TAXATION is the process or means by which the sovereign (independent State) through its law-making body (the

legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues
to carry out the legitimate objects of government.

- it is the act of levying a tax to apportion the cost of government among those who, in some measure, are
privileged to enjoy its benefits and must therefore bear it burdens.

ASPECTS OF TAXATIONS

1. Levying

2. Assessments

3. Collection

Purposes of Taxation

1. Primary: Revenue or Fiscal Purposes The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare and the protection of its citizens and
to enable it to finance its multifarious activities. A government can run its administrative set up only
through public funding which is collected in the form of tax.
2. Secondary: Regulatory Purpose (or Sumptuary/Compensatory)Taxation is often employed as a device for
regulation or control (implementation of State’s police power) by means of which certain effects or
conditions envisioned by the government may be achieved such as:
a. Promotion of General Welfare
b. Reduction of Social Inequality
c. Economic Growth

BASIS OF TAXATION The government provides benefits to the people in the form of services and the people provide
funds that finance the government. This mutuality of support between the people and the government is referred
to as the basis of 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 following general considerations in the exercise of its
taxation power

• 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.

The LIFEBLOOD DOCTRINE The power of taxation is essential because the government can neither exist nor endure
without taxation. “Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need” (Lifeblood Doctrine) . The government cannot continue to perform its basic functions of serving
and protecting its people without means to pay its expenses. Consequently, the state has the right to compel all its
citizens and property within its limits to contribute

Necessity TheoryIt is a power emanating from necessity. It is a necessary burden to preserve the state’s sovereignty
and a means to give the citizenry an army to resist an aggression , a navy to defend its shores from invasion , a
corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which
come within the state’s territory, and facilities and protection which a government is supposed to provide.

THREE INHERENT POWERS OF THE STATE

1. Police Power. It is the power of the State for promoting public welfare by restraining and regulating the use of
liberty and property. It may be exercise only by the government. The property taken in the exercise of this power is
destroyed because it is noxious or intended for a noxious purpose

2. Power of Taxation – it is the power by which the State raises revenue to defray the necessary expenses of the
government.

3. Power of Eminent Domain –It is the power of the State to acquire private property for public purpose upon
payment of just compensation.

DISTINCTIONS AMONG THE THREE (3) INHERENT POWERS

1. Nature
2. Authority
3. Purpose
4. Persons Affected
5. Scope
6. Effect
7. Benefits
8. Amount of imposition

SCOPE of the Power of Taxation In the case of Sison vs. Ancheta (130 SCRA 654), the Supreme Court held that the
power of taxation is the most absolute of all powers of the government. It has the broadest scope of all the powers
of the government because in the absence of limitations, it is considered as comprehensive unlimited, plenary and
supreme.

a. Comprehensive –as it covers persons, businesses, activities, professions, rights and privileges.
b. Unlimited – In the absence of limitations prescribed by law or the constitution, the power to tax is
unlimited and comprehensive. Its force is
so searching to the extent that the courts scarcely venture to declare that it is subject to any restrictions.
c. Plenary – as it is complete; BIR may avail of certain remedies to ensure collection of taxes
d. Supreme – is so far as the selection of the subject of taxation.

THE LIMITATION OF THE TAXATION POWER

A. Inherent limitations These are restrictions arising from the very nature of the power itself and those limitations
which exist despite the absence of an express constitutional provision.

1. Territoriality of taxation- tax laws cannot operate beyond a State’s territorial limits. Property outside one’s
jurisdiction does not receive any protection from the State.

2. International comity – no country is powerful than the other. Each country observes international comity or
mutual courtesy or reciprocity between them.

3. Public purpose- Tax is intended for the common good. It must be exercised absolutely for public purpose. It
cannot exercise to further any private interest.
4. Exemption of the government – 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.

5. 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 check and
balances,

B. Constitutional Limitations

1. Due process of law – No one should be deprived of his life , liberty or property without due process of law. Tax
laws should neither be harsh or oppressive.

a. 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.

b. 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 assessment and in enforcing collections.

2. Equal protection of the law- No person shall be denied the equal protection of the law. It applies where the
taxpayers are under the same circumstances and conditions.

3. Uniformity rule in taxation-taxpayers under dissimilar circumstances should not be taxed the same.

4. Progressive system of taxation- tax rates increase as the tax base increases.

5. Non-imprisonment for non-payment of debt or poll tax- No one shall be imprisoned because of his poverty and
no one shall imprisoned for mere inability to pay debt.

6. Non-impairment of obligation and contract –It should not set aside its obligations from contracts by the exercise
of its taxation power.

