CHAPTER 1 - INTRODUCTION TO TAXATION
TAXATION – is 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 legislative process - Taxation is a process of levying taxes by the legislature of
the State to raise revenue from its subjects to pay the necessary expenses of the govt.;
3. As a mode/means of cost distribution - Taxation is a mode by which the State through
its law making body demands for revenue in order to support its existence and carry out
its legitimate objectives.
TAXES ARE THE LIFEBLOOD OF THE GOVT. Taxes are essential and indispensable to the
continued subsistence of the govt. Without taxes, the govt. would be paralyzed for lack of
motive power to activate or operate it.
INHERENT POWERS OF THE STATE. A govt. has its basic needs and rights which coexist
with its creation. It has right to sustenance, protection, and properties. These rights or powers of
the State are natural, inseparable and inherent to every govt.
INHERENT POWERS OF THE STATE ARE:
1. Taxation Power – the power of the State to enforce proportional contribution from its
subjects to sustain itself. (for govt. support)
2. Eminent Domain – the power of the State to take private property for public use upon
payment of just compensation. As to purpose, in eminent domain, private property is
taken for public use.
3. Police Power – the power of the State to enact laws to promote public health, public
morals, public safety and the general welfare of the people. As to purpose, in police
power, private property is taken or destroyed to protect general welfare.
SITUS OF TAXATION - PLACE OF TAXATION
Factors affecting the situs of taxation:
1. Subject matter- or what is being taxed. - may be a person, a property or an act or
activity;
2. Nature of tax- or which or kind of tax to impose. - may be an income tax, an import duty
or a real property tax.
3. Citizenship of the taxpayer- Filipino citizen; Resident alien, Non-resident alien
4. Residence of a taxpayer- within or without
The following Situs of Taxation apply
1. Persons- residence of a taxpayer;
2. Real Property or Tangible Personal Property- location of the property;
3. Intangible Personal Property- As a rule, situs is the domicile of the owner unless he
has acquired a situs elsewhere;
4. Income- taxpayer’ residence or citizenship, or place where the income was earned;
5. Business, Occupation and Transaction- place where business is being operated
6. Gratuitous transfer of property- taxpayer’s residence or citizenship, or location of the
property.
TAXATION LAWS – refer to any law that arises from the exercise of the taxation power of the
State. They provide for the assessment and collection of taxes.
TAXES - are enforced proportional contributions levied by the law making body of the State to
raise revenue for public purpose. A tax in its essential characteristics is not a debt.
Essential Characteristics of a tax:
1.
2.
3.
4.
5.
It is an enforced contribution
It is levied by the lawmaking body
It is proportionate in character
It is generally payable in money
It is imposed for the purpose of raising revenues; and6. It is to be used for public
purpose
TYPES OF TAX RATE STRUCTURES
A. Regressive - the average rate decreases as the tax base increases
B. Proportional (Uniform Taxes) - the average rate of tax remains constant for all levels of
the tax base
C. Progressive - the average rate increases as the amount of tax base increases.
CLASSIFICATION OF TAXES
1. As to Subject Matter or Object
A. Personal, Poll or Capitation - a tax of a fixed amount imposed on individuals,
whether citizens or not, residing within a specified territory without regard to their
property or occupation in which they may be engaged. (Ex. Community tax)
B. Property - tax imposed on property whether real or personal, in proportion either
to its value, or in accordance with some other reasonable method or
apportionment. (Ex. Real Property Tax)
C. Excise Tax or Privilege tax - a tax imposed upon the performance of an act, the
enjoyment or a privilege or the engaging in an occupation, any tax which does
not fall within the classification of a poll tax or a property tax. (Ex. VAT, Income
Tax, Donor Tax, Estate Tax)
2. As to who bears the burden
A. Direct- A tax that is demanded from the person who also shoulders the burden of the tax
(Ex. Income tax, Estate tax, donor’s tax)
B. Indirect- A tax which the taxpayer can shift to another. (Ex. VAT and Percentage Tax)
3. As to determination of amount
A. Specific - Tax imposed based on physical unit of measurement, by head or number ,
weight, or length or volume (Ex. Tax on distilled spirits, fermented liquors cigars, wines,
fireworks)
B. Ad Valorem - Tax of a fixed proportion for the value of property; needs an independent
appraiser to determine its value. (Ex. Real Estate Tax, certain Customs duties, Excise
Tax on cigarettes, gasoline, etc.)
4. As to Purpose
A. General, Fiscal or Revenue - Tax with no particular purpose or object for which the
revenue is raised, but is simply raised for whatever need may arise (Ex. Income Tax and
VAT)
B. Special or Regulatory - Tax imposed for a special purpose regardless of whether
revenue is raised or not. , and is intended to achieve some social or economic end. (Ex.
Protective Tariffs or custom duties)
5. As to Authority Imposing the Tax or Scope
A. National - tax imposed by the national govt
B. Municipal or Local - tax imposed by the municipal govt. for specific needs.
6. As to Graduation Rate
A. Proportional - fixed percentage (Ex. Percentage Tax, Real Estate Tax)
B. Progressive or Graduated - tax rate increases as the tax base increases (Ex. Income
Tax, Estate tax, Donor’s tax)
C. Regressive – tax rate decreases as tax base increases (Ex. VAT)
TERMS RELATED TO TAXATION
DOUBLE TAXATION - occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing
ESCAPE FROM TAXATION - are the means available to the taxpayer to limit or even avoid the
impact of taxation.
TAX EVASION (TAX DODGING) - any act or trick that tends to illegally reduce or avoid the
payment of tax.
TAX AVOIDANCE (TAX MINIMIZATION) - any act or trick that reduces or totally escapes taxes
by any legally permissible means.
TAX EXEMPTION (TAX HOLIDAY) - refers to the immunity, privilege or freedom from being
subject to a tax which others are subject to.
TAX AMNESTY - a general pardon granted by the govt. to erring taxpayers to give them a
chance to have a fresh start.
TAX CONDONATION - is a forgiveness of the tax obligation under certain justifiable grounds.
CHAPTER 2 TAXES, TAX LAWS & TAX ADMINISTRATION
TAXATION LAW – refers to any law that arises from the exercise of the taxation power of the
State. Tax laws are laws that provide for the assessment and collection of laws.
Sources and Types of Tax Laws:
1. The National Internal Revenue Code (NIRC)
a. Income Tax (Individual and Corporate)
b. Estate and Donor’s Taxes
c. Value Added Tax
d. Other Percentage Tax
e. Excise Tax
f. Documentary Stamp Tax
2. The Tariff and Customs Code of 1978
a. Import duties
b. Export duties
3. Local Government Code of 1991
a. Real Property Tax
b. Business Taxes, Fees and Charges
c. Professional Tax
d. Community Tax
e. Tax on banks and other Financial Institutions.
4. Special Laws
a. Motor Vehicle Law - motor vehicle fees
b. Private Motor Vehicle Tax Law - private motor tax
c. Philippine Immigration Act of 190 - Immigration Tax
d. Travel Tax Law - Travel Tax
TRAIN LAW - TAX REFORM FOR ACCELERATION AND INCLUSION – Republic Act No.
10963 – It is the first package of the Comprehensive Tax Reform Program (CTRP) which was
approved on December 19, 2017.
