Course Description and Introduction to Taxation

Course Description
This course introduces the general principles of taxation and statutory provisions on income taxation including
pertinent revenue regulations. The main topics that will be covered include: the general principles of taxation,
sources of income, determining income from employment, income from a business, and income from property,
deductions from business and property income, capital gains and losses, other income and deductions
computation of taxable income and tax administration.
INTRODUCTION TO TAXATION
WHAT IS TAXATION?
Taxation may be defined as a state power, a legislative process, and a mode of government cost distribution.
1. As a state power Taxation is an inherent power of the State to enforce a proportional contribution
from its subjects for public purpose.
2. As a process Taxation is a process of levying taxes by the legislature of the State to enforce
proportional contributions from its subjects for public purpose.
3. As a mode of cost distribution Taxation is a mode by which the State allocates its costs or burden to
its subjects who are benefited by its spending.
The Theory of Taxation
Every government provides a vast array of public services including defense, public order and safety, health,
education, and social protection among others.
A system of government is indispensable to every society. Without it, the people will not relish the benefits of a
civilized and orderly society. However, a government cannot exist without a system of funding. The
government’s s necessity for funding is the theory of taxation.
The Basis of Taxation
The government provides benefits to the people in the form of public services, and the people provide the funds
that finance the government This mutuality of support between the people and the government is referred to as
the basis of taxation.
Receipt of benefits is conclusively presumed
Every citizen and resident of the State directly or indirectly benefits from the public services rendered by the
government. These benefits can be in the form of daily free usage of public infrastructures, access to public
health or educational services, the protection and security of person and property, or simply the comfort of
living in a civilized and peaceful society which is maintained by the government.
While most public services are received indirectly, their realization by every citizen and resident is undeniable.
In taxation, the receipt of these benefits by the people is conclusively presumed. Thus, taxpayers cannot avoid
payment of taxes under the defense of absence of benefit received. The direct receipt or actual availment of
government services is not a precondition to taxation.

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people. In distributing the costs or burden,
the government regards the followìng general considerations in the exercise of its taxation power:
1. Benefit received theory
2. Ability to pay theory
Benefit received theory
The benefit received theory presupposes that the more benefit one receives from the government, the more
taxes he should pay.
Ability to pay theory
The ability to pay theory presupposes that taxation should also consider the taxpayer’s ability to pay.
Taxpayers should be required to contribute based on their relative capacity to sacrifice for the support of the
government.
In short, those who have more should be taxed more even if they benefit less from the government. Those who
have less shall contribute less even if they receive more of the benefits from the government
Aspects of the Ability to Pay Theory
 1. Vertical equity proposes that the extent of one’s ability to pay is directly proportional to the level of his
tax base. For example, A has P200,000 Income whlle B has P400,000, In taxing income, the
government should tax B more than A because B has greater income, hence, a greater capacity to
contribute.
2. Horizontal equity requires consideration of the particular circumstance of the taxpayer. For example,
Businessmen A and B both have P300,000 income. A Incurred P200,000 in business expenses while
B Incurred only P50,000 business expenses. The government should tax B more than A because he
has lesser expenses and thus greater capacity to contribute taxes,
Vertical equity is a gross concept while horizontal equity is a net concept.
The Lifeblood Doctrine
Taxes are essential and indispensable to the continued subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power to activate or operate it. (CIR Vs. Algue
Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious need.
Upon taxation depends on the government’s ability to serve the people for whose benefit taxes are
collected. (Vera vs Fernandez)
Implication of the lifeblood doctrine in taxation:
1. Tax is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
1. Income received in advance is taxable upon receipt.
2. Deduction for capital expenditures and prepayments is not allowed as it effectively defers the
collection of income tax.
3. A lower amount of deduction is preferred when a claimable expense is subject to limit.
4. A higher tax base is preferred when the tax object has multiple tax bases.
INHERENT POWERS OF THE STATE
A government has its basic needs and rights which co-exist with its creation, it has rights to sustenance,
protection, and properties. The government sustains itself by the power of taxation, secures itself and the well-
being of its people by police power, and secures its own properties to carry out its public services by power of
eminent domain.
These rights, dubbed as “powers” are natural, inseparable, and inherent to every government. No government
can sustain or effectively operate without the powers. Therefore, the exercise of these powers by the
government is presumed understood and acknowledged by the people from the very moment they establish
their government. These powers are naturally exercisable by the government even in the absence of an
express grant of power in the Constitution.
The Inherent Powers of the State
1. Taxation power is the power of the State to enforce proportional contribution from its subjects to
sustain itself.
2. Police power is the general power of the State to enact laws to protect the well-being of the people.
3. Eminent domaín is the power of the State to take private property for public use after paying just
compensation.
Point of Difference Taxation Police Power Eminent Domain
Government and
Exercising Authority Government Government
private utilities
To protect the
For the support of the
Purpose general welfare of the For public use
government
people
Community or class Community or class Owner of the
Persons Affected
of individuals of individuals property
Amount of Imposition Unlimited (Tax is Limited (Imposition is No amount imposed.
based on limited to cover cost (The government
government needs) of regulation) pays just
 compensation)
Importance Most important Most superior Important
Inferior to the “Non- Superior to the “Non- Inferior to the “Non-
Relationship with the
impairment Clause” impairment Clause” impairment Clause”
Constitution
of the Constitution of the Constitution of the Constitution
Constitutional and Public interest and Public purpose and
Limitation
inherent limitations due process just compensation

Similarities of the three powers of the State

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the government even without
Constitutional grant. However, the Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the persons affected by the
exercise of the power.
7. The exercise of these powers by the local government units may be limited by the national legislature.
SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as comprehensive, plenary, unlimited, and supreme.
However, despite the seemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation has its own
inherent limitations and limitations imposed by the Constitution.
THE LIMITATIONS OF THE TAXATION POWER
Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from
property taxes.
9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases.
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives
16. The delegation of taxing power to local government units
INHERENT LIMITATION OF TAXATION
Territoriality of taxation
Public services are normally provided within the boundaries of the State. Thus, the government can only
demand tax obligations upon its subjects or residents within its territorial jurisdiction, There Is no basis in taxing
foreign subjects abroad since they do not derive benefits from our government. Furthermore, extraterritorial
taxation will amount to encroachment of foreign sovereignty.
Two-fold obligations of taxpayers:
1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its remittance to the government
These obligations can only be demanded and enforced by the Philippine government upon its citizens and
residents, It cannot enforce these upon subjects outside its territorial jurisdiction as this would result in
encroachment of foreign sovereignty.
Exception to the territoriality principle
1. In income taxation, resident citizens and domestic corporations are taxable on income derived within
and outside the Philippines.
2. In transfer taxation, residents or citizens such as resident citizens, non-resident citizens and resident
aliens are taxable on transfers of properties located within or outside the Philippines.
International comity
In the UN Convention, countries of the world agreed to one fundamental concept of co-equal sovereignty
wherein all nations are deemed equal with one another regardless of race, religion, culture, economic condition
or military power.
No country is powerful than the other. It is by this principle that each country observes international comity or
mutual courtesy or reciprocity between them. Hence,
1. Governments do not tax the income and properties of other governments.
2. Governments give primacy to their treaty obligations over their own domestic tax laws.
Embassies or consular offices of foreign governments in the Philippines including international organizations
and their non-Filipino staf are not subject to income taxes or property taxes. Under the National Internal
Revenue Code (NIRC), the income of foreign government and foreign government-owned and controlled
corporations are not subject to income tax.
When a state enters into treaties with other states, it is bound to honor the agreements as a matter of mutual
courtesy with the treat partners even if the same conflicts with its local tax laws.
Public purpose
Tax is intended to for the common good. Taxation must be exercised absolutely for public purpose. It cannot be
exercised to further any private interest.
Exemption of the government
The taxation power is broad. The government can exercise the power upon anything including itself. However,
the government normally does not tax itself as this will not raise additional funds but will only impute additional
costs.
Under the NIRC, government properties and income from essential public functions are not subject to taxation.
However, income of the government from its properties and activities conducted for profit including income from
government-owned and controlled corporations is subject to tax.
Non-delegation of the taxing power
The legislative power is vested exclusively in Congress and is non-delegable pursuant to the doctrine of
separation of the branches of the government to ensure a system of checks and balances.
The power of lawmaking, including taxation, is delegated by the people to the legislature. So as not to spoil the
purpose of delegation. It is held that what has been delegated cannot be further delegated.
Exception to the rule of non-delegation
1. Under the Constitution, local government units are allowed to exercise the power to tax to enable them
to exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President is empowered to fix the amount of tariffs to be
flexible to trade condition.
3. Other cases that require expedient and effective administration and implementation of assessment
and collection of taxes.
CONSTITUTIONAL LIMITATIONS OF TAXATION
Observance of due process of law
No one should be deprived of his life, liberty, or property without due process of law. Tax laws should neither
be harsh nor oppressive.
Aspects of Due Process
 1. Substantive due process Tax must be imposed only for public purpose, collected only under
authority of a valid law and only by the taxing power having jurisdiction. An assessment without a legal
basis violates the requirement of due process.
2. Procedural due process There should be no arbitrariness in assessment and collection of taxes, and
the government shall observe the taxpayer’s right to notice and hearing. The law established
procedures which must be adhered to in making assessments and in enforcing collections.
Under the NIRC, assessments shall be made within three years from the due date of filing of the return or
from the date of actual filing, whichever is later.
Collection shall be made within five years from the date of assessment. The failure of the government to
observe these rules violates the requirement of due process.
Equal protection of the law
No person shall be denied the equal protection of the law. Taxpayers should be treated equally both in terms of
rights conferred and obligations imposed.
This rule applies where taxpayers are under the same circumstances and conditions. This requirement would
mean Congress cannot exempt sellers of “balot” while subjecting sellers of “penoy” to tax since they are
essentially the same goods.
Uniformity rule in taxation
The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar circumstances should not be
taxed the same. Taxpayers should be classified according to commonality in attributes, and the tax
classification to be adopted should be based on substantial distinction. Each class is taxed differently, but
Taxpayers falling under the same class are taxed the same. Hence, uniformity is relative equality.
Progressive system of taxation
Congress shall evolve a progressive system of taxation. Under the progressive system, tax rates increase as
the tax base increases. The Constitution favors progressive tax as it is consistent with the taxpayer’s ability to
pay. Moreover, the progressive system aids in an equitable distribution of wealth to society by taxing the rich
more than the poor.
Non-imprisonment for non-payment of debt or poll tax
As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere
inability to pay debt.
However, this Constitutional guarantee applies only when the debt is acquired by the debtor in good faith. Debt
acquired in bad faith constitutes estafa, a criminal offense punishable by imprisonment.
Is non-payment of tax equivalent to non-payment of debt?
Tax arises from law and is a demand of sovereignty. It is distinguished from debt which arises from private
contracts, Non-payment of tax compromises public interest while the non-payment of debt compromises
private interest. The non-payment of tax is similar to a crime. The Constitutional guarantee on non-
imprisonment for non-payment of debt does not extend to non-payment of tax, except poll tax.
Poll personal, community or residency tax
Poll tax has two components:
1. Basic community tax
2. Additional community tax
The constitutional guarantee of non-imprisonment for non-payment of poll tax applies only to the basic
community tax. Non-payment of the additional community tax is an act of tax evasion punishable by
imprisonment.
Non-impairment of obligation and contract
The State should set an example of good faith among its constituents. It should not set aside its obligations
from contracts by the exercise of its taxation power. Tax exemptions granted under contract should be honored
and should not be cancelled by a unilateral government action.
Free worship rule
The Philippine government adopts free exercise of religion and does not subject its exercise to taxation.
Consequently, the properties and revenues of religious institutions such as tithes or offerings are not subject to
tax. This exemption, however, does not extend to income from properties or activities of religious institutions
that are proprietary or commercial in nature.
Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and
mosques, lands, buildings, and improvements from property taxes
The Constitutional exemption from property tax applies for properties actually, directly, and exclusively (i.e
primarily) used for charitable, religious, and educational purposes.
In observing this Constitutional limitation, the Philippines follows the doctrine of use wherein only properties
actually devoted for religious, charitable, or educational activities are exempt from real property tax.

Under the doctrine of ownership, the properties of religious, charitable, or educational entities whether or not
used in their prinary operations are exempt from real property tax. This, however, is not applied in the
Philippines.
Non-appropriation of public funds or property for the benefit of any church, sect, or system of religion
This constitutional limitation is intended to highlight the separation of religion and the State. To support freedom
of religion, the government should not favor any particular system of religion by appropriating public funds or
property in support thereof.
It should be noted, however, that compensation to priests, imams, or religious ministers working with the
military, penal institutions, orphanages, or leprosarium is not considered religious appropriation.
Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations, or contributions for educational purposes
The Constitution recognizes the necessity of education in state building by granting tax exemption on revenues
and assets of non-profit educational institutions. This exemption, however, applies only on revenues and assets
that are actually directly, and exclusively devoted for educational purposes.
Consistent with this constitutional recognition of education as a necessity, the NIRC also exempts government
educational institutions from income tax and subjects private educational institutions to a minimal 10% income
tax.
Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
Tax exemption law counters against the lifeblood doctrine as it deprives the government of revenues. Hence,
the grant of tax exemption must proceed only upon a valid basis. As a safety net, the Constitution requires the
vote of the majority of all members of Congress in the grant of tax exemption.
In the approval of an exemption law, an absolute majority or the majority of all members of Congress, not
a relative majority or quorum majority, is required. However, in the withdrawal of tax exemption, only a relative
majority is required.
Non-diversification of tax collections
Tax collections should be used only for public purpose. It should never be diversified or used for private
purpose.
Non-delegation of the power of taxation
The principle of checks and balances in a republican state requires that taxation power as part of lawmaking be
vested exclusively in Congress.
However. Delegation may be made on matters involving the expedient and effective administration and
implementation of assessment and collection of taxes. Also, certain aspects of the taxing process that are non-
legislative in character are delegated.
Hence. Implementing administrative agencies such as the Department of Finance and the Bureau of Internal
Revenue (BIR) İssues revenue regulations, rulings, orders, or circulars to interpret and clarify the application of
the law. But even so, their functions are merely intended to interpret or clarify the proper application of the law.
They are not allowed to introduce new legislations within their quasi-legislative authority.

