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Chapter 1. Introduction to Taxation
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TAXATION – state power, legislative
process, mode of government cost
distribution.
THEORY OF TAXATION – government’s
necessity for funding.
BASIS OF TAXATION – mutuality of
support between the people and the
government.
Receipts of benefits are conclusively
presumed.

– encroachment of foreign
sovereignty.
International Comity – all
nations deemed equal to
one another (co- equal
sovereignty); non-taxing
of income and properties of
other governments
THEORIES OF COST ALLOCATION
Benefit received theory – more benefit,
more taxes.
Ability to Pay Theory – contribute
based on relative capacity to sacrifice.
ASPECTS:
: Vertical Equity – gross concept;
extent of ability to pay is proportional to tax
base.
: Horizontal Equity – net
concept; consideration of
circumstances

THE LIFEBLOOD DOCTRINE – without
taxes, government would be paralyzed:
Taxes – essential and indispensable.
IMPLICATION:
: doesn’t need constitutional grant.
: tax exemption – claims: construed
against taxpayer
: right to choose object of taxation –
government
: courts not allowed to interfere
: Income taxation
taxable upon receipt;
deduction for capital expenditures
and prepayment not allowed;
lower amount of deduction is
preferred, in case claimable expense
subject to limit;
higher tax base is preferred, in case
of
multiple tax bases.

INHERENT POWERS OF THE STATE (pg. 45)
Taxation Power – enforce
proportional contribution
Police Power – enact laws to protect wellbeing of the people
Eminent Domain – take private
property for public use after paying just
compensation

SCOPE OF TAXATION POWER
(CPUS) – comprehensive, plenary,
unlimited, and supreme.

THE LIMITATIONS OF THE TAXATION
POWER
Inherent Limitations (TIPEN)
 Territoriality of Taxation – demand tax
obligations within territorial
jurisdiction; extraterritorial taxation
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Public Purpose (only) – intended for the
common good
Exemption of the Government –
exemption: income from its properties and
activities conducted for profit (GOCC)
Non-delegation of the Taxing Power – vested
exclusively in congress and is non- delegable.
Exemption: LGU, President – fix amount of
tariffs, other cases requiring expedient and
effective administration and
implementation.
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Constitutional limitations (DEUP-NNFE-NECNNNTT)
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Due process of law – neither harsh nor
oppressive
Aspects:
: Substantive due process – tax must be
imposed only for public purpose
: Procedural due process – no
arbitrariness, right to notice and hearing.
Assessment – made within 3 years
from due date of filing of return or actual
filing (whichever is later)
Collection – made within 5 years
from date of assessment
Equal protection of the Law – equal
treatment both in terms of rights
conferred and obligations imposed;
applies to taxpayers under same
circumstances.
Uniformity rule in taxation – taxation shall be
uniform and equitable;
: taxpayers under dissimilar
circumstances should not be taxed the
same (substantial distinction)
: each class is taxed differently – falling
under same class are taxed the same
(relative equality)
Progressive system of taxation – tax rates
increase as tax base increases (consistent
with taxpayer’s ability to pay)
Non-imprisonment for non-payment of
debt or poll tax – applies only when
the debt is acquired in good faith (bad
faith
– estafa)
Non-impairment of obligation and
contract – honored and shouldn’t be
cancelled by a unilateral
government action.
Free worship rule – free exercise of
religion but does not extend to
income from properties or activities
that are proprietary or
commercial in nature
Exemption of the following
lands, buildings, and
improvements from property
taxes
: Religious, charitable and educational
entities
: Non-profit cemeteries, churches and
mosques


Doctrine of use: applies only
to properties actually,
directly, and exclusively
devoted to religious activities,
etc.
Non-appropriation of public funds or
property for the benefit of any
church, sect, or system of religion –
government should not favor nor
support any particular system of
religion
: however, compensation
to priests, etc. with
military, penal institutions,
etc. not considered
religious appropriation.

Exemption from taxes of the revenues
and assets non-profit, non-stock
educational institutions (Doctrine of
use)
: including grants, endowments, donations, or
contributions
: Private educational institutions
– minimal 10% income tax
 Concurrence of a majority of all
members of Congress for the passage
of a law granting tax exemption
: In withdrawal, only a relative
or quorum majority is required
 Non-diversification of tax collections –
used only for public use.
 Non-delegation of the power of taxation –
as part of lawmaking be vested exclusively
in Congress
 Non-impairment of the jurisdiction of the
Supreme Court to review tax cases – all
tax cases can be raised to and be finally
decided by the Supreme Court of the
Philippines

Appropriations, revenue, or tariff bills
shall originate exclusively in the house
of representatives
: does not necessarily mean that the House bill must
become the final law.
: Senate may propose or concur with amendments
: Held constitutional – senate changed entire
house version of tax bill

Delegation of taxing power to local
government units – constitutional
recognition of the local autonomy of
LGU

STAGES OF THE EXERCISE OF TAXATION
POWER Levy or Imposition
: impact of taxation; legislative act
: enactment of a tax law by Congress – House
of Representatives and The Senate
: tax bills must originate from House
of Representatives.
: However, each may have their own
versions
proposed which is approved by both bodies.
DISCRETION IN THE EXERCISE:
(DSDKNSM)
‘Determine object of taxation ‘Set tax
rates/amount collected
‘Determine purpose of levy – public use ‘Kind of tax to
be imposed
‘National and local government apportionment
‘Situs of Taxation ‘Method of collection
Assessment and Collection
: incidence of taxation; administrative act
of taxation
: tax law is implemented by the
administrative branch of the government
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: involves assessment/determination of
the tax liabilities of taxpayers and
collection.