-
-
The TRAIN will provide hefty income tax cuts for majority of Filipino taxpayers while
raising additional funds to help support the government’s accelerated spending and
social service programs
With the people’s support and understanding all of these reforms will resort in more and
better jobs, lower prices, and a brighter future for every Filipino
CREATE LAW – CORPORATE RECOVERY AND TAX INCENTIVE FOR ENTERPRISES – It
cuts corporate income taxes and provides incentives to help businesses recover from the
pandemic and encourage foreign investments.
-
It will reduce income tax rates from 30% to 20% for MSMEs and to 25% for other
corporate taxpayers.
TAX – is an enforced proportional contribution levied by the lawmaking body of the State to
raise revenue for public purpose.
DISTINCTION OF TAXES WITH SIMILAR ITEMS
1. Tax vs Revenue
Tax – is the amount imposed by the government for public purpose.
Revenue – refers to all income collections of the govt. which includes taxes, tariff,
licenses, toll, penalties and others.
2. Tax vs License Fee
Tax – has broader subject than license.
License – emanates from police power and is imposed to regulate the exercise of a
privilege such as the commencement of business or a profession.
A Tax is a post-activity imposition while a license fee is pre-activity imposition.
3. Tax vs Toll
Tax – it is a levy of the government hence, it is a demand of sovereignty.
Toll – is a charge of the use of other’s property hence, it is a demand of ownership.
4. Tax vs Debt
Tax – it arises from law; generally payable in money; non-payment of tax leads to
imprisonment;
Debt – it arises from private contracts; can be paid in kind; non-payment of debt does
not lead to imprisonment
5. Tax vs Special Assessment
Tax – is an amount imposed upon persons, properties or privileges; non-payment of tax
leads to imprisonment;
Special Assessment - is levied by the government on lands adjacent to a public
improvement; Non-payment – no imprisonment
6. Tax vs Tariff
Tax – is broader than tariff.
Tariff – amount imposed on imported or exported commodities
7. Tax vs Penalty
Tax – an amount imposed for the support of the govt.; tax arises from law
Penalty – an amount imposed to discourage an act; may arise both from law or contract
TYPES OF TAX SYSTEMS ACCORDING TO IMPOSITION
1. Progressive – is one that emphasizes direct tax (cannot be shifted)
2. Proportional – employed in taxation of corporate income and business
3. Regressive – one that emphasizes indirect taxes, shifted by business to consumers;
anti-poor
Basic Principles of a Sound Tax System:
1. Fiscal Adequacy – The sources of revenue should be sufficient to meet the demands of
public expenditures. This can be obtained by creating new taxes or new tax machinery,
or by merely changing the rates applicable to existing taxes so that the revenue would
substantially respond to the expanding needs of public expenditures.
2. Equality or Theoretical Justice - The tax burden should be proportionate to the
taxpayer’s ability to pay (this is the so-called Ability-To=Pay Principle).
3. Administrative Feasibility – The tax laws should be capable of convenient, just and
effective tax administration. Each tax should be clear and plain to the taxpayer, capable
or uniform enforcement by govt. officials, convenient as to time, place and manner of
payment, and not unduly burdensome upon, or discouraging to business activity.
CHAPTER 3 INTRODUCTION TO BUSINESS TAXATION
Consumption refers to the acquisition or utilization of goods or services by any person. The
utilization of goods or services may be through purchase, exchange or other means. The
utilization is subject to a tax called Consumption tax.
Consumption is levied without regard to the purpose of the purchaser or consumer whether it is
for business, personal or charity use. However, a consumption tax should not be levied upon
basic necessities such as food, education, health, and shelter or housing. A business tax is a
form of consumption tax.
Only goods and services destined for consumption in the Philippines are subject to consumption
tax while those destined for consumption abroad are not subject to consumption tax. The govt.
do not impose taxes on exports. The NIRC either exempts exports or subject them to a 0% tax
rate.
The domestic consumption of resident buyers from resident sellers commonly known as
purchase is subject to consumption tax called a Business Tax
It is called a business tax because the consumption tax is indirectly imposed upon sellers which
are businesses.
Business refers to habitual engagement in a commercial activity. It connotes regularity of
transactions involving sale of goods or services for a profit.
ELEMENTS OF A BUSINESS:
1. Habitual Engagement - regularity in transactions. Therefore, isolated or casual sales
are not regular activities because they are presumed not made in the ordinary course of
business.
2. Commercial activity - for profit
If the Seller is
If the Buyer is
Subject to Bus. Tax
Business
Business
Yes
Business
Not a Business
Yes
Not a Business
Business
No
Not a Business
Not a Business
No
Only Sales or Receipts of persons engaged in business is subject to business tax. Hence, if the
seller of goods or services is not a business, there is no business tax.
NATURE OF BUSINESS TAX
1. Relative Consumption tax - Business tax is a tax on the consumption of goods or
services and is imposable only when the seller is a business.
2. Indirect tax - The tax is collected from the seller rather than from the buyer consumer
3. Privilege tax - Business tax is also viewed as a tax on the privilege to do business
4. National tax - Business tax is imposed by the national government.
Business taxes are those imposed upon onerous transfers such as sale, barter, exchange and
importation. It is called as such because without a business pursued in the Philippines by the
taxpayer, business taxes cannot be applied. “In the course of trade or business” means the
regular conduct or pursuit of a commercial or an economic activity including transactions
incidental thereto by any person engaged therein as a non-stock, non-profit private organization
or govt. entity.
isolated transactions are generally not considered in the ordinary course of trade or business
hence, not subject to business tax. However, services rendered in the Philippines by a
non-resident foreign person shall be considered as being rendered in the course of trade or
business even the performance is not regular
For Subsistence or Livelihood – Any business pursued by an individual where the aggregate
gross sale or receipts do not exceed P 100,000 during the any 12 month period shall be
considered principally for subsistence or livelihood and not in the ordinary course of trade or
business. Hence, not subject to business taxes.
They are called Marginal Income Earners (MIEs). The MIE shall include but not limited to
agricultural growers/producers (farmers/fishermen), those selling directly to ultimate consumers
such as, small sari-sari stores, small carenderias or turo-turos, drivers/operators of a single unit
tricycle, and such, but shall not licensed professionals, consultants, artists, sales agents,
brokers and other similarly situated, include all others whose income has been subject to a
withholding tax.
BUSINESS TAXES
Scope of Tax - Purchases from businesses only
Statutory taxpayer - Seller
Economic taxpayer - Buyer
Nature of Imposition - Indirect
Basis of Tax - Sales or Receipts
The business tax is imposed only if the seller is a business and is based upon the sale of goods
or receipts from rendering of services of the seller. That is why this consumption tax came to be
known as a “Business Tax” but it is not actually a tax upon the business because the tax burden
is shifted by the business to the buyer who will actually shoulder the tax burden.
Only sales or receipts of persons engaged in business is subject to business tax. No business
tax if the seller is not a business.
Business refers to habitual engagement in a commercial activity. It connotes regularity of
transactions involving sale of goods or services for a profit. A Casual Sale transaction is not a
business even if profit is derived from the transaction.
TYPES OF BUSINESS TAXES
● Percentage Tax – (Non-Vat Taxpayer) P 3M threshold – Effective July 1, 2020 until
June 30, 2023, Percentage tax is reduced from 3% to 1% (CREATE LAW)
● Value Added tax (VAT) - a consumption tax of 12%
● Excise tax - an ad valorem tax or specific tax, which is imposed in addition to
Percentage tax or VAT only on certain goods or services.
GROSS SELLING PRICE - refers to total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or
exchange of goods or properties.
GROSS RECEIPTS - refers to the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty . It excludes VAT.
