTRATIVE RULING
- Does not impose tax liability, but only the power REVENUE ADMINISTRATIEV
to tax. REGULATION RULING
- LGUs are subject by limitations ISSUING Issued by the Issued by:
BODY secretary of 1. the
2) STATUTES finance commissioner
- Which specifically imposes or levies taxes, fees of internal
and charges revenue (if
- They provide restrictions to the power of the ruling of first
president under flexible tariff clause. impression)
- National applicability in scope 2. its
subordinates
3) ISSUANCE BY SEC. OF FINANCE (if ruling of 2nd
- In the form of revenue regulations and and so forth
department orders impression)
- Promulgated upon the recommendation of the NATURE An The best guess of the
commissioner of internal revenue implementing commissioner
rule of tax laws concerning tax
4) ADMINISTRATIVE ISSUANCES applications
- Issued by the CIR in the following forms: SCOPE Applicable to Only applicable to the
a. Revenue memorandum orders – issuance all taxpayers taxpayer who
that provides directives, instructions and requested the said
prescribes guidelines, outlines processes and ruling, except when it
operations, activities, workflows, methods, is in the nature of a
procedures necessary in the implement of
 general interpretative
ruling PROSPECTIVITY OF TAX LAWS
BINDING Binding upon Not binding, but - tax laws are prospective in application unless the
EFFECTS the courts for it entitled a great weight language of the statute clearly provides
UPON THE being a otherwise
COURTS subordinate - may be applied retroactively if there is a clear
legislation provision in the law providing for such
exemption. However, if the law will result into a
harsh and oppressive imposition of taxes, it must
LEGISLATIVE RULE V INTERPRETATIVE RULE not be retroactively applied because it will
LEGISLATIEV INTERPRETATIVE violate the due process clause of the
RULE RULE constitution.
NATURE Subordinate Interpretative in
legislation nature NO ESTOPPEL AGAINST THE GOVERNMENT (CIR V
PURPOSE Designed to Designed to PETRON)
implement provide guidelines - The state, in the performance of its
primary to the law which governmental function, is not estopped by the
legislation by the administrative neglect or omission of its agents, and nowhere is
providing the agency is in it truer than the field of taxation, and said
details charge of principle cannot be applied to work injustice
thereof enforcing against an innocent party
REQUIREMENT Publication Needs nothing - The CIR insists that the government is not
FOR and hearing further than the estopped from collecting from Petron, the excise
APPLICABILITY bare issuance, for tax liabilities accrued to the latter as a result of
it gives no real the avoidance of the TCCs.
consequence
more than what IMPRESCRIPTIBILITY OF TAXES
the law itself - The government’s right to assess or collect the
already has tax, does not prescribe
prescribed - Limitations upon the government’s right will not
be presumed in the absence of a clear express
TAX ORDINANCES statutory provision to that effect.
- a municipal tax ordinance empowers a local
government unit to impose taxes (2) TYPES OF DOUBLE TAXATION
- local in their extent 1. DIRECT DOUBLE TAXATION (STRICT SENSE)
- Tax imposed on:
TAX TREATIES a. The same subject matter or property;
- a bilateral agreement between 2 states b. For the same purpose;
- the purpose of each international agreement is c. By the same taxing authority;
to reconcile the national fiscal legislations of the d. Within the same jurisdiction or taxing
contracting parties in order to help the taxpayer district;
to avoid simultaneous tax liabilities in two e. During the same period;
jurisdictions f. And of the same kind and character
- created to eliminate international juridical 2. INDIRECT DOUBLE TAXATION (BROAD SENSE)
double taxation, which is defined as the - Tax imposed on:
imposition of comparative taxes in 2 or more a. The same subject matter or property;
states on the same taxpayer, in respect of the b. For the same purpose;
same subject matter and for identical periods c. Within the same jurisdiction or taxing
district;
PACTA SUNT SERVANDA d. During the same period;
- performance of good faith of the treaty e. With the same kind and character;
obligation on the part of states that enter into f. DIFFERENT TAXING AUTHORITIES
agreement

CONSTITUTIONALITY OF DOUBLE TAXATION
- No constitutional prohibition against double
taxation
- It is obnoxious only when the taxpayer is taxed
twice, for the benefit of the same jurisdiction for
the same purpose. Thus, when it is obnoxious, it
violates the due process clause of the
constitution.
- Direct double taxation is a violation of the due
process clause of the constitution
MODES OF ELIMINATING DOUBLE TAXATION
A. EXEMPTION METHOD
- The income or the capital which is taxable in the
state of the source or situs, is exempted in the
state of residence, although it may be taken into
account in determining the rate of the tax
applicable to taxpayer’s remaining income or
capital.
B. CREDIT METHOD
- Although the income or the capital which is
taxed in the state of the source is still taxable in
the state of residence.
- The tax paid in the former, is still taxable
CREDITED against tax levied in the latter.
PROHIBITION ON SET-OFF OR COMPENSATION
A. PHILEX MINING V CIR
- Taxes cannot be subject of compensation for the
simple reason that the government and the
taxpayer are not creditors and debtors of each
other.
- Debts are due to the government in its corporate
capacity and taxes are due to the government in
its sovereign capacity
B. SECTION 76 OF THE NIRC
- If the sum of the quarterly tax payments is made
during the said taxable year is not equal to the
total tax that is due, the corporate may either:
a. Pay the balance of the tax that is still due;
b. Carry over the excess credit;
c. Credited or refunded with excess of the
amount paid, as the case may be.
CONCEPT OF INCOME
INCOME
- Amount of money coming to an individual or a
corporation, within a specified time, whether as
a payment for the services rendered, interests
from profits from investment. Unless otherwise
specified, it means cash or its equivalent. It can
be thought of as the flow of fruits of one’s labor.
INCOME V CAPITAL
1. INCOME is the flow, while CAPITAL is the fund;
2. INCOME is the flow of services rendered by a
capital, while CAPITAL is the fund of property
existing at the instant time
3. INCOME is a payment of money from any other
benefit rendered by a fund or a capital in relation
to such fund, through a period of time, while
CAPITAL is the tree
4. INCOME is the service of wealth or the fruit,
CAPITAL is the tree
5. INCOME is also defined as profit or gains
REQUISITES FOR THE TAXABILITY OF AN INCOME:
1. There must be gain;
2. The gain must be realized;
3. The gain must not be excluded by the law or any
treaty from taxation
I. THERE MUST BE GAIN
A. SEVERANCE OR REALIZATION TEST
- Income is recognized when there is separation of
something which is of exchangeable value.
- RETURN ON CAPITAL – income earned from the
transaction including the capital itself, it is
TAXABLE
- RETURN OF CAPITAL – amount of the
investment and not an income, which is NOT
TAXABL
B. TAX BENEFIT RULE
- Income is recognized when there is recovery of
an expense, provided that there is concurrence
of
- the following elements:
a. Prior to the year of recovery of the expense,
the expense was deducted in the income;
b. The recognition of the expense as an
allowable deduction resulted into the
payment of lower taxes.
- Expenses are the amount spent by the taxpayer
in relation to his business, trade or profession
and can be deducted from the gross income,
resulting into a lower amount of net income,
making a lower tax liability.
C. ECONOMIC BENEFIT
- applies to cash basis taxpayers who receives
compensation for services
- the taxpayer is taxed when the taxpayer receives
an economic benefit from an absolute right to
receive money in the future.
- economic and financial benefits that are:
1. fixed;
2. irrevocable fund or trust to be used for the
taxpayer’s sole benefit;
3. are not subject to the taxpayer’s debtors.
- can apply to situations involving an employee
deferred compensation that is deposited in trust
or escrow account
- cash basis taxpayer is taxed when the taxpayer
rec3ived economic benefit from a right to
receive property in the future
D. CLAIM OF RIGHT
- Recognition of a gain is conditioned upon the
presence of a claim of right to the alleged gain
and an absence of a definite unconditional
obligation to return
- In the instance where the taxpayer receives
money and other property and treats it as its
own under a claim of right, that payments are
made not contingently, then the said amounts
be included in the income of the said taxpayer,
even though the right to income has not
perfected or property in dispute and that
property may later be recovered from the
taxpayer.