7. Free worship rule- The government adopts free exercise of religion and does not subject its exercise to taxation.

8. Exemption of religious or charitable entities, non profit cemeteries, churches and mosque from property
taxes- The Constitutional exemption from property tax applies for properties actually, directly, and exclusively used
for charitable, religious and educational purposes.

9. Non-appropriation of public funds or property for the benefit of churches, sect or system of religion- this is 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.

10. Exemption from taxes of the revenues and assets of non-profit, educational institution.-The necessity of
education in state building by granting

tax exemption on revenues and assets of non-profit educational institutions.

11. Concurrence of a majority of all members of Congress for the passage of law granting tax exemption- 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.

12. Non-diversification of tax collection - Tax collection should be used only for public purpose. it should never be
diversified or used for private purpose.
13. Non-delegation of the power of taxation- The principle of check and balances in a republican state requires
that taxation power as part of law-making be vested exclusively in congress.

14. Non –impairment of the jurisdiction of the Supreme Court to review tax cases – 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 SC of
the Philippines.

15. 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 representative while Senate may concur with
amendments.

16. 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 constitutional recognition of the local autonomy of local governments and
an express delegation of the taxing power

Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing
authority.

Classification of Individual taxpayers under RA 8424. Otherwise known as the National Internal Revenue Code
(NIRC) also known as the Tax Code.

● Importance /reasons for classification: Individual taxpayers differ among others as to:

- Situs of income

- Manner of computing tax

- Treatment of passive income

- Allowable deductions

- References in the Tax Code

Classification of Individual Taxpayers

1. Resident Citizens (RC)

2. Nonresident citizens (NRC)

3. Resident aliens (RA)

4. Nonresident aliens (NRA)

● Engaged in trade (NRAET)

● Nonresident aliens not engaged in trader or

Business (NRANET)

A. Classification of Individual Taxpayers

1. Resident Citizens (RC) A citizen of the Philippines residing therein. Under the 1987 Constitution, the following
are citizens of the Philippines.

● Those who are citizens of the Philippines at the time of the adoption of this Constitution;

● Those whose fathers or mothers are citizens of the Philippines;

● Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age
of majority; and

● Those who are naturalized in accordance with the law.

2. Non-resident Citizen

● A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein – to the
satisfaction of the Commissioner of Internal Revenue;

• 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 good example would be Overseas Contract
Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit. For
purposes of income tax, a seaman is considered an OCW;
• 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. “Most of the
time” means at least 183 days;
• A citizen who has been previously considered as 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 with respect to his income derived from sources abroad until the
date of his arrival in the Philippines.
• So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July 1,
2016 with the intention of residing permanently in the Philippines, he/she shall be considered a non-
resident citizen for his income from January 1 to June 30, 2016 (prior to his date of arrival) and a resident
citizen for the rest of the year.

3. Resident Alien (RA)

● An alien who lives in the Philippines with no definite intention as to his stay (floating intention);

● 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;

● An alien who has acquired a residence in the Philippines and retains his status as such until he abandons the
same and actually departs from the Philippines.

Non-resident Alien (NRA)

● An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished;

● One who may either be a: (a) NRA engaged in a trade or business (NRAETB) in the Philippines or (b) NRA not
engaged in trade or business (NRANETB) in the Philippines. A NRA who shall come to the Philippines and stay for an
aggregate of more than 180 days shall be deemed a NRAETB.

Applicable Taxes and Tax Rates The applicable taxes for individuals depend on several factors such as but not
limited to:

● Classification of the taxpayer

● Source of Income

● Type of Income

Types of Income
1. Ordinary or regular income

2. Passive income derived from the Philippines sources

3. Capital gains subject to capital gains tax

Ordinary or regular income - refers to income such as compensation income (salaries or wages), business income,
income from practice of profession, income from sale and/ or dealings of property and miscellaneous income and
passive income other than those subject to final taxes and capital gains tax of the Tax Code, as amended.

Self-employed and Professionals (SEP) SEP as defined under RA10963 (TRAIN LAW) as “a sole proprietor or an
independent contractor who reports income earned from self employment. He controls who he works for, how the
work is done and when it is done. It includes professionals whose income is derived purely from the practice of
profession and not under an employer-employee relationship”

Self-employed and Professionals (SEP)

PROFESSIONAL - is defined as a “person formally certified by a professional body belonging to specific profession
by virtue of having completed a required course of studies and/or practice, whose competence can usually be
measured against an established set of standards.