Business Tax Accounting Period
The length of the accounting period for business taxes is one quarter. This is referred to as a
taxable quarter.
The taxable quarter is composed of 3 months which is synchronized with the taxable year ( i. e
Calendar Year or Fiscal Year) of the taxpayer for purposes of income tax.
CHAPTER 4: EXEMPT SALES
Exempt Sales are exempt consumption of goods or services from domestic sales. Exempt
sales are not subject to VAT and Percentage tax.
Hence,
1) Making an exempt sale of goods, properties or services shall not bill any output VAT to their
customers because the sale is not subject to VAT.
2) A non-VAT person making exempt sales shall not be subject to the 3% percentage tax on the
sale or receipt.
EXEMPT SALES OF GOODS OR PROPERTIES (SECRET Tax free Gold)
1. Sale of goods to Senior Citizens (SC) and Persons with Disability (PWDs) This
covers sale of essential goods only. Aside from VAT exemption, an additional 20%
discount is legally mandated.
2. Sales of Exempt Goods.
A. Agricultural and marine food products in their original state.
B. Fertilizers, seeds, seedling and fingerlings, fish, prawns, livestock and poultry
feeds, including ingredients used in the manufacture of finished feeds.
C. Books, newspaper and magazines
D. Medicines prescribed for diabetes and hypertension
E. Passenger or cargo vessels and aircrafts
3. Sales of Goods by cooperatives
- Sale by agricultural cooperatives duly registered in good standing with the Cooperative
Development Authority (CDA) to their members, as well as sales of their produce,
whether in its original state or processed form to non-members, their importation of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and or processing of their produce. Sales by
non-agricultural, non-electric and non-credit cooperatives duly registered and with good
standing with the CDA are vatable.
4. Sales of residential properties
A. Sale of real properties utilized for low-cost housing
B. Sale of real properties utilized for socialized housing.
C. Sale of residential lot valued at P 1,919,500 and below and other residential dwelling
valued at P 3,919, 200 and below.
5. Export sales by Non-VAT person
6. Treaty-exempt sales of goods. - Sales of goods, exempt under international agreement to
which the Philippines is a signatory or under special laws.
7.Tax-free exchange of property - The exchange of properties in pursuant to a plan of merger
or consolidation or the transfer of property that resulted in the initial acquisition of corporate
control.
8. Sale of GOLD to the Bangko Sentral ng Pilipinas - The sale of gold to the BSP is now a
VAT-exempt transaction which is previously considered a zero-rated sale.
EXEMPT SALES OF SERVICES (SEARCH VA TRIPS)
1. Schools
2. Employees - Services performed by individuals in pursuant to an employer-employee
relationship
3. Agricultural contract growers and milling for others of palay into rice, corn into corn
grits and sugar into raw sugar.
4. Residential leasing - Lease of residential units with monthly rental not exceeding P
15,000.
5. Cooperative Services - Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered and in good standing with the CDA.
6. Hospitals - Medical, dental, hospitals and veterinary services except those rendered by
professionals and sales of drugs by a hospital drug store.
7. Homeowners Association or Condominium corporations - Association dues,
membership fees and other assessments and charges collected by homeowner’s
associations and condominium corporations.
8. Lease passenger or Cargo vessels and aircrafts, including engine equipment and
spare parts thereof for domestic or international transport operations.
9. Treaty-exempt services
10. Regional area headquarters - DEFER
11. International carriers - Transport of passengers by international carriers.
12. Printers or Publishers - Sale, printing or publication of books and any newspaper,
magazines, review or bulletins.
13. Senior Citizens and PWDs – sale of basic essential services.
CHAPTER 5: PERCENTAGE TAX AND OTHER PERCENTAGE TAXES (OPT)
A PERCENTAGE TAX is a national tax measured by a certain percentage of the gross selling
price or gross value in money of goods sold or bartered; or of the gross receipts or earnings
derived by any person engaged in the sale of services.
SCOPE OF PERCENTAGE TAX
COVERAGE
SCOPE
TAX RATES
1. Sales of Goods or other services
General % tax
1%
2. Services specifically subject
Specific % tax
Various rates
Who pays percentage tax?
Types of Percentage Tax
VAT Registered Taxpayer
Non-VAT Taxpayer
General Percentage Tax
No
Yes
Specific Percentage Tax
Yes
Yes
Percentage Taxpayers (Non-VAT) are those who do not exceed the VAT threshold of ( P 3 M)
and who do not register as VAT taxpayers.
WITHHOLDING PERCENTAGE TAX AT SOURCE
The sale to govt. agencies and instrumentalities including Govt. Owned and Controlled
Corporations (GOCCs) are subject to a withholding tax of 1% at source.
The govt. agency, instrumentality or GOCC withholds the 1% percentage tax and issues to the
taxpayer BIR Form 2307. The taxpayer shall attach this form in filing his quarterly percentage
tax return.
TAX ON OTHER TAXABLE SALES OF NON-VAT TAX PAYERS
The imposable percentage tax on taxable sales or receipts, other than from services or
transactions specifically subject to percentage tax of Non-VAT taxpayers is 1 %.
SERVICES SPECIFICALLY SUBJECT TO OTHER PERCENTAGE TAX(OPT)
1. Banks and Non-Bank financial intermediaries
2. International Carriers on their transport of cargoes, excess baggage and mails only
3. Common carriers on their transport of passengers by land and keepers of garage
4. Certain amusement places
5. Brokers in effecting sale of stocks through Phi. Stock Exchange and corporations or
shareholders on initial public offering
6. Certain franchise grantees
7. Life insurance companies and agents of foreign insurance
8. Telephone companies on overseas communication
9. Jai-alai and cockpit operators on winnings
SUMMARY OF SPECIFIC PERCENTAGE TAXES
Business or Activity
Percentage Tax
Tax Rates
Gross Receipts Tax
5%,1%,7%
Int’l. Carrier’s Tax
3%
Common Carrier’s Tax
3%
Amusements Tax
10%/15%/18%/30%
Sales of stocks by an investor
Stock Transaction Tax
60% x 1%
Sales of stocks during an Initial
Public offering (IPO)
IPO Tax
4%/2%/1%
Franchise
Franchise Fee
5%
Life Insurance
Premiums Tax
2%/4%/5%
Banks & Financial Intermediaries
International Carriers
Common Carriers
Amusement Places
Overseas Calls
Amusement betting
Overseas
Communication Tax
10%
Winnings Tax
10%/4%
TAX RATES ON BANK AND QUASI BANKS
Quasi Banks- are non-bank financial intermediaries performing quasi-banking functions such
as borrowing of funds. (Ex. Money Changers, Pawnshops)
The percentage tax on banks, quasi-banks and other non-bank intermediaries is commonly
called Gross Receipts Tax.
Interest income, commissions and discounts from lending activities, and income from financial
leasing on the basis of remaining maturities of instruments:
A. Maturity period of 5 years or less - - - - - 5%
B. Maturity period of more than 5 years - - - - 1%
On Royalties, rentals of property, real or personal, profits from exchange and all other items.
Treated as gross income - - - - - - - - 7%
Percentage tax on Domestic Carriers and Keepers of Garage
Common Carrier = is any person, corporation, firm or association engaged in the business of
carrying or transporting passengers or goods or both, by land, water or air, for compensation,
and offering their services to the public
“Common Carrier’s Tax” = tax due on gross receipts of common carriers on their transport of
passengers by land.