Non-impairment of the jurisdiction of the Supreme Court to review tax case

Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all cases involving taxes
can be raised to and be finally decided by the Supreme Court of the Philippines.
Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but
the Senate may propose or concur with amendments.
Laws that add income to the national treasury and those that allows spending therein must originate from the
House of Representatives while Senate may concur with amendments. The origination of a bill by Congress
does not necessarily mean that the House bill must become the final law. It was held constitutional by the
Supreme Court when Senate changed the entire house version of a tax bill.
Each local government unit shall exercise the power to create its own sources of revenue and shall
have a just share in the national taxes
This is a constitutional recognition of the local autonomy of local governments and an express delegation of the
taxing power.
STAGES OF THE EXERCISE OF TAXATION POWER
1. Levy or imposition
2. Assessment and collection
Levy or imposition
This process involves the enactment of a tax law by Congress and is called impact of taxation. It is also
referred to as the legislative act in taxation.
Congress is composed of two bodies:
1. The House of Representatives, and
2. The Senate
As mandated by the Constitution, tax bills must originate from the House of Representatives. Each may,
however, have their own versions of a proposed law which is approved by both bodies, but tax bills cannot
originate exclusively from the Senate.
Matters of legislative discretion in the exercise of taxation
1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of taxation
7. Method of collection
Assessment and Collection
The tax law is implemented by the administrative branch of the government. Implementation involves
assessment or the determination of the tax liabilities of taxpayers and collection. This stage is referred to
as incidence of taxation or the administrative act of taxation.
SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object. Situs
rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of
the taxing authority.
Examples of Situs Rules:
1. Business tax situs: Businesses are subject to tax in the place where the business is conducted.
Illustration: A taxpayer is involved in car dealership abroad and restaurant operation in the Philippines.
The restaurant business will be subject to business tax in the Philippines since the business is conducted
herein, but the car dealing business is exempt because the business is conducted abroad.
2. Income tax situs Service fees are subject to tax where they are rendered.
Illustration: A foreign corporation leases a residental space to a nonresident Filipino citizen abroad. The rent
Income will be exempt from Philippine taxation as the leasing service is rendered abroad.
3. Income tax situs on sale of goods The gain on sale Is subject to tax in place of sale.
Illustration: While in China, a nonresident OFW citizen agreed with a Chinese friend to sell his diamond
necklace to the latter. They stipulated that the delivery of the item and the payment will be made a week later In
the Philippines. The sale consummated as agreed.
The contract of sale Is consensual and is perfected by the meeting of the minds of the contracting parties. The
perfection of the contract of sale Is in China. The situs of taxation is China. The gain on the sale of the necklace
will be taxable abroad exempt In the Philippines.
4. Property tax situs: Properties are taxable in their location.
Illustration: An overseas Filipino worker has a residential lot in the Philippines. He will still pay real property
tax despite his absence In the Philippines because his property Is located herein.
5. Personal tax situs: Persons are taxable in their place of residence.
Illustration: Ahmed Lofti Is a Sudanese studying medicine In the Philippines. Ahmed will pay personal tax In
the Philippines even If he is an alien because he is residing In the Philippines.
Other Doctrines - Taxes to Distinction of Taxes with Similar
Items
OTHER FUNDAMENTAL DOCTRINES IN TAXATION
1. Marshall Doctrine – “The power to tax involves the power to destroy.” Taxation power
can be used as an instrument of police power. It can be used to discourage or prohibit
undesirable activities or occupation. As such, taxation power carries with it the power to
destroy.
However, the taxation power does not include the power to destroy if it is used solely for the
purpose of raising revenue. (Roxas Vs. CTA)
2. Holme’s Doctrine – “Taxation power is not the power to destroy while the court sits.”
Taxation power may be used to build or encourage beneficial activities or industries by
the grant of tax incentives.
While the Marshall Doctrine and the Holme’s Doctrine appear to contradict each other, both are
actually employed in practice. A good manifestation of the Marshall Doctrine is the imposition
of excessive tax on cigarettes while applications of the Holme’s Doctrine include the creation of
Ecozones with tax holidays and provision of incentives, such as the Omnibus Investment Code
(E.0. 226) and the Barangay Micro-Business Enterprise (BMBE) Law
3. Prospectivity of tax laws
Tax laws are generally prospective in operation. An ex post facto law or a law that retroacts is
prohibited by the Constitution.
Exceptionally, income tax laws may operate retrospectively if so, intended by Congress under
certain justifiable conditions. For example, Congress can levy tax on income earned during
periods of foreign occupation even after the war.
4. Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation. The taxpayer cannot delay payment
of tax to wait for the resolution of a lawsuit involving his pending claim against the government.
Tax is not a debt; hence, it is not subject to set-off. This rule is important to allow the
government sufficient period to evaluate the validity of the claim. (See Philex vs. CIR, G.R.
125704)
Exceptions:
1. Where the taxpayer’s claim has already become due and demandable such as when the
government already recognized the same and an appropriation for refund was made
2. Cases of obvious overpayment of taxes
3. Local taxes
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by contract. Contracts
executed by the taxpayer to such effect shall not prejudice the right of the government to collect.
6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to the passage of time. When one sleep on his right
over an unreasonable period of time, he is presumed to be waiving his right. The
government’s right to collect taxes does not prescribe unless the law itself provides for such
prescription.
Under the NIRC, tax prescribes if not collected within 5 years from the date of its assessment. In
the absence of an assessment, tax prescribes if not collected by judicial action within 3 years
from the date the return is required to be filed. However, taxes due from taxpayers who did not
file a return or those who filed fraudulent returns do not prescribe.
7. Doctrine of estoppel
Under the doctrine of estoppel, any misrepresentation made by one party toward another who
relied therein in good faith will be held true and binding against that person who made the
misrepresentation.
The government is not subject to estoppel. The error of any government employee does not bind
the government. It is held that the neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the interest of the people.
Also, erroneous applications subsequent correct application of the same.
8. Judicial Non-interference
Generally, courts are not allowed to issue injunction against the government’s pursuit to collect
tax as this would unnecessarily defer tax collection. This rule is anchored on the Lifeblood
Doctrine.
9. Strict Construction of Tax Laws
When the law clearly provides for taxation, taxation is the general rule unless there isa clear
exemption. Hence the maxim, “Taxation is the rule, exemption is the exception.
When the language of the law is clear and categorical, there is no room for interpretation. There
is only room for application. However, when taxation laws are vague, the doctrine of strict legal
construction is observed.
Vague tax laws
Vague tax laws are construed against the government and in favor of the taxpayers. A vague tax
law means no tax law. Obligation arising from law is not presumed. The Constitutional
requirement of due process requires laws to be sufficiently clear and expressed in their
provisions.
Vague exemption laws
Vague tax exemption laws are construed against the taxpayer and in favor of the government. A
vague tax exemption law means no exemption law. The claim for exemption is construed strictly
against the taxpayer in accordance with the lifeblood doctrine.
The right of taxation is inherent to the State. It is a prerogative essential to the perpetuity of the
government. He who claims exemption from the common burden must justify his claim by the
clearest grant of organic or statute law. (lloilo, et al vs. Smart Communications, Inc., G.R. No.
167260, February 27, 2009)
When exemption is claimed, it must be shown indubitably to exist. At the outset, every
presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of
the concession are too explicit to admit fairly of any other construction that the proposition can
be supported.
Tax exemption cannot arise from vague inference. Tax exemption must be clear and
unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law
conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any
doubt whether a tax exemption exists is resolved against the taxpayer. (see Digital
Telecommunications, Inc. vs. City Government of Batang as, et al)
DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for
the same thing.
Elements of double taxation
1. Primary element: Same object
2. Secondary elements:
1. Same type of tax
2. Same purpose of tax
3. Same taxing jurisdiction
4. Same tax period
Types of Double Taxation
1. Direct double taxation
This occurs when all the element of double taxation exists for both impositions.
Examples:
1. An income tax of 10% on monthly sales and a 2% income tax on the annual sales (total of
monthly sales)
2. A 5% tax on bank reserve deficiency and another 1% penalty per day as a consequence of
such reserve deficiency
Indirect double taxation
This occurs when at least one of the secondary elements of double taxation is not common for
both impositions.
Examples:
1. The national government levies business tax on the sales or gross receipts of business
while the local government levies business tax upon the same sales or receipts.
2. The national government collects income tax from a taxpayer on his income while the
local government collects community tax upon the same income.
3. The Philippine government taxes foreign income of domestic corporations and resident
citizens while a foreign government also taxes the same income (international double
taxation).
Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is
prevalent in practice in practice. However, direct double taxation is discouraged because it is
oppressive and burdensome to taxpayers. It is also believed to counter the rule of equal
protection and uniformity in the Constitution.
How can double taxation be minimized?
The impact of double taxation can be minimized by any one or a combination the following:
1. Provision of tax exemption – only one tax law is allowed to apply to the tax object
while the other tax law exempts the same tax object.
2. Allowing foreign tax credit – both tax laws of the domestic country and a foreign
country tax the tax object, but the tax payments made in the foreign tax law are
deductible against the tax due of the domestic tax law.
3. Allowing reciprocal tax treatment- provisions in tax laws imposing a reduced tax rates
or even exemption if the country of the foreign taxpayer also gives the same treatment to
Filipino non-residents therein.
 4. Entering into treaties or bilateral agreements – countries may stipulate for a lower tax
rate for their residents if they engage in transactions that are taxable by both of them
ESCAPES FROM TAXATION
Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact
of taxation.
Categories of Escapes from Taxation
1. Those that result to loss of government revenue
 Tax evasion, also known as tax dodging, refers to any act or trick that tends to
illegally reduce or avoid the payment of tax.
Examples:
1. This can be achieved by gross understatement of income, nondeclaration of income,
overstatement of expenses or tax credit.
2. Misrepresenting the nature or amount of transaction to take advantage of lower taxes.
 Tax avoidance, also known as tax minimization, refers to any act or trick that
reduces or totally escapes taxes by any legally permissible means.
Examples:
1. Selection and execution of transaction that would expose taxpayer to lower taxes.
2. Maximizing tax options, tax carry-overs or tax credits
3. Careful tax planning
 Tax exemption, also known as tax holiday, refers to the immunity, privilege or
freedom from being subject to tax which others are subject Tax exemptions may
be granted by the Constitution, law, or contract.
All forms of tax exemptions can be revoked by Congress except those granted by the
Constitution and those granted under contracts.
1. Those that do not result to loss of government revenue
1. Shifting – This is the process of transferring tax burden to other taxpayers.
Forms of shifting
1. Forward shifting -This is the shifting of tax which follows the normal flow of
distribution (i.e. from manufacturer to wholesalers, retailers to consumers). Forward
shifting is common with essential commodities and services such as food and fuel.
2. Backward shifting – This is the reverse of forward shifting. Backward shifting is
common with non-essential commodities where buyers have considerable market power
and commodities with numerous substitute products.
3. Onward shifting – This refers to any tax shifting in the distribution channel that exhibits
forward shifting or backward shifting.
Shifting is common with business taxes where taxes imposed on business revenue can be shifted
or passed-on to customers.
2. Capitalization – This pertains to the adjustment of the value of an asset caused by
changes in tax rates.
For instance, the value of a mining property will correspondingly decrease when mining output
is subjected to higher taxes. This is a form of backward shifting of tax.
3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to
form savings to compensate for the tax imposition or increase in taxes.
Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give them a
chance to reform and enable them to have a fresh start to be part of a society with a clean slate. It
is an absolute forgiveness or waiver by the government on its right to collect and is retrospective
in application.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to as tax remission. Because they deprive the
government of revenues, tax exemption, tax refund, tax amnesty, and tax condonation are
construed against the taxpayer and in favor of the government.
Tax Amnesty vs. Tax Condonation
Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities
of the taxpayer.
Amnesty operates retrospectively by forgiving past violations. Condonation applies
prospectively to any unpaid balance of the tax; hence, the portion already paid by the taxpayer
will not be refunded.
Amnesty is also conditional upon the taxpayer paying the government a portion of the tax
whereas condonation requires no payment.
TAXATION LAW
Taxation law refers to any law that arises from the exercise of the taxation power of the State.
Types of taxation laws
1. Tax laws – These are laws that provide for the assessment and collection of taxes.
Examples:
1. The National Internal Revenue Code (NIRC)
2. The Tariff and Customs Code
3. The Local Tax Code
4. The Real Property Tax Code
2. Tax exemption laws – These are laws that grant certain immunity from taxation.
Examples:
1. The Minimum Wage Law
2. The Omnibus Investment Code of 1987 (E.O. 226)
3. Barangay Micro-Business Enterprise (BMBE) Law
4. Cooperative Development Act
Sources of Taxation Laws
1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and Conventions with foreign countries
8. Revenue Regulations
Types of Administrative Issuances
 1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings
Revenue Regulations are issuances signed by the Secretary of Finance upon recommendation of
the Commissioner of Internal Revenue (CIR) that specify, prescribe, or define rules and
regulations for the effective enforcement of the provisions of the National Internal Revenue
Code (NIRC) and related statutes.
Revenue regulations are formal pronouncements intended to clarify or explain the tax law and
carry into effect its general provisions by providing details of administration and procedure.
Revenue regulation has the force and effect of a law, but is not intended to expand or limit the
application of the law; otherwise, it is void.
Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods, and
procedures necessary in the implementation of stated policies, goals, objectives, plans, and
programs of the Bureau in all areas of operations except auditing.
Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the CIR
with respect to the provisions of the Tax Code and other tax laws as applied to a specific set of
facts, with or without established precedents, and which the ClR may issue from time to time for
the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and
void ab initio.
Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable
portions as well as amplifications of laws, rules, regulations, and precedents issued by the BIR
and other agencies/offices.
Revenue Bulletins (RB) refer to periodic issuances, notices, and official announcements of the
Commissioner off Internal Revenue that consolidate the Bureau of Internal Revenue’s position
on certain specific issues of law or administration in relation to the provisions of the Tax Code,
relevant tax laws, and other issuances for the guidance of the public.
RIR Rulings are official positions of the Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws.
Rulings are merely advisory or a sort of information service to the taxpayer such that none of
them is binding except to the addressee and may be reversed by the BIR at anytime.
Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings
Generally Accepted Accounting Principles (GAAP) vs. Tax Laws
Generally accepted accounting principles or GAAP are not laws, but are mere conventions of
financial reporting. They are benchmarks for the fair and relevant valuation and recognition of
income, expense, assets, liabilities, and equity of a reporting entity for general purpose financial
reporting. GAAP accounting reports are intended to meet the common needs of a vast number of
users in the general public.
Tax laws including rules, regulations, and rulings prescribe the criteria for tax reporting, a
special form of financial reporting which is intended to meet specific needs of tax authorities.
Taxpayers normally follow GAAP in recording transactions in their books. However, in the
preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of
conflict with GAAP.
NATURE OF PHILIPPINE TAX LAWS
Philippine tax laws are civil and not political in nature. They are effective even during periods
of enemy occupation. They are laws of the occupied territory and not by the occupying enemy.
Tax payments made during occupations of foreign enemies are valid.
Our internal revenue laws are not penal in nature because they do not define crime. Their penalty
provisions are merely intended to secure taxpayers’ compliance.
TAX
Tax is an enforced proportional contribution levied by the lawmaking body of the state to raise
revenue for public purpose.
Elements of a Valid Tax
1. Tax must be levied by the taxing power having jurisdiction over the object of taxation,
2. Tax must not violate Constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.
Classification of Taxes
As to purpose
1. Fiscal or revenue tax – a tax imposed for general purpose.
2. Regulatory – a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary – a tax levied to achieve some social or economic objectives
As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents of a particular territory
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the performance of an act, enjoyment of a
privilege or engagement in an occupation
As to incidence
4. Direct tax – When both the impact and incidence of taxation rest upon the same taxpayer,
the tax is said to be direct. The tax is collected from the person who is intended to pay the
same. The statutory taxpayer is the economic taxpayer.
5. Indirect tax – When the tax is paid by any person other than the one who is intended to pay
the same, the tax is said to be indirect. This occurs in the case of business taxes where the
statutory taxpayer is not the economic taxpayer.
The statutory taxpayer is the person named by law to pay the tax. An economic taxpayer is the
one who actually pays the tax.
As to amount
 1. Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo, liter
or meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the value of the tax.
As to rate
3. Proportional tax – This is a flat or fixed rate tax. The use of proportional tax emphasizes
equality as it subjects all taxpayers with the same rate without regard to their ability to
pay.
4. Progressive or graduated tax -This is a tax which imposes increasing rates as the tax
base increase. The use of progressive tax rates results in equitable taxation because it gets
more tax to those who are more capable. It aids in lessening the gap between the rich and
the poor.
5. Regressive tax – This tax imposes decreasing tax rates as the tax base increase. This is
the total reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly
violates the Constitutional guarantee of progressive taxation.
6. Mixed tax – This tax manifest tax rates which is a combination of any of the above types
of tax.
As to imposing authority
1. National tax – tax imposed by the national government
Examples:
1. Income tax – tax on annual income, gains or profits
2. Estate tax – tax on gratuitous transfer of properties by a decedent upon death
3. Donor’s tax – tax on gratuitous transfer of properties by a living donor
4. Value Added Tax – consumption tax collected by VAT business taxpayers
5. Other percentage tax – consumption tax collected by non-VAT business taxpayers
6. Excise tax – tax on sin products and non-essential commodities such as alcohol,
cigarettes and metallic minerals. This should be differentiated with the privilege tax
which is also called excise tax.
7. Documentary stamp tax – a tax on documents, instruments, loan agreements, and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or
property incident thereto.
8. Local tax- tax imposed by the municipal or local government
Examples:
1. Real property tax
2. Professional tax
3. Business taxes, fees, and charges
4. Community tax
5. Tax on banks and other financial institutions
DISTINCTION OF TAXES WITH SIMILAR ITEMS
Tax vs. Revenue
Tax refers to the amount imposed by the government for public purpose. Revenue refers to all
income collections of the government which includes taxes, tariff, licenses, toll, penalties and
others. The amount imposed is tax but the amount collected is revenue.
Tax vs. License fee
Tax has a broader subject than license. Tax emanates from taxation power and is imposed upon
any object such as persons, properties, or privileges to raise revenue.
License fee emanates from police power and is imposed to regulate the exercise of a privilege
such as the commencement of a business or a profession.
Taxes are imposed after the commencement of a business or profession whereas license fee is
imposed before engagement in those activities. In other words, tax is a post-activity imposition
whereas license is a pre-activity imposition.
Tax vs. Toll
Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of
other’s property; hence, it is a demand of ownership.
The amount of tax depends upon the needs of the government, but the amount of toll is
dependent upon the value of the property leased.
Both the government and private entities impose toll, but private entities cannot impose taxes.
Tax vs. Debt
Tax arises from law while debt arises from private contracts. Non-payment of tax leads to
imprisonment, but non-payment of debt does not lead to imprisonment. Debt can be subject to
set-off but tax is not. Debt can be paid in kind (dacion en pago) but tax is generally payable in
money.
Tax draws interest only when the taxpayer is delinquent. Debt draws interest when it is so
stipulated by the contracting parties or when the debtor incurs legal delay.
Tax vs. Special Assessment
Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied
by the government on lands adjacent to a public improvement. It is imposed on land only and is
intended to compensate the government for a part of the cost of the improvement
The basis of special assessment is the benefit in terms of the appreciation in land value caused by
the public improvement. On the other hand, tax is levied without expectation of a direct
proximate benefit.
Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of
the land owner. Therefore, the non-payment of special assessment will not result to
imprisonment of the owner (unlike in non-payment of taxes).
Tax vs. Tariff
Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or
properties. Tariff is the amount imposed on imported or exported commodities.
Tax vs. Penalty
Tax is an amount imposed for the support of the government. Penalty is an amount imposed to
discourage an act. Penalty may be imposed by both the government and private individuals. It
may arise both from law or contract whereas tax arises from law.
TAX SYSTEM
The tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. It
includes all the tax laws and regulations, the means of their enforcement, and the government
offices, bureaus and withholding agents which are part of the machineries of the government in
tax collection. The Philippine tax system is divided into two: the national tax system and the
local tax system.
Types of Tax Systems According to Imposition
1. Progressive – employed in the taxation of income of individuals, and certain local
business taxes.
2. Proportional – employed in taxation of corporate income and business.
3. Regressive – not employed in the Philippines.
Types of Tax System According to Impact
1. Progressive system
A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted.
Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be
efficient. This type of tax system impacts more upon the rich.
2. Regressive system
A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by
businesses to consumers; hence, the impact of taxation rests upon the bottom end of the society.
In effect, a regressive tax system is anti-poor.
It is widely believed that despite the Constitutional guarantee of progressive taxation, the
Philippines has a dominantly regressive tax system due to the prevalence of business taxes.
Tax Administration - Introduction to Income Tax
TAX COLLECTION SYSTEMS
1. Withholding system on income tax – Under this collection system, the payor of the
income withholds or deducts the tax on the income before releasing the same to the payee
and remits the same to the government. The following are the withholding taxes collected
under this system:
2. Creditable withholding tax
1. Withholding tax on compensation – an estimated tax required by the
government to be withheld (i.e. deducted) by employers against the compensation
income to their employees.
2. Expanded withholding tax – is an estimated tax required by the government to
be deducted on certain income payments made by taxpayers engaged in business.
The creditable withholding tax is intended to support the self-assessment method to lessen the
burden of lump sum tax payment of taxpayers and also provides for a possible third-party check
for the BIR of non-compliant taxpayers.
2. Final withholding tax – a system of tax collection wherein payors are required to deduct
the full tax on certain income payments. The final withholding tax is intended for the
collection of taxes from income with a high risk of non-compliance.

