BAM031 INCOME TAXATION

General Principles TAXATION

Income Taxation TAXATION IS THE POWER INHERENT IN EVERY
SOVEREIGN STATE TO IMPOSE A CHARGE OR
BURDEN UPON PERSONS, PROPERTIES, OR
THREE (3) INHERENT POWERS OF
RIGHTS TO RAISE REVENUES FOR THE USE AND
STATE SUPPORT OF THE GOVERNMENT TO ENABLE IT
1. Police Power TO DISCHARGE ITS APPROPRIATE FUNCTIONS.
➢ It is the power of the state for promoting public
welfare by restraining and regulating the use of Power by which an independent State, through its
liberty and property. lawmaking body, raises and accumulates revenue from
2. Power of Taxation its inhabitants to pay the necessary expenses of the
➢ It is the power by which the Sate raises revenue government. (51 Am. Jur, 341)
to defray the necessary expenses of the
government. PURPOSE OF TAXATION
1. Primary or Revenue-Raising Purpose:
3. Power of Eminent Domain Taxation is the power by which the sovereign raises
• It is the power of the State to acquire private revenue to defray the necessary expenses of government.
property for public purpose upon payment of just
compensation. Taxes provide the funds or property with which to
promote the general welfare and protection of the whole
citizenry.

2. Secondary or Non-Revenue/Special or
Regulatory or Sumptuary Purpose:
Taxation is also used for regulatory purposes. It is used
to attain non-revenue objectives and pursue policy
decisions.
a) Promotion of General Welfare
b) Regulation of activities/industries
c) Reduction of Social Inequity
d) Encourage economic Growth
e) Protectionism

THEORY AND BASIS OF TAXATION

1. LIFEBLOOD THEORY
Taxes are the lifeblood of the Government. Without
revenue raised from taxation, the government will not
survive, resulting in detriment to society. Without taxes,
the government would be paralyzed for lack of motive
power to activate and operate it.
(Commissioner v. Algue, G.R. No. L-28896, 1988)

2. NECESSITY THEORY
The power of taxation proceeds upon the theory that the
existence of government is a necessity; that it cannot
continue without means to pay its expenses; and that for
those means, it has the right to compel all citizens and
property within its limits to contribute.

3. BENEFITS-RECEIVED THEORY
(SYMBIOTIC RELATIONSHIP THEORY)
The basis of taxation is found in the reciprocal duties of
protection and support between the state and its
inhabitants. In return for this contribution, the taxpayer
receives the general advantages and protection which the
government affords the taxpayer and his property.

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 BAM031 INCOME TAXATION

CHARACTERISTICS OF TAXATIONS

1. It must be used for public purpose

2. It is the strongest of all the inherent powers
of the government. (Sison v. Ancheta, G.R.
No. L-59431, 1984)
3. It is territorial in operations.
4. It is comprehensive as it covers persons,
things or property, privilege, occupation,
profession or business, and transactions or
activities.
5. It is generally pecuniary in nature (i.e.,
payable in money)
6. It is plenary in nature

PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY
➢ The sources of tax revenue should coincide with
and approximate the needs of government
expenditures and their variations. (Chavez v.
Ongpin, G.R. No. 76778, 1990)

2. THEORETICAL JUSTICE
➢ The tax system should be fair to the average
taxpayer and be based upon the ability to pay.
The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation. (Sec. 28(1), Art.
VI, Constitution
3. ADMINISTRATIVE FEASIBILITY
➢ The tax system should be capable of being
properly and efficiently administered by the
government and enforced with the least
inconvenience to the taxpayer. Example:
Creditable withholding tax which is a system of
advance collection of payee’s income tax
liability.
INHERENT AND CONSTITUTIONAL
LIMITATIONS ON TAXATION
➢ The power of taxation is the strongest of all the
powers of the government. Nevertheless,
effective limitations thereon may be imposed by
the people through the Constitution.
Accordingly, no matter how broad and
encompassing the power of taxation, it is still
subject to inherent and constitutional limitations.
SOURCES OF TAX LAWS
1. Constitution;
2. Legislations or statutes, executive orders, local
ordinances, tax treaties;
3. Administrative issuances by the DOF, BIR or BOC;
4. Rulings issued by the BIR, opinions of the DOJ
5. Judicial decisions by the Supreme Court
REQUISITES OF A VALID TAX
Requisites:
1. Must be for a public purpose;
2. Should be uniform and equitable;
3. Either the person or property taxed is within the
jurisdiction of the taxing authority;
4. Complies with the requirements of due process; and
5. Does not infringe any constitutional or inherent
limitations.
KINDS OF TAXES
1. AS TO SUBJECT MATTER OR OBJECT
a. Personal, Capitation, or Poll Tax
1. Fixed amount
2. Individuals residing within specified territory
3. Without regard to their property, occupation or
business Example: Community Tax (Cedula)
b.Property Tax
4. Imposed on property, real or personal
5. In proportion to its value or other reasonable method
of apportionment
Example: Real estate tax
c.Excise/Privilege tax
6. Imposed upon the performance of an act, the
enjoyment of a privilege or the engagement in an
occupation, profession or business
7. This is different from the excise tax of Title VI of the
NIRC Example: Income tax, VAT, estate tax, donor’s tax
2