- When the taxpayer includes the amounts in the
income pursuant to a claim of right and repays
the said amounts, he may be entitled to a
deduction in the year of the repaymen
E. ALL EVENTS TEST
- Requires that the right to income or liability be
fixed with reasonable certainty. It is not required
to be exact but with reasonable estimation or
determined with reasonable certainty.
- REQUISTIES:
1. The computation remains uncertain if its
basis is unchangeable;
2. The test is satisfied where computation
be unknown, but not as much as
unknowable within the taxable year;
3. Amount of liability not have to be
determined exactly but must be of
reasonable accuracy only
F. INCOME FROM WHATEVER SOURCE
- Legislative policy to include all the income that is
not expressly exempted within the class of
taxable income under our laws. Whether such
was sourced from legal or illegal, the income is
subject to tax, so long as it is not exempted or
excluded under Section 32 (B) of the NIRC.
- Even if the government official misappropriated
the funds of the government, it is part of his
income and even though the amount or the fund
was sourced from an illegal activity.
II. REALIZATION OF GAIN
A. ACTUAL
- Income is possessed by the taxpayer, which is
actually received by the employee as salaries
from his employer
B. CONSTRUCTIVE
- Income that is not yet possessed by the taxpayer,
but he has control over it, meaning, he can
demand the person to give him his gain or salary
- Example: dividend income is earned today, but it
will be given in cash in another day. Thus, the
stockholder has constructive realization of his
gain with regard to the dividend income, today,
even if he will get the cash equivalent in another
day.
C. PRESUMPTIVE
- Concerns the income that is dictated by the law
- Example; the law presumed a gain that is
equivalent to the gross selling price or the fair
market value, whichever is higher, in cases of
real property classified as a capital asset. When
the seller incurred losses, there is still realized
gain because the law dictated the amount, which
is to be taxable by them.
TYPES OF INCOME TAX SYSTEM
SCHEDULAR V GLOBAL INCOME TAX
- SCHEDULAR is one which separate taxes are
imposed on different categories of income, while
GLOBAL imposes a single tax on all income,
whatever its nature
SCHEDULAR SYSTEM V GLOBAL SYSTEM
- SCHEDULAR SYSTEM, the gross income and
deductible expenses are determined separately
for each type of income, in some cases, limited
deductions or no deductions. GLOBAL SYSTEM,
there is not matching of particular type of
income to the expenses that is incurred to derive
the income. All the income and expenses are
considered together to arrive at a single net gain
that is subject to tax.
FEATURES OF THE PHILIPPINE INCOME TAX LAW
1. Income tax is direct and progressive tax
2. Direct tax because the tax liability and the
burden or incidence of tax is imposed on the
taxpayer and cannot shift the burden of tax
without the express stipulation between the
taxpayer and the buyer or the client
 3. It is an excise tax because it is tax on the right to
earn an income
4. It is progressive tax because the imposition of
the tax, on the taxpayer’s liability to pay is taken
into account
CRITERIA IN IMPOSITION OF INCOME TAX
a. SOURCE PRINCIPLE
- State may impose tax on the income sourced
within such state and this is the basis of the
imposition of the income tax on the income
earned by all taxpayers, except resident citizens,
if the income is sourced within the PH
b. CITIZENSHIP PRINCIPLE
- State may impose income of a citizen regardless
of the source. This is the basis of imposition of
the income tax that is earned by a resident
citizen, regardless of the source.
c. RESIDENCE PRINCIPLE
- State imposes tax on the income of the resident,
regardless of the source.
KINDS OF INCOME TAXPAYERS AND THE GENERAL
PRINCIPLES OF THEIR TAXABILITY
A. SECTION 23 OF THE NIRC
1. A citizen of the PH residing therein is taxable
on all the income derived from sources
within and without the PH
2. A non-resident citizen is taxable only on the
income derived from sources within the PH
3. An individual citizen of the PH who is
working abroad and deriving income from
abroad as an OWF is taxable only from his
income sourced from within the PH.
Provided that: Seaman, that is a citizen of the
PH who receives compensation for services
rendered abroad for being a member of a
vessel, engaged exclusively in the
international trade, shall be treated as an
OFW who is a non-resident citizen
4. An alien individual whether or not a resident
of the PH, shall be taxable only on their
income sourced from within the PH
5. A domestic corporation shall be taxable on
all income derived from sources within and
without the PH
6. Foreign corporation, whether engaged in
business or trade in the PH, shall only be
taxable on their income sourced from within
the PH
B. INDIVIDUAL TAXPAYERS
1. RESIDENT CITIZEN
- A resident or citizen of the PH residing therein
shall be taxable on all his income sourced from
within and without the PH, or worldwide income
2. NON-RESIDENT CITIZEN
a. Citizen who establishes to the satisfaction of the
commissioner of the fact of his physical presence
abroad with a definite intention to reside
therein,
b. Citizen of the PH who leaves the PH during the
taxable year, to reside abroad, either as an
immigrant for employment or on a permanent
basis
c. Citizen of the PH who works and derives income
abroad and whose employment requires him to
be physically present abroad most of the time
during the taxable year. More than 183 days
(most of the time). If foreign corporation
exercises control over the employee, then he is
a NON-RESIDENT CITIZEN, but if domestic, then
RESIDENT CITIZEN. OVERSEAS CONTRACT
WORKER OR OCW, is a non-resident citizen so
long as his employment contract passes thru the
POEA.
d. Citizen who has been previously considered as a
non-resident citizen and who arrives in the PH at
anytime during the taxable year to reside
permanently in the PH, shall be treated as a non-
resident citizen to his income derived from
sources abroad until the date of his arrival in the
PH
3. RESIDENT ALIEN
- Individual whose residence is within the PH, and
who is not a citizen thereof and taxable only
from his income derived from the PH
- Requirement for a foreign national to be a
resident in the PH:
A. Has a SRRV holder;
B. Acquired a real property in the PH, and
spends most of the time physically in the PH
since 2005;
C. Registered as a taxpayer to the BIR
4. NON-RESIDENT ALIEN ENGAGED IN TRADE
OR BUSINESS
- An individual whose residence is not within the
PH, and not a citizen thereof, shall be taxable
only on his income derived from sources within
the PH
5. NON-RESIDENT ALIEN NOT ENGAGED IN
TRADE OR BUSINESS
- Taxable only on the income derived from sources
within the PH
- If staying more than 180 days during the
taxable year, he is deemed a non-resident alien
DOING business in the PH
C. CORPORATIONS
1. DOMESTIC CORPORATIONS
- Entity incorporated under the laws of the PH,
shall be taxable on all income derived from
sources within and without the PH
2. RESIDENT FOREIGN CORPORATIONS
- Foreign corporations engaged in trade or
business in the PH, shall be taxable only in their
income derived from sources within the PH
- INTENTION: Important for the foreign
corporation to prove that it is conducting
business in the PH
3. NON-RESIDENT FOREIGN CORPORATIONS
- Taxable only on their income derived from
sources within the PH
D. ESTATES AND TRUSTS
1. ESTATE
a. If under judicial settlement – it shall be the
estate, as a taxpayer, who will report the
income that is earned from the properties
forming part of the estate, and shall be
taxable from their income derived from
sources within and without the PH
b. If under extrajudicial settlement – is shall be
the heirs of the deceased, who shall report
the income that is earned from the
properties forming part of the estate. If the
heirs formed an unregistered partnership,
the partnership shall be the one to report
the income earned from the properties
forming part of the estate.
2. TRUST
- Separate taxpayer, if the income is accumulated
in trust for the benefit of an unborn or
unascertained person with contingent interests
and if accumulated and held for future
distribution under trust which can no longer be
modified, thus, the trust must be in the nature of
an irrevocable trust and taxable on its income
derived from sources within and without the PH.
SOURCES or SITUS OF INCOME (SECTION 42 OF THE
NIRC)
1. SERVICES
- Compensation for labor or personal services
performed in the PH, shall be considered income
sourced from within the PH. Residence of the
person rendering the service is immaterial and
not indicia of the situs of tax.
