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 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 o 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 following 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
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 while 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
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 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:
a. Income received in advance is taxable upon receipt
b. Deduction for capital expenditures and prepayments is not allowed as effectively
defers the collection of income tax.
c. A lower amount of deduction is preferred when a claimable expense is subject to
limit.
d. 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 b, the
power of taxation, secures itself and the well-being of its people by polio power, and
secures its own properties to carry out its public services by the power of eminent
domain.
These rights, dubbed as "powers" are natural, inseparable, and inherent to even
government.
No government can sustain or effectively operate without thes€ powers. Therefore, the
exercise of these powers by the government is presumec understood and acknowledged
by the people from the very moment they establis} their government. These powers are
naturally exercisable by the governmen 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 th
well-being of the people.
3. Eminent domain is the power of the State to take private property for public use
after paying just compensation.
Comparison of the three powers of the State

Point of Difference Taxation Police Power Eminent Domain

Exercising Authority Government Government Government and
private utilities

Purpose For the support of the To protect the For public use
government general welfare of
the people

Persons affected Community or class of Community or class of Owner of the property

individuals individuals

Amount of Imposition Unlimited (Tax is based Limited (Imposition is No amount

on government needs.) limited to cover cost Imposed. (The
of regulation.) government pays just
compensation.)

1mportance Most important Most superior Important

Relationship with the Inferior to the "Non- Superior to the “Non Superior to the
Constitution Impairment Clause" of -impairment Clause" "Non-impairment
the Constitution of the Constitution Clause" of the
Constitution

Limitation Constitutional and Public interest and Public purpose and

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 a 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 b the
Constitution.
THE LIMITATIONS OF THE TAXATION POWER
A. Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
B. 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 an) church, sect or
system of religion
10.Exemption from taxes of the revenues and assets of non-profit, non-stocl
educational institutions
11.Concurrence of a majority of all members of Congress for the passage oft 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 ta) cases
15.The requirement that appropriations, revenue, or tariff bills shal originate
exclusively in the House of Representatives
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 both 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 United Nations 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 staff 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 th agreements as a matter of mutual
laws.courtesy with the treaty partners even if th same conflicts with its local tax.

➔ Public purpose
Tax is intended for the conunon 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, the 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 taxing 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.
Expectations 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

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 Proces
1. Substantive due process
Tax nust be imposed only for public purpose, collected only under authority of a
valid jaw 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 taxaüon

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:
a. Basic community tax
b. 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 primary 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 insåtutions 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.-directlb-and-exclusi-uely 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 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 b
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) issues 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 cases

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 th 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 ma) concur with
amendments. The origination of a bill by Congress does no 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 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 on services: Service fees are subject to tax where they are rendered.
Illustration
A foreign corporation leases a residential space to a non-resident 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 the place of
sale.
Illustration
While in China, a non-resident 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 was 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 and 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 i
residing in the Philippines.
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 t discourage or prohibit undesirable activities
or occupation. As such, 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.O. 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 Mining Corporation vs. CIR, GR. 125704)
Exceptions:
a. 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
b. Cases of obvious overpayment of taxes
c. 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 b 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 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 of
the law by public officers do not block the 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 unles
there is a 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.
(Iloilo, 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. (Ibid)
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 Batangas, 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:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation
1. Direct double taxation
This occurs when all the element of double taxation exists for both impositions.
2. Indirect double taxation
This occurs when at least one of the secondary elements of double taxation is not
common for both impositions. Examples:
a. 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.
b. The national government collects income tax from a taxpayer on his income while
the local government collects community tax upon the same income. c. The
Philippine government taxes foreign income of domestic corporations and resident
citizens while a foreign government also taxes the same income (international
double taxation).
c.

Nothing in our law expressly prohibits double taxation. In fact, indirect double
taxation is prevalent 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 o the
following:
a. Provision of tax exemption - only one tax law is allowed to apply to the tm object
while the other tax law exempts the same tax object
b. Allowing foreign tax - both tax laws of the domestic country and 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
c. Allowing reciprocal tax treatment- provisions in tax laws imposing a reduce( tax
rates or even exemption if the country of the foreign taxpayer also give the same
treatment to Filipino non-residents therein
d. Entering into treaties or bilateral agreements - countries may stipulate for lower
tax rates 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
A. Those that result to loss of government revenue
1. 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:
a. This can be achieved by gross understatement of income, non-declaration of
income, overstatement of expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take advantage of lower
taxes.
2. 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:
a. Selection and execution of transaction that would expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or tax credits
c. Careful tax planning
3. Tax exemption, also known as tax holiday, refers to the immunity, privilege or
freedom from being subject to a tax which others are subject to. 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.

B. 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
A. 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.
B. Backward Shifting - This is the reverse of of forward shifting. Backward shifting
is common -with non-essential commodities where buyers have considerable
market power and commodities with numerous substitute products.
C. 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 rates
3.Transformation taxpayer to form - 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. Condonatiff
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.
CHAPTER 2
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:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code
2. Tax exemption laws - These are laws that grant certain immunity from taxation.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)
c. Barangay Micro-Business Enterprise (BMBE) Law
d. 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 up4 recommendation of the
Commissioner of Internal Revenue (CIR) that specify prescribe, or define rules and
regulations for the effective enforcement of tilt' provisions of the National Internal
Revenue Code (NIRC) and related statutes.
Revenue regulations are formal pronouncements intended to clarify or explain the
law and carry into effect its general provisions by providing details of administrati o4 and
procedure. Revenue regulation has the force and effect of 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 CIR may issue from time to time for the
purpose of providing taxpayers guidance on the tax consequences in specific
situations. BM 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

 Revenue Bulletins (RB)

refer to periodic issuances, notices, and official announcements of the

Commissioner of 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.