2. AS TO WHO BEARS THE BURDEN OR
INCIDENCE
a. Direct
8. imposed on the person who also bears the burden
thereof
Example: income tax, community tax, estate tax
b.Indirect
9. imposed on the taxpayer who shifts the burden of the
tax to another (Maceda v. Macaraig, Jr., 1991)
Example: VAT, specific tax, percentage tax, customs
duties
3. AS TO TAX RATES OR DETERMINATION OF
AMOUNT
a.Specific
10. tax imposed and based on a physical unit of
measurement, as by head, number, weight, length or
volume
Example: Tax on distilled spirits, fermented liquors,
cigars
b.Ad Valorem
11. tax of a fixed proportion of the value of property with
respect to which the tax is assessed; requires intervention
of assessor.
Example: Real estate tax, excise tax on cars, non?
essential goods
c.Mixed
4. AS TO PURPOSES
a.General, fiscal or revenue
12. imposed for the general purpose of supporting the
government
Example: Income tax, percentage tax
b.Special or regulatory
13. imposed for a special purpose, to achieve some social
or economic objectives
Example: Protective tariffs or customs duties
5. AS TO SCOPE OR AUTHORITY TO IMPOSE
a.National
14. imposed by the national government
Example: National internal revenue taxes, custom duties
b.Municipal or local
15. imposed by the municipal corporations or local
governments
Example: Real estate tax, occupation tax
6. AS TO GRADUATION OF RATE (THREE
SYSTEMS OF TAXATION)
a.Progressive or graduated
16. tax rate increases as the tax base or bracket increases
Example: Income tax, estate tax, donor’s tax
b.Regressive
17. tax rate decreases as the tax base increases
BAM031 INCOME TAXATION
c. Proportionate or Flat
18. based on a fixed percentage of the amount of the
property, income or
other basis to be taxed
Example: Real estate tax, VAT, percentage tax
d.Mixed
19. the tax rates are partly progressive and partly
regressive.
DOUBLE TAXATION
A. DIRECT DOUBLE TAXATION (STRICT SENSE)
The same property is taxed twice when it should be taxed
only once. Both taxes must be imposed:
i. On the same property or subject matter;
ii. ii. For the same purpose;
iii. By the same taxing authority;
iv. Within the same jurisdiction or taxing district
and during the same period; and
v. They must be of the same kind or character of
tax. (Villanueva v. City of Iloilo, G.R. No. L-
26521, 1968)
B. INDIRECT DOUBLE TAXATION (BROAD
SENSE)
It means indirect duplicate taxation. It extends to all cases
in which there are two or more pecuniary impositions.
The Constitution does not prohibit the imposition of
double taxation in the broad sense.
ESCAPE FROM TAXATION
a. Shifting of tax burden
The imposition of tax is transferred from the statutory
taxpayer to another without violating the law.
WAYS OF SHIFTING THE TAX BURDEN (FBO):
• Forward shifting: The transfer of burden from the
producer to distributor until it finally reaches the
ultimate purchaser or consumer
• Backward shifting: The reverse of forward
shifting, e.g. the manufacturer has agreed to buy
the supplier’s product only if the price is reduced
by the amount of tax
• Onward shifting: The tax burden is shifted twice
or more either forward or backward
TAXES THAT CAN BE SHIFTED
1. VAT
2. Percentage tax
3. Excise tax on excisable articles
4. Ad valorem taxes that oil companies pay to BIR upon
removal of petroleum products from its refinery
TAX AVOIDANCE
– also called tax minimization, is a tax saving device that
is legally permissible
The Court held that tax avoidance is the use of a tax
saving device within the means sanctioned by law. Any
tax avoidance scheme should be used by the taxpayer in
good faith and at arm’s length (CIR v Estate of Benigno
Toda Jr., G.R. 147188, 2004)
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TAX EVASION
➢ connotes fraud through the use of pretenses and
forbidden devices to lessen or defeat taxes; must
be willful and intentional
It connotes the integration of three factors:
1. End to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a
tax is due;
2. Accompanying state of mind which ith,"
"willful," or "deliberate and not accidental"; and
3. Course of action or failure of action, which is
unlawful. (Toda, Jr. v. CA, G.R. No. 78583,
1990).
TAX EXEMPTION
The grant of immunity to particular persons or
corporations or to persons or corporations of a particular
class from a tax which persons and corporations
generally within the same state or taxing district are
obliged to pay. It is an immunity or privilege; it is
freedom from a financial charge or burden to which
others are subjected. (Greenfield v. Meer, G.R. No. 156,
1946)
BAM031 INCOME TAXATION
BAM 031 MODULES SUMMARY + NOTES
(MODULES 1-8)
TAXATION
Taxation is the inherent power of the sovereign,
exercised through the legislature, to impose burdens
upon subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the legitimate
objects of government.
TAXES
Taxes are the enforced proportional contributions from
persons and property levied by the law-making body of
the State by virtue of its sovereignty for the support of
the government and all public needs
PURPOSE OF TAXATION
ESSENTIAL ELEMENTS OF A TAX
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a
right or privilege (Excise tax).
5. It is levied by the State which has jurisdiction over the
subject or object of taxation.
6. It is levied by the law-making body of the State.
THEORY AND BASIS OF TAXATION
The power of taxation proceeds upon the theory that the
existence of government is a necessity; that it cannot
continue without means to pay its expenses; and that for
these means, it has a right to compel all its citizens’
property within its limits to contribute.