Rules on Common Carriers
Mode of Transport
Passengers
Baggage/Mails/Cargoes
3% Percentage Tax
Vatable
By Water or Sea
Vatable
Vatable
By Air
Vatable
Vatable
By Land
AMUSEMENT TAXES
Proprietor, lessee or operator of the following amusement places shall pay based on the tax
rates:
Place of boxing exhibitions = 10 %
Places of professional basketball games = 15 %
Cockpits, Cabarets, night or day clubs = 18 %
Jai-alai and Race tracks = 30 %
Bowling alleys, Golf courses, Billiard halls are Vatable. Cinemas and Theaters are not subject to
amusement tax but exclusively subject to local amusement tax.
TAX ON FRANCHISES
Generally, franchises are vatable. The percentage tax on franchise grantees is called “Franchise
Tax”
Only 2 types of franchises that are subject to Percentage Tax:
Franchise Grantees
% Tax Rate
Radio, Television broadcasting companies 3 % whose annual gross
receipts do not exceed P 10,000,000.
3%
Gas and Water Utilities
2%
VAT Registration - Franchise grantees of radio or television broadcasting companies are
mandatorily required to register as VAT taxpayer if they exceed the P 10 M gross receipts
threshold. Even if below the threshold, they may register as VAT taxpayer
Once the option is exercised, said option shall be irrevocable. In other words, VAT registration is
non-cancellable until the dissolution of the business
Note: There is no similar provision for franchise grantees of gas and water utilities. Hence, they
are subject to percentage tax even if they exceed the P 10 M gross receipts threshold.
VATABLE FRANCHISES
1. Electricity
2. Telecommunication
3. Transportation
4. Private franchises
CHAPTER 6: VALUE ADDED TAX (VAT)
VAT - is a tax on the value added by every seller on the purchase price or cost in the sale or
lease of goods, property or services in the ordinary course of trade or business as well as on
importation of goods into the Philippines whether personal or business use.
-
It covers all vatable sale of goods, properties, services or lease of properties by VAT
taxpayers.
Vatable sales or receipts are from sources other than:
● Exempt Sales
● Receipts from services subject to OPT.
Who are VAT taxpayers?
● VAT-Registered persons - even if its annual sales do not exceed the VAT threshold.
●
VAT-Registrable persons - whose sales or receipts exceed the VAT threshold but did not
register as VAT. Hence, subject to VAT but without the benefit of an input tax credit.
VAT THRESHOLD
● General Threshold – Applicable to all taxpayers other than Franchise grantees of radio
or television - P 3 M
●
Special Threshold – Applicable only to Franchise grantees of radio or television – P 10M
A Branch is not a separate entity with their head office. A head office and a branch shall file a
consolidated VAT return.
Optional VAT Registration
Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such an option is
subject to the 3-year lock-in period. The taxpayer is precluded to have the VAT registration
revoked until the lapse of 3 years registration
It must be noted that despite the VAT registration, VAT shall apply only to Non-vatable sales or
receipts. Exempt sales remain to be exempt while receipts specifically subject to percentage tax
are subject to Other Specific Percentage Tax rates.
OUTPUT VAT = is the VAT on vatable sales or receipts. The Output VAT is presumed passed
on by the seller to the buyer on its sales or receipts.
2 Types of Output VAT:
● Regular Output VAT – 12% VAT imposed on domestic sales or receipts.
● Zero Output VAT – 0% VAT imposed on export and other zero-rated sales.
INPUT VAT
- is the VAT paid by the taxpayer on the domestic purchases from VAT suppliers or on the
importation of goods or services in the course of business.
-
It has rules on creditability. Not all paid Input VAT is creditable against Output VAT.
Those allowed are called “Claimable Input VAT” or “Allowable Input VAT” or :Creditable
Input VAT” or a Deferred VAT.
VAT DUE
- At the end of each month, the Input VAT is offset with the Output VAT. A positive VAT due
is paid to the BIR. A negative VAT is normally non-refundable but is carried over to the
next succeeding months or quarter
VAT REPORTING - VAT is filed and paid Monthly and Quarterly.
COMPARISON OF VAT AND PERCENTAGE
Basis
VAT
Percentage Tax
Sale
Sale
Primary Tax
Primary Tax
Any business, in general
Any Business, in general
Taxpayers
Business only
Business only
Usual taxpayers
Big businesses
Small businesses
Liability
Expense
Timing of imposition
Nature
Subject businesses
Accounting treatment
PROCEDURES OF BUSINESS TAXATION
1. Evaluate if the sales activity qualifies as a business.
a. If not, the activity is exempt from business tax
b. If yes, the business must register for business tax. Proceed to the
succeeding procedures.
2. Identify the taxable person
a. If Individual - Include all proprietorship branches of the individual
taxpayer.
b. If juridical, include all branches of the corporate taxpayer
3. Determine the Activity Type
If sales of goods - determine the sales
If sales of services - determine the receipts
4. Classify the sales or receipts whether they are:
- Exempt sales or receipts - pay no business tax
- Sales or receipts subject to specific Percentage tax - pay specific
percentage tax
- Vatable sales or receipts
5. Determine taxpayer Registration Type
- if taxpayer is VAT registered - pay VAT on vatable sales or receipts
- if is Non-VAT-registered – pay the 1% Percentage tax then determine the magnitude of
12-month vatable sales at the end of every month.
- if it exceeds P 3,000,000 – the person shall register as a VAT prospectively effective on the
succeeding monthly
vatable sales or receipts
- If it does not exceed P 3,000,000 – the person shall continue paying the 1% general
percentage tax on the vatable sales or receipts.
6. Determine the goods or services is excisable.
- if Yes, pay the applicable excise tax in addition to VAT or Percentage tax.
-if No, pay only the VAT or Percentage tax
Sales Subject to Special or Unique VAT Rules
Types of Sales
What is Unique
Sales to the Government
Limited claimable Input VAT
Zero-rated Sales
No Output VAT but with Claimable Input VAT
Exempt Sales
No Output VAT and no claimable Input VAT
Sales to Government Including GOCCs
●
●
●
●
Vatable at 12% normal rate
To withhold 5% final VAT on their purchases
5% final VAT will be deducted based on sales or receipts and the taxpayer will only
collect the balance (presumed as the actual VAT )
No more VAT Payable
CHAPTER 7: Excise Taxes
EXCISE TAXES - In addition to VAT, excise taxes apply to goods manufactured or produced in
the Philippines for domestic sales or consumption or for any other disposition, and goods
imported.
- the excise tax applies to goods produced, imported, or sold in the Philippines
- manufacturers, producers, importers, and sellers file and pay the excise tax.
- but because it’s an indirect tax, the excise tax is passed on to consumers as part of
the selling price.
these goods manufactured or imported under this category are classified as either “sin
products” or “non-essential goods”
- it is a hybrid consumption tax which are generally levied at the point of production or
importation
- cosmetic surgery is the only service currently subject to excise tax
- in other countries, even vices such as gambling or morally damaging activities such as
prostitution are taxed.
List of Excisable Articles and Services (as to Classification) in the Philippines
ARTICLE OR SERVICE
IMPORT
PRODUCTION
SALE
Alcohol Products (distilled spirits, wines and
fermented liquors
Yes
Yes
-
Tobacco products (cigars and cigarettes)
Yes
Yes
-
Petroleum Products (gas, gasoline, diesel, wax,
lubricants, oils and greases, kerosene, naphtha,
denatured alcohol, coke, asphalt and bunker fuel
oil.