- “THE SITUS OF INCOME FROM SERVICES, SHALL
BE THE PLACE WHERE THE SERVICES ARE
RENDERED”
2. INTEREST INCOME
- Interests derived from sources within the PH,
and interests on bonds, notes and other interest-
bearing obligations of residents, corporate or
otherwise, are taxable income derived from
sources within the PH
- The residence of the obligor who pays the
interest rather than the physical location of the
securities, notes neither place of payment, is the
determining factor of the source of the interest
income.
- “THE SITUS OF THE INTEREST INCOME, IS THE
PLACE OF RESIDENCE OF THE DEBTOR.
3. DIVIDENDS; issued by:
a. Domestic Corporation
- income sourced from within the PH
b. Resident Foreign Corporation
1. Less than 50% of gross income for the 3-
year period ending the close of its
taxable year preceding the declaration
of such dividend or for such part of such
period as the corporation has been in
existence, was derived from sources
within the PH – only such extent as will
be determined to be an income sourced
from within the PH. SOURCED WITHOUT
2. 50% or more are sourced within the PH
– taxable on such percentage
c. Non-resident Foreign Corporation
- As a corporation who has no operations in the
PH, then they are not engaged in the PH, then
their income shall be considered as income
without.
4. RENTS AND ROYALTIES
- Rentals and royalties from property located in
the PH, or from any interest from such property,
including rentals, royalties for intangible
personal properties, equipment, information,
motion picture films, video tapes shall be
considered as sourced from within the PH.
5. SALE OF PROPERTY
A. REAL PROPERTY
- Gains, profits and income from the sale of a real
property located in the PH, shall be considered
as income sourced from within the PH
- “THE SITUS OF THE INCOME FROM THE SALE OF
A REAL PROPERTY, IS THE PLACE WHERE THE
REAL PROPERTY IS LCOATED.”
B. PERSONAL PROPERTY
 - Depends on whether the personal property was
manufactured or produced by the taxpayer
himself
- The income is entirely within or without:
a. Place where the personal property was sold;
b. Place where such personal property was
produced or manufactured.
- “THE SITUS OF THE INCOME FROM THE SALE OF
A PERSONAL PROPERTY IS THE PLACE WHERE IT
IS PRODUCED OR MANUFACTURED, OR WAS
SOLD”
TAX FREE EXCHANGE
- Transfer of property in exchange of shares of
stocks in order to obtain corporate control
provided that the merger or consolidation is
solely in kind and not in cash.
- Gains are not taxable and losses are not
deductible.
- REQUISITES (CIR V FILINVEST)
a. Transferee is a corporation
b. The transferee exchanges its shares of stocks
for a property of the transferor
c. Transfer is made by a person acting alone or
together with others, not exceeding 4
persons
d. As a result of such exchange by a transferor,
alone or together with others, gains control
of the transferee
TYPES OF COMPENSATION INCOME
1. NORMAL TAX / SCHEDULAR / GRADUATED TAX –
income subject to normal tax may be subject to
creditable withholding tax as an advance payment of the
annual income tax liability.
2. FINAL WITHHOLDING TAX – type of withholding tax
imposed on certain income and is not creditable against
the income due of the payee on the other income subject
to normal tax for the taxable year. It represents the full
and final payment of the income tax due from the
recipient of the income. One it is withheld and remitted,
the said income will no longer be subject to normal tax
and the tax liability is now extinguished.
3. CAPITAL GAINS TAX – normally refers to the 6% tax
imposed on the sale of a real property located in the
Philippines classified as a capital asset. In some instances,
this also refers to the 15% final tax imposed on the net
gain arising from the sale of unlisted shares of stocks as
net capital gains tax or capital gains tax.
4. 8% OPTIONAL INDIVIDUAL INCOME TAX – an option
to be taxed on the gross receipts in excess of
Php.250,000 in cases of purely self-employed individuals
or the gross receipts without the Php.250,000 deduction
in cases of mixed income earners provided that such
individual’s annual gross receipts do not exceed
Php.300,000.
5. 25% FINAL WITHHOLDING TAX – applies to non-
resident alien not engaged in trade or business in the
Philippines. When they earn interest, cash and property
dividends, rents, salaries, wages, premiums, annuities,
compensation, renumerations and other profits or
income, a tax of 25% of such income shall make them
liable.
- EXCEPTION: 1) CGT from shares of stocks in any
domestic corporation; 2) CGT sale of real property
located in the PH.
RATES OF INDIVIDUALS ON COMPENSATION EARNERS
1. rank and file employees earning more than
minimum wage
- more than minimum but not more than 250,000,
then the excess of the minimum wage like the
holiday pay, hazard pay, overtime pay and night
shift differential, shall be part of the taxable
income
- the amount of the basic pay and above 4, will be
subject to normal tax using graduated tax rates
and consequently to withholding tax on
compensation.
- The 13th month pay and other benefits of 90,000
shall be exempt and the excess shall be subject
to taxable income subject to graduated tax rates.
- PERA (personnel economic relief and allowance)
for government employees is a reimbursement
of the performance of the governmental duties
will be exempt from income tax and
consequently from withholding tax.
2. Managerial or supervisory employees
- Amount of the basic holiday pay, overtime pay,
night shift differential and hazard pay shall be
subject to graduated tax rates and consequently
to withholding tax on compensation
- DE MINIMIS BENEFITS are also exempt, and the
excess shall be taxable
- Other benefits granted to the managerial or
supervisory shall be called FRINGE BENEFITS,
including but not limited to the ff: HEVHIMTHEL
A. Housing
B. Expense account
C. Vehicle of any kind
 D. Household personnel paid by employer for
his benefit
E. Interest on loan at less than market rate to
the extent of difference between the market
rate and actual rate granted
F. Membership fees and dues and other
expenses borne by the employer for his
employee, social and athletic dues
G. Expenses for foreign travel
H. Holiday or vacation expenses
I. Educational assistance to the employee and
his dependents
J. Life and health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows
3. Minimum wage earners
- Shall be exempt from tax, as well as their
overtime pay, hazard pay, holiday pay, night shift
differential
- The same rule with their de minimis benefits, the
excess of the 90,000 ceiling will be taxable
- When the minimum wage earner receives
service charge and the amount is not included in
the enumerated exemptions, such as the holiday
pay, etc, then it shall be exempt from his income
tax on the SMW including the income earned
specifically under the law is exempt.
INDIVIDUALS EARNING FROM BUSINESS, TRADE OR
PROFESSION
1. SELF-EMPLOYED
- Sole proprietor, independent contractor or
earning income on self-employment wherein he
controls his business or work and not dependent
on anyone
- Includes those hired for contract service, job
orders, professionals, income derived from the
practice of profession and who are not under an
employer0employee relationship
- **when the gross sales or receipts DOES NOT
EXCEED 3M VAT threshold, has the option to:
a. Graduated rates under section 24
b. 8% on gross sales or receipt in excess of
250,000 in lieu if the graduated tax rates
and VAT threshold be 3M
2. MIXED INCOME EARNERS
- Earning income from employment as well as
from business trade or practice of a profession
- It depends on the amount of the gross receipts
or gross sale during the taxable year
- **compensation income shall be subject to
graduated tax rates under section 24
- **income from BTP shall be subject to ff:
1. WHEN NOT EXCEED 3M VAT threshold:
a. Graduated rates; when gross sales or
receipts NOT EXCEED 3M VAT threshold
b. 8% not in excess of 250,000 but based on
gross sales or receipts in lieu of graduated
tax rates and cannot anymore deduct the
250,000
2. WHEN EXCEED 3M VAT threshold
- Shall be subject to graduated income tax rates
and also to VAT a type of business tax
****PASSIVE INCOME
- income from foreign and Philippine currency bank
deposits including yields and other monetary benefits
from deposit substitutes and trust fund and similar
arrangements, royalties, prizes and other winnings and
dividends.
1. DIVIDEND INCOME – income received by a
shareholder representing his distributive share of the
company earnings.