The basis of taxation is found in the reciprocal duties of
protection and support between the State and its
inhabitants. In return for his contribution, the taxpayer
received benefits and protection from the government.
This is the so called “Benefits received principle”.
LIFEBLOOD DOCTRINE
The lifeblood theory constitutes the theory of taxation,
which provides that the existence of government is a
necessity; that government cannot continue without
means to pay its expenses; and that for these means it has
a right to compel its citizens and property within its
limits to contribute.
NECESSITY THEORY
Taxation as stated in the case of Phil. Guaranty Co., Inc.
v. Commissioner [13 SCRA 775], is a power predicated
upon necessity.
BENEFITS RECEIVED PRINCIPLE
This theory bases the power of the State to demand and
receive taxes on the reciprocal duties of support and
protection. The citizen supports the State by paying the
portion from his property that is demanded in order that
he may, by means thereof, be secured in the enjoyment
of the benefits of an organized society.
DOCTRINE OF SYMBIOTIC RELATIONSHIP
This doctrine is enunciated in CIR v. Algue, Inc. [158
SCRA 9], which states that “Taxes are what we pay for
civilized society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and
operate it.
INHERENT POWERS OF THE STATE
1. Police Power
2. Eminent Domain
3. Taxation
THE SCOPE OF TAXATION
The power of taxation is the most absolute of all powers of the
government [Sison v. Ancheta 130 SCRA 654]. It has the
broadest scope of all the powers of government because in the
absence of limitations, it is considered as unlimited, plenary,
comprehensive and supreme.
FAQs
1. What is taxation? Taxation is the inherent power of the sovereign,
exercised through the legislature, to impose burdens upon subjects
and objects within its jurisdiction for the purpose of raising revenues
to carry out the legitimate objects of government
2. Is Taxation necessary? Taxes are crucial because governments
collect this money and use it to finance social projects. Without taxes,
government contributions to the health sector would be impossible.
Taxes go to funding health services such as social healthcare, medical
research, social security, etc.
BAM031 INCOME TAXATION
MODULE 2
INHERENT LIMITATIONS
1. Taxes must be exacted for PUBLIC PURPOSE
Money raised by taxation can be spent only for public
purposes and not for the advantage of private individuals
2. The power to tax is INHERENTLY LEGISLATIVE in
nature
General Rules: The power to tax is purely legislative and
cannot be delegated to other branches of the government
EXCEPTIONS:
• Delegation to local governments
• Delegation to the President (tariff rates)
• Delegation to administrative authorities
3. GOVERNMENT entities, agencies, and instrumentalities
are generally exempt from taxation
There is no point in national and local government taxing each
other, unless a sound and compelling policy requires such
transfer from public funds from one government pocket to
another
4. INTERNATIONAL COMITY
Tax treaties are entered into to minimize the harshness of
international double taxation
5. Taxes are limited to the State’s TERRITORIAL
JURISDICTION
EXCEPT where privity of relationship exists between the State
and the taxpayer (Resident citizens for income from sources
worldwide)
CONSTITUTIONAL LIMITATIONS
1. DUE PROCESS (Art. III, Sec 1 1987 Phil Constitution)
Tax laws and their enforcement must comply with substantive
and procedural due process
2. EQUAL PROTECTION OF LAWS (Art. III, Sec 1 1987
Phil Constitution)
There is valid discrimination when the classification:
• Rests on substantial distinctions;
• Is germane to the purpose of the law;
• Not limited to existing conditions only; and
• Applies equally to all members of the same class.
A group of private vehicle owners challenged the
constitutionality of RA 10701 also known as “An Act
imposing a Transport Tax on the Purchase of Private
Vehicles” for contravening the Equal Protection Clause. Under
RA 10701, buyers of private vehicles are required to pay 5%
transport tax, and LTO shall not accept for any registration any
new vehicles without proof of payment of the 5% transport
tax.
RULING: RA 10701 is constitutional and complies with the
requisites of equal protection. There is a substantial distinction
between private vehicles vs. public utility vehicles and
government vehicles. Further, taxing private vehicles and not
PUVs is germane to the purpose of the law to alleviate traffic
because it’ll incentivize the use of PUVs which can carry more
people per vehicle compared to private vehicles.
3. RELIGIOUS FREEDOM (Art. III, Sec 5 1987 Phil
Constitution)
The constitutional guaranty of the free exercise and enjoyment
of religious profession and worship carries with it the right to
disseminate religious information.

4. NON-IMPAIRMENT OF CONTRACTS (Art. III, Sec 10
1987 Phil Constitution)
The tax exemptions protected by the non-impairment clause
are contractual tax exemptions, not those granted by franchises
or licenses.
Contractual tax exemptions are:
• Those entered into by the taxing authority,
• Lawfully entered into them under enabling laws,
• Wherein the government acts in its private capacity and sheds
its cloak of authority and immunity
5. Prohibition Against Imprisonment for Non-Payment of
Poll Tax (Art. III, Sec 20 1987 Phil Constitution)
Poll tax refers to cedula or residence tax. The Constitutional
protection only applies to poll taxes; hence, people can still be
imprisoned for non-payment of other kinds of taxes where the
law so expressly provides (tax evasion cases)
6. Uniformity and Equality of Taxation and Progressive
System of Taxation (Art. III, Sec 28 (1) 1987 Phil
Constitution)
Equality and uniformity in taxation mean that all taxable
articles of kinds of property of the same class shall not be
taxed at the same rate.
Uniformity does not call for perfect uniformity or perfect
equality; reasonable classifications do not violate the
uniformity and equality of taxation.
7. Delegated Authority to the President to Impose Tariff
Rates (Art. III, Sec 28 (2) 1987 Phil Constitution)
8. Prohibition Against Taxation of Real Property of
Charitable Institutions, Churches, Parsonages or
Convents, Mosques and Non-Profit Cemeteries (Art. III,
Sec 28 (3) 1987 Phil Constitution)
The exemption only applies to real property tax. “Actual,
direct, and exclusive use of the property”
9. Prohibition Against Taxation of Non-stock, Non-Profit
Educational Institutions (Art. XIV, Sec 4 (3) 1987 Phil
Constitution)
The revenues and the assets must be used actually, directly,
and exclusively for educational purposes.
10. Majority Vote of Congress of Tax Exemptions (Art. VI, Sec
28 1987 Phil Constitution)
11. Prohibition on Use of Tax Levied for Special Purpose
(Art. VI, Sec 29 (3) 1987 Phil Constitution)
12. Tax Bills Should Originate Exclusively in the House of
Representatives (Art. VI, Sec 24 1987 Phil Constitution)
13. President's Veto Power on Appropriation, Revenue, and
Tariff Bills (Art. VI, Sec 27 (2) 1987 Phil Constitution)
14. Judicial Power to Review Legality of Tax (Art. VIII, Sec 5
1987 Phil Constitution)
15. Grant of Power to the Local Government Units to Create
Its Own Sources of Revenue (Art. X, Sec 5 1987 Phil
Constitution)
STAGES OR ASPECTS OF TAXATION
1. Levy
Enactment of a law by Congress, imposing a tax.
2. Assessment and Collection
Act of administration and implementation of the tax law by the
executive department through the administrative agencies.
BAM031 INCOME TAXATION
3. Payment
Act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available to him
Situs of taxation - Tax jurisdiction that has the power to levy
taxes upon the tax object
➢ Situs of income
➢ Situs of taxation literally means place of taxation.
➢ The general rule is that the taxing power cannot go
beyond the territorial limits of the taxing authority.
➢ The basic rule is that the state where the subject to be
taxed has a situs may rightfully levy and collect the
tax; and the situs is necessarily in the state which has
jurisdiction or which exercises dominion over the
subject in question.
SITUS OF TAXATION
SOURCES OF TAX LAWS
1. Constitution;
2. Legislations or statutes, executive orders, local
ordinances, tax treaties;
3. Administrative issuances by the DOF, BIR or BOC;
4. Rulings issued by the BIR, opinions of the DOJ
5. Judicial decisions by the Supreme Court
H. REQUISITES OF A VALID TAX
Requisites:
1. Must be for a public purpose;
2. Should be uniform and equitable;
3. Either the person or property taxed is within the jurisdiction
of the taxing authority;
4. Complies with the requirements of due process; and
5. Does not infringe any constitutional or inherent limitations.
KINDS OF TAXES
1. As to subject matter or object
a. Personal, Capitation, or Poll Tax
1. Fixed amount
2. Individuals residing within specified territory
3. Without regard to their property, occupation or business
Example: Community Tax (Cedula)
b.Property Tax
4. Imposed on property, real or personal
5. In proportion to its value or other reasonable
method of apportionment
Example: Real estate tax
c. Excise/Privilege tax
6. Imposed upon the performance of an act, the enjoyment of a
privilege or the engagement in an
occupation, profession or business
7. This is different from the excise tax of Title VI of the NIRC
Example: Income tax, VAT, estate tax, donor’s tax

