Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
INSTRUCTIONAL MATERIALS
for
ACCO 20133: INCOME TAXATION
(Updated by RA 10963 -TRAIN Law)
COMPILED BY:
DEAN LILIAN M LITONJUA
PROF. VIRGILIO G. LITONJUA
PROF. GENO C. SAN JOSE
NEVER GIVE UP COZ TIME PASSES ANYWAY
1
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
INTRODUCTION:
There are two types of taxes collected in the Philippines, namely local taxes and national
taxes. Taxes imposed at the national level are called national tax which is collected by the Bureau
of Internal Revenue (BIR), while those imposed at the local level (i.e., provincial, city, municipal,
barangay) are called local taxes which is collected by a local treasurer's office. National taxes
include Donor’s taxes, Estate tax, Value Added tax, Other Percentage Tax and Income taxes.
These taxes are imposed by the National Government in accordance with the Tax Code of the
Philippines or the NIRC (National Internal Revenue Code). Last January 1, 2018, amendments
were made to our Tax code thru enactment of TRAIN Law. On this module, we will focus on
income taxes levied and collected by the BIR to different taxpayers.
In the Philippines, the Income Tax is a tax collected from Individuals / Corporations and is
imposed on different sources of income like labour, pensions, interest and dividends. Revenues
from the Income Tax are an important source of income for the government of Philippines. Also,
Income tax is a type of tax that governments impose on income generated by businesses and
individuals within their jurisdiction. Our Tax laws cannot be applied to other jurisdiction or
countries. By law, taxpayers must file an income tax return.
Citizens of the Philippines and resident aliens must pay taxes for all income they have
derived from various sources, which include, but are not limited to: compensation income (e.g.,
salary and wages);income of self-employed individuals and/or professionals; capital gains;
interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and, partner's
share from the profits of partnership.
Individuals, including nonresident aliens, earning compensation income are taxed based
only on the income tax schedule for individuals. On the other hand, self-employed individuals and
professionals are taxed based on the income tax schedule for individuals, applicable percentage
tax rates. However, if their gross sales (or gross receipts plus other non-operating income) does
not exceed the VAT threshold, they have the option to be taxed either on the basis of the income
tax schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8%
on their gross sales (or gross receipts plus other non-operating income.
On this module, we will discuss the income taxation for Individuals and Corporations as
defined by our Tax Code. Included on these modules are the amendments made in our Tax Code
by TRAIN Law which became effective January 1, 2018.
2
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
REPUBLIC OF THE PHILIPPINES
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR ACADEMIC AFFAIR
COLLEGE OF ACCOUNTANCY AND FINANCE
OBE COURSE SYLLABUS AND LEARNING PLAN
COURSE TITLE:
INCOME TAXATION
COURSE CODE:
ACCO 20133
COURSE CREDITS:
THREE (3) UNITS
COURSE PRE-REQUISITES:
ACCO 20043 FINANCIAL ACCOUNTING AND REPORTING (PART 2)
EFFECTIVITY:
School year 2018-2019 onwards
COURSE DESCRIPTION:
This subject covers the knowledge of the concepts, principles, laws, rules and procedures
associated with income taxation for individuals, partnerships and corporations. Understanding of the new tax laws, rules and provisions
of the TRAIN ACT (Tax Reform for Acceleration and Inclusion) per RA No. 10963, known as the NIRC of 2017, effective in the year
2018 and thereafter
This syllabus focuses on key tax topics, along with readings of cases studies, and primary source materials (Income Tax
Textbook and Income Tax Practice Set) and providing time for departmental mid-term assessment /exam and departmental final
assessment /exam.
Students must be able to do the theoretical and practical applications of said concepts, principles, laws, rules and the procedures
related to income taxation. This subject, likewise, is primarily concerned with the: general principle of taxation, tax remedies of the
government and of the taxpayers. Bureau of Internal Revenue organizations, powers and functions, classifications of and taxation for
various income taxpayers, and their compliance with the BIR rules and regulations on matters and procedures in filing income tax
returns and payments of income taxes due.
Institutional Learning
Programs Outcomes
Course Outcomes
Outcomes
1. Creative and Critical
Thinking
2.
Effective
Communication
3.
Strong
Service
Orientation
1. Resolve Business issues and
problems with a global and strategic
perspective, using knowledge and technical
proficiency in the areas of income taxation.
2. Conduct Accountancy research
through independent studies of relevant
literature and appropriate use of principles,
3
Upon completion of the course, the
students are expected to know the:
1. Income taxation provisions of the
New NIRC of 2017 also known as the TRAIN
ACT per RA 10963, effective in year 2018 and
thereafter
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
4. Passion to Life-Long
Learning
5. Sense of Personal and
Professional Ethics
6. Patriotic, Sense of
Nationalism
and
Global
Responsiveness
7.