Kinds of dividend income:
a. CASH dividend – dividend income is equal to the
cash received by the stockholder
b. PROPERTY dividend – recorded at book value, of
both the issuing corporation and the recipient
stockholders
c. STOCK dividend – corporation distributes its own
shares as dividends, then the dividend is in the
nature of a stock dividend
d. LIQUIDATING dividend – dividends declared
when a corporation liquidates by redeeming its
outstanding stock for cash or by distribution of
its assets to the stockholders in exchange for
their stock.
2. ROYALTIES – payment of any kind received as
consideration for the use of or the right to use scientific
works, including cinematography, copyright, artistic,
literacy, films and other similar ones.
- They are subject to 20% FWT when received by
residents or citizens.
- If in the nature of literary works, books, musical
compositions then they are subject to 10% FWT.
- Those earned by non-resident aliens not engaged in
trade or business is subject to 25% FWT.
3. INTEREST INCOME – income earned from a bona fide
indebtedness extended by the creditor or the holder of
the promissory note. No interest may be imputed in a
transaction where the shareholder gives a sum of money
to a corporation as deposit for future subscription, not
interest bearing and not subject to repayment or
redemption, as such deposit is a contribution to capital
and not a bona fide indebtedness.
4. INTEREST FROM LONG TERM DEPOSIT – received by
individuals from long-term deposits or investments with
a holding period of not less than 5 years. It is exempt
from FWT but when it is pre-terminated by the
individual, then the graduated rates of 5%, 12% or 20%
shall be applied depending on the period. Applied to the
entire income deducted and withheld by the depositary
bank.
a. 4 years – less than 5 years; 5%
b. 3 years – less than 4 years; 12%
c. less than 3 years; 20%
5. INTEREST FROM EXPANDED FOREIGN CURRENCY –
interest income received by residents from a depositary
bank under the expanded foreign currency deposit
system shall be subject to 15% of such interest income.
- If it is a long-term deposit then it will be EXEMPT FROM
15% interest income.
- applies only when the source of interest income is bank
deposit or deposit substitute.
6. PRIZES AND WINNINGS – refer to the discussion on
prizes and winnings on EXCLUSIONS.
GAINS DERIVED FROM DEALING WITH PROPERTY
1. CAPITAL ASSETS
- Refers to all properties held by a taxpayer
whether or not connected with his business and
trade and which are not included among those
properties considered as ordinary asset under
section 30 of the NIRC
- Are those which are not stocks in trade,
inventoriable properties, properties primarily
held for sale, properties used in business,
depreciable properties used in business
2. ORDINARY ASSETS
- Refers to all properties specifically excluded in
the inventory of the definition of capital assets
under Section 39 of the NIRC
CAPITAL GAINS TAX OF 6%
- The sale, exchange or disposition of a real
property located in the Philippines shall be
classified as a capital asset.
- Includes pacto de retro sale and other forms of
conditional sales
- ELEMENTS:
A. Involves a real property
B. Classified as a capital asset
C. Located in the Philippines
D. There is transfer of ownership
E. There is consideration from the exchange
F. Seller is an individual or domestic
corporation
ACCRUAL AND PAYMENT OF CAPITAL GAINS TAX
- 30 days from the date of the sale. The
documentary stamp tax shall be paid within 5
days after the close of the month after the date
of the sale.
The classification of such property in the hands of the
buyer or transferee shall be determined in accordance
with the following:
a. Succession or donation – when heir or donee
not engaged in real estate and does not use the
real property in trade or business, it shall be
considered as a CAPITAL ASSET
b. Received as dividend by stockholder – recipient
not engaged in real estate, and not use the real
property in trade or business, then it shall be a
CAPITAL ASSET EVEN IF the corporation who
declared the dividend is engaged in real estate
business
c. Received in an exchange of a real property -
classified as an ORDINARY ASSET in the hands of
the transferee in case of a tax-free exchange by
taxpayer who is not engaged in real estate, even
if he will not use the property for business
AVOIDANCE OF CGT:
1. EXPROPRIATION SALE
- Sale of a real property classified as a capital
asset, located in the Philippines to government
and political subdivisions and agencies and
GOCCs. The taxpayer has the option to:
a. CGT based on the GSP or fair market value
whichever is higher;
b. Normal tax using graduated tax rates under
Section 24 of the NIRC.
- Alternative taxation shall not be applicable in the
ff:
a. Corporate taxpayers
b. In favor of entities other than the
government and etc
c. Sales involving personal property
d. Real properties classified as ordinary asset
2. SALE OF PRINCIPAL RESIDENCE
- No CGT if the ff conditions concur:
a. Sworn declaration to the RDO to avail of the
exemption 30 days from the sale or
disposition;
b. Proceeds from the sale must be utilized in
acquiring or constructing a new residence
from 18 months from the sale;
c. It can be availed of only once in 10 years
d. The historical cost or adjusted basis of the
old residence is carried over to the cost of
basis of the new residence;
e. If no full utilization of the proceeds, then he
is liable for the deficiency for the CGT.
 3. TAX-FREE EXCHANGE
- No gain or loss shall be recognized is the
property is transferred to a corporation by a
person in exchange of a stock or unit of
participation of which, as a result, said person
alone, or together with others, gain control of
the said corporation.
4. SALE FOR SOCIALIZED HOUSING
- Owners of raw land are exempt from the
payment of CGT or the withholding tax under RR
2-98.
5. SALE PURUSANT TO CARL
- Exempt from tax CGT or DST
IN CASES OF FORECLOSURE SALE, THE FF ARE THE
RECKONING DATES:
1. Mortgagor exercise right of redemption during
the redemption period – no GCT be imposed, no
capital gains are derived and no sale or has been
deemed as if no transfer has been made
2. Non-redemption of the mortgagor of:
a. Capital asset – CGT on the foreclosure sale
shall become due based on the bid price of
the highest bidder
b. Ordinary asset – the CWT on the foreclosure
sale shall become due based on the highest
bid BUT only upon expiration of the
redemption period under the law, and shall
be paid within the 10 days from the close of
the month when the said redemption has
expired.
APPLICABLE STATUTORY REDEMPTION PERIOD
1. Individual mortgagor and non-bank mortgagee
- 1 year from the registration of the sale.
2. Juridical entity mortgagor and bank mortgagee
– 3 months from the registration of the sale.
FINAL TAX OF 15%
- The taxpayer is liable to pay CGT based on the
NET CAPITAL GAIN, for the sale, barter,
exchange or other disposition of SHARES OF
STOCK which are UNLISTED, by a DOMESTIC
CORPORATION, EXCEPT if the sale is through
the stock exchange.
- Disposition includes any act of disposing,
transferring or parting with, alienation and the
like.
- applies to all individual taxpayers who sells
shares of stocks classified as a CAPITAL ASSET.
ELEMENTS:
1. Shares of stock of a DOMESTIC CORPORATION.
2. It must not be listed in the stock exchange and
the sale is NOT through the stock exchange,
otherwise, it it subject to 6/10 of 1% stock
transaction tax.
3. The shares must be in the nature of a CAPITAL
ASSET.
STOCK TRANSACTION TAX OF 6/10 OF 1%
- Not an income tax but a type of percentage tax
which is a business tax
- Sale, barter or exchange of shares of stocks listed
or traded through local stock exchange other
than a dealer in securities shall be subject to tax
at the rate of 6/10 of 1% of the gross selling price
or the gross value in money of the shares of stock
that is sold, bartered or exchanged, which shall
be paid by the seller or transferor who is not a
dealer in securities. Thus, tax imposed on the
sale of listed shares of stocks classified as capital
assets
- Shall be subject to 15% tax on the net gain when
failed to meet the MPO or if stocks are not listed.
ACCRUAL OF STOCK TRANSACTION TAX
- The stock broker has the duty to collect the tax
from the seller upon its issuance of the
confirmation of the sale, and issue the
corresponding official receipt thereof, and remit
the same to the collecting bank or officer of the
RDO where the broker is registered within 5
BANKING DAYS FROM THE DATE OF THE
COLLECTION.