2. As to who bears the burden or incidence
a. Direct
8. imposed on the person who also bears the burden thereof
Example: income tax, community tax, estate tax
b. Indirect
9. imposed on the taxpayer who shifts the burden of the tax to
another (Maceda v. Macaraig, Jr., 1991)
Example: VAT, specific tax, percentage tax, customs duties
General Rule: The proper party to seek a refund is the statutory
taxpayer. (Silkair v. CIR, G.R. No.
173594, 2008)
Exception: if the law confers exemption from both direct or
indirect taxes, claimant is entitled to a refund
even if claimant is not the statutory taxpayer but only bears the
economic burden of the tax. (Philippine
Airlines v. CIR, G.R. No. 198759, 2013)
3. As to tax rates or determination of amount
a. Specific
10. tax imposed and based on a physical unit of measurement,
as by head, number, weight, length or volume
Example: Tax on distilled spirits, fermented liquors, cigars
b.Ad Valorem
11. tax of a fixed proportion of the value of property with
respect to which the tax is assessed; requires
intervention of assessor.
Example: Real estate tax, excise tax on cars, non-essential
goods
c.Mixed
4. As to purposes
a.General, fiscal or revenue
12. imposed for the general purpose of supporting the
government
Example: Income tax, percentage tax
b. Special or regulatory
13. imposed for a special purpose, to achieve some social or
economic objectives
Example: Protective tariffs or customs duties
5. As to scope or authority to impose
a.National
14. imposed by the national government
Example: National internal revenue taxes, custom duties
b.Municipal or local
15. imposed by the municipal corporations or local
governments
Example: Real estate tax, occupation tax
6. As to graduation of rate (three systems of taxation)
a.Progressive or graduated
16. tax rate increases as the tax base or bracket increases
Example: Income tax, estate tax, donor’s tax
b.Regressive
17. tax rate decreases as the tax base increases
c.Proportionate or Flat
18. based on a fixed percentage of the amount of the property,
income or other basis to be taxed
Example: Real estate tax, VAT, percentage tax
d.Mixed
19. the tax rates are partly progressive and partly regressive
DOUBLE TAXATION
• Double taxation refers to income tax being paid twice on the
same source of income.
• Double taxation occurs income is taxed at both the corporate
level and personal level, as in the case of stock dividends.
• Double taxation also refers to the same income being taxed
by two different countries.
• While critics argue that dividend double taxation is unfair,
advocates say that without it, wealthy stockholders could
virtually avoid paying any income tax.
BAM031 INCOME TAXATION
a. Direct Double Taxation (Strict sense) The same property
is taxed twice when it should be taxed only once. Both taxes
must be imposed:
i. On the same property or subject matter;
ii. For the same purpose;
iii. By the same taxing authority;
iv. Within the same jurisdiction or taxing district and during
the same period; and
v. They must be of the same kind or character of tax.
(Villanueva v. City of Iloilo, G.R. No. L-26521, 1968)
b. Indirect Double taxation (Broad sense) It means indirect
duplicate taxation. It extends to all cases in which there are
two or more pecuniary impositions. The Constitution does not
prohibit the imposition of double taxation in the broad sense.
The escapes from Taxation
Shifting of tax burden Process by which tax burden is
transferred from statutory taxpayer to another without
violating the law.
Kinds of Shifting
1. Forward shifting- when burden of tax is transferred from a
factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer
2. Backward shifting – when the burden is transferred from
consumer through factors of distribution to the factors of
production;
3. Onward shifting- when the tax is shifted 2 or more times
either forward or backward.
Taxes that can be shifted
1. VAT
2. Percentage tax
3. Excise tax on excisable articles
4. Ad valorem taxes that oil companies pay to BIR upon
removal of petroleum products from its refinery
Tax avoidance Use of legal methods to modify an individual's
financial situation to lower the amount of income tax owed.
– also called tax minimization, is a tax saving device that is
legally permissible
The Court held that tax avoidance is the use of a tax saving
device within the means sanctioned by law. Any tax avoidance
scheme should be used by the taxpayer in good faith and at
arm’s length (CIR v Estate of Benigno Toda Jr., G.R. 147188,
2004)
Tax evasion An illegal activity in which a person or entity
deliberately avoids paying a true tax liability.
- connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes; must be willful and
intentional
It connotes the integration of three factors:
1. End to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment
of tax when it is shown that a tax is due;
2. Accompanying state of mind which is described as being
"evil," in "bad faith," "willful," or "deliberate and not
accidental"; and
3. Course of action or failure of action, which is unlawful.
(Toda, Jr. v. CA, G.R. No. 78583, 1990).