Community
Engagement
8. Adeptness in the
Responsible Use of Technology
9.
High
Level
of
Leadership and Organizational
Skills
concepts of income taxation, accounting theory
and methodologies.
3. Demonstrate working knowledge in
the areas of financial accounting, reporting,
cost accounting, management accounting,
taxation, auditing, accounting information
system and accounting research.
4. Demonstrate self-confidence in
performing functions as a professional tax
accountant.
5. Employ technology as a business
tool in capturing financial and non-financial
information, preparing reports and making
decisions.
6. Apply acquired knowledge and skills
to pass the CPA professional licensure exam
and others.
7. Confidently maintain a commitment
to good corporate, business, social and
professional responsibility and ethical practice
in performing functions as tax accountants.
8. Appraise ethical problems /issues in
practical business, accounting and taxation
situations and recommend appropriate course
of actions that adheres to the personal and
professional code of ethics.
2. Pertinent /relevant BIR revenue
regulations, circulars, rulings and tax advisory
on income taxation in year 2018 onwards
3. Pertinent income taxation principles
in the decisions of the Court of Tax Appeal and
the Supreme Court
4. Preferential income taxation for tax
exemptions provisions pertaining to business
and industries.
5. Compliance requirements with the
various income taxation measures, which
includes: computations of income tax
liabilities, accomplishing the income tax
returns and forms, availment of income tax
incentive benefits, submission of income tax
regulatory and registration requirements and
dealing with the various offices involved in
income taxation
6. Effective communication matters
and procedures pertaining to income taxation
work to be handled
7. Knowledge and competencies of an
entry-level accountant who can address the
fundamental requirements of the various
parties that he will be personally and
professionally inter-acting in the future
DETAILED COURSE LEARNING PLAN:
Weeks
Meets,
Hours
Week
Meet
No. 01,
Topics
Learning Outcomes
Orientation
Day /Agenda
i.
Knowledge
and
compliance with the rules and
regulations of the PUP and the
CAF.
Methodologies
Resources
Assessments
1. take class
1.
PUP
Observations,
attendance
CAF course
income tax
Questions and
syllabus
answers,
4
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
3 hours
1.Introduction
2. Discuss and inculcate in
of the Subject, major students’ minds, their free –
topics,
sub-topics education benefits, objectives,
and relevant matters obligations, attendance, attitude,
behavior inside and outside the
2.
Class classroom, and other issues.
Objectives
3. Outline the income
taxation subject, major and sub3. Obligations topics, other relevant matters in
and Tasks of tax learning-process.
teacher and students
2.
see
certificate
of
2
PUP
Individually and
registration
student handbook class group,
3. give income
tax syllabus
3.
PUP
4. encourage /CAF Memos
students to read the
student handbook
5. assigned for
next meet,
study,
understand topics in
chapters 1 and 2,
4. Students
Do’s and Dont’s
Week
Meet
No. 02,
3 hours
Topic
/Chapter I.
General
Principles
of
Taxation
BIR Organization,
Power, Task
1. Principles of
Taxation
2. Tax Remedies
3. BIR Powers,
Functions,
4. BIR
Commissioner
Powers,
Functions
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teacher’s
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend these tax topics:
1. Inherent powers of
government
2. Limitations on the power
of taxation, situs /place of taxation,
3. Principles of Sound Tax
system
4.
Nature,
scope,
classifications
essential characteristics of
taxes,
1. take class
attendance,
and
collect homework,
2.
teacher
class
lectures,
discuss, illustrations
on tax topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 1,
2,
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
homeworks,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act, on Income Tax 2019
Per RA 10963
per Train Act
Income
tax books by other
4
discuss author
answers to questions
BIR
in chapters assigned
Revenue
5. assigned for Regulations,
next meet:
5
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
AND
Topic
/Chapter 2
General
Impositions of
Individual
Income Taxation
1.Changes to
Individual
Income
Taxation by TRAIN
ACT per RA 10963 in
2018 onwards
2.
Administrative
Provisions
on
Individual
Income
Taxation
3.
Fundamental
Concepts
on Individual
Income Taxation
4. Practical
Provisions
on Individual
Income Taxation
4.
Enumerations,
definitions,
features,
characteristics of taxes.
5.Tax evasion, vs tax
avoidance, double taxation,
6. Legislation of tax laws,
7. Tax remedies of the
government and taxpayers
8. Org. Powers, Functions,
of BIR
a. Primary Officials of the
BIR
b. Powers, Functions of the
BIR
c. Powers, Functions of the
BIR Commissioner
answer theory
Rulings,
question
for Circulars,
Tax
submission, recitation, Advisory,
quiz, seatwork
in classroom
Practice
Set on
Study,
Phil.
understand topics in Income Tax 2019,
Chapter 3
Train Act.
by Virgilio
and Lilian Litonjua
,
-----------------------------------1. Amendments by the
Train Act to individual income
taxation per RA 10963
2.Basic
concepts
on
Individual Income Tax
3.