NORMAL TAX “WITH” BUSINESS TAX IMPLICATION
- Sale of a real or personal property, including
shares of stocks classified as an ORDINARY
ASSET, are subject to graduated tax rates under
Section 24 OF THE NIRC.
NORMAL TAX WITHOUT BUSINESS TAX IMPLICATION
- Sale of a personal property classified as a
CAPITAL ASSET, by individual taxpayer, EXCEPT
NRANETB then the sale is subject to graduated
tax rates under Section 24 of the NIRC.
Elements:
1. Personal property
2. Capital asset
3. NOT share of stock or a security
4. Seller is resident or citizen of the PH, or NRAETB.
SPECIAL RULES ON CAPITAL TRANSACTIONS
1. LOSS LIMITATION RULE (corporations and
individuals)
 - Capital losses are allowed to be deducted only to
the extent of capital gains derived from the same
taxable year from the sale or exchange of shares
of stocks classified as capital assets.
2. HOLDING PERIOD RULE (individuals)
- In case of a taxpayer other than a corporation,
only the following percentages of gains and
losses are recognized from the sale or exchange
of the capital asset, shall be taken into account
a. 100% if the capital asset is not held for more
than 12 months
b. 50% if the capital asset is held not more than
12 months
3. NCLCO (individuals)
- Any taxpayer other than a corporation who
sustains in any taxable year, net capital loss, such
loss shall be treated in the succeeding taxable
year as a loss from the sale or exchange of a
capital asset held for not more than 12 months
not exceeding the taxable income in the year
that the loss is sustained.
SPECIAL RULES ON CAPITAL TRANSACTIONS IS NOT
APPLICABLE TO THE FF:
1. Sale of ordinary assets
2. Sale of real property classified as capital assets
3. Sales of unlisted shares of stocks
4. Sale of listed shares of stocks subject to 6/10% of
1% stock transaction tax
5. Sale by a non-resident alien not engaged in trade
or business because such taxpayer is not subject
to normal taxed based on the net income but
subject to 25% final withholding tax.
SPECIAL CAPITAL TRANSACTIONS
1. SHORT SALES
- Sale of a real property which the taxpayer do not
yet own and subsequently buy or recovers the
stock to complete the transaction
- Not deemed consummated until the delivery of
the property to cover the short sale
- Applies to dealers of shares of stocks who
ordinarily treat the income from the sale of
shares of stocks as an ordinary gain
- Gains or losses from short sales of property by a
dealer in securities shall be considered as gains
or losses from sales or exchange of capital assets
2. Failure to exercise the option to buy or sell a
property
- Shall be considered as capital assets resulting to
capital gain or loss
- The OPTION MONEY, when failed to exercise to
buy as a whole by the buyer, shall be treated as
a capital gain. BUT if bought as a whole within
the said allowable period, then it will be an
ordinary gain that is subject to normal tax and
the loss from the buyer when failed to buy is a
capital loss.
3. Securities becoming worthless
- From the losses on shares of stocks held as a
capital asset becoming worthless during the
taxable year shall be treated as capital losses at
the end of the year but shall not apply to banks
and trust companies
- Does not apply to unlisted shares and such loss
is not deductible against the capital gains from
such sale or exchange
4. WASH SALES
- Substantially identical shares of stocks or
securities are acquired for a 61-day period
beginning from 30 days prior the sale and 30
days after the sale.
- The taxpayer cannot deduct any loss when
within the 61-day period, he entered into a
contract to acquire substantially identical stocks
- DOES NOT APPLY TO: 1) individual acting as
dealers in stock or securities if the sale is made
in the ordinary course of business of such dealer;
2) short sale transaction
5. Liquidating gain
- Upon the surrender by the investor of the shares
in exchange for cash and property distributed by
the issuing corporation upon its dissolution and
liquidation of all assets and liabilities, the
investor shall recognize either capital gain or
capital loss and be computed by comparing cash
and fair market value of the property received
against the cost of the investment in shares
- If the investor is an individual, HOLDING PERIOD
RULE will apply and the percentage of the
taxable capital gain and deductible loss depends
on the number of months or years the shares are
held by the investor.
6. Shares redeemed for cancellation or retirement
- When the shares are redeemed on a period or
time when the corporation is on-going concern
and not contemplating the dissolving or
liquidating its assets or liabilities
- Capital gain or loss shall be recognized upon the
basis or difference between the amount or value
received at the time of redemption and cost of
the preferred shares

EXCLUSIONS FROM GROSS INCOME
SECTION 32 (B) OF THE NIRC
1. PROCEEDS OF LIFE INSURANCE
- Paid to the heirs or beneficiaries upon the DEATH
of the insured, whether in single sum or
otherwise.
- If such amounts are held by the insurer under an
agreement to pay the interest therein, interests’
payment shall be included in gross income
- when the employer is the named beneficiary,
premium payments are not income of the
employee because no benefit redounded to him.
On the other hand, when the beneficiary
designated is the employee’s heirs or family,
then it will benefit him and will form part of his
income but EXCLUDED in the gross income of his
beneficiaries or heirs.
2. AMOUNT RECEIVED BY THE INSURED AS
RETURN OF PREMIUMS
- The amount received by the insured as a return
of premiums paid by him under his life insurance,
endowment or annuity contracts either during
the term or at maturity of the term mentioned
and upon surrender of the contract.
- The accrued interest will be SUBJECT TO TAX and
not the initial value paid for insurance as well as
the excess on the amount of premiums paid
3. GIFTS, BEQUESTS AND DEVISES
- The value of the property acquired by gift,
bequests, devise or descent be excluded from
gross income.
- However, income from such property as well as
gifts, bequests and devise or descent of income
from any property in cases of transfer of
dividend interest, shall be INCLUDED in gross
income.
- Requisites of DONATION:
a. Reduction of patrimony of the donor;
b. Increase in patrimony of the done;
c. Intent to do an act of liberality or animus
donandi
- Rev regulation 7-2011; stated that UNUTILIZED
campaign funds or contributions net of
campaign expenditures be subject to income tax
and be also included in the candidate’s taxable
income for the subject taxable year.
- Any candidate failing to submit to the COMELEC,
appropriate statement of expenditures under
the Omnibus Election Code, is precluded from
claiming such expenditure as deductions from
his campaign contributions. The entire amount
of the campaign contributions is considered
directly subject to income tax.
- ONLY THE UNUTILIZED AMOUNT BE SUBJECT TO
INCOME TAX.
- Failure of the candidate to withhold the 5% CWT
on income payments made to his suppliers of
campaign paraphernalias then he is liable to
report the entire income in the amount received
as a donation regardless of the actual amount
that was utilized for his failure to withhold the
5% CWT.
- The failure of the candidate to report his
statement of expenditures even if the 5% CWT
was made, he is also liabel to report the entire
amount to be treated as unutilized even though
it is actually utilized, by reason of failure to
report the expenditure.
4. COMPENSATION FOR INJURIES OR SICKNESS
- a) amounts received though accident or health
insurance under workmen’s compensation acts,
as compensation for personal injuries or
sickness; b) amounts of any damages received,
whether by suit or agreement on account of such
injuries or sickness
- Damages from breach of contract is taxable
income on the year received ONLY TO THE
EXTENT that such damages constitute a loss of
anticipated profits and non-taxable to the extent
that the same represents a return of capital.
- NONE in the NIRC EXEMPTS INCOME ON MORAL
AND EXEMPLARY DAMAGES ARISING FROM
BREACH OF CONTRACT.
- But if moral and exemplary arises from personal
injuries or sickness, then it is EXCLUDED FROM
GROSS INCOME.
- Section 32 (B) (4); non-taxable: a) monetary sum
of representing the atonement from Japanese
people to former wartime comfort women; b)
compensatory damages or actual, moral or
exemplary and atty’s fees costs of suit received
by the plaintiffs on account of a murder victim.
- The following are taxable: a) award for moral
and exemplary damages from illegal dismissal; b)
moral and exemplary damages for breach of
contract; c) entitlement of women employees to
special benefits of 2 months full pay based on
gross monthly compensation following the
surgery; d) consequential damages representing
 the loss of victim’s earning capacity replaces
merely the income which would be subject to tax
if exempt.