Meaning of impact and incidence of taxation
● Impact of Taxation – point on which the tax is originally
imposed or the one on whom the tax is
formally assessed.
● Incidence of Taxation – point on which the tax burden
finally rests or settles down.
Example: VAT is originally assessed against the seller who is
required to pay the said tax, but the burden is actually shifted
or passed on to the buyer.
FAQs
1. How is the taxing power limited? Limitations on The
Power of Taxation. The power of taxation, is however, subject
to constitutional and inherent limitations. Constitutional
limitations are those provided for in the constitution or implied
from its provisions, while inherent limitations are restrictions
to the power to tax attached to its nature.
2. Is double Taxation Constitutional? “What the law
prohibits is the imposition of two taxes on the same subject
matter, for the same purpose, by the same taxing authority,
within the same jurisdiction and during the same taxing period;
thus, double taxation must be of the same kind or character to
be a valid issue”- www.pwc.co
MODULE 3
Recognize tax System & Collection System
1. Progressive tax – as the tax base increases the tax due also
increases such as tax on individual earning pure compensation
income.
2. Proportionate tax – based from a rate of the tax base such
corporate income tax. Tax systems and collection system is
thoroughly discussed in this site:
https://santandertrade.com/en/portal/establish-
overseas/philippines/tax-system
Attributes of a Sound Tax System
Fiscal Adequacy That the sources of revenue should be
sufficient to meet the demands of public expenditure.
Administrative Feasibility means that tax laws, rules and
regulations must be capable of being administered and
complied with by citizens by easy understanding
Theoretical Justice The tax system should be fair to the
average taxpayer and based upon his ability to pay.
FAQs
1. How is situs of taxation determined? The rules for
determining situs vary between jurisdictions and can depend
on the context. Situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in
question
2. What is the most important aspect of a sound tax system?
Although opinions about what makes a good tax system will
vary, there is general consensus that the three basic conditions
should be maximized to the greatest extent possible.
MODULE 4
Tax Administration is the administration, management,
conduct, direction, and supervision of the execution and
application of the internal revenue laws or related statutes (or
equivalent laws and statutes of a State) and tax conventions to
which the United States is a party; - definitions.uslegal.com/ T
ax administration in the Philippines is generally executed by:
1. Department of Finance
2. Bureau of Internal Revenue
3. Bureau of Customs
The Bureau of Internal Revenue (Filipino: Kawanihan ng
Rentas Internas, or BIR) is an agency of Department of
Finance. BIR collects more than half of the total revenues of
the government. Caesar Dulay is the current Commissioner of
BIR.
Refer to Section 5, Power of the Commissioner to Obtain
Information, and to Summon, Examine, and Take Testimony of
Persons, of the National Internal Revenue Code (NIRC), as
amended.
BAM031 INCOME TAXATION
Taxpayers for Purposes of Tax Administration
1. INDIVIDUALS
Citizens of the Philippines
a. Residents of the Philippines [Secs. 23 (A) and 24 (A)]
b. Not Residents of the Philippines [Secs. 23 (B) and 24 (A)]
c. OFW and Seaman [Sec. 23 (C) and 24 (A)]
Aliens
a. Residents of the Philippines
b. Not Residents of the Philippines [Secs. 22 (G); 23 (D); 25
(A) and (B)
c. Aliens employed by multinational companies, offshore
banking units and petroleum contractors and
subcontractors
Estates and Trusts
An estate, in common law, is the net worth of a person at any
point in time alive or dead. It is the sum of a person's assets –
legal rights, interests and entitlements to property of any kind
– less all liabilities at that time. The issue is of special legal
significance on a question of bankruptcy and death of the
person
A trust is a three-party fiduciary relationship in which the first
party, the trustor or settlor, transfers ("settles") a property
(often but not necessarily a sum of money) upon the second
party (the trustee) for the benefit of the third party, the
beneficiary
2. CORPORATIONS
Domestic Corporations (Sec. 27)
Domestic Corporations are liable to pay corporate income tax
from sources within or without.
Foreign Corporations
a. Resident Corporations - foreign corporations engaged in
trade or business in the Philippines; Not Residents of the
Philippines [Secs. 22 (G); 23 (D); 25 (A) and (B)
b. Non- resident corporations - foreign corporations not
engaged in business or trade in the Philippines.
3. Partnerships
a. Taxable Partnership
b. Exempt Partnership
- General Professional Partnership (GPP)
- Joint Venture or Consortium…
FAQs
1. How is situs of taxation determined? The rules for
determining situs vary between jurisdictions and can depend
on the context. Situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in
question
2. What is the most important aspect of a sound tax
system? Although opinions about what makes a good tax
system will vary, there is general consensus that the three basic
conditions should be maximized to the greatest extent possible.
MODULE 6
Income money (or some equivalent value) that an individual
or business receives, usually in exchange for providing a good
or service or through investing capital.
In general, accounting income is the change in net assets
during a reporting period, excluding any receipts from or
disbursements to owners.
Income means all wealth which flows into the taxpayer other
than as a mere return of capital.
Gross Income
gross income equates to gross margin, which is sales minus the
cost of goods sold. Thus, gross income is the amount that a
business earns from the sale of goods or services, before
selling, administrative, tax, and other expenses have been
deducted.
Gross income means all income derived from whatever source.
Types of income taxpayers
1. Individuals
2. Non-individuals