Administrative
provisions;
Persons required to file
income tax returns,
Place and time to file
income tax returns and pay income
taxes,
other
taxpayers’
requirements
4. Fundamental concepts;
Basic tax information on
6
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
various
classifications,
enumerations, definitions of terms /
items.
5. Practical provision;
Interpret, discuss illustrate, use
formulas, tax rates, applications to
comply with the laws /rules and
procedures on individual income
taxation
Week
Meet
No. 03,
3 hours
Topic
/Chapter 3
Taxable
Income
Individuals
After the students selfreading
and
self-understanding
for these tax topics at home and after
the
vital
related
teacher’s
classroom lectures, discussions
1. Income Tax Laws and illustrations, the students
/Rules
should be able to know and
For Ordinary
comprehend
Individuals
these tax topics:
2. Income Tax Laws
1. Income tax laws, rules
/Rules
on Ordinary Individuals:
For Special
RC, RA, NRC, NRAEBP,
Individuals
EEI, SEI, SPI, MIE,
3. Income Tax Laws
2. Income tax laws, rules
/Rules
on Special Individuals:
For Other Individual
NRANEBP, SAFE,
Income Taxpayers,
3. Income tax laws, rules
4. Income Tax Laws on Other Individuals;
/Rules on Optional
Minimum Wage Earner,
Income Taxation
Married Couple,
Parent and Child,
Taxable Estate and Trust
1. take class
attendance,
and
collect homework,
2.
teacher
class
lectures,
discuss, illustrations
on tax topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 3
,
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission, recitation,
quiz, seatwork
in classroom
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act, on Income Tax 201
RA 10963
per Train Act
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
tax
advisory,
Practice
Set on
7
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
4.
Optional
Income
Study,
Phil.
Taxation for NVRP, Self-employed understand topics in Income Tax 2019,
individual
Chapters 4 and 5
Train Act.
in NIRC Sec.116.
,
by Virgilio
& Lilian Litonjua
Week
Meet
No. 04,
3 hours
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustration
on
tax
1. Classifications of
topics
Income,
3.
conduct
2. Classifications of
short exercises,
Expenses
recitations,
3. Classifications of
questions
and
Income Tax
answers in Chapters 4,
5
4
discuss
AND
answers to questions
in chapters assigned
5. assigned for
Topic
next meet:
/Chapter 5
answer theory
Income Tax
3. Classifications of Income
question
for
Credits
Taxes
submission, recitation,
for
Income tax due before tax
quiz,
seatwork
in
Individuals
credit
classroom
income tax credit
1. income Tax
Income tax due /payable
Study,
Credits
after-tax credit
understand topics in
_____________________
Chapter 6
Topic /Chapter 4
Classifications of
Tax Items for
Individuals;
After the students selfreading
and self-understanding these tax
topics at home and after the vital
related teacher’s classroom
lectures, discussions and
illustrations, the students should
be able to know and comprehend
these tax topics:
1. Classifications of Income:
Income Exempt from Income Tax
Income subject to final tax
Income subject to the basic tax
2. Classifications of Expenses
Not Business Expense
Non-deductible Business Expense
Deductible
Business
Expense
8
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax,
recitations
2019 Train Act
by; Virgilio
questions
&
& Lilian Litonjua
answers
board works
Reference
home works,
s
NIRC
of
accomplishment
2017, Train Act,
of Practice Set
RA 10963
on Income Tax 2019
Income
per Train Act
tax books by other
author
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory,
Practice
Set on
Phil.
Income Tax 2019,
Train Act.
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Quarterly,
Annually
2. Income Tax
Returns
Variations of
Formats /Formulas
Quarterly,
Annually
by Virgilio
& Lilian Litonjua
1. income Tax Credits:
withholding tax on wages
withholding tax at source
excess income tax credit
income
tax
in
prior
quarters,
Income tax in original
income tax return filed, income tax
abroad,
2. Income Tax Credit for
Resident Citizen
3. Income Tax Credit for.
RA, NRC, NRAEB,
4. Income Tax Returns
Various
Formulas
for
Individuals
RC, RA, NRC, NRAEB,
EEI, SEI, SPI, MIE
Quarterly, Annual Tax
Returns.
9
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Week
Meet
No. 05,
3 hours
Topic
/Chapter 6
Fringe
Benefits for
Individuals
and Corporations
1.
NonTaxable
Fringe
Benefits
2.
Taxable
Fringe Benefits
3. De-minimis
Fringe Benefits
4.