 BIR 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 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 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

A. As to purpose
1. Fiscal or revenue tax - a tax imposed for general purpose
2. Regulatory - a tax imposed to regulate business, conduct, acts transaction
3. Sumptuary - a tax levied to achieve some social or economic objective
B. As to subject matter
1. Personal, poll or capitation - a tax on persons who are residents of 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 enjoyment of
a privilege or engagement in an occupation
C. As to incidence
1. 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.
 2. 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.
D. 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 object

E. As to rate

1. 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.
2. 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.
3. 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.
4. Mixed tax - This tax manifest tax rates which is a combination of any of the above
types of tax.
F. As to imposing authority
1. National tax imposed by the national government
Examples:
a. Income tax - tax on annual income, gains or profits
b. Estate tax - tax on gratuitous transfer of properties by a decedent upon death
c. Donor's tax - tax on gratuitous transfer of properties by a living donor
d. Value Added Tax - consumption tax collected by VAT business taxpayers
e. Other percentage tax - consumption tax collected by non-VAT business
taxpayers
f. 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.
g. 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.
2. Local tax - tax imposed by the municipal or local government
Examples:
a. Real property tax
b. Professional tax
c. Business taxes, fees, and charges
d. Community tax
e. Tax on banks and other financial institutions
DISTINCTION OF TAXES WITH SIMILARITIES
 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.
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 toll
is dependent upon the value of the property leased.
Both the government and private entities impose toll, but private entities cunt
impose taxes.

 Tax vs. Debt

Tax arises from law while debt arises from private contracts. Non-payment of tai
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 pogo) 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
taxpayersthan 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 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 a progress. taxation,
the Philippines has a dominantly regressive tax system due prevalence of business taxes.
TAX COLLECTION SYSTEMS
A. Withholding system on income tax - Under this collection system, the pair of the
income withholds or deducts the tax on the income before releasing same to the payee
and remits the same to the government.
The following the withholding taxes collected under this system:
1. Creditable withholding tax
a. 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
b. Expanded withholding tax - 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 taxpayer and also provides for a
possible third-party check for the BIR of noncompliant 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
high risk of noncompliance.
Similarities of final tax and creditable withholding tax
a. In both cases, the income payor withholds a fraction of the income and remits the
same to the government.
b. By collecting at the moment cash is available, both serve to minimize cash flow
problems to the taxpayer and collection problems to the government.

Differences between FWT and CWT

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

B. 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.

C. 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:
a. Withholding tax on compensation withheld by employers
b. Expanded withholding taxes withheld by suppliers of goods or services
 The taxpayer shall pay to the government any tax balance after such credit or claim
refund or tax credit for excessive tax withheld.
D. Assessment or enforcement system - Under this collection system, the government
identifies noncompliant 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.
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 – requires that the sources of government funds must be stiff
to cover government costs. The government must not incur a deficit. A budget deficit
paralyzes the government's ability to deliver the essential public service for the people.
Hence, taxes should increase in response to increase in government spending

 Theoretical justice - or equity suggests that taxation should consider the tax ability
to pay. it also suggests that the exercise of taxation should not be oppressive,
unjust,or confiscatory

 Administrative feasibility - suggests that tax laws should be capable of efficient

and effective administration to encourage compliance. Government should make
easy for the taxpayer to comply by avoiding administrative bottlenecks ah11 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 th e Bureau
of Internal Revenue which is under the supervision and administration 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:
a. Operations group
b. Legal Enforcement group
c. Information Systems Group
d. 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:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the MR
3. To obtain information and to summon, examine, and take testimony of persons to
effect tax collection

Purpose: For the CIR to ascertain:

a. The correctness of any tax return or in making a return when none has been made
by the taxpayer
b. The tax liability of any person for any internal revenue tax or in correcting any
such liability
c. Tax compliance of the taxpayer
Authorized acts:
a. To examine any book, paper, record or other data relevant to such inquiry
b. To obtain on a regular basis any information from any person other than the
person whose internal revenue tax liability is subject to audit
c. 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 records to produce such books, papers, records or other data and to
give testimony
d. To take testimony of the person concerned, under oath, as may be relevant or
material to the inquiry
e. To cause revenue officers and employees to make canvass of any revenue district

4. To make an assessment and prescribe additional requirement for t4 administration

and enforcement
5. 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 t axi notwithstanding any law
 requiring the prior authorization of any government agency or instrumentality. Failure to
file a return shall not prevent the CHI 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 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:
 The taxpayer failed to issue receipts; or
 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
similar business under similar circumstances adjusted for other relevant information.
8. To terminate tax period when the taxpayer is:
a. Retiring from business
b. Intending to leave the Philippines
c. Intending remove, hide, or conceal his property
d. Intending to perform any act tending to obstruct the proceedings for the
collection of the tax or render the same ineffective
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 value.
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:
a. Zonal value prescribed by the Commissioner
b. Fair market value as shown in the schedule of market values of the
Provincial and City Assessor's Office
The N1RC previously used the assessed value which is merely a fraction of the fair market
value. 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 tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer's claim of financial incapacity to pay tax in an application for
tax compromise
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 t, Department of
Finance. The failure of the Secretary of Finance to act ' 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 toi 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 :
a. Assessments are issued by the regional offices involving basic deficiency tax of
P500,000 or less , and
b. Minor criminal violations discovered by regional and district officials