SITUS OF TAXATION

Situs – place of taxation; tax
jurisdiction.

Situs rules – frames of reference
whether
tax object is within or without the jurisdiction.
: Business Tax Situs – where the
business is conducted.
: Income tax situs on services – where
service is rendered
: Income tax situs on sale of goods –
in the place of sale
: Property tax situs – in its location
: Personal tax situs – in their
place of residence

OTHER FUNDAMENTAL DOCTRINES IN
TAXATION

Marshall Doctrine – “The power
to tax involves the power to
destroy”: an instrument of police
power.
: used to discourage or
prohibit undesirable activities
or occupation.
(e.g.
SINTAX)
: solely for the purpose of
raising revenues – does not
include the power to destroy

Holme’s Doctrine – “Taxation power
is not the power to destroy while the
court sits.”
: used to build or encourage
beneficial activities – grant of
tax incentives. (e.g. Tax
Holidays)

Prospectivity of tax laws
: ex post facto law/law that
retroacts – prohibited by
constitution, unless intended
by
Congress under certain
justifiable conditions. (e.g.
under foreign occupation even
after the war)

Non-compensation or set-off –
cannot delay payment of tax; not a
debt.
Exceptions
: Taxpayer’s claim
become due and demandable
– recognized by government; a
refund was made
: overpayment of taxes
: Local taxes

Non-assignment of taxes
: Contracts executed shall not
prejudice the right of
government to collect

Imprescriptibility in taxation –
government’s right to collect does
not prescribe unless the law
itself provides for such
prescription.
: Prescription – lapsing of a
right due to the passage of
time
Under NIRC, tax prescribed if not collected
within:


5 years from the date of
assessment
 3 years from the date of return
required to be filed, in absence
of an assessment
Doctrine of estoppel – “still the
taxpayer’s fault”
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: error of any government
employee does not bind
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Judicial Non- Interference
: generally, courts cannot
issue injunction against the
government’s pursuit to
collect tax
: anchored on the
lifeblood doctrine
Strict Construction of Tax Laws –
“taxation is the rule; exemption is the
exception”
: when language of law is
clear and categorical – no
room for interpretation, only
for application
: Vague tax laws – means no
tax law; construed against the
government and in favor of the
taxpayers – obligation arising
from law is not presumed
(due process)
: Vague exemption laws –
means no exemption law;
claim for exemption is
construed
strictly against the taxpayer
in accordance with the
lifeblood doctrine
‘Exemption must
be
clear
and
unequivocal. Any doubt is
resolved
against
the
taxpayer.
the government since it is
not subject to estoppel.

Categories of Escape from Taxation
A. Those that result to loss of
government revenue (Ev, Av, Ex)
: Tax Evasion (tax dodging) – any act or
trick that tend to illegally reduce or avoid
payment of tax (e.g. understatement of
income, overstating of expenses)
: Tax Avoidance (tax minimization) – any
act or trick that reduces or totally escapes
taxes by any legally permissible means.
(e.g. selection/execution of transaction
that would effect to lower taxes)
: Tax exemption (tax holiday) – immunity,
privilege or freedom from being subject to
tax granted by constitution, law, or
contract.
‘Can be revoked by Congress except
those granted by constitution and under
contracts’
B. Those that do not result to loss of
government revenues (ShiCapTra)
: Shifting – process of transferring tax
burden to other taxpayers
Forms of Shifting
‘Forward Shifting’ follows the
normal flow of distribution; common
with essential
commodities and services such as
food and fuel (e.g. manufacturers to
wholesalers, wholesalers to retailers)

DOUBLE TAXATION – occurs when same
taxpayer is taxed twice by same tax
jurisdiction for the same thing.

Elements of double taxation (OTPJP)
: Primary elements – same object
: Secondary elements – same type, purpose, taxing
jurisdiction and/or tax period.

Types of Double Taxation
: Direct double taxation – all the element of double
taxation exists for both impositions; discouraged since
it is oppressive and burdensome.
‘counter the rule of equal
protection and uniformity in
the constitution’
: Indirect double taxation – at least
one of the secondary elements of
double taxation is not common for
both impositions; prevalent in
practice.