Similarities of final tax and creditable withholding tax

1. In both cases, the income payor withholds a fraction of the income and remits the same to
the government.
2. By collecting at the moment cash is available, both serve to minimize cash flow problems
for the taxpayer and collection problems for the government.

Differences between FWT and CWT

Final Withholding Tax Creditable Withholding Tax
Income tax withheld Full Only a portion
Certain passive and active
Coverage of withholding Certain passive income
income
Income payor for the CWT and
Who remits the actual tax Income payor
the taxpayer for the balance
The necessity of income tax
Not required Required
return for taxpayers

1. Withholding system on business tax – When the national government agencies and
instrumentalities including government-owned and controlled corporations (GOCCs)
purchase goods or services from private suppliers, the law requires withholding of the
relevant business tax (i.e. VAT or percentage tax). Business taxation is discussed under
Business and Transfer Taxation by the same author.
2. Voluntary compliance system – Under this collection system, the taxpayer himself
determines his income, reports the same through income tax returns, and pays the tax to
the government. This system is also referred to as the “Self-assessment method.”
The tax due determined under this system will be reduced by:
1. Withholding tax on compensation withheld by employers.
2. Expanded withholding taxes withheld by suppliers of goods or services.
1. Assessment or enforcement system – Under this collection system, the government
identifies non-compliant taxpayers, assesses their tax dues including penalties, demands
for taxpayer’s voluntary compliance or enforces collections by coercive means such as a
summary proceeding or judicial proceedings when necessary.
The taxpayer shall pay to the government any tax balance after such credit or claim refund or tax
credit for excessive tax withheld.

PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles or canons to
evolve a sound tax system:
1. Fiscal adequacy
2. Theoretical justice
3. Administrative feasibility
Fiscal adequacy
Fiscal adequacy requires that the sources of government funds must be sufficient to cover
government costs. The government must not incur a deficit. A budget deficit paralyzes the
government’s ability to deliver essential public services to the people. Hence, taxes should
increase in response to an increase in government spending.