Composition of the Regional Evaluation Board

a. Regional Director as chairman Т
b. Assistant Regional Director
c. Heads of the Legal , Assessment and Collection Division
d. Revenue District Officer having jurisdiction over the taxpayer
4. 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 function shall not
remain in the same assignment for more than 3 years
3. Revenue officers assigned to perform assessment and collection function shall not
remain in the same assignment for more than 3 years

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 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 thru 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
5. Fiscal Incentives Review Board

Bureau of Customs (BOC )

Aside from its regulatory functions , the Bureau of Customs is tasked to administer
collection of tariffs on imported articles and 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 (BOI )

The 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 is composed of five full -time governors , excluding the DTI secretary as its
chairman . The President 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 is 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 , exemption from agency import and export taxes including
local taxes . The PEZA is also an attached 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 imposed and collect various
local taxes , fees and charges to rationalize their fiscal autonomy .
The special tax treatments of BOI-registered or PEZA-registered enterprises
including the local taxes imposed by local governments will be discussed under Local
& Preferential Taxation by the same author .

Fiscal Incentive Review Board (FIRB )

FIRB has 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 grant 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 into
:
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

Criteria for Large Taxpayers

A. As to payment
1. Value Added Tax - At least P200,000 per quarter for the preceding year
2. Excise Tax - At least P1,000,000 tax paid for the preceding year
3. Income Tax - at least P1,000,000 annual income tax paid for the preceding
year
4. Withholding Tax - At least P1,000,000 annual withholding tax payments or
remittances from all types of withholding taxes
5. Percentage tax at least P200,000 percentage tax paid or payable per quarter
for the preceding year
6. Documentary stamp tax - At least P1,000,000 aggregate amount per year

B. As to financial conditions and results of operations

1. Gross receipts or sales P1,000,000,000 total annual gross sales or receipts
2. Net worth P300,000,000 total net worth at the close of each calendar or
fiscal year
3. Gross purchases P800,000,000 total annual purchases for the preceding
year
 4. 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 group of companies of a large
taxpayer
3. Surviving company in case of merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of spin - off of any large
taxpayer
5. Corporation with an authorized capitalization of at least P300,000,000 registered with
the SEC
6. Multinational enterprises with an authorized capitalization or assigned capital of at
least P300,000,000
7. Publicly listed corporations
8. Universal , commercial , and foreign banks ( the regular business unit and foreign
currency deposit unit shall be considered one taxpayer for purposes of classifying them
as large taxpayer
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking
insurance , telecommunication , utilities , petroleum , tobacco , and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals
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 term. 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
Capi tal mea ns a ny we alth or p rop ert y. Gro s s inc ome is a r etu rn o n wea lth o r property that increases
the taxpayer's net worth.

The r e t u r n o n c a p i t a l that increases net worth is income subject to income tax. R e t u r n o f c a p i t a l

m e r e l y m a i n t a i n s n e t w o r t h ; h e n c e , i t i s n o t t a x a b l e . A n improvement in net worth indicates an ability
to pay tax.
Capital items deemed with infinite value
There are capital items that have i n f i n i t e v a l u e a n d a r e i n c a p a b l e o f p e c i n i a r y valuation. Anything
received as compensation for their loss is deemed a re tu rn o f capital.
Examples:
1 . L i f e
2 . Health
3 . Human reputation

Life
T h e v a l u e o f l i f e i s i m m e a s u r a b l e b y m o n e y . U n d e r S e c . 3 2 o f t h e N I R C , t h e proceeds of life
insurance policies paid to the heirs or beneficiaries upon 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 f r o m t h e l i f e i n s u r a n c e o f

a n o f f i c e r o r a n y p e r s o n d i r e c t l y i n t e r e s t e d w i t h h i s t ra d e a re lik e w i s e ex e m pt . Th e s e p r oc e e ds a r e
v i e w e d as a d v an c e d re c o v er y o f future loss.

However, the following are taxable return on capital from insurance policies :
a. Any excess amount received over premiums paid by the insured upon
surrender or maturity of the policy (i.e. the insured outlives the policy.)
b. G a i n r e a l i z e d b y t h e i n s u r e d f r o m t h e a s s i g n m e n t o r s a l e o f h i s i n s u r a n c e policy
c. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premium payments by an
assignee of a life insurance policy

Health
A n y c o m p e n s a t i o n r e c e i v e d i n c o n s i d e r a t i o n f o r t h e l o s s o f h e a l t h s u c h a s compensation for
personal injuries or tortuous acts is deemed a return of capital.

Human Reputation
T h e v a l ue o f o n e ' s rep u t a t io n c a nn o t b e me a s u r ed f i n an c i al l y. A n y i n d em n i ty received as
compensation for its impairment is deemed a return of capital exempt from income tax.

Examples include moral damages received from:

a. Oral defamation or slander
b. Alienation of affection
c. Breach of promise to marry

Recovery of lost capital vs. Recovery of lost profits

The loss of capital results in 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:

a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement sui t

REALIZED BENEFIT
The "benefit" concept
The term "benefit" means any form of advantage derived by the taxpayer. There is 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, hence, not taxable:

a. Receipt of a loan - properties increase but obligations also increase resulting in an offsetting effect in
net worth.
b. Discovery of lost properties - under the law, the finder has an obligation to return the same to
the owner.
c. Receipt of money or property to be held in trust for, or to be remitted to,
another person.

If t h e t a xp a y er is e n t it l e d t o k ee p f o r h is ac c o u n t po r t io n o f a r ec e i p t, o n ly th a t portion is a benefit.

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 of 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:
a . S a l e
b . Barter

These are referred to as "onerous transactions".