Yes
Yes
-
Mineral Products (metallic or non metallic, quarry
sources)
Yes
-
Yes
Automobiles
Yes
Yes
-
Non-Essential goods (jewelry, perfume, yacht,
sodas or sweetened drinks
Yes
Yes
Non-Essential Services (Cosmetic Surgery)
-
-
Nature of Philippine Excise Tax
A. Excise tax as a regulatory tax
1. Environmental tax – it is imposed on products which cause harm to the
environment when produced or extracted or used. It is also known as
Green Tax. Examples: petroleum products, quarry resources and minerals
products.
2. Sumptuary Tax – it is imposed to restrain luxury or extravagance. It is also
referred to as Vanity Tax.
Examples: Intrusive Cosmetic Surgery, Automobiles, Yacht, Jewelry
Yes
3. Sin Tax – it is imposed on the consumption of sin products or those known
to pose health risk. It is also known as Health Tax. Examples are alcohol
beverages and tobacco products.
B. Excise tax as Indirect tax – it is levied upon producers or importers with the
understanding that it will pass on the same to the consumers.
C. Excise tax as a Consumption tax – it is usually levied at the point of production
or importation except excise tax on minerals and cosmetic surgery which
are levied at the point of sale.
D. Excise tax as an additional business tax – it is an addition to Percentage tax and
VAT.
E. Excise tax as Specific and Ad valorem tax
Types of Excise Taxes:
1) Specific Taxes – based on weight, volume, capacity or any other physical unit of
measurement of the goods
- No. of units or other measurement x specific tax rate
2) Ad valorem taxes – based on the selling price or other specified value of the goods.
- No. of units or other measurement x Selling Price of any specific value per units x Ad
valorem tax rate
Automobiles - refer to any 4 or more wheeled motor vehicle regardless of seating capacity
which is propelled by gasoline, diesel, electricity or other motive power. Utility vehicles such as
buses, trucks, cargo vans, jeepneys or jeepney substitutes, single cab chassis and special
purpose vehicles such as cement mixer, fire truck, boom truck, ambulance and/or medical unit
and off-road vehicles for heavy industries shall not be considered automobiles.
Basis of Ad valorem Tax
locally produced goods imposed with ad valorem tax are subject to tax on Gross Selling Price.
Gross Selling Price - means the price excluding VAT at which the goods are sold at wholesale
in the place of production or through their sales agent to the public.
Persons Liable to Pay Excise Tax
A) On Domestic or Local Articles
1) Manufacturer
2) Producer
3) Owner or Person having possession of articles removed from the place of production
without payment of the tax
B) On Imported Articles
1) Importer
2) Owner
3) Person who is found in possession of articles which are exempt from excise taxes
other than those legally entitled to exemption
C) On Indigenous Petroleum
1) Local Sale, Barter or Transfer
a) First Buyer, Purchaser or Transferee
2) Exportation
a) Owner, Lessee, Concessionaire or Operator of the mining claim
Terms of Payment of Excise Taxes
A) On Domestic Products – before removal from the place of production
B) On Imported Products – before release from custom’s custody
SMALL SCALE MINERS
RA 11256 exempts registered small scale miners and accredited traders who are selling gold to
the Bangko Sentral ng Pilipinas (BSP) from paying income tax and excise tax. Note also that
the sale of gold to the BSP is also exempt from business tax. All gold sold to the BSP by
accredited traders shall be presumed to have been purchased by said traders from small-scale
miners
IMPORTED GOODS
Unless otherwise specified by law, imported goods imposed with ad valorem tax shall be subject
to the same rates and basis of excise taxes applicable to locally manufactured articles
WHO ARE THE PERSONS LIABLE TO EXCISE TAX? As a general rule,
1) For domestically produced excisable articles = PRODUCER
2) For imported excisable article = IMPORTER
CHAPTER 8 CONCEPT OF INCOME
INCOME – means all wealth which flows into the taxpayer other than a mere return of capital.
- It includes the forms of income specifically described as gains derived from the sale or
other disposition of capital.
-
For tax purposes income is defined as the amount of money coming to a person or
corporation within a specified time whether as payment for services, interest or profits
from investment.
-
It includes earnings, lawfully or unlawfully acquired, without consensual recognition,
express or implied, of an obligation to repay and without restriction as to their disposition.
INCOME TAX – is referred to as tax on all yearly profits arising from property, professions,
trades or offices, or as a tax on a person’s income, emoluments, profits and the like.
-
it is a tax based on income, gross or net
Classification of Income Tax:
1) a national tax
2) an excise tax
3) a direct tax
4) a general tax
Classification of Income Taxpayers
1) Individual – refers to natural persons, whether Filipino citizens or not and whether
resident or non-resident of the Philippines.
2) Corporation – includes partnership no matter how created or organized, joint-stock
companies, joint accounts, associations or insurance companies but does not include
general professional partnerships and a joint venture or consortium formed for the
purpose undertaking construction projects or engaging in petroleum, geothermal and
other energy operations pursuant to an operating or consortium agreement under a
service contract with the government.
3) Estate – refers to all the property, rights and obligations of a person which are not
extinguished by his death and also those which have accrued since the opening of the
succession.
-
to be subject to income tax, an estate must be under judicial settlement. Otherwise, it is
not subject to income tax.
4) Trust – is an arrangement created by will or an agreement under which property is
passed to another for conservation or investment with the income there from and
ultimately the principal to be distributed in accordance with the directions of the creator
as expressed in the governing instrument.
- A Trust to be taxable must be an irrevocable trust both as to body and income.
Classification of Individual Income Taxpayaers:
1) Citizen – The following shall be considered citizens of the Philippines:
- those who are citizens of the Philippines at the time of the adoption of the Feb. 2, 1987
Constitution;
- those whose fathers or mothers are citizens of the Philippines;
- those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitutionof
Filipino mothers who elect Philippine citizenship upon reaching the age of majority; and,
- those who are naturalized in accordance with law.
A. Resident – a Filipino citizen who permanently resides in the Philippines.
B. Non-Resident
2) Alien
A. Resident
B. Non-resident
a. Engaged in trade or business in the Philippines
b. Not engaged in trade or business in the Philippines
c. Employed by:
1. Regional or Area headquarters (RHQs) and Regional Operating
Headquarters (ROHQs) of multinational entities in the Phils. That
are engaged in international trade with affiliates and subsidiary
nranch office in the Asia Pacific region;
2. Offshore banking units
3. Petroleum contractors and sub-contractors
Sources of Income – It is not a place but the property, activity or service that produced the
income.
A. Labor – income derived from labor, it is the place where the labor is performed;
B. Use of Capital – it is the place where the capital is employed
C. Profit from the sale or exchange of capital assets – it is the place where the sale or
transaction occurs.
For Resident Citizens – they are taxable on all income derived from sources within or
without the {hilippines.
Definition of Terms (Train Law)
A. Compensation Income – In general, means all renumeration for services performed by an
employeefor his employer under an employer-employee relationship, unless excluded by
the Code.
B. Compensation Income Earners – Individuals whose source of income is purely derived
from an employer -employee relationship
C. Employee – an individual performing services under an employer-employee relationship.
The term covers all employees, including officers and employees, whether elected or
appointed, of the Government of the Philippines, or any political subdivision thereof or
any agency or instrumentality.
D. Employer – any person for whom an individual performs or performed any service, of
whatever nature, under an employer-employee relationship.
E. Employer and Employee Relationship – exists when a person for whom services were
perforformed (employer) has the right to control and direct an individual who performs
the services (employee). It is sufficient that there exists a right to control the manner of
doing the work.