5. INCOME EXEMPT UNDER TREATY
- Income of any kind to the extent required by any
treaty obligation binding upon the government
of the PH shall be excluded from gross income
pursuant to international comity inherent
limitation of the power of taxation
- Who can apply for tax treaty relief: a) non-
resident individual or corporation with income
derived from sources within the PH and whose
country of residence has an effective DTA with
the PH; b) duly authorized representatives of the
non-resident individual may apply
6. RETIREMENT BENEFITS, PENSIONS, GRATUITIES
RECEIVED FROM PRIVATE FIRMS
- RA 4917; employer has reasonable private
benefit plan approved by the bureau. A) the
retiring employee must have at least rendered
10 years of service; B) not less than 50 years old
at the time of the retirement; C) retiring
employee should not have previously availed of
the privilege under the retirement benefit plan
of the same or another employer.
- RA 7641;
a. No reasonable benefit plan or not approved
and has no CBA; 1) employee has been in
private firm for at least 5 years; 2) at least 60
years old at the time of retirement and not
beyond 65.
b. Granted under 7641, no reasonable private
benefit plan but has CBA;
1. CBA same with RA 7641; a) service for at
least 5 years; b) at least 60 at the time of
retirement
2. CBA different with RA 7641; a) at least
10 years of service; b) minimum age
required in the CBA
7. RETIREMENT BENEFITS, PENSIONS, GRATUITIES
RECEIVED FROM THE GOVERNMENT
- If the benefits are received from and enjoyed
under the AFP, retirement and separation
benefit system, in accordance with the
provisions of PD 361 as amended by PD 1909
including death and disability benefits enjoyed
by AFP personnel as provided by the law,
benefits shall likewise exempt from any tax of
whatever nature.
8. SSS, RETIREMENT GRATUITIES, PENSIONS AND
OTHER SIMILAR BENEFITS RECEIVED BY A
RESIDENT, NON-RESIDENT PERMANENTLY IN
THE PH, FROM FOREIGN GOVERNMENT
AGENCIES OR OTHER INSTITUTIONS, PRIVATE
OR PUBLIC
- REQUISITES: 1) amount received represents
social security benefits, retirement gratuities,
pensions and other similar benefits; 2) the
benefits are granted either by: foreign
government agencies or foreign private and
public institutions; 3) the taxpayer comes to
reside in the PH permanently.
9. SEPARATION PAY
- Received by the employee or his heirs due to his
1) death; 2) sickness; 3) other physical disability;
4) any cause beyond the control of the employee
or AUTHORIZED CAUSES shall be exempt from
the income tax and consequently from
withholding tax under Section 32 (B) (6) (b) NIRC.
10. BENEFITS BY REASON OF SOCIAL LEGISLATION
- The following are benefits exempt from tax:
a. Payment for benefits due or become due to
any person residing in the PH under the laws
of the US veteran administration;
b. Benefits received from enjoyed under SSS in
accordance with the provisions of RA 8282;
c. Benefits received from the GSIS under RA
8291 including retirement gratuity received
by the government officials and employees
11. INCOME DERIVED BY FOREIGN GOVERNMENT
- Pursuant to international comity: Income
derived from investments in the PH in loans,
stocks and other domestic securities or from
interests on deposit in banks in PH by:
a. Foreign government;
b. Financing institutions owned and controlled
and enjoying financing from foreign
governments;
c. International and regional financial
institutions established by foreign
governments shall be excluded from gross
income hence the income be exempt from
tax.
12. INCOME DERIVED BY THE GOVERNMENT OR ITS
POLITICAL SUBDIVISIONS
- Income derived from any public utility or from
the exercise of any essential governmental
function accruing to the government of the PH or
 any political subdivisions be EXEMPT from tax
since it is an inherent limitation of the power of
taxation, that the government enjoys such
exemption.
- PROPRIETARY FUNCTION: powers supposed to
be conferred NOT from consideration of the
state but for private advantage of a particular
operation as distinct legal personality
- GOVERNMENT FUNCTION: exists when
performed for any public benefit and is merely
part of the machinery of the government of the
sovereignty in creating the, and the authority of
the state which is supreme.
13. PRIZES, AWARDS AND WINNINGS
I. PRIZES AND AWARDS:
- A. individual taxpayers – a) prizes in the amount
of 10k or less subject to normal tax; b) more than
10k then subject to 20% FWT
- B. corporate taxpayers – prizes are subject to
NCIT
- C. domestic corporations – prizes regardless of
the amount shall be subject to 20% or 25% NCIT
- D. resident foreign corporations – prizes
regardless of the amount shall be subject to 25%
NCIT
- E. non-resident foreign corporations – prizes
regarding any amount shall be subject to 25%
FWT
- The following are PRIZES EXEMPT:
a. Those made primarily in recognition of
religious, charitable, scientific, educational,
artistic, linguistic or civic achievement if: 1)
the recipient was selected without any
action on his part to enter the contest or
proceeding; 2) he is not required to render
substantial future services as condition to
receiving the price or award;
b. Prizes and awards in SPORTS competition if:
1) prize granted to athletes in local and
international sports competition; 2)
tournament is sanctioned by their national
sports association which means that it is duly
accredited by the Olympic committee.
II. WINNINGS: 20% FWT regardless of the
amount. But if in the nature of
LOTTO/PCSO:
1. 10k and below – EXEMPT
2. More than 10k – 20% FWT. This
applies to individual taxpayers. For
corporate taxpayers, winnings
regardless of the amount shall be
subject to NCIT.
14. 13TH MONTH PAY AND OTHER BENEFITS
- 13TH month pay and other benefits in the amount
of 90k per year shall be exempt. The excess of
the 90k shall be taxable and form part of gross
income.
15. DE MINIMIS BENEFITS
- Facilities and privileges of relatively small value
and provided by an employer to his employees
merely as a means to promote their health, good
will, contentment and efficient. They are exempt
from WTC and FBT on compensation. They are
exclusive list:
a. Monetized unused vacation leave credits of
private employees NOT exceeding 10 days
during the year;
b. Monetized value of vacation or sick leave
credits paid to government employees;
c. Medical cash allowance to dependents of
employees not exceeding 1,500 per
employee per semester or 250 per month;
d. Rice subsidy of 2,000 or 50-kg sack of rice
worth not more than 2,000;
e. Uniforms, clothing allowance not exceeding
6,000 pers annum;
f. Actual medicine assistance not exceeding
10,000 per annum;
g. Laundry allowance not exceeding 300 per
month;
h. Employee’s achievement awards in the form
of tangible personal property other than
cash or gift certificates with the annual
monetary value not exceeding 10,000
received by the employee under an
established written plan which does not
discriminate in favor of highly paid
employees;
i. Gifts given during Christmas or major
anniversary celebrations not exceeding
5,000 per employee per annum;
j. Daily meal allowance for overtime work,
night shift differential, graveyard shift not
exceeding 25% of the basis minimum wage;
k. Benefits received by the employee by virtue
of the CBA, productivity incentive schemes
provided the total annual monetary value
received from both the CBA and productivity
incentive schemes combined not exceeds
10,000 per employee per taxable year.
16. GSIS, SSS AND MEDICARE AND OTHER
CONTRIBUTIONS
- Train law retains the rule that it excludes the
mandatory deductions from the gross
compensation of employees and such only
covers the compulsary and mandatory
contributions of the concerned employees to
SSS, GSIS, PHIC, HDMT.
- Voluntary contributions in excess of the amount
considered as compulsary shall not be excluded
from gross income and be taxable.
17. GAINS FROM THE SALE OF BONDS,
DEBENTURES AND OTHER CERTIFICATES OF
INDEBTEDNESS
- Those which has a maturity of more than 5 years
shall be excluded from the gross income and be
exempt from tax.
18. GAINS FROM REDEMPTION OF SHARES IN A
MUTUAL FUND
- Gains realized by the investor upon redemption
of shares of stock in a mutual fund company
which is an open-end and close-end investment
company as defined under the investment
company act, shall be excluded from gross
income, then they are exempt from tax.