- It also refers to a person who engages in some art or sport for money, as a means of livelihood, rather than as a
hobby. It includes but is is not limited to professional entertainers, professional athletes, directors, producers,
insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other
recipients of professional, promotional and talent fees.

● Self-employment is considered income derived from the conduct of trade or business, hence, classified as
REGULAR OR ORDINARY INCOME.

● But income derive from the conduct of trade or business such as that of SEP is generally subject to TWO types of
taxes ,

1. The income tax (using the graduated tax rate)

2. Business tax (generally either 12% Vat 1% Percentage tax under CREATE Act. (unless exempt under the law)

Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and Inclusion Law (TRAIN Law),
regular income of SEP amounting to more than P250,000.00 in a taxable year but with a gross sales/receipts and
other non-operating income not exceeding the revised vat threshold of P3,000,000 shall have the option to avail of
8% tax on in LIEU of the graduated income tax rate and business tax under Section 116 of the Tax Code, as
amended.

Passive incomes subject to Final Withholding Taxes (FWT) are certain passive incomes from sources within the
Philippines as enumerated under Section 24 (B) and 24(A)(2) of the tax Code as amended. These passive incomes
are not subject to graduated tax rate or basic tax but to specific FWT rates.

The specific passive incomes derived from the Philippines sources that are subject to final withholding taxes are as
follows.

1. Interest income

2. Dividend Income

3. Royalties

4. Prizes
5. Other winnings

*Unless exempt, other passive incomes derived from Philippines but not in the list, if any, as well as passive
incomes derived abroad are subject to basic tax.

Capital Gains Tax Income from sale of capital assets, specifically from sale of shares of stocks of a closely held
corporation (shares domestic corporation not listed in the local stock exchange) and real properties located in the
Philippines are subject to capital gains tax (CGT)

Minimum Wage earners (MWE)

- “Statutory minimum wage earner (SMW) or minimum wage earner (MWE) under RA 9504 shall refer to a worker
in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation
income not more than the statutory minimum wage in the non agricultural sector where she/he is assigned.

- The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). Regional Tripartite Wage and
Productivity Boards (RTWPB) of each region determine the wage rates in the different regions based on established
criteria and shall be the basis of exemption from income tax.

Minimum Wage Earners are exempt from income tax on:

1. Minimum Wage

2. Holiday pay

3. Overtime pay

4. Night shift differential

5. Hazard pay

Sec. 32(B)(7)(E) of the tax Code in relation to PD 851 as amended by RA 10963 (TRAIN LAW) provides;

- 13th month pay and other benefits received by officials and employees of public and private entities are exempt
from income tax and creditable withholding tax on compensation, PROVIDED, however, that beginning January
1,2018, the total exclusion shall not exceed P90,000.

- Otherwise, the excess would form part of an individual’s gross income and would be subject to income tax and
applicable creditable withholding taxes.

An employee who receives/earns additional “compensation” such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable P90,000 (as amended), taxable allowance and other taxable income other than
statutory minimum wage ,overtime pay, holiday pay , night shift differential, hazard pay shall still enjoy the privilege
of being a minimum wage earner.

MWE with additional “business”income Minimum wage earners receiving other income such as income from the
conduct of trade, business or practice of profession, except income subject to final tax, , in addition to
compensation income are not exempted from income tax on their entire income earned during the taxable year.

Hazard Pay Given to Minimum Wage Earners Those on working on hazardous workplaces where primary duty
performed under circumstances in which an accident could result in serious injury or death. The exposures to
hazard which affects the entire population in a locality as air, land water borne noise hazards are COMPENSABLE
under the Regulations.

MINIMUM WAGE EARNER who are receiving hazard pay due to their work is also exempt to tax.
Senior Citizen and Persons with Disabilities (PWDs)- Generally, Senior Citizens and PWDs are subject to income tax
in the same manner as as ordinary individual taxpayer. Hence, qualified Senior Citizens and PWDs deriving
returnable income during the taxable year, whether from compensation or otherwise, are required to file their
income tax returns and pay the tax as they file the return HOWEVER, if the returnable income of a Senior Citizen
/PWD is in the nature of compensation income but he qualifies as a minimum wage earner under RA No. 9504, he
shall be exempt from income tax on the said compensation income subject to the rules provided under RR10-2008
applicable to minimum wage earners,

Benefits for senior Citizens and / or PWDs Senior citizens and/or OWDs , as the case may be, under the law are
entitled to the following benefits.

1. 20% discount and exemption from VAT on their purchase of specified good and services.