2. Unilateral transfers, such as:

a. Succession - transfer of property upon death
b. Donation

These are also referred to as "gratuitous transactions".

Under current usage, unilateral transfers are simply referred to as " t r a n s f e r s " while bilateral transfers are
called " e xc h a n ge s . " Benefits derived from onerous transa cti on s are " earn ed o r rea li zed" ; henc e, the y
are s ubj ect to in com e tax. Ben efi ts d eri ved f rom gra tui tou s tr ans a ctio ns a re n ot re al ize d bec aus e of
the absence of an earning process. Benefits derived from gratuitous transactions are subject to transfer tax, not
income tax.

3. Complex transactions
C o m p l e x t r a n s a c t i o n s a r e p a r t l y g r a t u i t o u s a n d p a r t l y o n e r o u s . T h e s e a r e commonly referred to as
"transfers for less than full and adequate consideration". T h e g r a t u i t o u s p o r t i o n o f t h e t r a n s a c t i o n i s
s u b j e c t t o t r a n s f e r t a x w h i l e t h e benefit from the onerous portion is subject to income tax.

The excess of fair value over 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 w h i l e j u r i d i c a l p e r s o n s
a r e t h o s e c r e a t e d b y l a w s u c h a s p a r t n e r s h i p s a n d corporations. An entity may be a taxable
entity or an exempt entity. A ta xable item of gross income arises from transactions which involve
another natural or juridical entity.
Gains or income derived between relatives, corporations, and between a part ner a n d t h e p a r t n e r s h i p a r e
t a x a b l e s i n c e i t i s m a d e b e t w e e n s e p a r a t e e n t i t i e s . Likewise, the income between affiliated
companies such as between a holding or parent company and its subsidiaries and between sister
companies are taxable b e c a u s e e a c h c o r p o r a t i o n i s a s e p a r a t e e n t i t y . T h i s a p p l i e s r e g a r d l e s s o f
t h e underlying economic relationship.

However, the sales of a home office to its branch office are not taxabl e 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 t a x a b l e u p o n t h e s a m e o w n e r . N o t e t h a t a p r o p r i e t o r s h i p b u s i n e s s i s
n o t a juridical entity.

Benefits in the absence of transfers

The increase in wealth of the taxpayer in the form of appreciation or increase t h e v a l u e o f h i s p r o p e r t i e s
o r d e c r e a s e i n t h e v a l u e o f h i s o b l i g a t i o n s i n t h e 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:

a. Increase in value of investments in equity or debt securities
b. Increase in value of real properties held (revaluation increment)
c. Increase in value of foreign currencies held or receivable
d. Decrease in value of foreign currency denominated debt by virtue of favorable
fluctuation in exchange rates
e. Birth of animal offspri ng, accruals of fruits in an orchard orgrowth of f a r m
vegetables
f. Increase in value of land due to the discovery of mineral reserves

Rendering of services
The rendering of services for a consideration is an exchange but does not c a u s e a
loss of capital. Hence, the entire consideration received from rendering of services
such as compensation income or service fees is an item of gross income.

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

N o r m a l l y , t a x p a y e r s w i l l h a v e t h e a b i l i t y t o p a y t a x w h e n t h e i r i n c o m e 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.
Inco me r eal ize d in n o n - ca sh p rop ert ies are, in eff ect, rec eiv ed i n cash b ut t he 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 consideration.

Mode of Receipt/Realization Benefits

Taxable items of income may be realized by the taxpayer in two ways:
1. Actual receipt
A ctual re ce ipt involves actual physical taking of the income in the form of cash
or property
2. Constructive receipt
C o n s t r u c t i v e r e c e i p t involves no actual physical taking of the income but the
taxpayer is effectively benefited.

Examples:
a. Offs et o f de bt of the t axpa yer in co ns ide rat i on fo r th e sal e of goo ds or
service
b. Deposit of the income to the taxpayer's checking account
c. Matured detachable interest coupons on coupon bonds not yet encas hed
by the taxpayer
d. Increase in the capital of a partner from the profit of the partnership

Inflow of wealth without increase in net worth

T h e i n f l o w o f w e a l t h t o a p e r s o n t h a t d o e s n o t i n c r e a s e h i s n e t w o r t h i s n ot income due to the
total absence of benefit.

Examples:
a. Receipt of property in trust
b. B o r r o wi n g o f m on e y u n d e r a n ob l i ga t i o n to r et u r n

In law, the proceeds of embezzlement or swindling where money is taken without an original intention to
return are considered as income because of the increase in 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. Revenue s 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. I n c o m e o f f o r e i g n g o v e r n m e n t s a n d f o r e i g n g o v e r n m e n t - o w n e d a n d controlled
corporations
7. Income of international missions and organizations with income tax immunity

Items of gross income that are exempted from taxation are discussed extensively under Exclusions in Gross
Income in Chapter 8.