List individual income taxpayers
1. Individuals
o Resident citizens receiving income from sources within or
outside the Philippines
o Employees deriving purely compensation income from two
or more employers, concurrently or successively at any time
during the taxable year
o Employees deriving purely compensation income regardless
of the amount, whether from a single or several employers
during the calendar year, the income tax of which has not been
withheld correctly (i.e. tax due is not equal to the tax withheld)
resulting to collectible or refundable return
o Self-employed individuals receiving income from the
conduct of trade or business and/or practice of profession
o Individuals deriving mixed income, i.e., compensation
income and income from the conduct of trade or business
and/or practice of profession
o Individuals deriving other non-business, non-professional
related income in addition to compensation income not
otherwise subject to a final tax
o Individuals receiving purely compensation income from a
single employer, although the income of which has been
correctly withheld, but whose spouse is not entitled to
substituted filing
• Non-resident citizens receiving income from sources within
the Philippines
• Aliens, whether resident or not, receiving income from
sources within the Philippines
Explain taxable estates and trusts and corporate taxpayers
• Non-Individuals
o Corporations including partnerships, no matter how created
or organized.
o Domestic corporations receiving income from sources within
and outside the Philippines o Foreign corporations receiving
income from sources within the Philippines
o Estates and trusts engaged in trade or business
Criteria in imposing Philippine Income Tax
i. Citizenship – A citizen taxpayer is subject to income tax: (a)
on his worldwide income if he resides in the Philippines; or (b)
only on his income from sources within the Philippines, if he
qualifies as a non-resident citizen.
ii. Residence – A resident alien is liable to pay income tax on
his income from sources within the Philippines but exempt
from tax on his income from sources outside the Philippines.
iii. Source – A non-resident alien could be subject to
Philippine income tax if he derives income from sources
within the Philippines such as dividend, interest, rent or
royalty.
CITIZENSHIP
CITIZENS OF THE PHILIPPINES (Article IV Sec 1 1987
Phil Constitution)
Section 1. The following are citizens of the Philippines:
[1] Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
[2] Those whose fathers or mothers are citizens of the
Philippines;
[3] Those born before January 17, 1973, of Filipino mothers,
who elect Philippine citizenship upon reaching the age of
majority; and
[4] Those who are naturalized in accordance with law.
BAM031 INCOME TAXATION
NON-RESIDENT CITIZEN (NRC) OF THE
PHILIPPINES
● Establishes the fact of his physical presence abroad with a
definite intention to reside therein.
● Leaves the Philippines during the taxable year to reside
abroad, as immigrant or for employment on a permanent basis.
● Works & derives income from abroad & whose employment
requires him to be physically present abroad most of the time
(i.e. not less than 183 days) during the taxable year.
● Was previously considered as nonresident citizen & arrives
in the Philippines at any time during the taxable year to reside
permanently in the Philippines.
Examples:
1. Immigrant - one who leaves the Philippines to reside abroad
as an immigrant for which a foreign visa has been secured.
2. Permanent employee - one who leaves the Philippines to
reside abroad for employment on a more or less permanent
basis
3. Contract worker - one who leaves the Philippines on
account of a contract of employment which is renewed from
time to time under such circumstance as to require him to be
physically present abroad most of the time (i.e. not less than
183 days) during the taxable year.
Seafarers or seamen are Filipino citizens who receive
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively for international
trade.
An OCW is a Filipino citizen who:
● Holds a job outside the Philippines,
● Is physically present in that foreign country where the job is,
● Is registered with the POEA,
● Has a valid overseas employment certificate, and
● His/her salaries and wages are paid by an employer abroad
and are not borne by any entity or person in the Philippines.
(Rev. Regs. 01-11)
ALIENS
- Is a foreign-born person who is not qualified to acquire
Philippine citizenship by birth or after birth.
(a) Resident Alien 12 (RA)
an individual whose residence is within the Philippines and
who is not a citizen thereof is taxable only on income derived
from sources within the Philippines
• An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident of the Philippines for
purposes of the income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and
nature of his stay.
• A mere floating intention, indefinite as to time, to return to
another country is not sufficient to constitute him a transient.
• If he lives in the Philippines and has no definite intention as
to his stay, he is a resident. One who comes to the Philippines
for a definite purpose which in its nature may be promptly
accomplished is a transient.
• But if his purpose is of such a nature that an extended stay
may be necessary for its accomplishment, and to that end the
alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all times
to return to his domicile abroad when the purpose for which he
came has been consummated or abandoned.
(b) Nonresident Alien 13 (NRA)
an individual whose residence is not within the Philippines and
who is not a citizen thereof but doing business therein is
taxable only on income from sources within.
 BAM031 INCOME TAXATION
(1) Engaged in trade or business (NRA-ETB) – an alien who
comes and stays in the Philippines for an aggregate period of
more than 180 days during any calendar year
(2) Not engaged in trade or business (NRA-NETB) – an
alien whose stay in the Philippines is 180 days or less
CORPORATIONS
A corporation shall include partnerships, no matter how
created or organized. It includes joint stock companies, joint
accounts, associations, and insurance companies. But does not
include, for the purpose of imposing the 30% regular corporate
income tax (RCIT):
1. General professional partnerships; and
2. Joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum,
coal, geothermal, and other energy operations pursuant to an
operating or consortium agreement under a service contract
with the government.
Kinds of Corporations
(i) Domestic Corporation (DC) – created or organized in the
Philippines or under its laws and is liable for income derived
from sources within and without
(ii) Foreign Corporation19 (FC) – organized and existing
under the laws of a foreign country, which includes:
(i) Resident foreign corporation (RFC) – foreign corporation
engaged in trade or business within the Philippines and is
liable from sources within
(ii) Nonresident foreign corporation (NFC) – foreign
corporation not engaged in trade or business within the
Philippines

Joint Venture and Consortium - Joint venture is a

commercial undertaking by two or more persons, differing
from a partnership that it relates to the disposition of a single
lot of goods or the completion of a single project. Consortium
is an association, typically of several business companies.
Partnerships Taxed as a corporation Includes unregistered
joint ventures and business partnerships
Exception: that joint ventures are not taxable as corporations
when the purpose is for:
● Undertaking construction projects; or
● Engaging in petroleum, coal, and other energy operation
under a service contract with the government. Partners in a
business partnership are considered stockholders. Their
distributive shares are taxed as dividends, and thus subject to
final income tax on their gross distributive share.
General Professional Partnerships Established solely for
purpose of exercising common profession and no part of
income derived from engaging in trade or business. As an
entity, it is not subject to income tax.
Estate and Trusts Estate – property, rights, and obligations of
a person which are not extinguished by his death and those that
accrue thereto
Trust – arrangement created by agreement under which title to
property is passed to another for conservation or investment
with the income and the corpus/principal distributed in
accordance with the directions of the creator; to be taxable as a
separate entity, grantor must have absolutely and irrevocably
given up control and benefit over the trust
The general rules in income taxation
Every individual citizen, alien residing in the Philippines, and
every non-resident alien engaged in trade or business in the
Philippines, who is receiving income, whether it constitutes the
sole source of their income or in combination with salaries,
wages, and other fixed or determinable income, is required to
file an income tax return on or before 15 April of each year
covering income for the preceding taxable year.
The tax year runs from 1 January to 31 December of each year.
The tax return to be filed declares the total amount of income
earned by the individual and any unpaid tax is settled at the
time the return is filed. A citizen or a resident alien is not
required to file the annual individual income tax return if they
qualify for the substituted filing. A non-resident alien engaged
in trade or business, however, does not qualify for substituted
filing.
FAQs
1. How differentiate income from gross income in terms of
taxation? Income means all wealth which flows into the
taxpayer other than as a mere return of capital. While gross
income means all income derived from whatever source.
2. Why is it important to determine income for taxes? In
taxation the most common measure/basis for taxes. In most
cases, income earned determines the taxes we owe to the
government.
MODULE 7
The following are some of the concepts being used in the
Philippines to implement its tax schemes.
Explain accounting Period
1. Calendar period
The calendar accounting period starts from January 1 and ends
December 31. This accounting period is available to both
corporate taxpayers and individual taxpayers.
2. Fiscal period
A fiscal accounting period is any 12-month period that ends on
any day other than December 31. The fiscal accounting period
is available only to corporate income taxpayers and is not
allowed to individual income taxpayers.