2. 5% discount on basic and prime commodities

3. P500 monthly social pension, for indigent senior citizens;

4. Death benefit assistance

5. 5% discount on utilities; and

6. Income tax exemption for minimum wage earners of for senior citizens/PWDs whose annual taxable income is
not more than P250,000.

Co-Ownership, Estates and Trusts

Article 484 of the Civil Code provides that there is co-ownership whichever the ownership of an undivided thing or
right belongs to different persons. The portions belonging to the co-owners in the co-ownership shall be presumed
equal, unless the contrary is proved (Art 485 (CC)

For taxation purposes, there is co-ownership when two or more heirs or beneficiaries inherit an undivided
property from a decedent, or when a donor makes a gift of an undivided property in favor of two or more donees.

Inheritance is subject to “Estate Tax”

Donation is subject to “Donor’s tax”.

= Both taxes are not income taxes but classified as “Transfer Taxes”.

Co-owners are taxed individually on their distributive share in the income of the co-ownership.

Co-ownership itself is not taxable for the reason that the activities of co-ownership are generally limited to
preservation of the common property and the collection of the income therefrom. Should the co-owners invest the
income in business for profit, they would constituting themselves into a partnership and such shall be taxable as a
corporation.

When inherited property remained undivided for more than ten (10) years and no attempt was ever made to
divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust, the
property should be considered as owned by an unregistered partnership, consequently, taxable as corporation.

Part 2- Estate and Trusts

Income Tax of an Estate Income tax of an estate refers to the tax on income received by the estate during the
period of administration or settlement. An “Estates” is a mass of all property, rights and obligations of a deceased
person, which are not extinguished by his death, including those which have accrued thereto since the opening of
succession.
Administration or Settlement Period - refers to the period when title to the properties left by a decedent is not yet
finally transferred to the heirs/beneficiaries. At this period, the executor named by the deceased in his last will and
testament, if any or the administrator appointed by the court, as the case may be , is temporarily in-charge of the
administration of the estate until such time that the estate is finally distributed to the rightful heirs. While under
administration, the estate may earn income, thus, the corresponding income should be paid.

• The properties to be received by his lawful heirs upon his death are not part of their gross income for
purposes of computing the heirs taxable income because it does not come within the definition income

The estate of a decedent may be settled judicially or extrajudicially.

Judicial settlement pertains to settlement of an estate in a court proceedings.

Extrajudicial settlement, the heirs of beneficiaries settle themselves the distribution of the estate or their
inheritance.

Applicable Tax The taxable income of the estate is computed in the same manner as individual taxpayer. The tax
due therefore computed using the graduated income tax rates for individual , likewise, an estate is required to
adopt the calendar year as its accounting period.

- Where prior to the settlement of the estate, the executor or administrator sells property of decedent’s
estate for more than the appraised value place upon it at the decedent’s death, the excess is income
taxable to the estate
- Where the heir sells the property after the settlement, the heir is taxable individually on any profit
derived.

Deduction from estate’s gross income Deductions from the estate’s gross income are the same items of deductions
(business expenses) allowed for individual taxpayers. HOWEVER , in addition to the usual allowable business
expenses, the amount of income of the estate for the taxable year which is properly paid or credited during such
year to any legatee, heir, or beneficiary should be deducted (special deduction) in the determination of the estate’s
taxable income.

Termination of Judicial/Extrajudicial Settlement

*If the heirs still do not divide the property but instead contribute to the estate money , property, or industry with
intention to divide the profits between/among themselves,an unregistered partnership is created and the estate
becomes liable for the payment of corporate income tax.

- But if the heirs, without contributing money property or industry to improve the estate,simply divide the
fruits thereof between/among themselves, a co-ownership is created, and individual income tax is
imposed on the income received by each of the heirs, payable in their separate and individual capacity.

TAXATION OF TRUSTS

Trust is a right on property, real or personal, held by one party for the benefit of another.

It also refers to a legal instrument or device whereby a person called a Trustor or Grantor delivers part or all of his
properties to another person called Trustee or Fiduciary who administer and manages the property/ies for the
benefit of designated person/s called Beneficiaries.

“Person”- can be individual or natural person or juridical person like a corporation.

Trust may be arranged inter-vivos (while alive) or created by will under which title to a property is passed to
another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be
distributed in accordance with the directions of the creator as expressed in the governing instrument.

Subject matter

- Must be clearly identified

- It must be existing,lawful, definite and transferable

- Anything that has an economic value and which a person may own

- To which he may transfer legal title, by gifts or sale.