F. Fringe Benefits – means any good, service or other befit furnished or granted in cash or in
kind other than the basic compensation, by an employer to an individual employee
(except rank and file employee) such as, but not limited to:
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel uch as maid, driver and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and the actual rate granted
6. Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents; and,
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
G. Gross Receipts – refers to the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services and deposit and advance payments
H. Gross Sales – refers to the total sales transactions net of VAT.
I. Minimum Wage Earner (MWE) – refers to a worker in the private sector who is paid with a
statutory minimum wages (SMW) rates, or to an employee in the public sector with
compensation income of not more than the statutory wage rates in the non-agricultural
sector where the worker/employee is assigned Such statutory minimum wage rates are
exempted from income tax.
J. Mixed Income Earner – an individual earning compensation income from employment, and i
ncome from business, practice of profession and/or other sources aside from
employment.
K. Rank and File Employee – refers to an employee holding neither managerial nor
supervisory position
L. Self-employed – a sole proprietor or an independent contractor who report income earned
from self-employment. It includes those hired under a contract of service or job order
and professionals whose income is derived purely from the practice of profession not
under an employer-employee relationship.
M. Professional – a person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required examination or course of studies
and/or practice whose competence can usually be measured against an established set
of standards. It also refers to a person who engages in some art or sport for money,as a
means of livelihood rather than as a hobby.
N. Gross Income – it is an income reduced by exclusions and is derived from taxable sources.
O. Taxable Income - refers to the pertinent items of gross income specified in the tax Code
less deductions. It is the amount of income that is taxed.
Gross income means all income derived from whatever sources including (but not limited to) the
following items:
1. Compensation for services in whatever form, paid including, but not limited to fees,
salaries, wages, commissions, and similar forms.
2. Gross income derived from the conduct of trade or business or the exercise of a
profession.
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions; and,
11. Partners’ distributive share from the net income of the general professional
partnerships.
“Income from whatever source derived” means all income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or involuntary action of
the taxpayer in producing the income. It includes income from illegal activities such as
extortion, illegal gambling, bribery, graft and corruption, kidnapping, racketeering,and drug
peddling.
Items related to Income:
1. SELF-HELP INCOME – if an individual painted his own house, not treated as his income.
But, if a taxpayer hires someone else he would have earned an income and pay a tax.
- Though accepted by economists as income, it is not accepted by accountants, the
internal revenue code and the courts.
2. COMPENSATION PAID IN KIND – Compensation may be paid in money or in some
medium other than money, as for example, stocks, bonds or other forms of property.
- If paid in Cash whole amount is subject to tax. However, withholding tax required by law
to be declared by the employer from the compensation of an employee is part of the
compensation subject to tax.
Basis if the compensation is paid in kind:
A) If services are paid – fair market value of the thing taken as payment
B) If services are rendered – fair market of the remuneration received
C) If the corporation transfers its own stock – fair market value of the stock at the time
the services were rendered
3. COMPENSATION PAID IN PROMISSORY NOTE – Promissory notes in payment of service
at the time of receipts constitute income to the extent of their fair market value
4. TIPS AND GRATUITIES – Tips and gratuities paid directly to an amployee by a customer of
the employer which are not accounted for by the employee to the employer are
considered as taxable income of the employee but not subject to withholding tax.
5. TRANSPORTATION, REPRESENTATION AND OTHER ALLOWANCES – In general, fixed
or variable transportation and other allowances which are received by a public officer or
employee or officer or employee of a private entity in addition to the regular compensation fixed
for his position or office is taxable as compensation income.
Conditions for advances or reimbursements for traveling, representation and other bona fide
expenses to be considered as compensation:
A. They are ordinary and necessary expenses
B. They are paid or incurred by the employees in the pursuit of the trade, business or
profession, and
C. The employee is required to account/liquidate the foregoing expenses The excess
of advances made over actual expenses shall constitute taxable income if such
amount is not returned to the employer.
6. RATA, PERA and ACA GRANTED TO GOVERNMENT EMPLOYEES – Representation and
Travel Allowance (RATA) granted to public officers and employees under the GENERAL
Appropriations Act and Personnel Economic Relief Allowance (PERA) granted to government
personnel are non-taxable compensation income.
7. VACATION AND SICK LEAVE ALLOWANCES – These constitute compensation. However,
the monetized value of unutilized vacation leave credits of 10 days or less which were paid to
the employee of private firms during the year are not subject to income tax but they are
classified as de minimis benefits which are exempt from income tax.
8. REMUNERATORY DONATIONS – Remuneratory donations are those which remunerate
past services which do not constitute demandable debts. The motivating cause is gratitude,
acknowledgement of a debt or a desire to compensate and not the liberality of the donor. They
are deemed subject to income tax.
CHAPTER 9 EXCLUSIONS FROM GROSS INCOME
Exclusions from Gross Income are income which will not be subject to income tax. They are not
included in gross income subject to regular tax, capital gains tax, or final tax.
Under the NIRC, the following items shall not be included in gross income, and shall be exempt
from taxation:
1.
2.
3.
4.
5.
6.
7.
Proceeds of life insurance policy
Amount received by the insured as a return of premium
Gifts, Bequest, Devise or Descent
Compensation for injuries, or sickness
Income exempt under Treaty
Retirement benefits, pensions, gratuities, etc
Miscellaneous items:
a. Income in the Philippines of foreign govt. or foreign govt-owned and controlled
corporations
b. Income of the govt. and its political subdivisions
c. Prizes and awards in foreign recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievements
d. Prizes and awards in athletic sports competitions
e. Contributions to GSIS, SSS, Philhealth, Pag-ibig and Union dues
f. 13th month pay and other benefits not exceeding P 90,000
g. Gains from sale of bonds, debentures or certificates of indebtedness with
maturity of more than 5 years
PROCEEDS OF LIFE INSURANCE POLICY
A. Proceeds of life insurance policy
- Life is regarded as a capital item with infinite value. Hence, the proceeds of life
insurance is a return of capital.
- The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, however, if such
amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.
B. Amount received by the insured as a return of premium - The amount received by
the insured as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract. The amount received by the insured as a
return of premium or any insurance contract is a return of capital, hence, it is excluded
from gross income.
COMPENSATION FOR INJURIES AND SICKNESS
Amounts received through accident or health insurance or under Workmen’s Compensation Act
as compensation for personal injuries or sickness, plus the amounts of any damages received,
whether by suit or agreement, on account of such injuries or sickness.
INCOME EXEMPT UNDER TREATY
Income items that are excluded by international agreement to which the Philippine govt. is a
signatory are excluded from income tax. It must be recalled that treaty agreements override
provisions of our revenue tax laws in case of conflict under the exemption doctrine of
international comity.
RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHER BENEFITS
Retirement benefits under RA 7641 and those received by officials and employees of private
firms in accordance with a reasonable private benefit plan maintained by the employer.
Requisites of exemption:
1. The employer maintains a reasonable private benefit plan.
2. The retiring official or employee has been in the service of the same employer for at
least 10 years;
3. The retiring employee is at least 50 years of age at the time of retirement;
4. This is the first time availment for retirement benefit exemption.
SEPARATION OR TERMINATION
Requisites of exemption:
1. The separation or termination must be due to job-threatening sickness, deaths or other
physical disability, and
2. The same must be due to any cause beyond the control of the employee or official such
as:
a.
b.
c.
d.
e.
f.