TYPES OF INCOME TAXPAYERS

A. Individuals
1. C i t i z e n
a. Resident citizen
b. Non-resident citizen

2. Alien
a. Resident alien
b. Non-resident alien
a. engaged in trade or business
b. not engaged in trade or business
3. T a xa b l e es t a t es a nd t r u s t s

B. Corporations
1. Domestic corporation
2. F oreign corpora tion
a. Resident foreign corporation
b. Non-resident foreign corporation

INDIVIDUAL INCOME TAXPAYERS

Citizens
Under the Constitution, citizens are:
a. Those who are citizens of the Philippines at the time of adoption of the
 Constitution on February 2, 1987
b. Those whose fathers or mothers are citizens of the Philippines
c. Those born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority
d. Those who are naturalized in accordance with the law

Classification of citizens:

A. Resident citizen - A Filipino citizen residing in the Philippines

B. Non-resident citizen includes:
1. 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;
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for an employment on a
permanent basis;
3. A citizen of the Philippines who works and derives income from abroad a n d w h os e
e m p l o ym e n t th e r ea t re q u i r es h i m t o b e ph ys i c a l ly p r e se n t abroad most of the time
during the taxable year;
4. A citizen who has been previously considered as non -resident citizen and who arrives in the
Philippines at anytime 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.

t
Alien
A. Resident alien - an individual who is residing in the Philippines but is not a citizen thereof, such as:

1. An alien who lives in the Philippines without definite intention a s to his stay; or s
2. O n e w h o c o m e s t o t h e P h i l i p p i n e s f o r a d e f i n i t e p u r p o s e w h i c h i n i t s nature would
require an extended stay and to that end makes his horne 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 a s
such until he abandons the same or actually departs from the Philippines.
 B. 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:
a. Aliens who come to the Philippines for a definite purpose which in its
nature may be promptly accomplished;
b. A l i e n s wh o s h a ll c o me t o th e P h i li p p in e s an d st a y t he r e i n f o r a n
aggregate period of not more than 180 days during the year

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention

The i nte nti on o f th e t axpa yer reg ard ing the natu re of his sta y wi t hin o r o u t s i d e t h e P h i l i p p i n e s
s h a l l d e t e r m i n e h i s a p p r o p r i a t e r e s i d e n c y classification. The taxpayer shall submit to the CIR of 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 n ot result in the reclassification of the
taxpayer's normal residency. Documents purporting a long-term stay such as immigration visa or working
visa for an extended p e r i o d w o u l d r e s u l t i n t h e a u t o m a t i c r e c l a s s i f i c a t i o n o f t h e t a x p a y e r ’ s
residency.

Examples:

a. An alien is normally non-resident. An alien who come to the Philippines with a tourist visa would still
be classified as non-resident alien.

b. A citizen is normally resident. A citizen who would go abroad under a tourist visa would still be
considered a resident citizen.

c. An alien who come to the Philippines with an immigration visa would be reclassified as a
resident alien upon his arrival.

d. A c i t i z e n w h o w o u l d g o a b r o a d w i t h a t w o - y e a r w o r k i n g v i s a w o u l d b e reclassified as
a non-resident citizen upon his departure.

2. Length of stay
I n d e f a u l t o f s u c h d o c u m e n t a r y p r o o f , t h e l e n g t h o f s t a y o f t h e t a x p a y e r i s considered:
a. Citi zen s st ay ing a bro ad fo r a pe rio d of a t l east 183 day s are con side red non-resident.
b. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year
are considered resident.
c. A l i e n s w h o a r e s t a y i n g i n t h e P h i l i p p i n e s f o r n o t m o r e t h a n 1 y e a r b u t more than
180 days are deemed non -resident aliens engaged in business.
d. A l i e n s w h o s t a y e d i n t h e P h i l i p p i n e s f o r n o t m o r e t h a n 1 8 0 d a y s a r e considered
non-resident aliens not engaged in trade or business.

Taxable Estates and Trusts

1. Estate
E s t a t e r e f e r s t o t h e p r o p e r t i e s , r i g h t s , a n d o b l i g a t i o n s o f a d e c e a s e d p e r s o n s not
extinguished by his death.

E s t a t e s u n d e r j u d i c i a l s e t t l e m e n t a r e t r e a t e d a s i n d i v i d u a l t a x p a y e r s . T h e es t at e i s
t axabl e on t he incom e of the properties left by the decedent. Estat e s u n d e r e x t r a j u d i c i a l
s e t t l e m e n t a r e e x e m p t e n t i t i e s . T h e i n c o m e o f t h e properties of the estate under
extrajudicial settlement is taxable to the heirs.

2. T r u s t

A trust i s an a rrang e m ent whereby on e p erson (gran tor or trust or) t ransf ers ( i . e . d o n a t e s )
p r o p e r t y t o a n o t h e r p e r s o n ( b e n e f i c i a r y ) , w h i c h w i l l b e h e l d under the management of a
third party (trustee or fiduciary).

A t r u s t t h a t i s i r r e v o c a b l y d e s i g n a t e d b y t h e g r a n t o r i s t r e a t e d i n t a x a t i o n a s i f it is an individual
taxpayer. The income of the property held in trust is taxable t o t he t rust . Trust s t hat are
desi gnat ed as revocabl e by the grant or are not taxable entities and are not considered as
individual taxpayers. The income of prope rt i es hel d under revoc abl e t rust s i s t axabl e t o t he
grant or not t o the trust.

When the trust agreement is silent as to revocability of the trust, the trust is presumed to be
revocable.
CORPORATE INCOME TAXPAYERS
T h e t e r m ' c o r p o r a t i o n ' s h a l l i n c l u d e o n e p e r s o n c o r p o r a t i o n s ( O P C s ) , partnerships,
no matter how created or organized, joint -stock companies, joint a c c o u n t s , a s s o c i a t i o n , o r
insurance companies, except general professional partnerships and a joint venture or
c o n s o r t i u m f o r m e d f o r t h e p u r p o s e o f undertaking construction projects or engaging in
petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium
agreement under service contract with the government.