- Property than can be conveyed such as cash, stocks, bond real property, livestock, growing crops and jewelry

PARTIES TO THE TRUST

1. Trustor - Person who establishes a trust

2. Trustee - One in whom confidence is reposed as regards to property for the benefit of another person

3. Beneficiary - Person for whose benefit trust is created

CLASSIFICATION OF TRUSTS

1. Ordinary Trust- the income and corpus of the trust do not revert to the grantor. The trust income is
accumulated and held for distribution to the beneficiaries.

Ordinary trust is any of the following trusts:

• A trust where the income accumulated or held for future distribution under the terms of a will trust.
• A trust where the income is to be distributed currently by the fiduciary to the beneficiaries.
• A trust where the income is accumulated for the benefit of unborn person or persons with contingent
interest
• A trust where the income collected by a guardian of an infant is held or distributed as the court may
direct;
• A trust where the income is at the discretion of fiduciary, May be either distributed to the beneficiaries or
accumulated.

2. Revocable Trust - a trust where any time, the power to revest in the grantor, title to any part of the corpus of the
trust is vested.

• In the grantor either alone or in conjunction with any person not having a substantial adverse interest in
the disposition of such part of the corpus of the income
• In any person not having a substantial adverse interest in the disposition of such part of the corpus or the
income therefrom.

3. Employees’ Trust - income tax shall not apply to employee’s trust which forms part of pension, stock bonus, or
profit-sharing plan of an employer for the benefit of some or all of his employees.

Consolidated Income Tax Returns (Two or more trusts) Rule when two or more trusts is created by the same
trustor or grantor and the beneficiary is the same person
 1. The taxable income of all the trusts shall be consolidated and the tax computed on such consolidated
income shall be apportioned to different trusts, such that each trusts shall have a share in the income tax
on consolidated income.

Tax apportionment computation

Tax Apportionment = Taxable income of the trust x Consolidated To a Trust Taxable income of all trusts income tax

2. Such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the
trusts administered by him bears to the consolidated income of the several trusts.

Each trust shall pay an income tax still due or payable computed as follows:

Income tax apportioned to a trust Pxxx

Less : Income tax already paid (xxx)

Income tax payable

Filing of Income Tax Returns

The following persons acting in any fiduciary capacity shall file the income tax return for an estate or trust:

● Guardians * Receiver

● Trustees * Conservators

● Executors/administrators

● All other persons or corporations acting in any fiduciary capacity

In case of two or more joint fiduciaries, return filed by one of them shall be sufficient compliance with the
requirements of the tax Code The return and the tax due may be filed and paid in:

• Authorized agent banks

• Revenue District Officer
• Collection agent
• Duly authorized city or municipal Treasurer in which taxpayer has his legal residence or principal place of
business.

INCOME TAX ON CORPORATIONS

CORPORATION - An artificial being created by operation of law, having the right of succession and the powers
attributes and properties expressly authorized by law or incident to its existence. (Section 2 of RA 11232-the
Revised Corporation Code of the Philippines)

The tax Code, as amended under CREATE Act

The term “corporation” shall include

One person corporations,

• Partnership (no matter how created or organized),

 • Joint stock companies
• Joint accounts
• Associations
• Insurance companies
• Mutual fund companies
• Regional operating headquarters of multinational corporations

Excluded in the definition of Corporation, for tax purposes

1. General Professional Partnership (GPP) - formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or business.
2. Joint venture or consortium(an agreement)
- formed for the purpose of undertaking construction projects pursuant to PD 929 to assist local contractors
in achieving competitiveness with foreign contractors by pooling their resources in undertaking big
constructions projects;
- A joint venture or consortium for engaging in petroleum, coal , geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract with the government.

TAX EXEMPT CORPORATIONS

Section 30 corporations include

1. labor, agriculture or horticultural organizations not organized principally for profit;

2. mutual savings banks not having capital stock represented by shares, and cooperative banks without
capital stock organized and operated for mutual purposes and without profit;
3. beneficiary society orders or associations, operating for the exclusive benefit of the members;
4. cemetery company, owned and operated exclusively for the benefit of its members;
5. non-stock corporations or associations operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans;
6. business leagues, chambers of commerce, boards of trade not organized for profit;
7. civic leagues or those organized exclusively for the promotion of social welfare;
8. non-stock and nonprofit educational institutions;
9. government educational institutions;
10. farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies,
mutual or cooperative telephone companies, or like organizations of a purely local character;
11. as well as farmers’, fruit growers’ associations operated as a sales agent for the purpose of marketing the
products of its members.