Redundancy
Retrenchment
Closure of employer’s business
Employee lay-off
Downsizing of employer’s business
Sickness or death of the employee
The term “beyond the control of the employee” connotes involuntariness on the part of the
employee. In other words, the separation must not be of his own making.
Abandonment of office such as the registration and subsequent appointment to another office is
considered as a voluntary separation and does not fall within the purview of the phrase “ for any
cause beyond the control of such official or employee”
The exemption of termination or separation benefits does not extend to:
1. Back wages or illegal deductions repaid by the employer upon termination ;
2. Terminal leave pay or the commutation of accumulated unused leave credits .
To avail of the tax exemption, the employee or his heirs shall request for a ruling or a Certificate
of Exemption (CTE) from the BIR. The request for a CTE and other required documents shall be
filed at the RDO where the employer is registered.
SOCIAL SECURITY BENEFITS, RETIREMENT GRATUITIES, AND OTHER SIMILAR BENEFITS
FROM FOREIGN GOVT. AGENCIES AND OTHER INSTITUTIONS, PRIVATE OR PUBLIC received by
residents or non-resident citizens or aliens who come to settle permanently in the Philippines.
PRIZES AND AWARDS MADE PRIMARILY IN RECOGNITION OF RELIGIOUS, CHARITABLE,
SCIENTIFIC, EDUCATIONAL, ARTISTIC, LITERARY, OR CIVIC ACHIEVEMENT, only if:
a. The recipient was selected without any action on his part to enter the contest or
proceedings, and,
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Prizes of this kind partake in the nature of a unilateral transfer and hence, exempt from income
tax.
PRIZES AND AWARDS IN SPORTS COMPETITIONS GRANTED TO ATHLETES:
a. In local or international competitions and tournaments
b. Whether held in the Philippines or abroad; and,
c. Sanctioned by their international sports associations.IV
CONTRIBUTIONS FOR GSIS, SSS, PHILHEALTH, PAG-IBIG AND UNION DUES OF INDIVIDUALS
These pertain to the employee share in the premium contributions to GSIS, SSS, Philhealth,
Pag-ibig and union dues. The portion of the salary contributed are exempt from income tax. The
exclusion pertains only to the mandatory or compulsory monthly contributions. Voluntary
contributions to Pag-ibig II, GSIS or SSS in excess of the mandatory monthly contributions are
taxable. Note that Pag-ibig is now called the Home Development Mutual Fund or HDMF.
OTHER EXEMPT INCOME UNDER NIRC AND SPECIAL LAWS
1. Minimum wage and certain benefits of Minimum Wage Earners;
2. Income of Barangay Micro Business Enterprise Act (RA 9178)
3. Income of Cooperatives (RA 9520)
4. Income of Non-stock, Non-profit entities
5. Income of Employee trust Funds.
CHAPTER 10 TAXATION OF INDIVIDUALS
For Income Tax purposes, individual taxpayers are classified as follows:
1. Resident Citizen – An individual whose residence is within the Philippines and
who is a citizen thereof.
2. Non-Resident Citizen – is a citizen who:
A. establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad, with a definite intention to reside therein,
B. leaves the Philippines during the taxable year to reside abroad either as an
immigrant or for employment on a permanent basis,
C. works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time (not less
than 183 days) during the taxable year.
A citizen who has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident 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.
3. Resident Alien – means any individual whose residence is within the Philippines
and who is not a citizen thereof.
4. Non-Resident Alien – means an individual whose residence is not within the
Philippines and who is not a citizen thereof. A nonresident alien is classified into:
A. Engaged in Trade or Business in the Philippines (ETB) – refers to a
Non-resident alien who shall come to the Philippines and stay for an aggregate period of
more than 180 days during any calendar year,
or,
B. Not Engaged in Trade or Business in the Philippines (NETB) – refers to a
nonresident alien who shall come to the Philippines and stay for an aggregate period of
180 days or less during any calendar year.
General Principles of Income Taxation on Individuals
1. A resident citizen is taxable on income derived from sources within and without
the Philippines.
2. A nonresident citizen is taxable only on income derived from sources within the
Philippines.
3. A citizen of the Philippines who is working and derived income from abroad as
an overseas contract worker is taxable only on income from sources within the
Philippines.
4. An alien individual whether a resident or not in the Philippines is taxable only on
income derived from sources within the Philippines.
The following table summarizes the situs of taxable income of individual tax[payer:
Tax on Income Earnings and Money Remittances of Overseas Contract Workers (OCW) /
Overseas Filipino Workers (OFW)
OCW refers to Filipino citizens employed in foreign countries, commonly referred to as OFWs
who are physically present in foreign countries as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and is not borne by any entity
or person in the Philippines. To be considered as an OCW or OFW, they must be truly
registered as such in the Philippine Overseas Employment Administration (POEA) with a valid
Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services rendered
abroad as members of the complement of a vessel engaged exclusively in international trade.
To be considered as an OCW or OFW they must be duly registered as such with the POEA and
with valid Overseas Employment Certificate (OEC) with a valid Seafarers Identification Record
Book (SIFB) or Seaman’s Book issued by the Maritime Industry Authority (MARINA).
An OCW is taxable only on income from sources within the Philippines. Thus, OCW or OFWs
income rising out of his employment is exempt from income tax.
If an OCW or OFW has income earnings from business activities or properties within the
Philippines, such income earnings are subject to regular income tax.
However, it shall be exempt from 15% final tax on interest income from a depository bank under
the expanded foreign currency deposit system upon presentation of proof of non-residency such
as OEC or Seaman’s Book.
If an account is in the name of the OCW or a Filipino seaman, and an individual (spouse or
dependent) who is living in the Philippines, 50% of the interest income from such bank deposit
will be treated as exempt while the other 50% shall be subject to a final withholding tax of 15%.
Kinds of Income of Individual Taxpayer
1. Compensation Income
- means all remuneration for services performed by an employee under the
employer-employee relationship .
- such as salaries, wages, emoluments and honoraria, allowances, commissions,
fees, taxable bonuses and fringe benefits
2. Business Income
earned by a sole proprietor or an independent contractor who reports income earned
from self-employment.
it includes those hired under a contract of service or job order.
3. Professional Income –earned by professionals whose income is derived purely
from the practice of profession and not under the employer-employee
4. Passive Income – income earned without working actively, they are subject to
different final withholding tax rates.
PASSIVE INCOME
Passive incomes are incomes subject to final withholding tax and shall not be included in the
gross income of the taxpayer. The liability for payment of the tax rests primarily on the payor as
a withholding agent. The payee is not required to file an income tax return for the particular
income.
EXAMPLES
A. Income payments to an individual subject to final taxes
INDIVIDUAL INCOME TAXPAYERS
1) Individuals Earning Purely Compensation Income
Individuals earning purely compensation income shall be taxed based on the income tax rates
prescribed.
Taxable income for compensation earners is the gross compensation income less nontaxable
income/benefits such as but not limited to 13th month pay and other benefits (subject to
limitations), de minimis benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-IBIG
contributions and Union dues.
Husband and wife shall compute their individual income tax separately based on their
respective income; if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.
Minimum wage earners shall be exempt from the payment of income tax based on their
statutory minimum wage rates. The holiday pay, overtime pay, night shift differential and hazard
pay received by such earners are likewise exempt.
FRINGE BENEFITS AND FRINGE BENEFIT TAX
Fringe Benefit means any good, service, or other benefit furnished or granted by an employer
in cash or in kind, in addition to basic salaries, to an individual employee except rank and file
employees.