Theoretical justice
Theoretical justice or equity suggests that taxation should consider the taxpayer’s ability to pay.
T also suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory.
Administrative feasibility
Administrative feasibility suggests that tax laws should be capable of efficient and effective
administration to encourage compliance. Government should make it easy for the taxpayer to
comply by avoiding administrative bottlenecks and reducing compliance costs.
The following are applications of the principle of administrative feasibility:
1. E-filing and e-payment of taxes
2. Substituted filing system for employees.
3. Final withholding tax on non-resident aliens or corporations
4. Accreditation of authorized agent banks for the filing and payment of taxes
TAX ADMINISTRATION
Tax administration refers to the management of the tax system. Tax administration of the
national tax system in the Philippines is entrusted to the Bureau of Internal Revenue which is
under the supervision and administration of the Department of Finance.
Chief Officials of the Bureau of Internal Revenue
1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
3. Operations Group
4. Legal Enforcement Group
5. Information Systems Group
6. Resource Management Group
POWERS OF THE BUREAU OF INTERNAL REVENUE
1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines, and judgments in all cases decided in
its favor by the courts.
3. Giving effect to and administering the supervisory and police powers conferred to it by
the NIRC and other laws.
4. Assignment of internal revenue officers and other employees to other duties.
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials.
6. Issuance of receipts and clearances.
7. Submission of annual report, pertinent information to Congress, and reports to the
Congressional Oversight Committee in matters of taxation.
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE
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, such as:
3. Disputed assessments
4. Refunds of internal revenue taxes, fees, or other charges
5. Penalties imposed.
6. Other NIRC and special law matters administered by the BIR.
7. To obtain information and to summon, examine, and take testimony of persons to effect
tax collection.
Purpose: For the CIR to ascertain:
1. The correctness of any tax return or in making a return when none has been made by the
taxpayer.
 2. The tax liability of any person for any internal revenue tax or in correcting any such
liability.
3. Tax compliance of the taxpayer.
Authorized acts:
1. To examine any book, paper, record or other data relevant to such inquiry.
2. To obtain on a regular basis any information from any person other than the person
whose internal revenue tax liability is subject to audit.
3. To summon the person liable for tax or required to file a return, his employees, or any
person having possession and custody of his books of accounts and accounting re cords to
produce such books, papers, records or other data and to give testimony.
4. To take testimony of the person concerned, under oath, as may be relevant or material to
the inquiry to cause revenue officers and employees to make canvass of any revenue
district.
5. To make an assessment and prescribe additional requirement for tax administration and
enforcement.
6. To examine tax returns and determine tax due thereon.
The CIR or his duly authorized representatives may authorize the examination of any taxpayer
and the assessment of the correct amount of tax, notwithstanding any law requiring the prior
authorization of any government agency or instrumentality. Failure to file a return shall not
prevent the CIR from authorizing the examination.
Tax or deficiency assessments are due upon notice and demand by the CIR or his representatives.
Returns, statements or declarations shall not be withdrawn but may be modified, changed and
amended by the taxpayer within 3 years from the date of filing, except when a notice for audit or
investigation has been actually served upon the taxpayer.
When a return shall not be forthcoming within the prescribed deadline or when there is a reason
to believe that the return is false, incomplete, or erroneous, the CIR shall assess the proper tax on
the basis of the best evidence available.
In case a person fails to file a required return or other documents at the time prescribed by law or
willfully files a false or fraudulent return or other documents, the CIR shall make or amend the
return from his own knowledge and from such information obtained from testimony. The return
shall be presumed prima facie correct and sufficient for all legal purposes.
6. To conduct inventory-taking or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
8. The taxpayer failed to issue receipts; or
9. The CIR believes that the books or other records of the taxpayer do not correctly reflect
the declaration in the return.
The presumptive gross sales or receipt shall be derived from the performance of a similar
business under similar circumstances adjusted for other relevant information.
8. To terminate the tax period when the taxpayer is:
9. Retiring from business
10. Intending to leave the Philippines.
11. Intending to remove, hide, or conceal his property.
12. Intending to perform any act tending to obstruct the proceedings for the collection of the
tax or render the same ineffective.
The termination of the taxable period shall be communicated through a notice to the taxpayer
together with a request for immediate payment. Taxes shall be due and payable immediately.
9. To prescribe real property values
The CIR is authorized to divide the Philippines into zones and prescribe real property values
after consultation with competent appraisers. The values thus prescribed are referred to as zonal
values.
Zonal values are subject to automatic adjustment once every 3 years through rules and
regulations issued by the Secretary of Finance based on the current Philippine valuation
standards. However, no adjustment in zonal valuation shall be valid unless published in a
newspaper of general circulation in the province, city, or municipality concerned, or in the
absence thereof, shall be posted in the provincial capitol, city or municipal hall and in 2 other
conspicuous public places therein. Furthermore, the basis of any valuation, including the records
of consultations done, shall be public records open to the inquiry of any taxpayer.
For purposes of internal revenue taxes, fair value of real property shall mean whichever is higher
of:
1. Zonal value prescribed by the Commissioner.
2. Fair market value as shown in the schedule of market values of the Provincial and City
Assessor’s Office
The NIRC previously used the assessed value which is merely a fraction of the fair market value.
The assessed value is the basis of the real property tax in local taxation. The value to use now is
the full fair value of the property.
10. To compromise the tax liabilities of taxpayers
Where the basic tax involved exceeds P1,000.000 or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation
Board which shall be composed of the Commissioner and the four Deputy Commissioners.
11. To inquire into bank deposits, only under the following instances:
12. Determination of the gross estate of a decedent
13. To substantiate the taxpayer’s claim of financial incapacity to pay tax in an application
for tax compromise.
In cases of financial incapacity, inquiry can proceed only if the taxpayer waives his privilege
under the Bank Deposit Secrecy Act.
12. To accredit and register tax agents
The denial by the CIR of application for accreditation is appealable to the Department of
Finance. The failure of the Secretary of Finance to act on the appeal within 60 days is deemed an
approval.
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
Non-delegated power of the CIR
The following powers of the Commissioner shall not be delegated:
1. The power to recommend the promulgation of rules and regulations to the Secretary of
Finance.
 2. The power to issue rulings of first impression or to reverse, revoke, or modify any
existing rulings of the Bureau.
3. The power to compromise or abate any tax liability.
Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the
following:
1. Assessments are issued by the regional offices involving basic deficiency tax of P500,000
or less, and
2. Minor criminal violations discovered by regional and district officials.
Composition of the Regional Evaluation Board
1. Regional Director as chairman
2. Assistant Regional Director
3. Heads of the Legal, Assessment, and Collection Division
4. Revenue District Officer having jurisdiction over the taxpayer
5. The power to assign and reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.
Rules in assignments of revenue officers to other duties
1. Revenue officers assigned to an establishment where excisable articles are kept shall in
no case stay there for more than 2 years.
2. Revenue officers assigned to perform assessment and collection functions shall not
remain in the same assignment for more than 3 years.
3. Assignment of internal revenue officers and employees of the Bureau to special
duties shall not exceed 1 year.
Agents and Deputies for Collection of National Internal Revenue Taxes
The following are constituted agents for the collection of internal revenue taxes:
1. The Commissioner of Customs and his subordinates with respect to the collection of
national internal revenue taxes on imported goods.
2. The head of appropriate government offices and his subordinates with respect to the
collection of energy tax.
3. Banks duly accredited by the Commissioner with respect to receipts of payments of
internal revenue taxes authorized to be made through banks. These are referred to as
authorized government depositary banks (AGDB).

OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES-

RELATED FUNCTIONS
1. Bureau of Customs
2. Board of Investments
3. Philippine Economic Zone Authority
4. Local Government Tax Collecting Unit
5. Fiscal Incentives Review Board
Bureau of Customs (BOC)
Aside from its regulatory functions, the Bureau of Customs is tasked to administer the collection
of tariffs on imported articles and the collection of the Value Added Tax on importation.
Together with the BIR, the BOC is under the supervision of the Department of Finance.
The Bureau of Customs is headed by the Customs Commissioner and is assisted by five Deputy
Commissioners and 14 District Collectors.
Board of Investments (BO)
The BOI is tasked to lead the promotion of investments in the Philippines by assisting Filipinos
and foreign investors to venture and prosper in desirable areas of economic activities. It
supervises the grant of tax incentives under the Omnibus Investment Code. The BOI is an
attached agency of the Department of Trade and Industry (DTI).
The BOI is composed of five full-time governors, excluding the DTI secretary as its chairman.
The President t of the Philippines shall appoint a vice chairman of the board who shall act as the
BOI’s managing head.
Philippine Economic Zone Authority (PEZA)
The PEZA was created to promote investments in export-oriented manufacturing industries in
the Philippines and, among other myriads of functions, supervise the grant of both fiscal and
non-fiscal incentives.
PEZA-registered enterprises enjoy tax holidays for certain years and exemption from import and
export taxes including local taxes. The PEZA is also an attached agency of the DTI.
The PEZA is headed by a director general and is assisted by three deputy directors.
Local Government Tax Collecting Units
Provinces, municipalities, cities, and barangays also impose and collect various local taxes, fees,
and charges to rationalize their fiscal autonomy.

Fiscal Incentive Review Board (FIRB)

FIRB has an oversight function on the administration and grant of tax incentives by the
Investment Promotion Agencies and other government agencies administering tax incentives. It
approves or disapproves grants of tax incentives to private entities and tax subsidies to
government-owned and controlled corporations, government instrumentalities, government
commissaries, state universities, and colleges.
TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION
For purposes of effective and efficient tax administration, taxpayers are classified as:
1. Large taxpayers – under the supervision of the Large Taxpayer Service (LTS) of the
BIR National Office.
2. Non-large taxpayers – under the supervision of the respective Revenue District Offices
(RDOS) where the business, trade, or profession of the taxpayer is situated.
Criteria for Large Taxpayers:
1. As to payment
2. Value Added Tax – At least P200,000 per quarter for the preceding year.
3. Excise Tax – At least P1,000,000 tax paid for the preceding year.
4. Income Tax – At least P1,000,000 annual income tax paid for the preceding year.
5. Withholding Tax – At least P1,000,000 annual withholding tax payments or remittances
from all types of withholding taxes.
6. Percentage tax – At least P200,000 percentage tax paid or payable per quarter for the
preceding year.
7. Documentary stamp tax – At least P1,000,000 aggregate amount per year.
 8. As to financial conditions and results of operations
9. Gross receipts or sales – P1,000,000,000 total annual gross sales or receipts.
10. Net worth – P300,000,000 total net worth at the close of each calendar or fiscal year.
11. Gross purchases – P800,000,000 total annual purchases for the preceding year.
12. Top corporate taxpayer listed and published by the Securities and Exchange
Commission.
Automatic classification of taxpayers as large taxpayers
The following taxpayers shall be automatically classified as large taxpayers upon notice in
writing by the CIR:
1. All branches of taxpayers under the Large Taxpayer’s Service.
2. Subsidiaries, affiliates, and entities of conglomerates or groups of companies of a large
taxpayer.
3. Surviving company in case of merger or consolidation of a large taxpayer.
4. A corporation that absorbs the operation or business in case of spin-off of any large
taxpayer.
5. A corporation with an authorized capitalization of at least P300,000,000 registered with
the SEC.
6. Multinational enterprises with an authorized capitalization or assigned capital of at least
P300,000,000
7. Publicly listed corporations.
8. Universal, commercial, and foreign banks (the regular business unit and foreign currency
deposit unit shall be considered one taxpayer for purposes of classifying them as large
taxpayers).
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking, insurance,
telecommunication, utilities, petroleum, tobacco, and alcohol industries.
10. Corporate taxpayers engaged in the production of metallic minerals.
INTRODUCTION TO INCOME TAXATION
THE CONCEPT OF INCOME
Why is income subject to tax?
Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an Excellent object
of taxation in the allocation of government costs.
What is income for taxation purposes?
The tax concept of income is simply referred to as “gross income” under the NIRC. A taxable
item of income is referred to as an “item of gross income’ or “inclusion in Gross income”.
Gross income simply means taxable income in layman’s terms. Under the NIRC however, the
term “taxable income” refers to certain items of gross income less deductions and personal
exemptions allowable by law. Technically, gross income is broader to pertain to any income that
can be subjected to income tax.
Gross income is broadly defined as any inflow of wealth to the taxpayer from whatever source,
legal or illegal, that increases net worth. It includes income from employment, trade, business, or
exercise of profession, income from properties, and other sources such as dealings in properties
and other regular or casual transactions.
ELEMENTS OF GROSS INCOME
1. It is a return on capital that increases net worth.
 2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.
RETURN ON CAPITAL
Capital means any wealth or property. Gross income is a return on wealth property that increases
the taxpayer’s net worth.
Illustration
ABC purchased goods for P300 and sold them for P500. The P500 consideration is analyzed as
follows:
Selling price (total consideration received) P 500 Total return
Cost (value of inventory forgone) 300 Return of capital
Mark-up (gross income) P 200 Return on capital
The return on capital that increases net worth is income subject to income tax. Return of
capital merely maintains net worth; hence, it is not taxable. An improvement in net worth
indicates an ability to pay tax.
Capital items deemed with infinite value
There are capital items that have infinite value and are incapable of pecuniary valuation.
Anything received as compensation for their loss is deemed a return of capital.
Examples:
1. Life
2. Health
3. Human reputation
Life
The value of life is immeasurable by money. Under Sec. 32 of the NIRC, the proceeds of life
insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, are exempt from income tax.
The proceeds of a life insurance contract collected by an employer as a beneficiary from the life
insurance of an officer or any person directly interested in his trade are likewise exempt. These
proceeds are viewed as advanced recovery of future loss.
However, the following are taxable return on capital from insurance policies:
1. Any excess amount received over premiums paid by the insured upon surrender or
maturity of the policy (i.e. the insured outlives the policy.).
2. Gain realized by the insured from the assignment or sale of his insurance policy interest
income from the unpaid balance of the proceeds of the policy.
3. Any excess of the proceeds received over the acquisition costs and premium payments by
an assignee of a life insurance policy.

Health
Any compensation received in consideration for the loss of health such as compensation for
personal injuries or tortuous acts is deemed a return of capital.
Human Reputation
The value of one’s reputation cannot be measured financially. Any indemnity received as
compensation for its impairment is deemed a return of capital exempt from income tax.
Examples include moral damages received from:
 1. Oral defamation or slander
2. Alienation of affection
3. Breach of promise to marry
Recovery of lost capital vs. Recovery of lost profits
The loss of capital results in a decrease in net worth while the loss of profits does not
decrease net worth. The recovery of lost capital merely maintains net worth while the recovery
of lost profits increases net worth. Therefore, the recovery of lost profits is a return on capital.
Taxable recovery of lost profits
The recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a
taxable return on capital.
The following are taxable recoveries of lost profits:
1. Proceeds of crop or livestock insurance
2. Guarantee payments
3. Indemnity received from patent infringement suit
Illustration 1
Mang Reyes insured his strawberry crop with a P200,000 crop insurance coverage against
calamities. The crop was eventually destroyed by an unusual frost. Mang Reyes was paid the
P200,000 insurance proceeds.
The P200,000 proceeds which is a reimbursement for the lost value of the future harvest, is an
item of gross income. The value of the lost crops is, in effect, realized not through actual harvest
but through the insurance contract.