Impact of double taxation
minimized:
: Provision of tax exemption – only
one tax law is allowed to apply
to the tax object
: Allowing foreign tax credit –
payment made in foreign tax law is
deductible against the tax due of
the domestic tax law
: Allowing reciprocal tax treatment
– reduced tax rates or
exemption on foreign taxpayer if
the country of the same give same
treatment to Filipino non-resident
therein
: Entering into treaties or bilateral
agreements – lower tax rates for
their residents engage in transaction
that are taxable by both of them

ESCAPE FROM TAXATION – means available
to the taxpayer to limit or even avoid the
impact of taxation.
Chapter 2: Taxes, Tax Laws, and Tax
Administration
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‘Backward shifting’ reverse of forward shifting;
common to non-essential commodities; buyers have
market power with numerous alternatives
‘Onward shifting’ any tax shifting in the distribution
channel exhibits either of the former forms.
: Capitalization – adjustment of the
value of an asset caused by changes in
tax rates.
‘Value of mining property decreases
when output is subject to higher tax – form
of backward shifting
: Transformation – elimination of
wastes or losses by taxpayer to form
savings to compensate for the tax
imposition or increase in taxes. (e.g.
improvement of goods)

TAX AMNESTY VS. TAX CONDONATION –
both construed against taxpayers and in
favor of the government

Tax Amnesty
: general pardon – granted by government for
erring taxpayers
: chance to reform and enable fresh
start
– clean slate
: retrospective in application
: covers both civil and criminal liabilities
: conditional upon the taxpayer paying a portion
 Tax Condonation (tax remission)
: forgiveness under certain justifiable grounds
: covers only civil liabilities
: applies prospectively to any unpaid balance –
portion paid will not be refunded
: requires no payment

TAXATION LAW – any law that arises
from the exercise of the taxation power
of the state.

TYPES OF TAXATION LAWS
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: Tax Laws – provide for the
assessment and collection of taxes
(e.g. NIRC, Tariff and Customs Code,
LGU)
: Tax Exemption Laws – grant
certain immunity from taxation. (e.g.
Minimum Wage Law, BMBE Law,
Coop.
Development Act)

SOURCES OF TAXATION LAWS
: Constitution
: Statutes and Presidential Decrees –
tariff and customs code
: Judicial decisions or case laws – due
to ambiguity
: Executive Orders and Batas Pambansa
: Administrative Issuance - DOF
: Local Ordinances
: Tax treaties and conventions with foreign
countries
: Revenue Regulations –
Administration, DOF, BIR, BOC

‘In cases of conflict in the
preparation and filing of tax returns,
tax laws shall prevail – mandatory’


Revenue Memorandum Orders
‘RMOs’ (steps)
: issuance that provide directives or instructions, etc.
necessary in the implementation of the Bureau in all
areas except auditing.

Revenue Memorandum Rulings
‘RMRs’ (exemption)
: rulings, opinions and interpretations of the CIR
: BIR Rulings, cannot contravene duly issues RMR’s;
otherwise, rulings are null and void ab initio.

Revenue Memorandum Circulars
RMCs’ (announcement whenever
there are issues)
: issuance that publish relevant and applicable
portions as well as implications – laws, rules, etc.
issues by BIR and others agencies.

Revenue Bulletins ‘RB’
: periodic issuances, notices, and official
announcements of the CIR for the guidance of the
public

BIR Rulings
: official positions of the Bureau to queries raised by
taxpayer’s and other stakeholder relative to
clarifications and interpretation of tax laws
: merely advisory, none of them binding except to the
addressee and may be reversed by BIR anytime

TYPES OF RULLINGS – VAT, International Tax
Affairs Division, BIR, Delegated Authority
NATURE OF PHILIPPINE TAX LAWS – civil
and not political in nature; effective even
during periods of enemy occupation.
‘Internal Revenue Laws’ not penal in
nature, do not define crime; merely intended
to secure compliance.

TYPES OF ADMINISTRATIVE ISSUANCES

Revenue Regulations (clarifications)
: Issuance signed by Secretary of Finance,
recommendation of the CIR
: formal pronouncements intended to clarify –
providing details of administration and procedure
: has the force and effect of a law, but not intended to
expand or limit; otherwise, void.
GENERALLY ACCEPTED ACCOUTING
PRINCIPLES VS. TAX LAWS

GAAP – not law but mere conventions
of financial reporting; intended to meet
the common needs of a vast number of
users in the general public.

TAX LAWS – special form of
financial
reporting
which
is
intended to meet specific needs of
tax authorities.

TAX – enforced proportional contribution
levied by the lawmaking body of the State to
raise revenue for public purpose
Elements of a Valid Tax
Must (be):
1. Levied by taxing power having jurisdiction
2. Not violate constitutional and
inherent limitations
3. Uniform and equitable
4. For public purpose
5. Proportional in character
6. Generally payable in money
Classification of Taxes

As to purpose
: Fiscal or revenue tax – for
general purpose
: Regulatory – to regulate
business, conduct, acts or
transactions
: Sumptuary – to
achieve social/economic
benefits

As to subject matter
: Personal, poll or capitation – on
persons/residents of a particular
territory
: Property Tax – on personal or
real properties
: Excise or Privilege tax – upon
performance of an act; enjoyment of
privilege: engagement in an
occupation

As to incidence
: Direct Tax – both impact and
incidence of taxation rest upon the
same taxpayer
: Indirect Tax – paid by any person
rather than statutory taxpayer
‘Statutory Taxpayer – person
named by law to pay the tax
‘Economic Taxpayer – one who
actually pays the tax

As to amount
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: Specific tax – fixed amount on per unit
basis (e.g. kilo, liter or meter, etc.)