Fringe
Benefit Tax
5.
Related
Deduction for Fringe
Benefits
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
1. Components of NonTaxable Fringe Benefits
2. Components of Deminimis Benefits
3
Components
of
Unspecified
Taxable
fringe
benefits
4. Specified Taxable Fringe
Benefits:
a. Housing Benefits
b.
Expense Account
Benefits
c. Vehicle Benefits
d. Household Personnel
Expense Benefits
e.
Interest on Loan
Benefits
f. Membership Fees, dues
and other expenses benefits
g. Holiday and Vacation
Expenses Benefits
h. Educational Assistance
Benefits to the employee or
his dependents
1. take class
attendance,
and
collect homework,
2.
teacher
class
lectures,
discuss, illustrations
on tax topics
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 6
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission, recitation,
quiz,
seatwork
in
classroom
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019, Train Act
questions
&
by; Virgilio answers
and Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act, on Income Tax 2019
Per RA 10963
per Train Act
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory,
Practice
Study,
Set on
understand topics in
Phil.
Chapter 7
Income Tax 2019,
Train Act.
by Virgilio
& Lilian Litonjua
10
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
i.
Life, health, non-life
insurance premiums benefits
j. Foreign travel benefits
5. Other unspecified fringe
benefits,
6. Related deductions for
fringe benefits:
if taxable benefits,
if non-taxable benefits
11
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Week
Meet
No. 06
and
No. 07
6 hours
Topic
/Chapter 7
Gross
Income for
Individuals
and Corporations
1. Exclusions
of items from the
taxable
Gross
Income,
2. Inclusions
of items
in the
taxable
Gross
Income
3.Taxable Gross
Income subject to
regular income tax
rates
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
A. Exclusions from Gross
Income;
1. Income Exempt from
income taxes
2. Income Subject to Final
Income Taxes
3. Not Income Items
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustration
on
tax
topics
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 7
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
B. Inclusions in Gross question
for
Income; Income at Basic Income submission, recitation,
Tax;
quiz,
seatwork
in
1.
Compensation
for classroom
Services
2. Gross Profit from Trade,
Study,
Business, Practice of Profession
understand
3. Gains from Dealings in
topics
in
Assets
Chapter 8
4. Interests Income
5. Rental income
6. Royalty Income
7. Dividend income
8. Annuity income
9. Prize, Winnings
12
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act,
on Income Tax 2019
Per
RA
per Train Act
10963
Income
tax books by other
author
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory
Practice
Set on
Phil.
Income Tax 2019,
Train Act.
by Virgilio
& Lilian Litonjua
,
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
10.
Pensions
and
Retirement Benefits
11. Share in the Net
income of Gen. Professional
Partnership
12. Other Income, in general
Week
Meet
No. 08
and
No. 09
6 hours
Topic
After the students self/Chapter 8
reading
Allowed
and
self-understanding
Deduction
for these tax topics at home and after
Individuals
and the
vital
related
teachers
Corporations
classroom lectures, discussions
and illustrations, the students
1. Exclusions should be able to know and
of items from the comprehend
allowed deduction
these tax topics:
A. Exclusions from the
2. Inclusions Allowed Deductions
of items in
the
1. Not Business Expenses
allowed deduction
2.
Non-deductible
Business Expenses
3.
Actual
3. Not Expense Items
Itemized Deduction
Components,
B. Inclusions in the Allowed
Determinations
Deductions:
Actual Itemized Deduction
4. Conditions (AID)
for deductibility
1. Interest Expense
of business
2. Taxes Expense
expenses
3. Losses Expense
4. Bad Debts Expense
5. Optional Standard
5. Depreciation Expense
Deduction,
6. Amortization Expense
Determinations
7. Depletion Expense
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustration, on tax
topics
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 8
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission, recitation,
quiz,
seatwork
in
classroom
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017,
on Income Tax 2019
Train Act,
per Train Act
Per
RA
10963
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory,
Study,
understand topics in
chapters 9 and 10
Practice
Read,
Set Phil. Income
understand, in pencil
13
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
8. Charitable Contribution
9.
Research
and
Development Cost
10.
Pension
Trust
Contribution
11.
Other
Business
Expenses, in general
accomplish
practice Tax 2019 per
set part 1:
Train Act.
Individual
by Virgilio
Income Taxation,
& Lilian Litonjua
to
discuss
/confirm
correct
,
procedures
and
solutions later
Standard
in classroom.