CLASSIFICATION OF CORPORATIONS

1. Domestic Corporations (DC)

2. Resident foreign corporations (RFC)
3. Nonresident foreign corporations (NRFC)

It is important to properly classify corporate taxpayers because DC are taxable on their income derived from
sources within and without the Philippines while foreign corporations (resident and non-resident) are taxable
only on their income derived from Philippines sources.
INCOME TAXES OF CORPORATION

THREE TYPES OF INCOMEYAX UNDER THE TAX CODE

1. Regular Corporate income tax (RCIT) - also known as BASIC INCOME TAX

2. Final withholding tax (FWT) - or certain passive incomes

3. Capital gains tax (CGT).

• The applicable income tax of a corporation also depends on several factors such as type or classification of
the corporation and the income subject to tax

TYPES OF INCOME

1. Ordinary or regular income

- Refers to income derived from the regular conduct of trade or business income, including incidental income Other
than income subject to final taxes and capital gains tax.

2. Passive income derived from Philippines sources

- Certain types of income derived from sources within the Philippines that are subject to Final Withholding Taxes
(FWT). Specifically, for corporate taxpayers, these incomes pertain only to interest income, royalties and dividends

3. Capital gains subject to capital gains tax

- Are incomes derived from sale of capital assets. Such as Capital gains from sale of shares of stocks of a domestic
corporation not traded in the local stock exchange and Capital gains from sale of real property in the Philippines.

SUMMARY OF INCOME AND THE APPLICABLE INCOME TAX

Regular Income - Regular Corporate Income Tax (RCIT)

Passive Income Phils. - - Final Withholding Tax (FWT)

Capital Gains - - - - - - Capital Gains Tax (CGT)

Under the CREATE Act, domestic corporations (DC) are generally subject to 25% regular corporate income tax (RCIT)
on their regular net income from sources within and without the Philippines. However, if the DC is classified as
MSME (Small and Medium-sized Enterprises), the RCIT rate shall be 20%.

● The RCIT rate applied in the problem was 25% even in the absence of information pertaining the amount of the
domestic corporation’s assets because it’s net taxable income was more than P5M.Thus, the DC will not qualify as
MSME.

● The interest income on bank deposit is not a regular income. It is a “passive income”subject to final tax of 20%.

● The 20% rate of MSMEs under the CREATE Act is a NOT applicable to foreign corporations. Consequently, the
RCIT rate applied in the problem was 25% regardless of the amount of company assets and net income

● Nonresident foreign corporation (NRFC) are subject to 25% income on their “GROSS”income from Philippine
sources (except income subject to CGT and tax -exempt income)
● During the transition period (from TRAIN law to CREATE Act ) the following average tax rates( assume the
Company is using calendar year basis) shall be used:

- 2020 DCs other than MSME : 27.5%

- 2020 MSME: 25%

● The 27.5% RCIT rate is computed by getting the average RCIT rate of 30% for January to June and 25% from July
to December, 2020.

● The 25% RCIT rate for MSMEs is computed by getting the average RCIT rate of 30% for January to June and 20%
from July to december,2020.

● The CREATE Act provides that in the computation of the taxable income during the transition period, there
should be no regard to the dates of the transactions within the calendar year. The income and expenses for the
year shall be considered earned and spent equally for each month or period.

CREATE ACT

On 26 March 2021, the president signed into law Republic Act No. 11534 or the CREATE Act, which is the reconciled
version of the Bicameral Conference Committee. It settled the disagreeing provisions of House Bill No. 4157 and
Senate Bill No. 1357. The CREATE Act was previously known as the Corporate Income Tax and Incentives Reform Act
(CITIRA) bill. The law will become effective on 11 April 2021.

What the law says The CREATE Act amends Republic Act No. 8424 or the National Internal Revenue Code of 1997,
as amended, with the following salient provisions:

INCOMETAX

Reduced corporate income tax: The CREATE Act lowers the corporate income tax rate from 30% to 25% beginning 1
July 2020. Where the corporation’s net income does not exceed PHP 5 million and its total assets do not exceed
PHP 100 million (excluding land where the business is situated), the tax rate shall be 20%. For non-resident foreign
corporations, the tax rate shall be 25% beginning 1 January 2021.

Proprietary educational Institutionsand hospitals: The applicable income tax rate for proprietary educational
institutions and hospitals shall be 1% (previously 10%) imposed on their taxable income beginning 1 July 2020 until
30 June 2023.

Minimum corporate income tax (MCIT): The MCIT shall be imposed at the rate of 1% (previously 2%) beginning 1
July 2020 until 30 June 2023.

Regional operating headquarters (ROHQ): ROHQs shall be subject to the regular corporate income tax beginning 1
January 2022.