As to rate
: Proportional tax – flat/fixed rate tax; emphasizes
equality
: Ad valorem – fixed proportion upon
the value of tax object

TAX VS. PENALTY
: Tax – imposed for government support;
arises from law
: Penalty – imposed to discourage an act
(by
both government and private individuals)
: Progressive of graduated tax – increasing rates as the
tax base increase
; arises from both law and contracts
: Regressive tax – decreasing tax rates
as the tax base increase; anti-poor
: Mixed Tax – combination of any of the above types of
tax

As to imposing authority
: National Tax – imposed by
national government
‘Income Tax – annual income,
gains or profits
‘Estate Tax – gratuitous
transfer of properties by a
decedent upon death
‘Donor’s Tax – gratuitous
transfer of properties by a living
donor
‘Value Added Tax – consumption
tax collected by VAT business
taxpayers ‘Other Percentage Tax
– consumption tax collected by
nonVAT business taxpayers
‘Excise Tax – tax on sin products
and non-essential commodities
(e.g. alcohol, cigarettes, metallic
minerals)
‘Documentary Stamp Tax
– on documents,
instruments, loan
agreements, etc.
: Local Tax – imposed by the
municipal or local government
‘Real Property
Tax
‘Professional
Tax
‘Business Taxes, fees, and
charges ‘Community tax
‘Tax on banks, etc.


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
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
TAX VS. REVENUE
: Tax – amount imposed
: Revenue – amount collected
TAX VS. LICENSE FEE
: Tax – broader subject; post-activity imposition
: License Fee – emanates from police power;
pre- activity imposition
TAX VS. TOLL
: Tax – demand of sovereignty
: Toll – demand of ownership; dependent
upon the value of property leased
‘Both government and private entities can
impose toll, but private entities can’t impose
tax.’
TAX VS. DEBT
: Tax – arises from law
: Debt – arises from private contracts
TAX VS. SPECIAL ASSESSMENT
: Tax – imposed upon persons, properties,
or privileges
: Special Assessment – levied on lands
adjacent to a public improvement; nonpayment will not imprison owner
TAX VS. TARIFF
: Tax - imposed upon persons, properties, or
privileges
: Tariff – imposed on imported or
exported commodities
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
law requires withholding of relevant
business
tax (e.g. VAT, percentage tax)
TAX SYSTEM – methods or schemed of
imposing, assessing, and collecting taxes.
TYPES OF TAX SYSTEM (pg. 41-42)
*Benefit- received theory
Voluntary compliance system –
taxpayer himself determine his
income, reports through ITR and pays
the tax to government: Selfassessment method
: will be reduced by creditable withholding tax
 Assessment or enforcement
system – government identifies
non-compliant taxpayers, assess
and demands compliance by means
of summary or judicial proceedings

 According to Imposition
: Progressive – income of individuals, and transfers of
properties by individuals
: Proportional – corporate income and business
: Regressive – not employed in PH

According to Impact
: Progressive System – emphasizes direct taxes;
cannot be shifted
: Regressive System – emphasizes indirect taxes;
shifted by business to consumers
TAX COLLECTION SYSTEM

PRINCIPLES OF SOUND TAX SYSTEM
Withholding System on Income
Tax – payor of the income
withholds/deduct the tax on the
income before releasing the same to
the payee and remits the
same to the government (ability to

pay theory)
: Creditable withholding tax
‘Withholding tax on
compensation - estimated tax
required to be withheld by
employers against employees’
income
‘Expanded Withholding Tax – tax required to be
deducted on certain income payments made by
taxpayer engaged in business (e.g. NRA-NETB)
: Final Withholding Tax – payors are required to
deduct the full tax on certain income payments:
income with high-risk of non-compliance (e.g. RA, NRA)

Withholding system on business
tax – when GOCCs purchase goods
or services to private entities, the
Chief Officials of the Bureau of Internal
Revenue
: 1 Commissioner
: 4 Deputy Commissioners, each designated:
‘Operations group
‘Legal Enforcement group ‘Information
Systems group ‘Resource Management group
POWERS OF THE BUREAU OF INTERNAL
REVENUE
(pg. 44)
1. Assessment and collection
2. Enforcement of penalties, etc.
3. Administering supervisory and police
power
4. Assignment of officers/employees to
other duties
5. Provision of forms, receipts, etc. to
proper officials
6. Issuances of receipts and clearances
7. Submission of annual report to Congress
and COC in matters of taxation
Power of the Commissioner of Internal
Revenue
1. To interpret the provisions of NIRC
2. To decide tax cases
3. To obtain information of person to effect
tax collection
4. To make assessment and
prescribe additional requirement
5. To examine and determine tax returns
: can be amended within 3 years from
filing, except notice for audit has been
served
6. To conduct inventory taking or surveillance
7. To prescribe presumptive gross sales
and receipts
8. To terminated tax period
(acc. to
Adam Smith)