Discuss accounting Methods
1. Accrual Basis
Under the accrual basis of accounting, income is recognized
when earned regardless of when received. Expense is
recognized when incurred regardless of when paid.
2. Cash Basis
Under the cash basis of accounting, income is recognized
when received and expense if recognized when paid.
Distinguish: cash and accrual method
The accrual method relies upon the taxpayer’s right to receive
amounts or its obligation to pay them, in opposition to actual
receipt or payment, which characterizes the cash method of
accounting.
Special method: installment, deferred payment, percentage
of completion (in long-term contracts) Installment method
– a proportionate income is recognized when an installment
payment is actually received.
Deferred payment method – used when there is an agreement
between the contracting parties allowing the borrower to take
possession of the goods and start making payments until later
date.
Percentage of Completion (in long-term contracts) –
reporting of income and expenses on a period-by period basis,
as determined by the percentage of the contract that has been
fulfilled. The percentage of completion is determined by
comparing total actual cost incurred to the estimated total cost
of completion.
Actual v. Constructive Receipt
Actual Receipt occurs when there is a physical transfer of the
money consideration or its equivalent to a person.
Constructive Receipt occurs when the money consideration or
its equivalent, is placed at the control of the person who
rendered the service without restrictions by the payor
Recognition of income Receipt of income for purposes of
taxation may be actual or constructive. (CIR v. BPI, G.R. No.
147375, 2006)
Rationalize Tax Reporting
“Compliance across all taxes, statutory accounting and tax
reporting is becoming increasingly complex. Companies are
struggling to do more with less while driving value out of their
tax and finance functions. The centralization of finance and
accounting functions presents additional challenges when
dealing with complex local rules, disparate technologies, and
manual processes during the compliance cycle. This results in
a greater risk of compliance failures and minimal time for
strategic forecasting or planning…” - www.pwc.com
BAM031 INCOME TAXATION
Revenue Issuances
Those issuances officially released by the CIR.
Different kinds of revenue issuances:
1. Revenue Regulations (RRs) - formal interpretations of the
NIRC signed by the Secretary of Finance upon the
recommendation of the CIR; have the force and effect of law
and can only be repealed, modified or amended by another
regulation or law; specify, prescribe or define rules and
regulations for effective enforcement of the provisions of the
NIRC and related statutes
2. Revenue Memorandum Orders (RMOs) - directives
outlining procedures which are necessary to carry out
programs or to achieve policy goals and objectives
3. Revenue Memorandum Rulings (RMRs) -rulings affecting
certain significant tax matters affecting groups of taxpayers or
an industry that are issue without any request by the taxpayers,
for the guidance and compliance of the revenue personnel
4. Revenue Memorandum Circular (RMCs) - issued to
amplify the rules, precedents, laws and other orders issued by
agencies other than the BIR, for the guidance and compliance
of the revenue personnel
5. Revenue Bulletins (RBs) - periodic issuances, notices and
official announcements of the CIR that consolidate the BIR’s
position on certain specific issues of law or administration in
relation to the provisions of the NIRC, relevant tax laws and
other issuances for the guidance of the public
6. Rulings - less formal interpretations by the CIR or his
authorized representatives involving tax provisions and
regulations; include:
a. BIR Rulings;
b. VAT Rulings;
c. Rulings issued by International Tax Affairs Division (ITAD);
and
d. Rulings issued thru delegated authorities or unnumbered
rulings
MODE OF FILING INCOME TAX RETURNS
1. Manual Filing System
The traditional manual system of filing income tax returns is
by paper documents where taxpayers fill up BIR forms to
report income, expenses, or any declaration required to be
filled with the BIR
2. E-BIR Forms
The BIR introduced the e-BIR Forms with an offline or online
version. Taxpayers fill up their income tax returns in electronic
spreadsheets without the need of writing on paper returns.
3. Electronic Filing and Payment System
The eFPS is a paperless tax filing system developed and
maintained by the BIR. Taxpayers file tax returns including
attachments in electronic format and pay the tax through the
internet.
Below shows some of the ways a taxpayer can file their
respective tax liabilities.
1. For eFPS Filer
• Fill-up applicable fields in the BIR Form
• Pay electronically by clicking the “Proceed to Payment”
button and fill-up the required fields in the “eFPS Payment
Form” then click “Submit” button.
• Receive payment confirmation from eFPS-AABs for
successful e-filing and e-payment.