Capital gains tax (CGT): The CGT from the sale of shares of stock not traded in the stock exchange shall be 15% for
both resident and non-resident foreign corporations

Value-added tax (VAT) VAT exemption of medicines: The VAT exemption on the sale or importation of drugs and
medicines for cancer, mental illness, tuberculosis and kidney diseases shall begin on 1 January 2021.

VAT exemption of medical supplies and vaccines: The sale or importation of equipment and raw materials for the
production of personal protective equipment for COVID-19 prevention, and all drugs, vaccines and medical devices
used for the treatment of COVID-19 shall be VAT exempt beginning 1 January 2021 until 31 December 2023.
Tax on VAT-exempt persons: VAT-exempt taxpayers, whose gross annual sales do not exceed PHP 3 million, shall
be subject to 1% tax (previously subject to 3% percentage tax) on their gross quarterly sales or receipts beginning 1
July 2020 until 23 June 2023.

Fringe Benefit and Fringe Benefit Tax

- Any goods, service or other benefits furnished or granted by an employer in cash or in kind, other than basic
compensation, by an employer to an individual employee

- In short , it is a form of pay which may be in the form of property, services, cash or cash equivalent to supplement
a stated pay for the performance of services.

Fringe benefits subject to fringe benefit tax cover only those fringe benefits given or furnished to a managerial or
supervisory employee.

- The regulations do not cover those benefits which are part of taxable compensation income because such
incomes are subject to withholding tax on compensation in accordance with RR No.2-98, as amended.

Distinctions of Rank-and file employee from managerial employee

- Managerial employee is one who vested with powers prerogatives to lay down and execute management
policies and/or to hire, transfer, suspend, lay-off, recall discharge, assign or discipline employees, or to
effectively recommend such managerial actions.
- All employees not falling within the definition are considered rank-in-file employees. Section 3(m) of RR 8-
2018 defines rank and file as an employee holding neither managerial nor supervisory position.

Nature of Fringe Benefit Tax

- FBT is a monetary burden imposed by the sovereignty on any good,service, or other benefit furnished or
granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee, other
than a rank-and file employee.
- The FBT is a final tax imposed on the employee withheld by the employer, computed at 35% (beginning
January 1, 2018 or upon the effectivity of TRAIN law)

FBT is effective regardless of whether the employer is an individual , professional partnership or a corporation
(regardless of whether the corporation is taxable or not), the government or its instrumentalities . FBT shall be
withheld and remitted by the employer to the BIR not later than the last day of the month following the close
quarter during which withholding was made.

ITEMS OF FRINGE BENEFITS subject to Tax

Unless exempt, the following items of fringe benefits received by a supervisory or managerial employee shall be
subject to fringe benefit tax;

1. Housing

2. Expense account

3. Vehicle of any kind

4. Household personnel, such as maid, driver and others

5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate
granted.
6.Membership fees,dues and other expenses borne by the employer for the employees in social and athletic clubs
and similar organizations

7. Expenses for foreign travel

8. Holiday and vacation expenses

9. Educational assistance to the employee or his dependents

10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law
allows.

Tax Exempt Fringe Benefits

1.Fringe benefits which are authorized and exempted from income tax under any special law such as:

● Contributions required under SSS law

● Contributions required under GSIS law

● Similar contributions under an existing law

● Premiums from group insurance of employees

2. If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or
profession of the employer

3. De minimis benefits (for later discussion)

4. If grant of benefits is for the convenience or advantage of the employer.

RULLING:

The Supreme Court ruled that the claims are not part of taxable income because no part of the allowances in
question redounded to their personnel benefit, nor were such amounts retained by them.

COMPUTATION OF FRINGE BENEFIT TAX

1. Evaluating the value of the benefit granted or determining the monetary value.

2. Determining the proportion or percentage (gross monetary factor) of the benefit which is subject to the FBT.

3. Determining the grossed-up monetary value of the fringe benefit by dividing the monetary value of the fringe
benefit by the gross monetary value factor; and

4. Multiplying the grossed-up monetary value factor by the FBT rate.

WHAT IS DE MINIMIS BENEFITS IN PHILIPPINES?

- These are benefits given by the company to the employees besides their regular compensation. These are subject
to a law or governed by special laws.

- What is the meaning of this term in taxation?. these terms are incentives or privileges of relatively small value.
Indeed, it is given by the employer to his employees. It is mandated by law or additional compensation according to
the performance to be given to all employees.