Fiscal Adequacy – sources of
government funds must be sufficient
to cover government costs; tax
should increase in response to
increase in government spending
Theoretical Justice – suggest that
taxation should consider the taxpayers’
ability to pay; it should not be
oppressive, unjust, or confiscatory
Administrative Feasibility – tax
laws should be capable of efficient
and effective administration to
encourage compliance: avoiding
administrative bottlenecks and
reducing compliance costs. (see
applications on pg. 44)

TAX ADMINISTRATION – management of
the tax system
‘Tax administration in PH – entrusted to BIR
under
supervision of DOF’
9. To prescribe real property values
‘Zonal Value – values prescribed
10. To compromise tax liabilities
11. To inquire bank deposits
12. To accredit and register tax agents
‘Failure of Secretary of Finance to act on the
appeal within 60 days is deemed an
approval’
13. To refund or credit internal revenue taxes
14. To abate/cancel tax liabilities in certain
cases
15. To prescribe additional
procedures/documentary requirements
16. To delegate his powers to any subordinate –
rank equivalent to a division chief of an office
Non-delegated power of the CIR
1. Power to recommend the promulgation of
rules and regulations to SOF
2. Power to issue rulings of first impression;
reverse/modify any existing rulings
3. Power to compromise/abate tax liabilities
Except, (Regional Evaluation Board may
compromise)
: basic deficiency – 500,000 or less
: minor criminal violence
4. Power to assign/reassign officers to
establishments - articles subject to excise tax
are produced/kept
Rules in Assignment of revenue officers to
other duties
1. No more than 2 years – officers assigned in
establishment where excisable articles are
kept
2. No more than 3 years – officers assigned to
perform assessment and collection
3. Not more than 1 year – officers and
employees assigned to special duties
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Agents and Deputies for Collection
of National Internal Revenue
Taxes
: Philippine Economic Zone Authority
(PEZA) – created to promote investments
in export- oriented manufacturing
industries in PH
1. Imported goods – commissioner of
customs and his subordinates
2. Energy tax – head of appropriate
government offices and his
subordinates
3. Receipts of payments of IR taxes
authorized to be made thru banks –
Authorized government depository
banks (AGDB)
-
-
OTHER AGENCIES TASKED WITH TAX
COLLECTIONS OR TAX INCENTIVES
RELATED FUNCTIONS
-
: Bureau of Customs (BOC) –
collection of tariffs and VAT on
importation
-
-
Under
supervision
of DOF
1 customs
commissioner
5 deputy
commissioner
14 district
collectors
: Local Government Tax Collecting Units –
provinces, municipalities, cities, and barangays
-
-

Supervise the
grant of tax
incentives
under Omnibus
Investment
Code
Attached agency of
DTI
5 full-time
governors
Managing head
appointed as
vice chairman
by President
5. Percentage Tax – at least
P200K paid/quarter: preceding
year
6. Documentary stamp tax – at
least P1M/year
AS to financial conditions and
results of operations
1. Gross receipts or sales – P1M/year
2. Net worth – P3B/year
3. Gross purchases –
P800M/year: preceding year
4. Top corporate listed and
published by SEC
Automatic Classification of Taxpayers as Large
Taxpayers
1. All branches under LTS
2. Subsidiaries, affiliates, and
entities of conglomerates
3. Surviving company in case of merger
or consolidation
4. Corporation that absorbs operation in
case of spin-off
5. Corporation with authorized capitalization
of at least P300M registered with SEC
6. Multination enterprises with
authorized/assigned capital at least
P300M
7. Publicly listed corp.
8. Universal, commercial, and foreign banks
Imposed and collect
to rationalize fiscal
autonomy

TAXPAYER CLASSIFICATION FOR
PURPOSES OF TAX ADMINISTRATION
: Large Taxpayers – under supervision of
Large Taxpayer Service (LTS) of BIR national
office
: Non-large Taxpayers – under supervision of
respective Revenue District Offices (RDOs)
where business, etc. is situated

CRITERIA OF LARGE TAXPAYERS

As to payment
1. Value Added Tax – at least
P200K/quarter: preceding
year
2. Excise Tax – at least P1M
paid: preceding year
3. Income Tax – at least P1M
annual payment: preceding
year
4. Withholding Tax – at least
P1M annual remittances
: Board of Investments (BOI) – tasked
to lead the promotion of investment in
PH: assisting Filipinos and foreign
investors to venture and prosper
-
Supervise the grant
both fiscal and nonfiscal incentives
Registered enterprises
enjoy tax holiday on
certain years;
exemption from
import/export
including local taxes
Attached agency of DTI
1 director general
3 deputy directors
9. Corporate taxpayer – at least P1M
authorized capital in banking
industries, etc.
10. Corporate taxpayers engaged in
the production of metallic
minerals
Chapter 3. Introduction to Income Taxation