Hence, the term corporation includes profit -oriented and non-profit institution s u c h a s
c h a r i t a b l e i n s t i t u t i o n s , c o o p e r a t i v e s , g o v e r n m e n t a g e n c i e s a n instrumentalities,
associations, leagues, civic or religious and other organizations

Domestic Corporation
A d o m e s t i c c o r p o r a t i o n i s a c o r p o r a t i o n t h a t i s o r g a n i z e d i n a c c o r d a n c e w i t h Philippine
laws. It includes one-person corporations (OPC) owned and registered by resident citizens in the
Philippines.

Foreign Corporation
A foreign corporation is one organized under a foreign law.

Types of foreign corporations:

1. Resident foreign corporation (RFC) - a foreign corporation which operates and conducts
business in the Philippines through a permanent establishment (i.e.
a branch).
2. N o n - r e s i d e n t f o r e i g n c o r p o r a t i o n ( N R F C ) - a foreign corporation which does not operate
or conduct business in the Philippines

Note:
1. A corporation that incorporates 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 to
residents outside its branch, it is taxable as a non-resident foreign corporation on the direct
transactions.
3. An individual that 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
S p e c i a l c o r p o r a t i o n s a r e d o m e s t i c o r f o r e i g n c o r p o r a t i o n s w h i c h a r e s u b j e c t t o special tax rules or
preferential tax rates.
OTHER 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.

B a n k s a nd q u a s i - b a nks , p r en e e d, t r us t, in s ur a n c e, p u bl i c a nd pu bl i c l y - l is t e d c o m p a n i e s , a n d
n o n - c h a r t e r e d G O C C s m a y n o t i n c o r p o r a t e a s O n e - p e r s o n 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 c o n t r i b u t e t h e i r

i n d u s t r y o r r e s o u r c e s t o a c o m m o n f u n d f o r t h e p u r p o s e o f dividing the profits from the venture.

Types of partnership
a ) G e n e r a l p r o f e s s i o n a l p a r t n e r s h i p (GPP)

A G P P i s a p a r t n e r s h i p f o r m e d b y p e r s o n s f o r t h e s o l e p u r p o s e o f exercising a
common profession, no part of the income of which is derived from engaging in any trade or business.

A G P P i s n o t t r e a t e d a s a c o r p o r a t i o n a n d i s n o t a t a x a b l e e n t i t y . I t i s exempt from
income tax, but the partners are taxable in their individual capacity with respect to their share in
the income of the partnership.

b) Business partnership

A b u s i n e s s p a r t n e r s h i p i s o n e f o r m e d f o r p r o f i t . I t i s t a x a b l e a s a corporation.

Examples:
a. A p ar t n er s h ip b e t we en A tt y. M e n d oz a, a l aw y e r, a n d M ar k S a n tos , a n accountant,
to practice in taxation advisory services would be a business partnership since the two
partners are not in the same profession.
b. A partnership between accountants Khim and Vhinson to venture into a beauty
p a r l o r w o u l d b e a b u s i n e s s p a r t n e r s h i p s i n c e t h e v e n t u r e i s n o t i n practice of a
common profession.
c. A partnership between accountants Juan and Miguel to venture into audit services
would be a general professional partnership.
 d. Dentists Wency and Andy partnered to operate a dental clinic. During slack season, they
are converting their clinic into a beauty saloon. Their partnership is a business partnership
since it is earning income from business.

3. 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:

a. Exempt joint ventures

E x e m p t j o i n t v e n t u r e s are those formed for the purpose of undertaking
c o n s t r u c ti o n p ro j e c t s o r e n g a g i n g i n p e t r o l eu m , c oa l , g e o t h e r m a l a n d 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 their venturers are taxable to their share in the net
income of the joint venture.

b. Taxable joint ventures

All other joint ventures are taxable as corporations.

4. Co-ownership
A c o - o w n e r s h i p i s j oi n t o w n er s h ip of a p ro p e r t y fo r m ed f o r t h e p u rp o s e of preserving the same
and/or dividing its income.

A co-ownership that is limited to property preservation or income collection i s n ot a t a x ab l e e n t it y

a n d i s e x em p t b u t th e c o - o w n er s a r e ta x a ble o n t h e i r share on the income of the co-owned property.

However, a co-ownership that reinvests the income of the co -owned property t o o t h e r i n c o m e -

p r o d u c i n g p r o p e r t i e s o r v e n t u r e s w i l l b e c o n s i d e r e d a n unregistered partnership taxable as a
corporation.

THE GENERAL RULES IN INCOME TAXATION

Taxable on income earned

Within
 Taxable on income earned

Individual taxpayers Within Without

Resident citizen ✓ ✓
Non-resident citizen ✓

Resident alien ✓

Non-resident alien ✓

Corporate taxpayers

Domestic corporation ✓ ✓
Resident foreign corporation ✓

Non-resident foreign corporation ✓

Note:
1. Consistent with the territoriality rule, all taxpayers, e x c e p t r e s i d e n t c i t i z e n s a n d d o m e s t i c
corporations, are taxable only on income earned within the Philippines.
2. The NIRC uses the term " w i t h o u t t h e P h i l i p p i n e s " to mean outside the Philippines.

The Residency and Citizenship Rule

T a x p a y e r s w h o a r e r e s i d e n t s a n d c i t i z e n s o f t h e P h i l i p p i n e s s u c h a s r e s i d e n t citizen and
domestic corporations are taxable on all income from sources within a n d w i t h o u t t h e
P h i l i p p i n e s . A c o r p o r a t i o n i s a c i t i z e n o f t h e c o u n t r y o f 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 ben efits from the P h i l i p p i n e
g o v e r n m e n t c o m p a r e d t o a l l o t h e r c l a s s e s o f t a x p a y e r s b y v i r t u e o f their proximity to the Philippine
government.