- Fringe benefit subject to the fringe benefit tax is not among the items of gross income for
purposes of computing the income tax liability of an individual employee.
-
Fringe benefit tax is subject to a final withholding tax.
-
Generally, the amount of taxable fringe benefit and the fringe benefits tax constitute
allowable deductions from the gross income of the employer.
-
The grossed-up monetary value of fringe benefit on which the withholding tax is paid is
now deductible on the part of the employer falling under the expense category.
-
Grossed-up monetary value is the whole amount of income realized by the employee
which includes the net amount of money or net monetary value of property which has
been received plus the amount of fringe benefit tax due thereon.
FRINGE BENEFITS TO MANAGERIAL OR SUPERVISORY EMPLOYEES:
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver, and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
7. Expense for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents , and
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
Imposition of Fringe Benefit Tax
A final withholding tax is hereby imposed on the grossed-up monetary value of fringe
benefit furnished, granted, or paid by the employer to the employee whether such employer is
an individual, professional partnership or a corporation, regardless of whether the corporation is
taxable or not, or the government and its instrumentalities, except on the following:
a) Fringe benefits which are authorized and exempted from income tax under the Code
or any other special law;
b) Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
c) Benefits given to the rank-and-file whether, granted under a collective bargaining
agreement or not;
A Collective Bargaining Agreement (CBA) is a negotiated contract between a legitimate
labor organization and the employer concerning wages, hours of work and other terms
and conditions of employment in a bargaining unit including mandatory provisions for
grievance and arbitration machineries.
d) De minimis benefits
e) If the grant of fringe benefit to the employee is required by the nature of or necessary
to the trade, business or profession by the employer, or
f) If the grant of the fringe benefit is convenience or advantage of the employer (this is
known as the “Convenience of the Employer Rule”
If the fringe benefit is exempted from the fringe benefits tax , the same may, however, still form
part of the employee’s gross compensation income which is subject to income tax, hence,
likewise subject to a withholding tax on compensation income payment.
An example is a fringe benefit given to rank and file employees. They are exempt from fringe
benefit tax but are usually taxable as ordinary income. Thus, forming part of taxable
compensation income.
CONVENIENCE OF THE EMPLOYER RULE – whenever the allowance such as free meals
and lodging are furnished by the employer as a condition for employment and for the
convenience of the employer, this allowance furnished are not taxable to the employee
BENEFITS TO RANK & FILE EMPLOYEES or (De minimis Benefits)
The fringe benefit tax shall not apply to rank and file as merely routinary or clerical in nature.
The fringe benefits received by this class of employees shall form part of their taxable
compensation income.
- De minimis Benefits are facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment or efficiency of his
employees.
The term “Rank-and File Employees' ' means all employees who are holding neither
Managerial nor Supervisory positions.
Supervisory Employees are those who, in the interest of the employer, effectively recommend
such managerial actions, if the exercise of such authority is not merely routinary or clerical in
nature but requires the use of independent judgment.
Managerial Employee is one who is vested with powers or prerogatives to lay down and
exercise managerial policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees.
De minimis Benefits – are exempt from the fringe benefits tax and shall, in general, be , merely
as a means of promoting the health, goodwill, contentment or efficacy of his employees.
De minimis Benefits not subject to income tax as well as withholding tax on
compensation income of managerial, supervisory and rank-and-file employees:
1. Monetized unused vacation leave credits of private employees not exceeding 10
days during the year.
2. Monetized value of vacation and sick leave credits paid to govt. officials and
employees;
3. Medical cash allowance to dependents and employees not exceeding P 1,500 per
employee per semester or P 250 per month.
4. Rice subsidy of P 2,000 or 1-sack of 50-kilogram rice per month amounting to not
more than P 2,000;
5. Uniforms and clothing allowance not exceeding P 6,000 per annum;
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/executive check-up, maternity assistance and medical
consultations, not exceeding P 10,000 per annum.
7. Laundry allowance not exceeding P 300 per month.
8. Employees’ achievement awards , e,g, for length of service or safety achievement,
which must be in the form of a tangible property other than cash or gift certificate,
with an annual monetary value not exceeding P 10,000 received by the employee
under an established written plan which does not discriminate in favor of highly paid
employees.
9. Gifts given during Christmas and major anniversary celebrations not exceeding
P 5,000 per employee per annum;
10. Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.;
11. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25%
of the basic minimum wage on a per region basis, and;
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement
(CBA) and productivity incentives schemes provided that the total annual monetary
value received from both CBA and productivity incentives schemes mentioned, do
not exceed P 10,000 per employee per taxable year.
All other benefits given by employers which are not included in the above enumeration shall not
be considered as “De minimis benefits”, and hence, shall be subject to income tax as well as
withholding tax on compensation
Employer gives benefit beyond the ceiling
The amount of De minimis benefits considered to the ceilings herein prescribed shall not be
considered in determining the P 90,000 of other benefits. However, if the employer pays more
than the ceiling, the excess shall be taxable to the employee receiving the benefits only if such
excess is beyond P 90,000.
Such excess, therefore, shall be considered as ordinary income of the employee and shall form
part of his taxable income.
In any case, the amount given by the employer as benefit (De minimis or fringe benefits) to its
employees shall be deductible expense of such employer.
Tax Rate and Tax Base
A final withholding tax at the rate of 35% is imposed on the Grossed-up monetary value of the
fringe benefit furnished, granted or paid by the employer to the employee.
Grossed-up Mon. Value
= Monetary value of the fringe benefit
65%
The grossed-up monetary value (100%) of the fringe benefit represents the whole amount of
income realized by the employee which includes the following:
1. The net amount of money or net monetary value of property received (65%), and;
2. The amount of fringe benefit tax (35%) thereon otherwise due from the employee but
paid by the employer for and on behalf of the employee.
The tax imposed shall be treated as a final income tax on the employee which shall be
withheld and paid by the employer on a calendar quarterly basis.
Nature of imposition and Payment of tax
The fringe benefit tax is subject to final withholding tax. It is imposed on the employee but the
employer is required by law to pay the tax for and on behalf of the employee. That is why the
tax is based on the grossed-up monetary value (the amount of the benefit plus the tax) and not
simply the amount paid by the employer to the employee.
If the payment is made to persons other than the employee, no actual withholding of the tax will
take place. Nonetheless, the value of the tax is computed based on the grossed-up monetary
value
EXPENSE ACCOUNTS – such as groceries for the personal consumption of the employee
and/or his family
The monetary value is the amount paid by the employer.
The following expenses of the employee shall be subject to fringe benefit tax:
1. Expenses incurred by the employee but which are paid or reimbursed by the
employer (whether or not receipted in the name of the employer).
2. Personal expense of the employee (like purchase of groceries for the consumption of
the employee and his family members) paid for or reimbursed by the employer
whether or not the same are duly receipted for in the name of the employer.
HOUSEHOLD EXPENSES
The following expenses of the employee which are born by the employer for household
personnel shall be treated as taxable fringe benefits:
1. Salaries of household help, personal driver of the employee, etc.
2. Other personal expenses like payment for homeowner’s association dues, garbage
dues, etc.
HOLIDAY AND VACATION EXPENSES
Holiday and vacation expenses of the employee borne by the employer shall be treated as
taxable fringe benefits.
FILING OF TAX RETURNS of Final Withholding Tax – Use BIR Form No. 1603 which shall
be filed and paid on or before the 25th day of the month following the quarter.