THE CONCEPT OF INCOME
: Subject to tax – best measure of
taxpayers’ ability to pay tax; excellent
object of taxation
: Taxation purposes – taxable concept,
“gross income”
Taxable item, “items of
gross income”,
“inclusion in gross
income”
Taxable income, items
of gross income less
deductions and
exemptions
Gross income, any
inflow of wealth to
taxpayers from
whatever source that
increases net worth
: Elements of Gross Income
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-
-



Return on capital
that increases net
worth
Realized benefit
Not exempted by
law, contract, or
treaty
: gain realized from assignment/sale
of policy
: interest income from unpaid balance
of the proceeds of policy
: excess of the proceeds received over
acquisition costs and premium
payment by an assignee
: Health – compensation for personal
injuries or torturous acts
: Human Reputation – cannot be
measured financially; any indemnity
received is deemed return of capital
(e.g. slander, alienation of affection, breach
of promise to marry)
Capital – any wealth or property
Return of capital – merely maintains net
worth
RETURN ON CAPITAL – increases the net
worth

Capital Items Deemed with Infinite Value
– incapable of pecuniary valuation; received
as compensation for their loss; deemed as
return of capital
: Life
‘Life insurance paid to heirs or beneficiaries upon
death of the insured are exempt from income tax.
‘Life insurance collected by employer as beneficiary
from an officer is likewise exempt.
Except: (return on capital)
: excess amount received over premiums paid upon
surrender/maturity of policy

RECOVERY OF LOST CAPITAL VS.
RECOVERY OF LOST PROFITS (pg. 65)
: Recovery of lost capital – merely maintains
net worth
: Recovery of lost profits – increases net
worth; as good as realization of income
Examples:
: Proceeds of crop or livestock insurance
: Guarantee payments
: Indemnity received from patent
infringement suit

REALIZED BENEFIT
“benefit”, any form of advantage derived
by taxpayer that leads to increase in net
worth
Excep
t:
: receipts on loan – offsetting effect
in net worth
: discovery of lost properties
: receipt of money or property – held
in trust, to be remitted
“realized”, earned; requires sacrifice from
the taxpayer to be entitled of benefit.
Requisites:
: exchange in transaction
: transaction involves another property
: increases net worth of recipient
MODE OF RECEIPTS/REALIZATION BENEFIT
(pg. 69)
1. Actual receipt – actual physical taking
of income in form of cash/property
2. Constructive receipt – no actual physical
taking of income but taxpayer is
effectively benefited
Examples:
: Offset of debt in consideration for
sale of goods/service
: deposit of income to checking
account
: increase in capital of a partner
from profit of partnership
INFLOW OF WEALTH WITHOUT INCREASE
OF NET
WORTH – e.g. receipt of property in
trust; borrowing of money

TYPES OF TRANSFERS
1. Bilateral transfer/exchanges –
onerous transactions (e.g. sale,
barter); subject to income tax
2. Unilateral transfers – gratuitous
transactions (e.g. succession – upon
death, donation); subject to transfer tax
3. Complex
transactions
–
partly
gratuitous and partly onerous; “transfers
for
less
than
full
and
adequate
consideration”
(e.g. Transfer tax – excess of fair value
from selling price; Income tax – excess of
selling price from cost)
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




Entity – every person, natural or juridical
Regardless of the underlying economic
relationship gains or income derived are
taxable since each corporation is a separate
entity (e.g. parent and subsidiaries, sister
companies)
Sales of home office to its branch
office – not taxable since they are a same
entity
Income between businesses of a
proprietor – taxable upon the same owner;
“proprietorship”, not a judicial entity
-
previously considered
as NRC and arrives in
PH anytime during
taxable year
Unrealized gains or holding gains – not
taxable since they haven’t yet materialized
in an exchange transaction
Examples:
: Increase in value of:
Investments in
equity/debt securities
Real properties held
(revaluation
increment)
Value of foreign
currencies
held/receivable
Land dues to discovery
of mineral reserves
: Decrease in value of:
Foreign currency –
fluctuation exchange
rates
: Birth of animal offspring
: Accrual of fruits in an orchard
: growth of farm vegetables
Exemption:
: Income received in non-cash considerations – taxable
at fair value of property received

Rendering of Services – an exchange does
not exist but does not cause loss of capital;
entire consideration received is an item of
gross income

EXEMPTED BY LAW, CONTRACT, OR TREATY
: Income of qualified employee trust fund
: Revenues of non-profit non-stock
educational institutions
: SSS, GSIS, Pag-Ibig, or PhilHealth benefits
: Minimum wage and salaries and qualified
senior citizen
: Regular income of BMBEs
: Income of foreign governments and FGOCCs
: Income of international missions and
organizations – tax immunity; named and
has ruling