19. MINIMUM WAGE EARNER’S PAY
- Such salaries equivalent to the statutory
minimum wage rates are EXEMPTED from
income tax. The exemption extends or covers
also the following benefits by the minimum wage
earner:
a. Holiday pay;
b. NSD;
c. Hazard pay;
d. OT pay
20. SENIOR CITIZENS PAY AS MINIMUM WAGE
EARNER
- Income of senior citizens who are considered to
be minimum wage earner shall be EXEMPT from
tax.
21. EMPLOYER’S CONVENIENCE RULE
- A benefit provided by the employer for his
employee, but which will be more beneficial to
the former, then it will not be taxable hen the
benefit required is in the nature of the following:
a) necessary to the trade or business of the
employer: b) the employee is expected to render
future services for the employer and for the
latter’s benefit.
- Examples are housing benefit, educational
benefit, monetary allowances.
22. TAXABLE INCOME IN THE AMOUNT OF
P250,000
- Train law explains that all income shall be subject
to normal tax subject to graduated tax rates. But
income of 250,000 and less, shall be exempt
from tax.
23. TAX-FREE EXCHANGE
- 1. The transferor is an individual or a
corporation;
2. the transferee is always a corporation;
3. the property of the transferor exchanges it for
the shares of stocks in the corporation-
transferee;
4. as a result, the transferor alone, or together
with others not exceeding 4 persons gains
control of the said corporation.
DEDUCTIONS FROM GROSS INCOME;
SECTION 34 OF THE NIRC
1. BAD DEBTS
- REQUISITES
a. Must have an existing indebtedness due to
the taxpayer, which is valid and legally
demandable;
b. The same must be connected with the
taxpayer’s business, trade or profession;
c. The same must not be sustained in
transactions between related parties under
Section 36 (b) of the NIRC;
d. The same must be actually charged of for
written off on the books of account of the
taxpayer at the end of the taxable year;
e. The same must be actually ascertained to be
worthless and uncollectible as of the end of
the taxable year
- RELATED PARTIES; SECTION 36 (b) NIRC
a. Members of a family;
b. Between individual and corporation;
c. Two corporations;
d. Grantor and fiduciary of any trust;
e. Fiduciary of a trust and fiduciary of another trust
if the same person is their grantor;
f. Fiduciary of a trust and beneficiary of such trust.
- RULE ON WORTHLESS RECEIVABLES; it must be
sufficient when there is a legal action to enforce
the payment but with all efforts, did not result
into the satisfaction of the judgement.
 a. BANKS: CIR shall be the one to determine if
the bad debt or not. The taxpayer shall
submit to the BSP written approval of the
writing off of the indebtedness from bank’s
books of account at the end of the taxable
year;
b. INSURANCE OR SURETIES: cannot write off
receivables from insurance company when
such company has not been declared closed
or insolvent by insurance commissioner.
2. INTERESTS
- REQUISITES:
a. There must be an indebtedness;
b. There is an interest expense paid or incurred
upon such indebtedness;
c. Indebtedness must be that of the taxpayer;
d. Must be connected with the taxpayer’s
business, trade or profession;
e. Interest expense paid or incurred during the
taxable year;
f. Stipulated in writing;
g. Legally due;
h. Not between related parties.
- INTEREST ON UNPAID TAXES: interest incurred
or paid by the taxpayer on all unpaid business-
related taxes shall be FULLY DEDUCTIBLE from
the gross income and shall not be subject to
limitation on deduction.
3. TAXES
- REQUISITES:
a. Obligation to pay must be connected with
the taxpayer’s business, trade or profession;
b. The tax must have been paid or incurred
during the taxable year;
c. The tax must not be in the nature of the
following: a) income tax; b) income taxes
imposed by authority of a foreign country; c)
estate or donor’s tax; d) taxes assessed
against local benefits of a kind tending to
increase the value of the property assessed.
- The following taxes are deductible from the
gross income:
a. Community tax; b. automobile registration
fees; c. municipal fee; d. import duties; e.
local business tax; f. documentary stamp tax;
f. occupational tax; g. privilege tax; h. license
fee.
4. ORDINARY AND NECESSARY EXPENSES
- REQUISITES:
a. Ordinary and necessary expense;
b. Paid or incurred during the taxable year;
c. Paid or incurred in carrying on the business
or trade of the taxpayer
d. Supported by receipts, records or pertinent
papers;
e. Not be contrary to law, moral and public
policy.
- ADDITIONAL REQUISITES FOR THE FF:
a. Salaries, wages and other forms of
compensation
1. Amount be reasonable
2. Final tax imposed has been paid or
withholding tax has been withheld or
remitted.
b. Travel expenses here and abroad in pursuit
of business, trade or profession
1. Amount be reasonable
c. Rentals, other payment required as
condition for continued use or possession;
1. Amount reasonable;
2. Withholding tax remitted or withheld;
3. Taxpayer has not taken any title in which
he has no equity ither than that of being
a lessee user or possessor.
d. Entertainment, amusement and recreation
expense;
1. Amount be reasonable not exceeding 1%
of net receipts or ½% of net sales
2. Expense not contrary to law, morals or
public policy.
- BRIBE OF KICKBACKS: no deduction from gross
income shall be allowed for any payment made
directly or indirectly to any official or employee
of the national government, local government,
GOCCs, foreign government or similar entities if
the payment constitutes a bribe or a kickback.
ALL EVENTS TEST
- ONLY used in accrual method. Requires the right
to income or liability to be fixed and the amount
of such income liability be determined with
reasonable certainty.
- REQUISITES:
a. Computation remains uncertain if its basis is
unchangeable;
b. Test is satisfied where the computation be
unknown, but not as much as unknowable
within the taxable eyar;
c. Amount of liability does not have to be
determined exactly and must only be
determined with reasonable certainty.
SUBSTANTIATION REQUIREMENT
- Sufficient evidence such as receipts or other
adequate records and must be kept within 3
years in order to prove the amount of expense
deducted and the direct connection or relation
of the expense being deducted to the
development and management and operation
and or conduct of the business, trade or
profession.
COHAN RULE
- Taxpayers may use estimates when they can
show that there is a factual foundation on which
to base a reasonable approximation of the
expense, they can prove that they had made the
deductible expenditure but cannot prove how
much, the expenditure was.
- It is the duty of the BIR to make an estimate of
the deduction that may be allowed in computing
the taxpayer’s tax liability, bearing heavily on the
latter’s inexactitude which is of his own making.
The deduction is valid when the disallowance of
50% of the taxpayer’s claim.
REPRESENTATION EXPENSES
- Expenses incurred by the taxpayer in connected
with his business, trade or profession in
entertaining or providing amusement,
recreation, meeting with guests at a dining place,
country club, sporting event and similar places.
- This does not refer to fixed representation
allowances that are subject to withholding tax on
wages pursuant to appropriate revenue
regulations.
- Membership in a country club and taxpayer is a
member, it is presumed to be FBT, UNLESS the
taxpayer proves that in the receipts and
adequate records:
a. Amount of expenses;
b. Date and place of expense;
c. Purpose of expense;
d. Professional or business relationship of the
expense
e. Name of the company pr person entertained
- ENTERTAINMENT FACILITES: yachts, vacation
homes, condominium and similar items of real or
personal property used by the taxpayer primarily
for entertainment, amusement, recreation of
guests and employees.
- PROOF TO BE AN ENTERTAINMENT EXPENSE:
owned or form part of the taxpayer’s business,
trade or profession or rented by the taxpayer for
which the latter claims such depreciation or
rental expense.
LABOR TRAINING EXPENSES
- Under the create law, additional deduction of
the taxable income of ½% of the value of the
labor training expense incurred for skills
development or enterprise-based trainees
enrolled in public senior high, public higher
education, public educational institutions,
vocational institutions duly covered by
apprenticeship agreement under the labor code.
- Conditions for deductibility: a) enterprise
secures a proper certification from the DEPED,
TESDA OR CHED; b) deduction shall not exceed
10% of the direct labor wage, which refers to
salaries, wages that can be attributed to specific
products and services.