U n d e r o u r l a w s , r e s i d e n t c i t i z e n s a n d d o m e s t i c c o r p o r a t i o n s e n j o y p r e f e r e n t i a l privileges over
aliens. Also, between resident and non -resident citizens, r esident citizens have full access of the public
services of our government because they are in the country. The taxation of foreign income of resident
citizens and domestic c o r p o r a t i o n s p r o p e r l y r e f l e c t s t h i s d i f f e r e n c e i n b e n e f i t s c o n s i s t e n t w i t h
the Benefit Received Theory.

The extra-territorial tax treatment of resident citizens and domestic corporations is also
i n t e n d e d a s a s a f e t y n e t t o t h e p o t e n t i a l l o s s o f t a x r e v e n u e s b r o u g h t b y 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
c o r p o r a t i o n s e x p o s e s t h e s e t a x p a y e r s t o d o u b l e t a x a t i o n . H o w e v e r , t h e N I R C allows a tax credit
for taxes paid in foreign countries. In fact, resident citizens and d o m e s t i c c o r p o r a t i o n s p a y m i n i m a l
t a x e s i n t h e P h i l i p p i n e s o n t h e i r f o r e i g n income because of the tax credit.

SITUS OF INCOME
The situs of income is the place of taxation of income. It is the jurisdiction tha t has the authority to impose
tax upon the income.

Situs of income vs, source of income

S i t u s o f i n c o m e s h o u l d b e d i f f e r e n t i a t e d f r o m t h e s o u r c e o f i n c o m e . T h e l a t t e r pertains to the
activity or property that produces the income.
S i t u s i s i m p o r t a n t i n d e t e r m i n i n g w h e t h e r o r n o t a n i n c o m e i s t a x a b l e i n t h e Philippines. Situs is
particularly important to taxpayers taxable only on i n c o m e w i t h i n . H o w e v e r , i t i s a l s o i m p o r t a n t t o
t a x p a y e r s t a x a b l e o n g l o b a l i n c o m e for purposes of the computation of the foreign tax credit.
INCOME SITUS RULES
Types of Income Place of Taxation (situs)
1. Interest Income Debtor’s residence
2. Royalties Where the tangible is employed
3. Rent Income Location of the property
4. Service Income Place where the service rendered

Resident citizen or domestic corporation taxpayers would be taxable on the world i n c o m e w h i l e o t h e r

t a x p a y e r s w o u l d b e t a x a b l e o n l y o n t h e i n c o m e f r o m w i t h i n the Philippines.
OTHER INCOME SITUS RULES

A. Gain on sale of properties

1. Personal property
✓ Domestic securities - presumed earned within the Philippines
✓ O t h e r p e r s o n a l p r o p e r t i e s - e a r n e d i n t h e p l a c e w h e r e t h e p r o p e r t y i s sold
2. Real property - earned where the property is located

B. Dividend income from:

1. Domestic corporation - presumed earned within
2. Foreign corporation
a) R e s i d e n t f o r e i g n c o r p o r a t i o n - depends on the pre-dominance test

The pre-dominance test

If the ratio of the Philippine gross income over the world gross income of t he r e s i de n t
f o r e i gn c o r po r a ti o n in t he t h r ee - y ea r p e r iod p re c e di n g t he year of dividend
declaration is:
✓ At least 50%, the portion of the dividend corresponding to the
Philippine gross income ratio is earned within
✓ Less than 50%, the entire dividends received is earned abroad

b) Non-resident foreign corporation - earned abroad

C. Merchandising income - e a r n e d w h e r e t h e p r o p e r t y i s s o l d

D. Manufacturing income - earned where the goods are manufactured and sold

Operations Remark

Production Distribution
Within Within Total income from production and distribution is earned within the
Philippines
 Without Without Total income from production and distributionis earned without the
Philippines

Within Without Production income is earned within, Distribution income is earned without

Without Within Distribution income is earned within, Production income is earned without

Note to readers:
Readers are advised to master the situs rules as this have a significant effect
on your comprehension of advanced tax rules to be introduced in succeeding
chapters.
CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND REPORTING

INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation
An item of gross income is taxable in any of these tax schemes.
ITEMS OF GROSS INCOME
TAXABLE TO ANYONE OF:
I. Final Income Taxation
II. Capital Gains Taxation
III. Regular Income Taxation

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 INCOME

Because of the different tax schemes, items of gross 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

Readers are advised to master the coverage of both final income tax and capital gains
tay. A thorough understanding of these exceptional tax treatments is very essential to
your mastery of Income Taxation.

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
Final income taxation will be discussed in detail in Chapter 5.

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.
Capital gains taxation will be discussed in detail in Chapter 6.

REGULAR INCOME TAXATION

The regular income tax is the general rule in income taxation and covers all other income
such as:
1. Active income
2. Other income
a) Gains from dealings in properties, not subject to capital gains tax
b) Other passive income not subject to final tax

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 reported.
Types of Accounting Periods
1. Regular accounting period - 12 months in length
a. Calendar
b. 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 (ie 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 covers the start of the current year to the
date of dissolution of the business.

Illustration
Tawi-tawi Inc. 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. (BPI 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, 2021, 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, 2021 on or before October 15, 2021.

Illustration 2
Effective August 2021, 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,
2021 on or before April 15, 2022.

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, 2021.

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, 2021. 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, 2022.
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 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, 2021.
The taxpayer must file an income tax return covering January 1 to August 2, 2021. 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
a. Accrual basis
b. Cash basis
2. Installment and deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. 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.

Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis

1. 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.
2. 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.