TYPES OF INCOME TAXPAYER (pg. 70)
A. Individuals

Citizen
Since February 2, 1987
Fathers/mother are citizen of
PH Born before January 17,
1973 of Filipino mothers
Naturalized thru law
: Resident Citizen – Filipino citizen
residing in PH
: Filipino working in PH
embassies/consulate
offices
: Went abroad under tourist visa
: Non-resident Citizen - Citizen
staying abroad:
for more than 183
days
as an immigrant or for
permanent
employment
works and
derives income
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
Alien
: Resident Alien
-
(retains status until he
abandons it or depart from PH)
alien who came with
an immigration visa
lives in PH without
definite intention to
stay
who came with
definite purpose that
requires an extended
stay
: Non-resident alien
Engaged in
trade/business: less
than 1 year but more
than 180 days
Not engaged: not
more than 180 days
:
with
definite
purpose that
can
promptly
accomplishe
d

Taxable Estates and Trusts
: Estate – properties, rights, and obligations of a
deceased person not extinguished by his death
Judicial settlement:
treated as an
individual taxpayer
Extrajudicial
settlement: taxable
to heirs
: Trust – an arrangement whereby one person transfer
property to another person which will be held by a third
party
-
-
(grantor/trustor – beneficiary – trustee or fiduciary)
-
Irrevocable: an
individual
taxpayer
Revocable: taxable
to grantor
If silent, presumed
revocable
B. Corporations – includes partnership
except GPP and joint venture engaged in
energy operations under contract with
government

Domestic Corporation –
organized in accordance with PH
laws (even if controlled by
foreigners)

Foreign Corporation – organized
under foreign law
: Resident Foreign Corporation (RFC) –
operates in PH through permanent establishment (a
branch)
: Non-resident Foreign Corporation (NRFC) –
does not operate in PH

Special Corporations –
domestic/foreign corporations which
are subject to special tax rules or
preferential tax rates

Other Corporate Taxpayers
: Partnership
‘GPP – not a taxable entity
but partners are taxable
individually ‘Business
Partnership – taxable as a
corporation
: Joint Venture – other than exempt venture which
are taxable to venturers’ share in net income
: Co-ownership – not taxable entity
but to income of co-owner unless
income of co-owned property is
reinvented into other incomeproducing properties

GENERAL RULE: Resident Citizen and
Domestic Corporation are taxable on income
earned within and without the PH, others
are within the PH only

SITUS OF INCOME – place of taxation of
income; jurisdiction that has the authority to
impose tax upon the income
: Source of Income – activity or property that produces
the income
INCOME SITUS RULES (pg. 78)
TYPES OF INCOME
Interest Income
Royalties
Rent Income
Service Income
PLACE OF TAXATION
Debtor’s residence
Where intangible is employed
Location of property
Place where service is rendered
OTHER INCOME SITUS RULES (pg. 79)
A. Gain on sale of properties
1. Personal Property
: Domestic securities – presumed within
: Other – earned where property is sold
2. Real Property – earned where
property is located
B. Dividend income from:
1. Domestic Corporation – earned within
2. Foreign Corporation
: Resident FC – pre-dominance test: ratio
of PH gross income over world gross
income
At least 50%, portion of
dividend corresponding
PH gross income – earned
within
Less than 50%, entire
dividends earned
without
: Non-resident FC – earned abroad
C. Merchandising Income – earned where
the property is sold
D. Manufacturing Income – earned where the
goods are manufactured and sold
(production and distribution)
Chapter 4. Income Tax Schemes, Accounting
Periods, Accounting Methods, and Reporting

INCOME TAXATION SCHEMES – mutually
exclusive
: Final Income Taxation – final
withholding tax system – withheld at source
Applicable on certain
passive income
PASSIVE INCOME VS. ACTIVE INCOME
: Passive income – earned with minimal or without
active involvement
: Active income – arising from transactions requiring
a considerable degree of effort or undertaking
: Capital Gains Taxation – gain realized on
the sale, exchange and other disposition of
certain capital assets; employs selfassessment method
Capital asset: not used in
business or trade; other
than ordinary asset
Capital gains:
domestic stock and real
property
Taxable whichever is
higher between selling
price and fair market value
(zonal value)
: Regular Income Taxation – general rule of
income taxation. Covers all active income
and other income not subject to final tax and
capital gains tax; applies self-assessment
method
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
ACCOUNTING PERIOD – length of time over
which income is measured and reported
TYPES OF ACCOUNTING PERIODS (pg. 102)
1. REGULAR ACCOUNTING PERIOD
: Calendar Year – from Jan 1 to Dec 31
Available for both
corporate and
individual
taxpayers
Used when taxpayer
has no actual
accounting book; does
not keep books; an
individual
: Fiscal Year – any 12-month period that
ends on any day other than Dec 31
Available only to
corporate income
taxpayers
2. SHORT ACCOUNTING PERIOD – less than
12 months
: Newly commenced business – date of
start until designated year-end
: Dissolution of Business – start of
current year to date of dissolution (return
shall be filed within 30 days for corporate
taxpayers)
: Change of accounting period by
corporate taxpayers – start of previous
accounting up to designated year-end of
new accounting period (BIR approval is required – not
automatic)
: Death of taxpayer – star of calendar
year until death of the taxpayer
(accounting period shall be terminated
exactly at the date of death)
: Termination of the accounting period
of the taxpayer by the commissioner
of internal revenue – start of current
year until date of
termination (ITR and tax shall be due
and payable immediately)

DEADLINE OF FILING THE INCOME TAX
RETURN
: CALENDAR YEAR – on or before April 15 of
the following year
: FISCAL YEAR – on or before the 15th day of
the fourth month in the same year

ACCOUNTING METHODS – accounting
techniques used to measure income (pg.
105)
1. General methods

Accrual
Basis
–
income(expense) is recognized
when earned(incurred) regardless
of when received(paid).