It is to recognize their efforts and contributions to the company. It is a small amount added to the compensation
or salary of the employee.
DE MINIMIS benefits NOT SUBJECT TO INCOME TAX A

s well as Withholding tax on compensation income or both managerial and rank and file employees:

1. Monetized unused “vacation leave”credits of private employees not exceeding “10 days”during the year.

2. The convertible value of vacation and sick leave credits paid to government officials and employees.

3. Medical cash allowance to dependents of employees not exceeding 1,500 per semester (6 months ) 250.00 per
month.

4. Rice subsidy of 2 000.00 (replaced the amount of 1500.00) or one sack of 50 kg. Rice per month amount to not
over 2, 000.00

5. Uniform and clothing allowance not exceeding 6 000 per year.

6. Actual medical assistance, e.g., a therapeutic benefit to cover medical and healthcare needs, annual
medical/executive check-ups, maternity assistance, and routine consultations, not exceeding 10 000 yearly.

7. Laundry allowance not exceeding 300 per month

OTHER DEMINIMIS BENEFITS IN PHILIPPINES

1. Employees’ achievement awards, e.g., for a length of service or safety achievement, employees’ achievement
awards must be as tangible personal property other than cash or gift certificates. It has an annual monetary value
not exceeding 10,000 received by the employee under an established written plan. This benefit does not
discriminate in favor of highly paid employees.

2. Any gifts received during Christmas and major anniversary celebrations not exceeding 5 000 per employee once
a year.

3. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage
on per region basis

4. Last, benefits received by an employee by a collective bargaining annual monetary value received from both this
and productivity incentive schemes combined do not exceed 10 ,000 per employee per taxable year.

BIR RULLING

● If not more than P10,000 - considered as de minimis

● If more than P10,000 - the entire amount shall be included in the “other benefits” with P90,000 ceiling

- This ruling shall apply only to benefits under CBA and productivity incentive schemes. CBA may also referred to as
CNA ( collective negotiation agreement)

The foregoing list of de minimis benefits are ALL INCLUSIVE. Meaning, allM other benefits given by employers
which are not included in the enumerations above shall NOT be considered de minimis benefits

Excess of de minimis benefits over their respective ceilings

The amount of de minimis benefits conforming to the ceiling of de minimis benefits shall not be considered in
determining the P90,000 ceiling of “other benefits” excluded from the gross income under Section 32B(7)(e) of the
Code as amended by RA 10963-TRAIN LAW.
- The excess of the de minimis benefits over their respective ceilings prescribed under the regulation shall be
considered as part of other benefits subject to tax only on the excess over P90,000 ceiling.

- Any amount of de minimis benefits in excess of the threshold can still be exempt as “other benefits,” such as;

● 13th month pay, but not to exceed P90,000.

● Christmas bonus

● Productivity incentive bonus

● Loyalty awards

● Gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both
government and private offices.

Business related expenses/ Allowance subject to liquidation

Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bona
fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the
performance of his duties are not compensation subject to withholding, if the following condition are satisfied

● It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the
employee in the pursuit of the trade , business or profession;

● The employee is required to account/liquidate for the forgoing expenses in accordance with the specific
requirements of substantiation for each category of expenses pursuant to Sec. 34 of the tax code.

Representation and Transportation Allowance

Representation and Transportation Allowance (RATA) granted under Sec. 34 of the General Appropriations Act to
certain officials and employees of the government are considered reimbursements for the expenses incurred in the
performance one’s duties rather than as additional compensation. However, the excess of RATA, if not returned to
the employer , constitutes taxable compensation income of the employee

Communication Allowance

Communication Allowance (Phone allowance) granted to employees are not subject from fringe benefit tax and tax
on compensation on the basis that communication allowance is deemed required by the nature of the job of the
employees and deemed necessary to business and redounds to the convenience and benefit

Benefits for the convenience or advantage of the

Employer Benefits or allowances which are intended for the furtherance of the interest of the employer’s business
or to ensure its smooth operations are likewise exempt from income tax. Referred as “CONVENIENCE OF THE

EMPLOYER RULE”

PRIVATE EMPLOYEES

1. The actual value of the monetized unused VL was computed as P600 x 9 while the limit was P600 x 10.

2. The 10 day rule applies only to vacation leaves . Monetization of sick leaves of private employees is taxable.

3. The rice subsidy and laundry allowance were likewise annualized by multiplying their monthly limit by 12. The de
minimis benefits within the limits are exempt from income tax
NOTE:

1. The limit on loyalty or service awards applies only if it is given in kind

2. Only meals for overtime or graveyard shifts are considered de minimis. Other meals benefits are no longer
considered de minimis.