2. For Non-eFPS Filer
• Fill-up fields in the BIR Form in the downloaded Electronic
Bureau of Internal Revenue Form (eBIRForm) Package
• Print the duly accomplished BIR Form
• Proceed to the nearest Authorized Agent Bank (AAB) under
the jurisdiction of the Revenue District Office where you are
registered and present the duly accomplished BIR Form,
together with the required attachments and your payment.
• In places where there are no AABs, proceed to the Revenue
Collection Officer or duly Authorized City or Municipal
Treasurer located within the Revenue District Office where
you are registered and present the duly accomplished BIR
Form, together with the required attachments and your
payment.
• Receive your copy of the duly stamped and validated form
from the teller of the AABs/Revenue Collection Officer/duly
Authorized City or Municipal Treasurer.
3. For Manual Filer
• Fill-up the BIR Form in triplicate copies.
• Proceed to the Revenue District Office where you are
registered or to any Tax Filing Center established by the BIR
and present the duly accomplished BIR Form, together with
the required attachments.
• Receive your copy of the duly stamped and validated form
from the RDO/Tax Filing Center representative.
How to pay taxes
1. With Payment
Manual Filing - Authorized Bank of the RDO
Electronic filing and payment system (EFPS) - eBIR forms
and pay using EFPS
e-BIR Forms - Authorized Bank of the RDO
2. No payment returns
Electronic filing and payment system (EFPS) - eBIR forms
and file using EFPS
e-BIR Forms - eBIR forms and file using EFPS
Tax credits and penalties
A tax credit is an amount of money that taxpayers can subtract
from taxes owed to their government. Unlike deductions and
exemptions, which reduce the amount of taxable income, tax
credits reduce the actual amount of tax owed. The value of a
tax credit depends on the nature of the credit; certain types of
tax credits are granted to individuals or businesses in
specific locations, classifications, or industries.
Penalties related to filing and payment of taxes
Surcharge
There shall be imposed, in addition to the tax required to be
paid, a penalty equivalent to twenty-five percent (25%) of the
amount due
Interest
There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum, or
such higher rate as may be prescribed by rules and regulations,
from the date prescribed for payment until the amount is fully
paid.
Compromise Penalty
Refer to NIRC Section 255 and compromise penalty table
STUDY THE TAXING AUTHORITY
1. JURISDICTION, POWER, AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
Powers of the Commissioner
1 To interpret the provisions of the NIRC, subject to review by
the Secretary of Finance
2 To decide tax cases, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals
BAM031 INCOME TAXATION
3 To obtain information and to summon, examine and take
testimony of persons to effect tax collection
4 To make assessment and prescribe additional requirement for
tax administration and enforcement
5 To examine tax returns and determine tax due thereon
6 To conduct inventory taking or surveillance
7 To prescribe presumptive gross sales and receipts for a
taxpayer when:
a The taxpayer failed to issue receipts
b The CIR believes that the books or other records of the
taxpayer do not correctly reflect the declaration in the return
8 To terminate tax period when the taxpayer is
a Retiring from business
b Intending to leave the Philippines
c Intending to remove, hide, or conceal his property
d Intending to perform any act tending to obstruct the
proceedings for the collection of the tax or render the same
ineffective
9 To prescribe real property values
10 To compromise tax liabilities of taxpayers
11 To inquire into bank deposits, only under the following
instances:
a Determination of the gross estate of a decedent
b To substantiate the taxpayer's claim of financial incapacity to
pay tax in an application for tax compromise
12 To accredit and register tax agents
13 To refund or credit internal revenue taxes
14 To abate or cancel tax liabilities in certain cases
15 To prescribe additional procedures or documentary
requirements
16 To delegate his powers to any subordinate officer with a
rank equivalent to a division chief of an office
2. RULE-MAKING AUTHORITY OF THE SECRETARY OF
FINANCE
FAQs
1. Is there a different treatment for taxpayer paying manual
or online? Normally taxpayers are given different deadlines
depending on the mode of filing taxes. Such as in filing
income taxes either a manual or an electronic filer.
2. Can penalties and surcharges be allowed not to be paid?
Yes, an example is Republic Act 11213 which gives tax
amnesty to delinquent taxes. The effect of an amnesty is to let
the taxpayer just pay the taxes without and penalties or
surcharges.
MODULE 8
INCOME TAXATION SCHEMES
There are three income taxation schemes under the NIRC:
a. Final Income Taxation
- Characterized by final taxes wherein full taxes are withheld
by the income payor at source. The recipient income taxpayer
receives income net of taxes. Final taxation is applicable only
on certain passive income listed by the law. Not all items
passive income is subject to final tax.
b. Capital Gains Taxation
- Capital Gains Tax is imposed on the gain realized on the sale,
exchange and other dispositions of certain capital assets.
c. Regular Income Taxation
- The regular income tax is the general rule in income taxation
and covers all other income such as:
1. Active income
2. Other income:
a. Gains from dealings in properties, not subject to capital
gains tax
b. Other passive income not subject to final tax
 BAM031 INCOME TAXATION
TYPES OF INCOME PERSONS REQUIRED TO WITHHOLD
There are three (3) types of income subject to income tax, as
follows: WITHHOLDING TAXES
• Ordinary or regular income
Refers to income such as compensation income (salaries or 1. Individuals engaged in business or practiced of
wages), business income, income from practice of profession, profession
income from sale, and/or dealings of property and
miscellaneous income and passive income other than those 2. Non-individuals (corporations, associations,
subject to final taxes and capital gains tax of the Tax Code, as partnership, cooperatives) whether engaged in
amended. business or not
Regular incomes are subject to graduated tax table (also
known as basic or normal tax) as provided for under Section 3. Government agencies and its instrumentalities
24(A) of the Tax Code, as amended. (National Government Agencies (NGAs),
Government-owned or Controlled Corporations
(GOCCs), Local Government Units including
Barangays (LGUs A
WITHHOLDING AGENT - is any person or entity who is in
control of the payment subject to withholding tax and therefore
is required to deduct and remit taxes withheld to the
government

FAQs
1. Who pays for the Final Tax? It is still the taxpayer but in a
final withholding tax system, before the taxpayer receives the
• Passive income derived from Philippine sources; and income the related tax has already been deducted by the
Passive incomes subject to Final Withholding Taxes (FWT) are withholding agent. Thus the amount the taxpayer receives is
certain passive incomes from sources within the Philippines as net of the final tax.
enumerated under Sections 24(B) and 25(A)(2) of the Tax 2. Who is responsible to remit final taxes? Even if the tax
Code, as amended. burden was shouldered by the taxpayer, the responsibility of
• Capital gains subject to Capital Gains tax remitting the tax is withholding agent.
Incomes from sale of capital assets subject to capital gains tax
(CGT)
1) Capital Gains from sale of shares of stocks of a omestic
corporation not traded in the local stock exchange (Sec. 24(c)
NIRC); and
2) Capital gains from sale of real property in the Philippines
(Sec. 24(d) NIRC)

Explain the feature Final Income Taxation

FINAL WITHHOLDING TAX
• The amount of income tax withheld by the withholding agent
is constituted as a full and final payment of income tax due
from the payee of the said income.
• The liability for payment of tax rests primarily on the payor
as a withholding agent. Failure to withhold the tax or in case of
under withholding, the deficiency tax shall be collected from
payor/withholding agent.
• The payee is not required to file an income tax return for the
particular income.

PASSIVE INCOME vs. ACTIVE INCOME

Passive Incomes are earned with very minimal or even
without active involvement of the taxpayer in the earning
process.
Active or regular income arises from transactions requiring a
considerable degree of effort or undertaking from the taxpayer.
It is the direct opposite of passive income.