Illustration 2
Mr. Ramos purchased a franchise. The franchisor guaranteed an annual franchise income of
P100,000 to Mr. Ramos. In the first year of operation, Mr. Ramos’ outlet only earned P60,000.
The franchisor paid the P40,000 difference to Mr. Ramos.
The P40,000 guarantee payment is not a gratuity but a recovery of lost profit for Mr Ramos;
hence, subject to income tax. Mr. Ramos shall report P100,000 as franchise income.
Illustration 3
Davao Crocodile Inc. experienced an unusual decline in its income after a competitor copied its
patented invention. Davao Crocodile sued the competitor for patent infringement and was
awarded an indemnity of P3,000,000.
The P3,000,000 indemnity is compensation for the income not realized by Davao Crocodile due
to the patent infringement. The same is an item of gross income.
The recovery of lost income or profits is not intended to compensate for the loss of capital. It is
as good as the realization of income; hence, it is an item of gross income.
REALIZED BENEFIT
What is meant by realized benefit?
The “benefit” concept
The term “benefit” means any form of advantage derived by the taxpayer. There is a benefit
when there is an increase in the net worth of the taxpayer. An increase in net worth occurs when
one receives income, donation, or inheritance.
The following are not benefits and, hence, not taxable:
 1. Receipt of a loan – properties increase but obligations also increase resulting in an
offsetting effect on net worth.
2. Discovery of lost properties – Under the law, the finder has an obligation to return the
same to the owner.
3. Receipt of money or property to be held in trust for, or to be remitted to, another
person.
If the taxpayer is entitled to keep for his account a portion of a receipt, only that portion is a
benefit.
Illustration
1. An employee was granted a P20,000 transportation advance. He liquidated P18,000 in
transportation expenses and was allowed by his employer to keep the P2,000. Only the
P2,000 retained by the employee is considered income since this was the extent he
benefited. (RR2-98)
2. A security agency receives P120,000 from clients, P100,000 of which is for the salaries
of security guards. Under RMC 39-2007, only the P20,000 attributable to the agency is
considered income of the agency since it is the extent it benefits. The P100,000 pertaining
to the salaries of security guards is recognized by the agency as a liability upon receipt.
The realized” concept
The term realized means earned. It requires that there is a degree of undertaking or sacrifice
from the taxpayer to be entitled to the benefit.
Requisites of a realized benefit:
1. There must be an exchange transaction.
2. The transaction involves another entity.
3. It increases the net worth of the recipient.
Types of Transfers
1. Bilateral transfers or exchanges, such as:
2. Sale
3. Barter
These are referred to as “onerous transactions”.
2. Unilateral transfers, such as:
3. Succession – transfer of property upon death
4. Donation
These are also referred to as “gratuitous transactions”.
Under current usage, unilateral transfers are simply referred to as “transfers” while bilateral
transfers are called “exchanges.” Benefits derived from onerous transactions are “earned or
realized’; hence, they are subject to income tax. Benefits derived from gratuitous transactions
are not realized because of the absence of an earning process. Benefits derived from gratuitous
transactions are subject to transfer tax, not income tax.
3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are commonly referred to
as “transfers for less than full and adequate consideration”. The gratuitous portion of the
transaction is subject to transfer tax while the benefit from the onerous portion is subject to
income tax.
Illustration
A taxpayer sold his car which was previously purchased for Pl,100,000 and with a current fair
value of P180,000 for only P130,000. The transaction will be analyzed as follows:
Fair value P 180,000
Selling price 130,000
Cost 100,000
(Fair Value – Selling Price) = P50,000 – Subject to transfer tax
(Selling Price – Cost) = P30,000 – Subject to income tax
The excess of fair value over the selling price is a gratuity or gift whereas the excess of the
selling price over the cost is an item of gross income.
What is meant by another entity?
Every person, natural or juridical, is an entity. Natural persons are living persons while juridical
persons are those created by law such as partnerships and corporations. An entity may be a
taxable entity or an exempt entity. A taxable item of gross income arises from transactions that
involve another natural or juridical entity.
Gains or income derived between relatives, corporations, and between a partner and the
partnership are taxable since it is made between separate entities. Likewise, the income
between affiliated companies such as between a holding or parent company and its subsidiaries
and between sister companies are taxable because each corporation is a separate entity. This
applies regardless of the underlying economic relationship.
However, the sales of a home office to its branch office are not taxable because they pertain to
one and the same taxable entity. Furthermore, the income between businesses of a proprietor
should not be taxed since proprietorship businesses are taxable upon the same owner. Note that a
proprietorship business is not a juridical entity.
Benefits in the absence of transfers
The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his
properties or decrease in the value of his obligations in the absence of a sale or barter transaction
is not taxable.
These are referred to as unrealized gains or holding gains because they have not yet materialized
in an exchange transaction.
Examples of unrealized gains or holding gains:
1. Increase in value of investments in equity or debt securities
2. Increase in value of real properties held (revaluation increment)
3. Increase in value of foreign currencies held or receivable
4. Decrease in value of foreign currency-denominated debt by virtue of favorable
fluctuation in exchange rates
5. Birth of animal offspring, accruals of fruits in an orchard, or growth of farm vegetables
6. Increase in value of land due to the discovery of mineral reserves
Rendering of services
The rendering of services for consideration is an exchange but does not cause a loss of capital.
Hence, the entire consideration received from the rendering of services such as compensation
income or service fees is an item of gross income.
Illustration
Mr. Mendoza lists the following possible items of gross income:
  Compensation income, P200,000
 Winnings from gambling, P100,000
 Increase in value of investments, P50,000
 Appreciation in the value of land owned, P300,000
 Debt of Saladin canceled by creditors in consideration for services he rendered to them,
P150,000
 Debt of Saladin canceled by his creditor out of affection, P250,000
 Loan received from a bank, P400,000

The items of gross income are:

Compensation income P200,000
Winnings from gambling 100,000
Debt of Mendoza forgiven in consideration
for service rendered to his creditors 150,000
Note:
1. Gains from gambling and the forgiveness of debt in consideration of services or
properties received are realized gains from exchanges.
2. The forgiveness of debt out of affection or mere generosity of the creditor is a gratuitous
transfer subject to transfer tax.
3. The loan received from a bank constitutes a transfer but is not a benefit.

Basis of Exemption of Unrealized Income

Normally, taxpayers will have the ability to pay tax when their income materializes in an
exchange transaction since tax is generally payable in money.
This does not mean, however, that only income realized in cash is subject to tax. Income realized
in non-cash properties is, in effect, received in cash but the taxpayer used the same to acquire the
non-cash property. Income received in non-cash considerations is taxable at the fair value of
the property received. Moreover, exempting income realized in non-cash considerations would
open a wide avenue for tax evasion since taxpayers can easily divert their income in the form of
non-cash considerations.
Mode of Receipt/Realization Benefits
Taxable items of income may be realized by the taxpayer in two ways:
1. Actual receipt - Actual receipt involves actual physical taking of the income in the form
of cash or property.
2. Constructive receipt - Constructive receipt involves no actual physical taking of the
income but the taxpayer is effectively benefited.
Examples:
1. Offset of debt of the taxpayer in consideration for the sale of goods service
2. Deposit of the income to the taxpayer’s checking account
3. Matured detachable interest coupons on coupon bonds not yet encashed by the taxpayer
4. Increase in the capital of a partner from the profit of the partnership
The inflow of wealth without an increase in net worth
The inflow of wealth to a person that does not increase his net worth is not income due to the
total absence of benefit.
Examples:
1. Receipt of property in trust
2. Borrowing of money under an obligation to return
In law, the proceeds of embezzlement or swindling where money is taken with the original
intention to return are considered as income because of the increase in the net worth of the
swindler.

NOT EXEMPTED BY LAW, CONTRACT, OR TREATY

An item of gross income is not exempted by the Constitution, law, contracts, or treaties from
taxation.
The following items of income are exempted by law from taxation; hence, they are not
considered items of gross income:
1. Income of qualified employee trust fund
2. Revenues of non-profit, non-stock educational institutions
3. SSS, GSIS, Pag-IBIG, or PhilHealth benefits
4. Salaries and wages of minimum wage earners and qualified senior citizen
5. Regular income of Barangay Micro-business Enterprises (BMBEs)
6. Income of foreign governments and foreign government-owned and controlled
corporations
7. Income of international missions and organizations with income tax immunity
TYPES OF INCOME TAXPAYERS
1. Individuals
2. Citizen
3. Resident citizen
4. Non-resident citizen
5. Alien
1. Resident alien
2. Non-resident alien
6. Engaged in trade or business
7. Not engaged in trade or business
8. Taxable estates and trusts
9. Corporations
10. Domestic corporation
11. Foreign Corporation
12. Resident foreign corporation
13. Non-resident foreign corporation
INDIVIDUAL INCOME TAXPAYERS
Citizens
Under the Constitution, citizens are:
1. Those who were citizens of the Philippines at the time of the adoption of the constitution
on February 2, 1987
2. Those whose fathers or mothers are citizens of the Philippines.
 3. Those born before January 17, 1973, of Filipino mothers who elected Filipino citizenship
upon reaching the age of majority
4. Those who are naturalized in accordance with the law.
Classification of citizens:
1. Resident citizen – A Filipino citizen residing in the Philippines
2. Non-resident citizen includes:
 A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein;
 A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
 A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year;
 A citizen who has been previously considered a non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
Filipinos working in Philippine embassies or Philippine consulate offices are not considered
non-resident citizens.
Alien
1. Resident alien – an individual who is residing in the Philippines but is not a citizen
thereof, such as:
 An alien who lives in the Philippines without definite intention as to his stay; or
 One who comes to the Philippines for a definite purpose which in its nature would
require an extended stay and to that end makes his home temporarily in the Philippines,
although it may be his intention at all times to return to his domicile abroad;
 An alien who has acquired residence in the Philippines retains his status as such until he
abandons the same or actually departs from the Philippines.
1. Non-resident alien – an individual who is not residing in the Philippines and who is not
a citizen thereof.
1. Non-resident aliens engaged in business (NRA-ETB)- aliens who stayed in the
Philippines for an aggregate period of more than 180 days during the year.
2. Non-resident aliens not engaged in business (NRA-NETB) include:
1. Aliens who come to the Philippines for a definite purpose which in its
nature may be promptly accomplished;
2. Aliens who shall come to the Philippines and stay therein for an aggregate
period of not more than 180 days during the year.

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention
The intention of the taxpayer regarding the nature of his stay within or outside the Philippines
shall determine his appropriate residency classification. The taxpayer shall submit to the CIR the
BIR documentary proofs such as visas, work contracts, and other documents indicating such
intention.
Documents purporting short-term stay such as tourist visa shall not result in the reclassification
of the taxpayer’s normal residency. Documents purporting a long-term stay such as an
immigration visa or working visa for an extended period would result in the automatic
reclassification of the taxpayer’s residency.
Examples:
1. An alien is normally a non-resident. An alien who comes to the Philippines with a tourist
visa would still be classified as a non-resident alien.
2. A citizen is normally a resident. A citizen who would go abroad under a tourist visa
would still be considered a resident citizen.
3. An alien who comes to the Philippines with an immigration visa would be reclassified as
a resident alien upon his arrival.
4. A citizen who would go abroad with a two-year working visa would be reclassified as a
non-resident citizen upon his departure.
5. Length of stay
In default of such documentary proof, the length of stay of the taxpayer is considered:
1. Citizens staying abroad for a period of at least 183 days are considered non-residents.
2. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable
year are considered residents.
1. Aliens who are staying in the Philippines for not more than 1 year, but more than 180
days are deemed non-resident aliens engaged in business.
2. Aliens who stay in the Philippines for not more than 180 days are considered non-
resident aliens not engaged in trade or business.
- Aliens who are staying in the Philippines for not more than 1 year, but more than
180 days are deemed NONRESIDENT ALIENS ENGAGED IN BUSINESS.
- Aliens who stayed in the Philippines for not more than 180 days are considered
NONRESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS.
(Example ay mga concert artists, mga oppa na bumisita dito at ngcoconcert lang
tapos balik na ulit sa ibang bansa)
Illustration 1
Daniel Mario Aresmendi, a Mexican actor, was contracted by a Philippine television company to
do a project in the Philippines. He arrived in the country on February 29, 2021, and returned to
Mexico three weeks later upon completion of the project.
Daniel Mario Aresmendi shall be classified as an NRA-NETB in 2021. His stay is for a definite
purpose which in its nature will be accomplished immediately.

Illustration 2
Mamoud Jibril, a Libyan national, arrived in the country on November 4, 2021 Mr. Jibril stayed
in the Philippines since then without any working visa or work permit.
For the year 2021, Mr. Jibril would be considered an NRA-NETB because he stayed in the
Philippines for less than 180 days as of December 31, 2021. If he is still in the Philippines until
December 31, 2022, he will qualify as a resident alien for 2022.
Illustration 3
Without any definite intention as to the nature of his stay, Juan Miguel, a Filipino citizen, left the
Philippines and stayed abroad from March 15, 2020, to April 1, 2021before returning to the
Philippines.
For the year 2020. Juan is a non-resident citizen because he is absent for more than 183 days
but he will be classified as a resident citizen for the year 2021 because he is absent for less than
183 days in 2021.
Taxable Estates and Trusts
1. Estate
Estate refers to the properties, rights, and obligations of a deceased person not extinguished by
his death.
Estates under the judicial settlement are treated as individual taxpayers. The estate is taxable on
the income of the properties left by the decedent. Estates under extrajudicial settlement are
exempt entities. The income of the properties of the estate under extrajudicial settlement is
taxable to the heirs.
2. Trust
A trust is an arrangement whereby one person (grantor or trustor) transferee (1.e. donates)
property to another person (beneficiary), which will be held under the management of a third
party (trustee or fiduciary).
A trust that is irrevocably designated by the grantor is treated in taxation as if it is an individual
taxpayer. The income of the property held in the trust is taxable to the trust. Trusts that are
designated as revocable by the grantor are not taxable entities and are not considered
individual taxpayers. The income of properties held under revocable trusts is taxable to the
grantor not to the trust.
When the trust agreement is silent as to the revocability of the trust, the trust is presumed to be
revocable.
CORPORATE INCOME TAXPAYERS
The term ‘corporation’ shall include one-person corporations (OPCs), partnerships, no matter
how created or organized, joint-stock companies, joint accounts, associations, or insurance
companies, except general professional partnerships and a 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 consortium agreement under a service contract
with the government.
Hence, the term corporation includes profit-oriented and non-profit institutions such as
charitable institutions, cooperatives, government agencies and instrumentalities, associations,
leagues, civic or religious and other organizations.
Domestic Corporation
A domestic corporation is a corporation that is organized in accordance with Philippine laws. It
includes one-person corporations (OPC) owned and registered by resident citizens in the
Philippines.
Foreign Corporation
Types of foreign corporations:
A foreign corporation is one organized under a foreign law.
 1. Resident foreign corporation (RFC) – a foreign corporation that operates and Conducts
business in the Philippines through a permanent establishment (i.e. a branch).
2. Non-resident foreign corporation (NRFC) – a foreign corporation which does not operate
or conduct business in the Philippines
Note:
1. A corporation that incorporated in the Philippines is a domestic corporation under the
incorporation Test even if the same is controlled by foreigners.
2. A foreign corporation that transacts business with residents through a resident branch is
taxable on such transactions as a resident foreign corporation through its branch.
However, if it transacts directly with residents outside its branch, it is taxable as a non-
resident foreign corporation on the direct transactions.
3. An individual who establishes a one-person corporation (OPC) shall be taxable as a
corporate taxpayer for the business transactions of the OPC but he shall be subject to tax
as an individual for his personal transactions.