Optional
Deduction OSD
Who can claim OSD,
Determination, Formulas
Prepare very
well
for the DMTE
Departmental
65
Multiple
Choice
Mid-term Exam
Questions:
Individual
30 Theory Questions,
Income Taxation
(1% credit each)
HOURS
Topics
in
35 Problem Questions
Chapters 1 to 8
(2% credit each)
of Textbook
DMTE
Three
(3)
Week
Meet
No. 10
AND
No. 11
6 hours
Topic /Chapter 9
General Imposition
of
Corporate Income
Taxation
1. Amendments to
Corporate Income
Taxation by the
TRAIN ACT, RA
10963
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
1. Amendments by the
Train Act to corporate income
taxation
Perusal of and
grading the results of
the DMTE.
1. take class
attendance,
and
collect homework,
2.
teacher
class
lectures,
discuss, illustrations
on tax topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters 9
and 10
14
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
by; Virgilio
questions
&
& Lilian Litonjua
answers
board works
Reference
home works,
s
NIRC
of
accomplishment
2017, Train Act,
of Practice Set
Per
RA on Income Tax 2019
10963
per Train Act
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
2. Administrative
Provisions on
Corporate Income
Taxation
3 Fundamental
Concepts
on Corporate
Income Taxation
4. Practical
Provisions
on Corporate
Income Taxation
AND
Topic /Chapter 10
Taxable Income of
Corporations
5. Income Tax Laws
/Rules on Ordinary
Corporations
6. Income Tax Laws
/Rules on Special
Corporations
7. Income Tax Laws
/Rules on Other
corporations
8. Various Corporate
Income Taxes
2.
Administrative
4
discuss
Provisions;
answers to questions
Persons Required to File in chapters assigned
Tax Returns, Place and time to File
5. assigned for
Income Tax Returns and Pay next meet:
Income Taxes,
answer theory
other requirements on question
for
taxpayer
submission, recitation,
3. Fundamental Concepts; quiz,
seatwork
in
Tax information on various
classroom
definitions, classification, enumerations
of items.
Study,
4. Practical Provisions;
understand topics in
Interpret, discuss, illustrate, Chapters
use
11 and 12
formulas, tax rates, applications
in compliance with the laws
/rules on corporate income taxation
_____________________
_____
1. Income Taxation for
Ordinary Corporation;
DC, RFC, NRFC.
2. Income Taxation for
Special Corporations;
a. Proprietary Educational
Institutions,
b. Non-Profit Hospital,
c.
Regional
OperatingHeadquarter of MultiNational Corporation,
d.
Non-Resident
Cinematographic Film Owner,
Lessor,
e. Resident International
Carrier,
15
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory
Practice
Set Phil. Income
Tax 2019 per
Train Act.
by Virgilio
&Lilian Litonjua
,
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
f. Non-Resident Owner,
Lessor of Vessels,
g. Non-Resident Owner,
Lessor of Aircrafts, machineries,
equipment
3. Income Taxation for
Other corporations:
a. General Professional
Partnership
b. Ordinary Partnership,
c. Taxable Joint Ventures,
d.
Non-taxable
Joint
Ventures
e. Taxable Co-Ownerships
f.
Non-taxable
CoOwnerships
4.
Various
Corporate
Income Tax:
MCIT, BCIT, OGIT, BPRT,
IAET,
FCGT, PFIT, FBT, SPCIT,
Week
Meet
No. 12
3 hours
Topic /Chapter 11
Classifications of
Tax Items
for Corporations;
1. Classifications of
Income,
2. Classifications of
Expenses
3. Classifications of
Income Tax
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
1.Classifications of Income:
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustration, on tax
topics
3.
conduct
short exercises,
recitations,
questions
and
16
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act,
on Income Tax 2019
per Train Act
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
AND
a. Income Exempt from Income
Tax
Topic
b. Income subject to final
income tax
/Chapter 12
Income Tax c. Income subject to the basic
/regular income tax
Credits
2. Classifications of Expenses
for
a. Not Business Expense
Corporations
b. Non-deductible Business
Expense
1. Components of
c. Deductible Business
Tax Credits
Expense
Quarterly,
3. Classifications of Income
Annually
Taxes
2. Income Tax
Income tax due before tax
Returns
credits,
Formats of Income
income taxes creditable
Tax Returns
Quarterly,
Income tax due /payable
Annually
after tax credits
____________________
answers in Chapters
11, 12
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission,
recitation,
quiz,
seatwork in classroom
Per
RA
10963
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory
Study,
Practice
understand topics in Set Phil. Income
Chapter 13
Tax 2019 per
Train Act.
by Virgilio
& Lilian Litonjua
1. income tax credits:
withholding tax at source
excess income tax credit
income tax paid in prior
quarters,
Income tax in original
income tax return filed
income tax abroad,
2. Income tax credit for
Domestic Corporation
3. Income tax credit
for
Resident
foreign
corporation
4. Income tax returns,
17
,
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
various
formulas
for
orporationsQuarterly
and
Annual
income tax returns.