Points to consider in converting GAAP cash basis to Tax cash basis

1. 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.
2. 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 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 installment 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.
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.

Accrual basis
Under the accrual basis, the entire P800,000 gross profit shall be reported as gross income in
2021, 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.

With indebtedness assumed by the buyer

The application of the installment method will slightly vary when the buyer assumes
indebtedness on the property sold.

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.

Deferred payment method

The 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.

Note:
1. The difference between the face value and the present value of the note, known as
discount, will not be recognized in gross income at the date of sale but will be deferred
and recognized as interest income.
2. 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 the 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.

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 or 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.

3. Note to Readers
 It should be pointed out that this rule exists only in the regulation and is absent in the
NIRC. Some taxpayers are questioning its validity pointing out lack of legal basis.
However, it is fairly proper to consider the depreciated value of the improvement that
remains to the lessor upon termination of the lease as income because it is an actual
benefit to the lessor. These are, in effect, additional rental consideration in kind.
However, the treatment specified by the outright method is perceived as unjust and abusive,
and is an improper introduction of legislation.

The depreciated value of the improvement at the termination of the lease should be the
proper value to be recognized as gross income under the outright method.

This view is supported by the fact that the spread-out method could not have been an option
if the outright method intended to tax the entire fair value of the improvement considering
the huge disproportion in the reportable gross income under the two options.

The outright method as mandated by the regulation will best apply in cases where
lessees pay the lessor rentals in the form of leasehold improvements or when
leasehold improvements made by lessees are treated as reductions to cash rentals. In
such cases, the fair value of the leasehold improvements upon completion
unquestionably income to the lessor for taxation purposes.

Agricultural or Farming Income

Farming income is commonly measured using the cash basis or accrual basis, such as in
the following:
a. Animal husbandry
b. Short-term crops
a. Perennial crops - those that yield harvests through years
b. One-time crops - those that are harvested once after several years

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.

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.
 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:
a. The original and the proposed new accounting period
b. The reason for desiring to change the accounting period
2. Certified true copy of the SEC approved amended by-laws showing change in
accounting period
3. Sworn statement of "non-forum shopping" stating that such request has
not been previously acted upon by the BIR National Office
4. Duly filed up BIR Form 1905
5. A sworn undertaking by an officer of the taxpayer to file a separate final of 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-filing 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 BIR 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 (ICC) 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
a. Banking institutions
b. Insurance and pension funding
c. Non-bank financial intermediation
d. Activities auxiliary to financial intermediation
e. Construction
f. Water transport
g. Hotels and restaurants
h. Land transport
 2. Group B
a. Manufacture and repair of furniture
b. Manufacture of basic metals
c. Manufacture of chemicals, and chemical products
d. Manufacture of coke, refined petroleum, and fuel products
e. Manufacture of electrical machinery, and apparatus NEC
f. Manufacture of fabricated metal products
g. Manufacture of foods, products, and beverages h. Manufacture of machineries, and
equipment NEC
h. Manufacture of medical, precision, and optical instruments
i. Manufacture of motor vehicles, trailers and semi-trailers
j. Manufacture of office, accounting, and computing machineries
k. Manufacture of other non-metallic mineral products
l. Manufacture of other transport equipment
m. Manufacture of other wearing apparel
n. Manufacture of papers, and paper products
o. Manufacture of radio, TV, and communication equipment, and apparatus
p. Manufacture of rubber and plastic products
q. Manufacture of textiles
r. Manufacture of tobacco products
s. Manufacture of wood and wood products
t. Manufacturing N.E.C.
u. Metallic ore mining
v. Non-metallic mining and quarrying
3. Group C

a. Retail sale
b. Wholesale trade and commission trade
c. Sale, maintenance, repair of motor vehicle, and sale of automotive fuel
d. Collection, purification, and distribution of water
e. Computer and related activities
f. Real estate activities

4. Group D

a. Air Transport
b. Electricity, gas, steam, and hot water supply
c. Postal and telecommunications
d. Publishing, printing, and reproduction of recorded media
e. Recreational, cultural, and sporting activities
f. Recycling
g. Renting out of goods and equipment
 h. Supporting and auxiliary transport activities

5. Group E

a. Activities of membership organizations Inc.

b. Health and social work
c. Private educational services
d. Public administration and defense compulsory social security
e. Public educational services
f. Research and development
g. Agriculture, hunting, and forestry
h. Farming of animals
i. Fishing
j. Other service activities
k. Miscellaneous business activities
l. 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. PENALTIES FOR LATE FILING OR PAYMENT OF TAX The late filing and
payment of taxes is subject to the following additional charges:

1. Surcharge -

a. 25% of the basic tax for failure to file or pay deficiency tax on time

b. 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.

2. Interest - 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 effective January 1, 2018. Note that NIRC imposed an interest penalty of 20%
per annum until December 31, 2017.
Under the new rules established by RR21-2018, the interest period shall be computed
based on actual days divided 365 days. The additional day in February during a leap
year will be counted. The yearly-monthly-daily counting method established in prior
regulations is already abandoned.

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 2016, 2020, 2024, 2028 and so on are leap years. Leap years have 29 days in
February hence the actual number of days in a leap year is 366 not the usual 365. This is
due to the fact that our planet revolves around the sun in 365 1/4 days. Hence, there is an
extra one complete day in every four calendar years.

Under the illustrative guidelines in RR21-2018, the new day counting system for the
interest penalty will be implemented for tax assessments effective January 1, 2018. This
means it will be applied even if the tax assessment pertains to 2017 and prior years.

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 included in Appendix 4
for your reference.

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.