Special Corporations
Special corporations are domestic or foreign corporations that are subject to special tax rules or
preferential tax rates.
0THER CORPORATE TAXPAYERS
1. One-person corporation
A one-person corporation is a corporation with a single stockholder who may be a natural
person, trust, or an estate.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-
chartered G0CCs may not incorporate as One-person corporations. A natural person who is
licensed to exercise a profession may not organize as a One Person Corporation for the purpose
of exercising such profession except as otherwise provided under special laws.
2. Partnership
A partnership is a business organization Owned by two or more persons who contribute their
industry or resources to a common fund for the purpose of dividing the profits from the venture.
Types of partnership
1. General professional partnership (GPP) - A GPP is a partnership formed by persons
for the sole purpose of exercising a common profession, no part of the income of which is
derived from engaging in any trade or business.
A GPP is not treated as a corporation and is not a taxable entity. It is exempt from income tax,
but the partners are taxable in their individual capacity with respect to their share in the income
of the partnership.
1. Business partnership - A business partnership is one formed for profit. It is taxable as a
corporation.
Examples:
1. A partnership between Atty. Mendoza, a lawyer, and Mark Santos, an accountant, to
practice in taxation advisory services would be a business partnership since the two
partners are not in the same profession.
 2. A partnership between accountants Khim and Vhinson to venture into a beauty parlor
would be a business partnership since the venture is not in the practice of a common
profession.
3. A partnership between accountants Juan and Miguel to venture into audit services would
be a general professional partnership.
4. Dentists Wency and Andy partnered to operate a dental clinic. During the slack season,
they are converting their clinic into a beauty salon. Their partnership is a business
partnership since it is earning income from the business.
Joint venture
A joint venture is a business undertaking for a particular purpose. It may be organized as a
partnership or a corporation.
Types of joint ventures:
1. Exempt joint ventures - Exempt joint ventures are those formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal, and other
energy operations pursuant to an operating consortium agreement under a service
contract with the government.
Similar to a GPP, this type of joint venture is not treated as a corporation and is tax-exempt on its
regular income, but its venturers are taxable to their share in the net income of the joint venture.
1. Taxable joint ventures - All other joint ventures are taxable as corporations.
2. Co-ownership
A co-ownership is joint ownership of a property formed for the purpose of preserving the same
and/or dividing its income.
A co-ownership that is limited to property preservation or income collection is not a taxable
entity and is exempt, but the co-owners are taxable on their share of the income of the co-owned
property.
However, a co-ownership that reinvests the income of the c0-0Wned property to other income-
producing properties or ventures will be considered an unregistered partnership taxable as a
corporation.
THE GENERAL RULES IN INCOME TAXATION
Taxable on income earned
Individual taxpayers Within Without
Resident Citizen / /
Nonresident Citizen /
Resident alien /
Nonresident alien /
Corporate taxpayers
Domestic corporation / /
Resident foreign corporation /
Nonresident foreign corporation /

Note:
1. Consistent with the territoriality rule, all taxpayers, except resident citizens and domestic
corporations, are taxable only on income earned within the Philippines.
 2. The NIRC uses the term “without the Philippines” to mean outside the Philippines.
The Residency and Citizenship Rule
Taxpayers who are residents and citizens of the Philippines such as resident citizens and
domestic corporations are taxable on all income from sources within and without the Philippines.
A corporation is a citizen of the country of incorporation. Thus, a domestic corporation is a
citizen of the Philippines.
Basis of the extraterritorial taxation
Resident citizens and domestic corporations derive most of the benefits from the Philippine
government compared to all other classes of taxpayers by virtue of their proximity to the
Philippine government.
Under our laws, resident citizens and domestic corporations enjoy preferential privileges over
aliens. Also, between resident and non-resident citizens, resident citizens have full access to the
public services of our government because they are in the country. The taxation of foreign
income of resident citizens and domestic corporations properly reflects this difference in benefits
consistent with the Benefit Received Theory.
The extra-territorial tax treatment of resident citizens and domestic corporations is also intended
as a safety net to the potential loss of tax revenues brought by situs relocation or the practice of
executing or structuring transactions such that income will be realized abroad to avoid Philippine
income taxes.
The issue of international double taxation
The rule on extraterritorial taxation on resident citizens and domestic corporations exposes these
taxpayers to double taxation. However, the NIRC allows a tax credit for taxes paid in foreign
countries. In fact, resident citizens and domestic corporations pay minimal taxes in the
Philippines on their foreign income because of the tax credit.
Income Tax Schemes, Accounting Periods, Methods, and
Reporting

INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
1. Final income taxation
2. Capital gains taxation
3. Regular income taxation
An item of gross income is taxable in any of these tax schemes.

Mutually exclusive coverage

The tax schemes are mutually exclusive. An item of gross income that is subject to tax in one
scheme will not be taxed by the other schemes. Similarly, items of income that are exempted in
one scheme are not taxable by the other schemes.

CLASSIFICATION OF ITEMS OF GROSS INCOOME

Because of the different tax schemes, items of pross income can be classified as follows:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax

FINAL INCOME TAXATION

Final income taxation is characterized by final taxes wherein full taxes are withheld by the
income payor at source. The recipient income taxpayer receives the income net of taxes. The
payor is the one required by law to remit the tax to the government. Consequently, the recipient
income taxpayer does not need to file income tax returns because the withheld tax constitutes
the full tax due and are therefore deemed final payments. This system of taxation is referred to as
the final withholding tax system.
Final taxation is applicable only on certain passive income listed by the law. Not all items of
passive income are subject to final tax.
Passive income vs. active income
Passive incomes are earned with very minimal or even without active involvement of the
taxpayer in the earning process.
Examples of passive income:
1. Interest income from banks
2. Dividends from domestic corporations
3. Royalties
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.
Examples of active income:
1. Compensation income
2. Business income
3. Professional income

CAPITAL GAINS TAXATION

Capital gains tax is imposed on the gain realized on the sale, exchange and other
dispositions of certain capital assets.
Capital assets are assets not used in business, trade or profession. Capital assets are the
opposites of ordinary assets. Ordinary assets are assets used in business, trade or
profession such as inventory, supplies or property, plant and equipment.
Also, not all capital gains are subject to capital gains tax. Most of them are subject to regular
income tax.
The NIRC identifies capital gains tax as a final tax, but they are hybrid forms of final taxes since
it also employs self-assessment method. The taxpayer still files capital gains tax returns to report
the gain and pay the tax to the government. Capital gains taxation applies only to two types of
capital assets: domestic stocks and real property.

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
1. Gains from dealings in properties, not subject to capital gains tax
2. Other passive income not subject to final tax
Items of gross income from these sources are valued or measured using an accounting method,
accumulated over an accounting period, and reported to the government through an income tax
return. Regular income taxation makes use of the self-assessment method.

ACCOUNTING PERIOD
Accounting period is the length of time over which income is measured and reported.
Types of Accounting Periods
1. Regular accounting period – 12 months in length
1. Calendar
 2. Fiscal
2. Short accounting period – less than 12 months

Calendar year
The calendar accounting period starts from January 1 and ends December 31. This accounting
period is available to both corporate taxpayers and individual taxpayers.
Under the NIRC, the calendar year shall be used when the:
1. Taxpayer’s annual accounting period is other than a fiscal year (i.e. longer than 12 months in
length)
2. Taxpayer has no annual accounting period (i.e. less than 12 months in length)
3. Taxpayer does not keep books.
4. Taxpayer is an individual

Fiscal year
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.

Deadline of Filing the Income Tax Return

Under the NIRC, the return is due for filing on the fifteenth day of the fourth month following
the close of the taxable year of the taxpayer. The regular tax due is payable upon filing of the
income tax return.

Illustration: Due date of the annual income return

1. Taxpayers under the calendar year must file their annual income tax return for the current
period not later than April 15 of the following year.
2. A corporate taxpayer with fiscal year ending June 30, 2021, must file its annual income tax return
not later than October 15, 2021.

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business – The accounting period covers the date of the start of the business
until the designated year-end of the business.
Illustration: Palawan Inc. started business operation on June 30, 2021 and opted to use the
calendar year accounting period.
Palawan should file its first income tax return covering June 30 to December 31, 2021 for the
year 2021. The return must be filed on or before April 15, 2022.
2. Dissolution of business – The accounting period cover’s the start of the current year to the date
of dissolution of the business.
Illustration: Tawi-tawi lnc. Is on the fiscal year accounting period ending every March 31. It
ceased business operation on August 15, 2021.
Tawi-tawi should file its last income tax return covering April 1 to August 15, 2021.
Under the old NIRC, dissolving corporations shall file their return within 30 days from the
cessation of activities or 30 days from the approval of merger by the Securities and Exchange
Commission in the case of merger. (BP vs. CIR, GR 144653, August 28, 2011). Hence, the
return shall be filed on or before September 15, 2021.
For individuals, the return shall be due on or before April 15, 2022. There is no requirement for
early filing under the NIRC.
3. Change of accounting period by corporate taxpayers – The accounting period covers the start of
the previous accounting period up to the designated year-end of the new accounting period.
Note that BIR approval is required in changing an accounting period. It is not automatic.
Illustration 1
Effective February 2023, Sulu Corporation changed its calendar accounting period to a fiscal
year ending every June 30.
Sulu Corporation shall file an adjustment return covering the income from January 1 to June 30,
2023 on or before October 15, 2023.
Illustration 2
Effective August 2023, Zamboanga Company changed its fiscal year accounting period ending
every June 30 to the calendar year.
Zamboanga Company should file an adjustment return covering July 1 to December 31, 2023 on
or before April 15, 2024.
4. Death of the taxpayer – The accounting period covers the start of the calendar year until the
death of the taxpayer.
Illustration
Mr. Regonald died on November 2, 2023.
The heirs of Mr. Regonald or his estate administrators or executors shall file his last income tax
return covering his income from January 1 to November 2, 2023. There is no requirement for
early filing in case of death of taxpayers. Hence, the income tax return shall be filed on or before
the usual deadline, April 15, 2024.
It must be noted that cut-off of income must be made at date point of death because properties
such as income accruing before death are p part of the estate of the decedent in Estate Taxation
while those income accruing after death are not part thereof. Hence, it is mandatory for the
accounting period of the taxpayer to be terminated exactly at the date of death.
5. Termination of the accounting period of the taxpayer by the Commissioner of Internal
Revenue – The accounting period covers the start of the current year until the date of the
termination of the accounting period.
Illustration: The accounting period of a taxpayer under the calendar year basis was terminated
by the CIR on August 2, 2024.
The taxpayer must file an income tax return covering January 1 to August 2, 2024. The income
tax return and the tax shall be due and payable immediately.

ACCOUNTING METHODS
Accounting methods are accounting techniques used to measure income.
Types of Accounting Methods
1. The general methods
2. Accrual basis
3. Cash basis
 4. Installment and deferred payment method
5. Percentage of completion method
6. Outright and spread-out method
7. Crop year basis

General Methods for income from sale of goods or service

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.
Income is said to have accrued when the right to receive is established or when an enforceable
right to secure payment is created against the counterparty.
2. Cash basis
Under the cash basis of accounting, income is recognized when received and expense is
recognized when paid.
Tax and accounting concepts of accrual basis and cash basis distinguished
The financial accounting concept of accrual basis and cash basis are similar to their tax
counterparts, except only for the following tax rules:
1. Advanced income is taxable upon receipt.
Income received in advance is taxable upon receipt in pursuant to the Lifeblood Doctrine and
the Ability to Pay Theory. The subsequent taxation of advanced income in the period earned will
expose the government to risk of non-collection. This rule is applicable on the sale of services
not on goods.
2. Prepaid expense is non-deductible.
Prepaid expenses are advanced payment for expenses of future taxable periods. These are not
deductible against gross income in the year paid. They are deducted against income in the future
period they expire or are used in the business, trade or profession of the taxpayer.
Normally, the expensing of prepayments does not properly reflect the income of the taxpayer. It
also contradicts the Lifeblood Doctrine as it effectively defers the recognition of income.
3. Special tax accounting requirement must be followed.
There are cases where the tax law itself provides for a specific accounting treatment of an
income or expense. The specified method must be observed even if it departs from the basis
regularly employed by the taxpayer in keeping his books.
The tax accrual basis income is determined as follows:
Cash income P XXX,XXX
Accrued (uncollected) income XXX,XXX
Advanced income XXX,XXX
Gross income P XXX,XXX

The tax accrual basis expense is determined as follows:

Cash expenses P XXX,XXX
Accrued (unpaid) expense XXX,XXX
Amortization of prepayments and
 depreciation of capital expenditures XXX,XXX
Deductions P XXX,XXX

The tax cash basis income is determined as follows:

Cash income P XXX,XXX
Advanced income XXX,XXX
Gross income P XXX,XXX

The tax cash basis expense is determined as follows:

Cash expenses P XXX,XXX
Amortization of prepayments and
depreciation of capital expenditures XXX,XXX
Deductions P XXX,XXX

Illustration
A taxpayer providing services reported the following in 2023 and 2024:
2023 2024
Collections from services rendered 500,000 P800,000
Accrued income from services rendered 500,000 400,000
Collection from accrued income of 2021 - 470,000
Collection for services not yet rendered 300,000 200,000
Payment of expenses of current period 400,000 600,000
Accrued expenses 100,000 150,000
Payment of accrued expenses of 2021 - 100,000
Payment for expenses of the following year 200,000 300,000

Tax Accrual Basis 2023 2024

Cash income P500,000 P800,000
Accrued income 500,000 400,000
Collection for future services 300,000 200,000
Total gross income P1,300,000 P1,400,000
Less: Deductions
Cash expenses P400,000 P600,000
Accrued expense 100,000 150,000
Amortization of 2021 prepaid expense - 200,000
Total deductions P500,000 P950,000
Net income P800,000 P450,000
Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis
  In accounting accrual basis, income is recognized when earned even if not yet received.
Advanced income is inherently not included in net income. For purposes of taxation, advanced
income is taxable. Hence, it must be added to accrual basis gross income.
 In accounting, expense is recognized when accrued even if not yet paid. Prepaid expenses are
inherently not deducted. Hence, no adjustment for prepayments is necessary under accrual basis.