Week
Meet
No. 13
3 hours
Topic /Chapter 13
(Chapter 6)
Fringe
Benefits For
Corporations
and Individuals
1.
Fringe
Benefits
2.
Taxable
Fringe Benefits
3.
NonTaxable Fringe
Benefits
4. De-minimis
Benefits
5.
Fringe
Benefit Tax
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
A. Unspecified Taxable
fringe benefits
B. Specified taxable fringe
benefits:
1. Housing benefits
2.
Expense account
benefits
3. Vehicle benefits
4.
Household personnel
benefits
5. Interest on loan benefits
6. Membership fees, dues
and other expenses benefits
7. Holiday and vacation
expense benefits
8. Educational assistance
benefits to the employee or his
dependents
9.
Life, health, non-life
insurance premiums benefits
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustrations on tax
topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters
13
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission,
recitation,
quiz,
seatwork in classroom
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act,
on Income Tax 2019
Per
RA
per Train Act
10963
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory,,
Practice
Study,
Set Phil. Income
understand topics in Tax 2019 per
Chapter 14
Train Act.
by Virgilio
& Lilian Litonjua
18
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
10. Foreign travel benefits
11.
Other
unspecified
fringe benefits, in general
C. De-minimis Benefits
Items, its
D. Related ded. for fringe
benefits
on taxable fringe benefits
on
non-taxable
fringe
benefits
Week
Meet
No. 14
3 hours
Topic
/Chapter 14 (Chapter
7)
Gross
Income For
Corporations
and Individuals
1. Exclusions
of items from the
Taxable
Gross
Income,
2. Inclusions
of items in the
Taxable
Gross
Income
3. Income subject to
basic /regular
income tax rates
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
A. Exclusions from the
Gross Income;
1. Income Exempt from
income taxes
2. Income Subject to Final
Income Taxes
3. Not Income Items
B. Inclusions in Gross
Income; Income at Basic Income
Tax
1.
Compensation
for
Services
2. Gross Profit from Trade,
Business and Profession
,
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustrations on tax
topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters
14
4
discuss
answers to questions
in chapters assigned
5. assigned for
next meet:
answer theory
question
for
submission,
recitation,
quiz,
seatwork in classroom
19
Textbook
quizzes,
Phil. Laws
seat works
on
Income
recitations
Taxaton 2019, per
questions
&
Train Act
answers
by; Virgilio
board works
& Lilian Litonjua
home works,
Reference
accomplishment
of Practice Set
NIRC
of on Income Tax 2019
2017, Train Act,
per Train Act
Per
RA
10963
Income
tax books by other
authors
BIR
Revenue
Regulations,
BIR
Rulings,
Circulars,
s
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
3. Gains from Dealings in
Assets
Study,
BIR Tax
understand topics in Advisory
Chapter 15
Practice
Set Phil. Income
Tax 2019 per
Train Act.
by Virgilio
and
& Lilian Litonjua
4. Interests Income
5. Rental income
6. Royalty Income
7. Dividend income
8. Annuity income
9. Prize, Winnings
10.
Pensions
Retirement Benefits
11. Share in the Net
income
of
General
Prof.
Partnership
12. Other Income, in general
Week
Meet
No. 15
3 hours
Topic
/Chapter 15 (Chapter
8)
Allowed
Deduction
For
Corporations
and
Individuals
1. Exclusions
of items from the
allowed deduction
2. Inclusions
of items in the
allowed deduction
3.
Actual
Itemized Deduction
After the students selfreading
and
self-understanding
these tax topics at home and after
the
vital
related
teachers
classroom lectures, discussions
and illustrations, the students
should be able to know and
comprehend
these tax topics:
A. Exclusions from the
Allowed Deductions
1. Not Business Expenses
2.
Non-deductible
Business Expenses
3. Not Expense Items
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustrations on tax
topics,
3.
conduct
short exercises,
recitations,
questions
and
answers in Chapters
15
4
discuss
answers to questions
in chapters assigned
5. assigned for
B. Inclusions in the Allowed next meet:
Deductions:
20
Textbook
quizzes,
Phil. Laws
seat works
on Income Tax
recitations
2019 Train Act
questions
&
by; Virgilio answers
& Lilian Litonjua
board works
home works,
Reference
s
accomplishment
NIRC
of
of Practice Set
2017, Train Act,
on Income Tax 2019
Per
RA
per Train Act
10963
Income
tax books by other
authors
BIR
Revenue
Regulations,
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Components,
Determination
4. Optional Standard
Deduction,
Determination,
formulas
Actual Itemized Deduction
(AID)
1. Interest Expense
2. Taxes Expense
3. Losses Expense
4. Bad Debts Expense
5. Depreciation Expense
6. Amortization Expense
7. Depletion Expense
8. Charitable Contributions
9.