DEDUCTION ALLOWED IN THE FOLLOWING WHERE
NO WITHHOLDING TAX WAS MADE:
1. The payee reported the income and pays the tax
due thereon and the withholding agent pays the
tax including the interest incidental to the failure
to withhold the tax and the surcharges if
applicable at the time of the audit, investigation,
reinvestigation or reconsideration;
2. The payee or the recipient failed to report the
income on the due date but the withholding
agent or taxpayer pays the tax including the
interest incident to the failure to withhold the
tax and the surcharges if applicable at the time
of the audit, investigation, reinvestigation or
reconsideration;
3. The withholding agent had erroneously under-
withheld the tax but pays the difference
between the correct amount and the amount of
the tax withheld including the interest and
surcharges if applicable at the time of the audit,
investigation, reinvestigation or reconsideration;
5. DEPRECIATION
- Gradual diminution in the useful value of the
tangible property resulting from the wear and
tear and normal obsolescence. Term also applied
to amortization of value of intangible assets use
of which is trade or business definitely limited in
duration.
- REQUISITES:
a. Amount be reasonable
b. Charged-off during the taxable year;
c. Attributed to a property used in business;
 d. Supported by receipts, records and pertinent
papers.
- REASONABLENESS TEST ON DEPRECIATION:
a. No deduction from gross income for
depreciation unless taxpayer substantiate
with receipts as evidence of expense
b. Only 1 vehicle for land transportation be
allowed for the use of an official or employee
and such value of the vehicle shall not
exceed the threshold of 2.4M unless the
taxpayer’s main line of business is transport
operations or lease of transportation
equipment and vehicles purchased are used
in operations.
c. All maintenance expenses on non-
depreciable vehicles for taxation purposes is
disallowed in its entirety
d. Input taxes on purchase of non-depreciable
vehicles and all input taxes on maintenance
expenses incurred likewise be disallowed for
taxation purpose.
6. DEPLETION
- Allowable for exhaustion of oil and gas wells and
mines by virtue of a legislative intent.
- OPTIONS ON DEDUCTION:
a. Deductible in the year incurred if such
expenditures incurred for non-producing
wells or mines;
b. Deductible in full in the year paid or at the
election of the taxpayer, may be capitalized
and amortized if such expenditure is
incurred for producing well or mines in the
same contract area.
7. LOSS
- REQUISITES:
a. Loss actually sustained during the taxable
year;
b. Not compensated for by insurance or other
forms of indemnity;
c. Incurred in the trade or business or
profession;
d. Arose from a property connected in the
business, trade or profession or from fires,
storms, shipwrecks, other casualties or from
robbery, theft, embezzlement;
e. Submit a declaration of loss sustained from
the from fires, storms, shipwrecks, other
casualties or from robbery, theft,
embezzlement, 45 days from the discovery
of the loss;
f. Loss not claimed as deduction for estate tax
purposes in estate tax return;
g. Loss not arise from transactions between
related parties.
KINDS OF LOSSES
1. ORDINARY LOSS
- arise from transactions involving ordinary assets,
when it arose from the business, trade or
profession.
- NET OPERATING LOSS CARRY OVER; loss can be
carried over until its fully exhausted provided
that the carry-over is done within the 3-year
period. Any net loss incurred in taxable year
during which, taxpayer may be exempt on
income tax, not be allowed as a deduction.
CANNOT BE CLAIMED by those who opted to use
the OSD. This is only for those who chose
itemized deductions.
- 75% INTEREST RETENTION RULE: for NOLCO to
apply, there must be NO substantial change in
ownership and net operating loss carry-over
shall be allowed only if there is no substantial
change in ownership provided that: a) not less
than 75% in nominal value of outstanding issued
shares if the business is in the name of
corporation held on behalf of the same persons;
b) not less than 75% of the paid up capital of the
corporation if the business is in the name of a
corporation is held by or on behalf of the same
persons.
2. CAPITAL LOSS
- Arise from transactions involving capital assets.
They are only allowed as a deduction to the
extent of the capital gains.
3. WAGERING LOSS
- From gambling activities or wagering
transactions allowed only to the extent of the
gains from such transactions
4. ABANDONMENT LOSS
- Contract area where petroleum operations are
undertaken in partial or wholly abandoned, all
accumulated exploration and development
expenditures pertaining thereto shall be allowed
as deduction.
8. CHARITABLE CONTRIBUTIONS
- Deductible from gross income if the recipient is
any of the following entities:
 a. Government agencies, political
subdivisions, fully owned and controlled
corporation to finance or provide for used
in undertaking priority activities in
education, health, youth, sports, human,
science, culture, economic developments
according to NEDA.
- Must be used in the purposes above to be
deductible.
- Certification must be secured from the NEDA and
contribution to the government is made in
accordance with the priority programs and
projects in the current national priority plan.
- Donations not in accordance with the national
priority plan, has limited deductibility not
exceeding 10% for individuals and 5% for
corporations of the taxpayer’s taxable net
income as computed without the benefit of
deduction.
b. Donation to foreign institutions, internal
organizations which are fully deductible in
pursuance of or in compliance with
agreements and treaties, commitments
entered into by the government of the PH,
foreign institutions, international
organizations in pursuance of special laws.
c. Donations to accredited NGOs, organized
and operated exclusively for scientific,
educational, research, character-building,
provided that no part of the net income of
which inures to the benefit of any private
individual and not more than 30% of
donations used for an administrative
purpose.
- TO AVAIL OF FULL DEDUCTIBILITY:
a. NGO must be accredited with appropriate
government agency and the PH council for
NGO certification
b. The donor should be the one to notify within
30 days from the receipt of the certificate of
donation, the RDO of the place of business is
located of donations worth 50,000 which he
made and have COD stamped at the
concerned revenue district office.
- Donation to non-stock, non-profit educational
institutions – deductible in full on the gross
income of the donor provided that the donee
complied with the utilization and expense
requirement.
- Value of donations made in PROPERTY - shall be
the fair market value at the time when the
donation was made.
- Donations other than money – based on
acquisition cost, book value of the said property.
DONATIONS DEDUCTED FROM GROSS INCOME BUT
DEDUCTIBLE AMOUNT SUBEJCT TO LIMITATIONS:
1. Contributions and gifts actually paid or made
within the taxable year to or for the use of the
government or its agencies exclusively for public
purpose;
2. Contributions and gifts to accredited domestic
corporation organizes and operated exclusively
for religious, charitable, scientific youth, sports
development, cultural and educational. Provided
that no part of the net income shall accrue to the
benefit of any officer or member;
3. Contributions for rehabilitation of veterans and
social welfare institutions and no part of the net
income or asset which shall belong or inure to
the benefit of any member or officer or specific
person
4. Contributions to NGOs.
9. PENSIONS TRUSTS
- An employer establishing or maintaining a
pension trust to provide for the payment of
reasonable pensions to his employees shall be
allowed as a deduction, provided that a
reasonable amount is transferred and paid to
such trust during the taxable year in excess of
such contributions but only if such amount:
1. Not been allowed as deduction;
2. Appointed in equal parts over period of 10
consecutive years beginning with the year
which transfer was made.
10. RESEARCH AND DEVELOPMENT
- Taxpayer may treat research of development
expenditures which are paid or incurred by him
during the taxable year in connected with this
business, trade or profession as ordinary
expense not chargeable to the capital account
the expenditures so treated shall be allowed as
deduction during the taxable year when paid or
incurred.
NON-DEDUCTIBLE ITEMS
1. Personal, living, family expenses;
2. Any amount paid out for new buildings,
permanent improvements or betterments made
to increase the value of any property or estate;
3. Any amount expended in restoring the property,
making good in exhaustion thereof, for which
allowance was made;
4. Premiums paid on any life insurance policy
covering the life of the employee interested in
any trade or business carried by the taxpayer
when the taxpayer directly and indirectly is a
beneficiary under such policy.
5. Illegal expense;
6. Bad debts, interests and losses arising from
transactions between related taxpayers.