Tax Cash Basis 2023 2024

Collections from services rendered P500,000 P1,270,000*
Collection for future services 300,000 200,000
Total gross income P800,000 P1,000,000
Less: Deductions
Payments of expenses P400,000 P700,000**
Amortization of 2023 prepayments - 200,000
Total deductions P400,000 P900,000
Net Income P400,000 P570,000

*P800,000 + P470,000 = P1,270,000

**P600,000 + P100,000 = P700,000
Points to consider in converting GAAP cash basis to Tax cash basis
 Under the accounting cash basis, income is recognized when received not when it is earned.
Advanced income is inherently recognized as income. Hence, no adjustment is necessary on
income.
 Under accounting cash basis, expense is deducted when paid including prepaid expenses. Hence,
the deducted prepaid expenses must be reversed for purposes of taxation.

Sellers of goods
The gross income of taxpayers selling goods is determined as follows:
Sales P XXX,XXX
Less: Cost of goods sold XXX,XXX
Gross income P XXX,XXX

The cost of sales is computed using the inventory method:

Beginning inventory P XXX,XXX
Add: Purchases XXX,XXX
Total goods available for sale P XXX,XXX
Less: Ending inventory XXX,XXX
Cost of goods sold P XXX,XXX
The expensing of the purchase cost of goods does not properly and fairly reflect the income of
the taxpayer particularly when there are significant fluctuations in inventory levels between
accounting periods. This could expose the taxpayer to risk of BIR assessment. The use of the
accrual method is suggested but of course subject to practical and cost considerations.
Hybrid basis
The hybrid basis is any combination of accrual basis, cash basis, and/or other methods of
accounting. It is used when the taxpayer has several businesses which employ different
accounting methods.
Illustration
Mr. Roxas has two proprietorship businesses: a service business which uses cash basis and a
trading business which uses accrual basis.
The gross income as determined by cash basis in the service business and the gross income as
determined by the accrual basis in the trading business are simply combined. There is no
requirement to measure the income of different businesses under a single accounting method.
Sale of goods with extended payment terms
The sale of goods with extended payment terms may be reported using the accrual basis,
installment method, or deferred payment method.
Installment method
Under the installment method, gross income is recognized and reported in proportion to the
collection from the instalment sales.
Installment method is available to the following taxpayers:
1. Dealers of personal property on the sale of properties they regularly sell.
2. Dealers of real properties, only if their initial payment does not exceed 25% of the selling price.
3. Casual sale of non-dealers in property, real or personal, when their selling price exceeds P1,000
and their initial payment does not exceed 25% of the selling price
Initial payment
Initial payment means total payments by the buyer, in cash or property, in the taxable year the
sale was made. The term “initial payment” is broader than downpayment. It also includes the
installment payments in the year of sale.
Selling price
Selling price means the entire amount for which the buyer is obligated to the seller. It is
computed as follows:
Cash received and/or receivable PXXX,XXX
Fair market value of property received or receivable XXX,XXX
Mortgage or any indebtedness assumed by the buyer XXX,XXX
Selling price PXXX,XXX
Contract price
The contract price is the amount receivable in cash or other property from the buyer. It is usually
the selling price in the absence of an agreement whereby the debtor assumes indebtedness on the
property.

Comprehensive Illustration
Malaybay Company, a car dealer, sold a machine with a tax basis of P1,200,000 on installment
on January 3, 2023 Malaybay received a P200,000 cash downpayment and a P1,800,000
promissory note for the balance payable in six installments of P300.000 every July 3 and January
3 thereafter.
The selling price and gross profit on the sale is computed as follows:
Cash downpayment P 200,000
Notes receivables 1,800,000
Selling price P2,000,000
Less: Tax basis of machine sold (1,200,000)
Gross profit P 800,000
Accrual basis
Under the accrual basis, the entire P800,000 gross profit shall be reported as gross income in
2023, the year of sale.
Installment basis
Malaybay cannot readily use the installment method because it is a dealer of cars rather than a
dealer of machineries. The sale of properties of which the seller is not a dealer is referred to as a
“casual sale.” Hence, the ratio of initial payment shall be tested first.
The initial payment of Malaybay can be computed as follows:
Cash downpayment (January 3, 2023) P200,000
First installment (July 3, 2023) 300,000
Initial payment P500,000
Ratio of initial payment (P500,000/P2,000,000) 25%

Malaybay can use the installment method. The contract price or the amount due shall be
determined next. Since there is no mortgage assumed by the buyer, the selling price is the
contract price.
The gross profit will be reported in gross income throughout the installment period by the
formula: (Collection/Contract price) x Gross profit
Malaybay shall recognize the following gross income:
At the date of sale: (P200K/P2M x P800,000) P 80,000
Upon every installment: (P30OK/P2M x P800,000) P120,000
If Malaybay is a dealer in machinery, it can avail of the installment method even if the ratio of
its initial payment over selling price exceeds 25% so long as the selling price on the installment
sale exceeds P1,000.

With indebtedness assumed by the buyer

The application of the installment method will slightly vary when the buyer assumes
indebtedness on the property sold.
In this case, the selling price is no longer the contract price. The contract price is the residual
amount after deducting the mortgage from the selling price. Thus.
Selling Price P XXX,XXX
Less: mortgaged assumed by the buyer XXX,XXX
Contract Price P XXX,XXX
Illustration
On January 3, 2025, Tagaytay, Inc., a real property dealer, sold a lot costing P1,400,000 for
P2,000,000. The lot was encumbered by a P1.000,000 mortgage which was assumed by the
buyer. The buyer paid P200,000 downpayment. The balance is due over four installments of
P200,000 every July 3 and January 3 thereafter.

The gross profit can be computed as follows:

Selling price P2,000,000
Less: Tax basis of lot sold 1,400,000
Gross profit P 600,000
Note that dealers of real properties are subject to limitation on the use of installment method. The
ratio of initial payment shall be determined first.
January 3, 2023 cash downpayment P200,000
July 3, 2023 installment 200,000
Initial payment P400,000
Ratio of initial payment (P400,000/P2,000,000) 20%
Tagaytay is qualified to use the installment method. The contract price should be determined
next.
Selling price P2,000,000
Less: Mortgage assumed by buyer 1,000,000
Contract price P1,000,000

Alternatively, the contract price can be computed directly as follows:

Cash downpayment P 200,000
Collectible balance (P200,000 x4 installments) 800,000
Contract price P1,000,000

Tagaytay shall recognize the following gross income:

At the date of sale: (P200K/P1Mx P600,000) P120,000
Upon every installment: (P200K/P1M x P600,000) P120,000

Indebtedness assumed exceeds tax basis of property sold

When the indebtedness assumed by the buyer exceeds the tax basis of the property sold, the
excess is an indirect receipt realized by the seller. This is an indirect downpayment which must
be added as part of the contract price and the initial payment. Note also that under this condition,
all collection from the contract including the excess mortgage is a collection of income.
The contract price shall be computed as follows:
Selling price PXXX,XXX
Less: Mortgage assumed by buyer XXX,XXX
Cash collectible PXXX,XXX
Add: Excess indebtedness – constructive receipt XXX,XXX
Contract price PXXX,XXX

The initial payment shall be computed as follows:

Downpayment PXXX,XXX
Installment in the year of sale XXX,XXX
Excess of mortgage over tax basis XXX,XXX
Initial payment PXXX,XXX

Illustration
On July 1, 2023, a taxpayer made a casual sale of property with a tax basis of P1,300,000 for
P2,000,000. The property was subject toa P1,500,000 mortgage which was agreed to be assumed
by the buyer. The buyer paid a P100,000 down payment with the balance due in two installments
of P200,000 on December 31, 2023 and July 1, 2024.
The gross profit on the sale is determined as follows:
Selling price P2,000,000
Less: Tax basis of property sold 1,300,000
Gross profit P 700,000

The initial payment shall be determined first:

Downpayment P100,000
December 31, 2023 installment 200,000
Excess mortgage (P1,500,000 – P1,300,000)| 200,000
Initial payment P500,000
Ratio of initial payment (P500K/P2,000,000) 25%

The contract price shall be computed as:

Selling price P2,000,000
Less: Mortgage assumed by buyer 1,500,000
Cash collectible P 500,000
Excess mortgage (P1,500,000 – P1,300,000) 200,000
Contract price P 700,000
Note that the gross profit on the sale is the same as the contract price. Hence, any collection
from the contract including the excess mortgage shall be recognized as gross income upon
collection.
Canlubang shall recognize the following gross income:
At the date of sale (P200K down + P100K excess) P300,000
Upon receipt of first installment – 12/31/2023 200,000
Upon receipt of second installment- 7/1/2024 200,000
Total gross profit on the contract P700,000
Deferred payment method
Deferred payment method is a variant of the accrual basis and is used in reporting income when
a non-interest-bearing note is received as consideration in a sale.
Under the deferred payment method, the gross income is computed based on the present value
(discounted value) of a note receivable from the contract. The discount interest on the note is
amortized (i.e., spread) as interest income over the installment term.
Illustration
On December 31, 2023, a taxpayer sold an office building costing P1,400,000 for P2,000,000.
The buyer made P1,000,000 downpayment and the balance, evidenced by a note, is due in 2
annual installments of P500,000 every December 31 starting December 31, 2024.
Note that the installment method cannot be allowed since the ratio of initial payment is already
50% (P1,000,000/P2,000,000).
Assume the note is non-interest bearing but can be discounted at a local bank for P900,000.
Under the deferred payment method, the reportable gross income for each year shall be:
2023 2024 2025
Cash downpayment P1,000,000
Present value of the note 900,000
Selling price P1,900,000
Less: Tax basis of the property 1400,000
Gross income P 500,000
Interest income (P1,000,000 – P900,000) P50,000 P50,000
Note:
 The difference between the face value and the present value of the note, known as discount. It
will not be recognized in gross income at the date of sale but will be deferred and recognized as
interest income.
 The discount is amortized as interest income upon every collection on the balance of the note as
follows: P500.000 installment/P1,000,000 total note balance x P100,000 discount.
In the case of interest-bearing notes, the use of the deferred payment method will bear the same
result as the accrual basis of accounting.

The Percentage of Completion Method for Construction Contracts

Under the percentage of completion method, the estimated gross income from construction is
reported based on the percentage of completion of construction project.
There are several methods of estimating project completion in practice, but the output method
based on engineering survey is prescribed by the NIRC.

Illustration
In 2023, Cagayan De Oro Construction Company accepted a P5,000,000 fixed-price construction
contract. The following shows the details of its Construction activities.
2023 2024
Construction expenses P3,000,000 P1,200,000
Engineer’s estimate of completion 70% 100%

The reportable gross income on construction will simply be computed as follows:

2023 2024
Contract price P5,000,000 P5,000,000
Multiply by: % of completion 70% 100%
Construction revenue P3,500,000 P5,000,000
Less: Construction revenue in prior year - (3,500,000)
Construction revenue this year P3,500,000 P1,500,000
Less: Expense during the year (3,000,000) (1,200,000)
Construction gross income P 500,000 P 300,000

Income from Leasehold Improvement

Leasehold improvements are tangible improvements made by the lessee to the property of the
lessor. Improvements will benefit the lessor when their useful life extends beyond the lease term.
This benefit is referred to as income from leasehold improvement.
Under Revenue Regulations No. 2, the income from leasehold improvement can be reported
using either of the following method at the option of the taxpayer:
1. Outright method
The lessor may report as income the fair market value of such buildings of improvements subject
to the lease at the time when such buildings or improvements are completed.
2. Spread-out method
The lessor may spread over the life of the lease the estimated depreciated value of such buildings
or improvements at the termination of the lease and report as income for each year of the lease an
aliquot part thereof.
The depreciated value of the leasehold improvement is computed as:
Cost of improvement x Excess useful life over lease term / Useful life of the improvement
Illustration
On January 1, 2023, Ivan leased a vacant lot to Greg under a 20-year lease contract. Greg
immediately constructed a building on the lot at a total cost of P4,500,000. The building has
useful life of 30 years.
Outright method
Under the plain wordings of Section 49 of Revenue Regulations No. 2, Ivan shall recognize the
entire P4,500,000 fair value of the improvement as gross income upon completion of the
improvement in 2023. Conceptually, this is not income in its totality, but this is the amount
referred to by the regulation.
Spread-out method
The depreciated value of the property at the termination of the lease is the value of the years of
usage of the lessor. This can be computed by splitting the value of the improvement as follows:

User Years of usage Allocation Cost

- Lessee 20 20/30 x P4,500,000 P 3,000,000
- Lessor 10 10/30 x P4,500,000 1,500, 000
Total 30 P4,500,000
The P1,500,000 depreciated value of the improvement at the termination of the lease is the
income from leasehold improvement of the lessor.
Under the spread-out method, Greg shall spread the P1,500,000 income over 20 periods or
recognize an annual income of P75,000 (i.e. P1.5M/20) from the leasehold improvement from
Year 2023 through Year 2042.
The taxation of leasehold improvement is an old regulation and is absent in the current tax code.
As such, its legitimacy is questioned for lack of legal basis and is viewed as an improper
introduction of legislation. Moreover, it has no sense after all since the income from the
leasehold improvement will be claimed by the lessor as depreciation expense throughout the
remaining life of the improvement. In effect the government is taking advanced tax money which
it will later return through tax deduction or tax shield to the taxpayer.
If our tax administrators would still implement this rule, declaring the value of the improvement
as income may be perceived by taxpayers as unjust and abusive as it could unnecessarily cause
cash flow problems. This is unnecessarily strangling the goose that lay the golden egg. It would
be more logical and acceptable if the depreciated value of the improvement at the termination of
the lease is income under the outright method.
Note that regardless of whether the value of the improvement or the depreciation value of the
improvement is declared as income under the outright method, the net effect to the tax revenue
the government would be the same except only if there are changes in the income tax rates
during the life of the improvement.