Research
and
Development Cost
10.
Pension
Trust
Contribution
11.
Other
Business
Expenses,
answer theory
Rulings,
question
for Circulars,
Tax
submission,
Advisory,
recitation,
quiz,
seatwork in classroom
Practice
Set Phil. Income
Read,
Tax 2019 per
understand,
Train Act.
in
pencil
by Virgilio
accomplish
practice & Lilian Litonjua
set part 2: Corporate
Income Taxation to
discuss
/confirm
correct
procedures
and solutions later in
classroom.
Optional
Standard
Next
meet.
Deduction,OSD
Bring practice set
Who can claim OSD
Limitations, Formulas
Week
Meet
No. 16
3 hours
Topic:
Practice
Set
on
Income
Taxation,
Train Act,
per
RA
10963, in 2019,
by
Virgilio
and Lilian Litonjua
After the students selfreading
and
self-understanding
these tax topics in practice set at
home and after the vital related
teachers
classroom
lectures,
discussions and illustrations, the
students should be able to know,
to comprehend, to accomplish and
The Board of
to submit the practice set
Accountancy in its on income taxation.
prescribed
CPA
Licensure
1. take class
attendance,
and
collect homework,
2.
teacher
class lecture, discuss,
illustrations on tax
topics,
3.
discuss
analyses, procedures,
answers and solutions
to the case problems
in the practice set.
21
Phil. Laws
on Income Tax
2019 Train Act
perusal of and
by; Virgilio grading
the
& Lilian Litonjua
accomplished
practice
sets
Reference submitted
s
NIRC
of
2017, Train Act,
RA 10963
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Examination
Syllabus in Taxation,
effective in May 2019
onwards, mandates
that:
BSA,
accountancy
students,
CPA
candidates,
must
have
working
knowledge to comply
with the various
taxation measures.
Compliance includes
computations
of taxable income
amounts and tax
liabilities,
accomplishing
various income tax
returns and BIR tax
forms such as 1700,
1701Q,
1701,
1702Q, 1702
1. Tax teacher conducts a
three (3) hours classroom session
to guide students in needed
analyses and solutions to given
case problems, processing of
applicable BIR tax forms and in the
realization of the goals of this
practice set.
4. Finalize in
ball pen, accomplish
the practice set part 1.
individual
income
taxation and part 2.
corporation
Income
taxation,
submit
your
practice set next meet
2. Students are provided in the classroom.
adequate classroom experiences /
“hands-on activities” in the
5. Prepare very
matters, manners, procedures and well for the DFE
rules in the needed computations
of taxable gross income, allowed
deductions, taxable net income,
income taxes due, income tax
credits, income tax payable, fillingup and filing the various BIR Forms
Nos. 1700, 1701Q, 1701 1702Q,
1702, with the BIR, at the
prescribed
place
and
date
mandated by law.
Income
tax books by other
authors
BIR
Revenue
Regulations,
Rulings,
Circulars,
Tax
Advisory
Practice
Set on
Phil.
Income Tax 2019
per Train
Act.
by Virgilio
& Lilian Litonjua
3. Students will be able to
do the roles and tasks of tax
accountants in giving services to
tax clients.
DFE
Three
(3)
Hours
Departmental
65
Multiple
Choice
Final Exam
Questions:
Income
30 Theory Questions,
Taxation
(1% credit each)
topics
in
35 Problem Questions
Chapters 1 to 16
(2% credit each)
22
Perusal of and
grading the results of
the DFE
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
GRADING SYSTEM:
Students will be evaluated based on homework assignments and examinations. The
homework assignments and exams will be graded on a scale from 28.60% to 100%. Student’s
grade will be divided into two: Midterm Grade (1st Grading period) and Final Grade (2nd grading
period). The Midterm Grade and Final Grade will be based and computed using the following
weights:
Quizzes
Assignments
Departmental Exam
Grades
50 %
20 %
30 %
100 %
!st Grade (Mid-Term Grade) >>> (Midterm Quizzes x 50 %) plus (Midterm Assignments x 20 %)
plus (DMTE x 30 %) equals 100 %
2nd Grade (Final Grade) >>> (Final period Quizzes x 50 %) plus (Final Period Assignments x 20
%) plus (DMTE x 30 %) equals 100 %
The semestral grade will computed as follows: The semestral grade will be equal to the average
of 1st Grading peroiod and 2nd Grading Period
3rd Grade (Semestral Grade) >>> (1st grade plus 2nd grade) / 2 = 100 %
Grades and Equivalents
Grades
1.00
1.25
1.50
Equivalents
97% – 100%
94% - 96%
91% - 93%
Descriptions
Excellent
Excellent
Very Good
Grades
2.75
3.00
4.00
Equivalents
76% - 78%
75%
70% - 74%
1.75
2.00
2.25
2.50
88% - 90%
85% - 87%
82% - 84%
79% - 81%
Very Good
Good
Good
Satisfactory
5.00
Inc.