Cash Basis – income(expense)
is
recognized
when
received(paid).
TAX VS. ACCOUNTING CONCEPTS
: Advanced income is taxable upon
receipt (services only)
: Prepaid expense is non-deductible
Deducted against
gross income on date
of expiration
Contradicts the
Lifeblood Doctrine
: Special tax accounting requirements
must be followed
Hybrid Basis – combination of accrual basis, cash
basis and or other methods of accounting when
taxpayer has several businesses that employs
different accounting methods
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2.
Installment and deferred method (pg. 109)

Installment Method – gross
income is recognized and reported in
proportion to the collection from the
installment sales.
Available to:
Dealers of:
: Personal Property
: Real Properties, if
initial payment does
not exceed 25% of
selling price (Initial
Payment/Selling Price)
Casual sale of nondealers of
real/personal property,
when selling price
exceeds P1000
and/or initial payment
does not exceed 25%
of selling price
5. Crop Year Basis – farming income =
proceeds of harvest – expenses of the
particular crop harvested (pg. 117)
Expenses of each crop
are accumulated and
deducted upon harvest
INITIAL PAYMENT:
downpayment +
installment payments in the taxable year of
sale (cash or property)
SELLING PRICE: entire amount which the
buyer is obligated; debtor assumes
indebtedness of the property
CONTRACT PRICE: amount receivable from
buyer; in absence of agreement to assume
indebtedness by the debtor (Selling Price –
Indebtedness)
GROSS INCOME: (Collection/Contract
Price) x Gross Profit
INDEBTEDNESS ASSUME EXCEEDS TAX
BASIS:
Indirect payment added to initial payment

Deferred Payment Method –
variant of accrual basis, used when
non-interest
bearing
note
is
received (pg. 113)
Gross income
computed based on
present value while
discount interest on
note is amortized as
interest income
3. Percentage of Completion Method –
estimated gross income from
construction is reported based on the
percentage of completion of the project.
Output method:
Prescribed by
NIRC
4. Outright and Spread-out Method –
applied on income from leasehold
improvement
: Outright Method – lessor reports
income the FMV of building or
improvements whenever it is completed
Perceived as unjust,
abusive and
improper
: Spread-out Method – estimated
depreciated value of such
building/improvement at the termination
of lease and report as income per year of
the lease an aliquot part thereof
cost of improvement
x (excess useful life
over lease
term/useful life of the
improvement)
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
TAX REPORTING
TYPES OF RETURNS TO THE GOVERNMENT
1. Income Tax Returns – provides
details of the taxpayer’s income,
expense, tax due, tax credit and tax
still due
2. Withholding Tax Returns – provide
reports of income payments subjected
to withholding tax by the taxpayerwithholding agent
3. Information Returns – do not involve
payment or withholding of tax; essential
to government tax mapping and
evaluation
NON-FILING OF ANY OF THE
ABOVE
IS
SUBJECT
TO
PENALTIES, FINES, AND/OR
IMPRISONMENT
Penalty of P1,000
for each failure not
exceeding P25,000
for all failure
during a calendar
year (due to willful
neglect)

MODE OF FILING INCOME TAX RETURNS
MANUAL
DATE ENTRY
FILLING/SUBMISSION
TAX PAYMENT
Manual
Manual
Manual
e-BIR
FORMS
Electronic
Electronic
Manual
eFPS
Electronic
Electronic
Electronic
TAXPAYERS MANDATED TO USE THE eFPS
(pg. 118)
1. Notified large taxpayers
2. Notified top 20,000 private corp.
3. Notified top 5,000 individual taxpayers
4. Taxpayer who wish to enter contracts
with government
5. Corp. with P10M paid-up capital
6. PEZA registered and those located
w/n Special economic zones
7. Government offices – remittance of
withheld VAT and Business Tax
8. Included in Taxpayer Account
Management Program (TAMP)
9. Accredited importers – required to
secure ICC and BCC
GROUPINGS OF TAXPAYES UNDER
eFPS (see pg. 119)

PAYMENT OF INCOME TAXES – general
rule: “pay as you file”; installment payment
of income tax is allowed on certain
conditions

PENALTIES FOR LATE FILING OR PAYMENT
OF TAX
: Surcharge
25%, simple
neglect - failure
to file on time
50%, “willful
neglect” – notice
received
: Interest – computed based on actual
days divided by 365 days (pg. 122 for
examples)
20%, until Dec 31,
2017
12%, since Jan 1,
2018
: Compromise Penalty – amount paid in
lieu of criminal prosecutions over a tax
violation
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