Agricultural or Farming Income

Farming income is commonly measured using the cash basis or accrual basis, such as in the
following:
1. Animal husbandry
2. Short-term crops
Illustration
Northern Barn had the following details of its agricultural activity during the year:
Total sales of fattened pigs, P1,000,000 on credit P 12,000,000
Increase in fair value of pig herd compared last year 2,700,000
Total costs of farm feeds and supplies bought 7,000,000
Total costs of farm feeds and supplies used 6,800,000
Administrative and selling expenses 1,200,000
Northern Barn shall compute its net income using either method as follows:
Accrual method Cash basis
Sales P12,000,000 P11,000,000
Direct farm costs 6,800,000 7,000,000
Gross profit from operations P 5,200,000 P 4,000,000
Less: administrative and selling expenses (1,200,000) (1,200,000)
Net income P 4,000,000 P 2,800,000
The accounting for long-term crops depends on the harvesting frequency:
1. Perennial crops – those that yield harvests through years.
2. One-time crops – those that are harvested once after several years.
The initial farm development costs of perennial crops like mangoes, mangosteen, coconut and
banana are capitalized and amortized over the expected years of harvest. The harvests are
accounted for using cash basis or accrual basis. One-time crops are accounted for using the crop
year basis.

Crop year basis

Under the crop year basis, farming income is recognized as the difference between the proceeds
of harvest and expenses of the particular crop harvested. The expenses of each crop are
accumulated and deducted upon the harvest of the crop.
Illustration
John de la Cruz, a farmer, plants a certain crop that takes more than a year to harvest. Juan had
the following data on his farming operations:
2023 2024 2025
Proceeds of harvest - P750,000 P1,000,000
1 cropping expenses
st
400,000 200,000 -
2 cropping expenses
nd
- 500,000 300,000

The reportable farming income using crop year method would be:
2023 2024 2025
Proceeds of harvest - P750,000 P1,000,000
Less: Cropping expenses
Incurred last year 400,000 500,000
Incurred this year 200,000 300,000
Farming gross income P150,000 P200,000
Crop year basis is an accounting method and is not an accounting period.

Use of different accounting methods

Taxpayers with more than one type of business using different accounting methods can
consolidate the income reported using the different methods. There is no need to restate the
income to a common accounting method. However, the methods applied to each business should
be applied consistently from period to period.
Selection of an Accounting Method
The NIRC allows taxpayers to determine the most appropriate accounting method that apply to
themselves. The BIR cannot impose an accounting method to be used. The CIR may only
prescribe an accounting method if:
1. The taxpayer did not use an accounting method, or
2. The accounting method selected does not clearly reflect the income of the taxpayer.
Change in Accounting Period
The change in accounting period requires prior BIR notice. The following documentations are
required:
1. A letter of request addressed to the RDO having jurisdiction over the place of business of the
taxpayer showing:
2. The original and the proposed new accounting period
3. The reason for desiring to change the accounting period
4. Certified true copy of the SEC approved amended by-laws showing change in accounting period
5. Sworn statement of “non-forum shopping” stating that such request has not been previously
acted upon by the BIR National Office.
6. Duly filed up BIR Form 1905
7. A sworn undertaking by an officer of the taxpayer to file a separate final or adjustment return for
the period between the close of the original accounting period and the date designated as the
close of the new accounting period.
The request for approval of the change in accounting period shall be filed at any time not less
than 60 days prior to the beginning of the new accounting period. The certification approving the
adoption of a new accounting period must be released within 30 days from the date of receipt of
the complete documentary requirements.

TAX REPORTING
Types of Returns to the Government
1. Income tax returns – provide details of the taxpayer’s income, expense, tax due, tax credit and
tax still due the government.
2. Withholding tax returns – provide reports of income payments subjected to withholding tax by
the taxpayer-withholding agent.
3. Information returns
Information Returns
Certain taxpayers are also required to file information returns. Information returns do not involve
any payment or withholding of tax but are essential to the government in its tax mapping efforts
and in its evaluation of tax compliance.
The non-fling of income tax returns, withholding tax returns, or information returns is subject to
penalties, fines, and or imprisonment.

MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System
The traditional manual system of filing income tax return is by paper documents where taxpayers
fill up BIR forms to report income, expenses, or any declaration required to be filed with the
BIR.
Under the NIRC, the income tax return shall be filed to the following, in descending order of
priority, within the revenue district office where the taxpayer is registered or required to register:
1. An authorized agent bank (AAB)
2. Revenue Collection Officer
3. Duly authorized city or municipal treasurer, if there is no BIR office in the locality.

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 papers returns. The
system ensures completeness of data on the return and is capable of online submission. If there
are no penalties that require BlR assessments, taxpayers would have to print a hard copy of the
filled tax returns and proceed directly to the bank for payment.

3. Electronic Filing and Payment System (eFPS)

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.
Taxpayers mandated to use the eFPS
1. Large taxpayers duly notified by the BIR.
2. Top 20,000 private corporations duly notified by the BIR.
3. Top 5,000 individual taxpayers duly notified by the BIR.
4. Taxpayers who wish to enter into contracts with government offices.
5. Corporations with paid-up capital of P10,000,000.
6. PEZA-registered entities and those located within Special Economic Zones.
7. Government offices, in so far as remittance of withheld VAT and business tax are concerned.
8. Taxpayers included in the Taxpayer Account Management Program (TAMP).
9. Accredited importers, including prospective importers required to secure the importers
Clearance Certificate (1CC) and Custom brokers Clearance Certificate (BCC)
In case of unavailability of the eFPS during maintenance or instances of technical errors, eFPS
enrolled taxpayers may file manually.

Grouping of Taxpayers under EFPS

1. Group A
1. Banking institutions
2. Insurance and pension funding
3. Non-bank financial intermediation
4. Activities auxiliary to financial intermediation
5. Construction
6. Water transport
7. Hotels and restaurants
8. Land transport
2. Group B
1. Manufacture and repair of furniture
2. Manufacture of basic metals
3. Manufacture of chemicals, and chemical products
4. Manufacture of coke, refined petroleum, and fuel products
5. Manufacture of electrical machinery, and apparatus NEC
6. Manufacture of fabricated metal products
7. Manufacture of foods, products, and beverages
8. Manufacture of machineries, and equipment NEC
9. Manufacture of medical, precision, and optical instruments
10. Manufacture of motor vehicles, trailers and semi-trailers
11. Manufacture of office, accounting, and computing machineries
12. Manufacture of other non-metallic mineral products
 13. Manufacture of other transport equipment
14. Manufacture of other wearing apparel
15. Manufacture of papers, and paper products
16. Manufacture of radio, TV, and communication equipment, and apparatus
17. Manufacture of rubber and plastic products
18. Manufacture of textiles
19. Manufacture of tobacco products
20. Manufacture of wood and wood products
21. Manufacturing N.E.C.
22. Metallic ore mining
23. Non-metallic mining and quarrying
3. Group C
1. Retail sale
2. Wholesale trade and commission trade
3. Sale, maintenance, repair of motor vehicle, and sale of automotive fuel
4. Collection, purification, and distribution of water
5. Computer and related activities
6. Real estate activities
4. Group D
1. Air transport
2. Electricity, gas, steam, and hot water supply
3. Postal and telecommunications
4. Publishing, printing, and reproduction of recorded media
5. Recreational, cultural, and sporting activities
6. Recycling
7. Renting out of goods and equipment
8. Supporting and auxiliary transport activities.
5. Group E
1. Activities of membership organizations Inc.
2. Health and social work
3. Private educational services
4. Public administration and defense compulsory social security
5. Public educational services
6. Research and development
7. Agriculture, hunting, and forestry
8. Farming of animals
9. Fishing
10. Other service activities
11. Miscellaneous business activities
12. Unclassified activities

PAYMENT OF INCOME TAXES

The general rule is “pay as you file”, The capital gains tax and regular income tax are paid as the
taxpayer files his return, Installment payment of income tax is allowed on certain conditions.
Taxpayers under the eFPS system shall e-pay their tax online through internet banking service.
The account of the taxpayer will be auto-debited for the amount of taxes to be paid.
BASIC COMPARISON OF FILING AND PAYMENT SYSTEMS
Manual e-BIR Forms eFPS
Data entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Tax payment Manual Manual Electronic

PENALTIES FOR LATE FILING OR PAYMENT OF TAX

The late filing and payment of taxes is subject to the following additional charges:
1. Surcharge –
1. 25% of the basic tax for failure to file or pay deficiency tax on time
2. 50% for willful neglect to file and pay taxes.
The non-filing is considered ‘willful neglect if the BIR discovered the non-filing first. This is the
case when the taxpayer received a notice from the BIR to file return prior to his actual filing, If
the taxpayer filed a return before the receipt of such notice, the same is considered simple
neglect subject to the 25% surcharge.
Separate penalties are also imposed for each of the following incidence:
1. Wrong venue filing- 25% of the basic tax
2. Filing of fraudulent return – 50% of the basic tax electronic

2. Interest – The interest shall be double of the legal interest rate for loans or forbearance of any
money in the absence of any express stipulation. Since the legal interest is currently set at 6%,
the interest penalty is therefore 12% per annum computed on the basic tax over the actual days
of delay divided 365 days.
Note that a month normally has 30 days except the following:
31-day months January, March, May, July, August, October, December
28 or-day month February
The best way to put this in mind is that 31-day and 30-day months are alternating from January
to July, but the sequence is reset in August. Also put in mind that February is a 28-day month,
except on a leap year.
How to identify a leap year?
A year divisible by 4 with a whole number quotient without a decimal is a leap year, Years 2020,
2024, 2028 and so on are leap years. Leap years have 1 extra days in February making it 29 days.
Our planet revolves around the sun in 365 ¼ days. Hence, there is an extra one complete day in
every four calendar years making a leap year to have 366 days rather than the usual 365 days.

Illustration 1: Basic procedure

The tax return of the taxpayer was due on April 15, 2023 but was filed on August 3, 2023. The
tax due per return of the taxpayer amounts to P100,000. The number of days would be counted
as follows:
Days
April (16-30) 15
May 31
June 30
July 31
August 3
Total 110
The interest penalty shall be computed as P 100,000 x 12% x 110/365 = P3,616.44.

Illustration 2: Interest in a leap year

A taxpayer-withholding agent failed to file his withholding tax return and failed to remit the
P50,000 withholding tax thereon on April 30, 2023. The taxpayer filed the return on July 16,
2024. The number of days would be counted as follows:
Days
April 2023 50 2024 366
May 31
June 30
July 16
Total 443
The interest penalty shall be computed as P 50,000 x 12% x 443/365 = P7,282. 19.
3. Compromise penalty - Compromise penalty is an amount paid in lieu of criminal prosecution
over a tax violation. The schedules of compromise penalty related to income taxes are provided
in the revenue regulations for the reference of taxpayers.

Integrative Illustration 1
An individual taxpayer filed his 2023 income tax return with a computed tax due of P100,000 on
July 15, 2024. A total of P20,000 creditable withholding taxes was deducted by various income
payors from his gross income.

The total amount to be paid by the taxpayer including penalties shall be:
Tax due P100,000
Less: Tax credits (creditable withholding taxes) 20,000
Net tax due P 80,000
Plus: Penalties
Surcharge (P80,000 x 25%) 20,000
Interest (P80,000 x 12% x 91/365) 2,393
Compromise penalty* 15,000
Total tax due P117,393

Note:
 The deadline of the 2023 income tax return is April 15, 2024. April 15, 2024 to July 15, 2024 is a
91-day period.
 Interest is computed from the net amount of tax due before the 25% surcharge. Imposition of
interest upon the surcharge is illegal.
  The compromise penalty is taken from the table of compromise penalties for failure to file and
or pay internal revenue tax at the time or times required by law, as follows:
If the amount of tax unpaid
Exceeds But not exceed Compromise is
… … …
P20,000 P50,000 P10,000
50,000 100,000 15,000
100,000 500,000 20,000

Integrative Illustration 2
A corporate taxpayer filed its 2024 income tax return with a computed tax still due of P400,000
earlier than the deadline for filing its income tax return but in the wrong Revenue District Office
(RDO). The total amount to be paid by the taxpayer including penalties shall be:
Tax still due P400,000
Add: Wrong venue penalty (25%) 100,000
Total amount due P500,000
There would be no surcharge, interest and compromise since the filing is on time.

PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION RETURN

For each failure to file a separate information return, statement or list, or keep any record, or
supply any information required by the Code or by the Commissioner on the date prescribe
therefor, unless it is shown that such failure is due to reasonable cause not to willful neglect,
shall be subject to a penalty off P1,000 for each such failure, Provided that the amount imposed
for all such failure during a calendar year shall not exceed P25,000.