W
D
Below 70%
23
Descriptions
Satisfactory
Passing
Condition
/Failing
Failed
Incomplete
Withdrawn
Dropped
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
TABLE OF CONTENTS:
Topics
Page/s
Introduction
Course Syllabus
Grading System
Course Outcome
Assessment / Activity Instructions
2
3-22
23
26
27
Module 1: General Principles and Concepts of taxation
Definitions and purpose of Taxation
Theory and basis of taxation
Tax differentiated from other revenue items / terms
Enumeration of Philippines Taxes and Classification of Taxes
Aspect of taxation and basic principles of Taxation
Limitations of Power of Taxation
Situs of taxation and Double Taxation
Tax avoidance / Tax evasion and Tax amnesty
Sources of tax laws
Power and Duties of BIR
Tax Remedies
28
28-29
30-31
32-33
34-36
37-38
39-51
52-56
57-64
65-69
69-72
72-75
Module 2: Administrative provisions of Individual Income Taxation
Person required to file Income Tax Return (ITR) and Compliance requirement
Procedures for Filing of ITR and BIR forms
Methods of Accounting allowed by law
Classification of Income and Taxpayers
76-77
78-79
80-86
86-87
88-90
Module 3: Individual Income Taxation
91
Classification of Income of Individuals and related Income tax rates (TRAIN Law) 91-93
Minimum Wage Earner
93
Summarized Rules on Individual income taxation after TRAIN Law
93-94
Illustrations: Problem Solving (Computation of Income Tax due)
95-98
Optional Income Tax rate (8% tax rate) and Requirements
98
Passive Income Subject to Final tax (Final tax rates)
99-101
Illustrations: Problem Solving (Computation of Final tax due)
102-104
Capital Gains Tax (Exempted transactions / Requirements)
104-105
Other Related Topics
106-109
Module 4: Income Tax Credits
Income tax credits available for Individual taxpayers
Withholding taxes (Two types)
Income Tax returns / BIR forms to be used
Computation of Income Tax due (Quarterly and Annually)
110
101
111-112
113
113
Module 5: Fringe Benefits
114
24
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Fringe Benefits granted to Employees except Rank and File Employees
Fringe benefits tax rates
De minimis Benefits and Non-taxable Fringe Benefits
Illustrations: Problem Solving (Computation of Fringe Benefit tax due)
114
115
116-117
117-118
Module 6: Gross Income and Allowed Deductions
Gross Income (Inclusions, Exclusions / Exemptions)
Requisites of Taxable Income
Situs of Taxation
Rule on taxability of Capital Gain /Loss on Sale /Exchange/Barter
Allowed Deductions (OSD and Itemized Deductions)
Illustrations: Problem Solving (Computation of Taxable Net income)
Module 7: Corporate Income Tax (Income Taxation for Corporations)
Definitions
Classification of taxable Corporations
Taxation for Domestic Corporations
Taxation for Resident Foreign Corporations
Taxation for Non-Resident Corporations
BIR Forms
Minimum Corporate Income Tax (MCIT)
Summary of Corporate Tax rates
119
120-122
122
122
123-124
124-135
136-137
138
138
139
139-141
141
142
142
144
145-148
References
149
25
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
COURSE OUTCOMES:
Upon completion of the course, the students will be able to:
1. They are expected to know the old National Internal Revenue Code (NIRC) or old tax
code and the new tax code (as amended by TRAIN law) provisions on income tax, tax
remedies and compliance requirements.
2. The student must be familiar with the Implementing Rules and Regulations, circulars,
rulings and other issuances and jurisprudences pertinent to the implementation of the
various taxation laws earlier specified.
3. The student should know the taxation principles in the decisions of the Court of Tax
Appeals, Court of Appeals and Supreme Court.
4. The students must also be familiar with the taxpayer rights and remedies, handling
disputes on tax issues, knowing the various tax offices that they will be interacting and
basic tax planning to derive the benefits of the tax laws and incentives.
5. Understand how to apply and follow the provisions of old tax code (NIRC) and the new
tax code (as amended by TRAIN law).
6. Prepare the Quarterly and Annual Income Tax Return of an individual, Partnership and
Corporate Taxpayers.
7. Understand the importance of paying correct taxes to the government.
8. Apply Integrity, honesty and competence in the performance of the service as a TAX
consultant
26
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
ASSESSMENT / ACTIVITY INSTRUCTIONS:
A. Modified True or False
Kindly write “T” if the statement is correct and “F” if otherwise. If your answer is “F”,
please provide the word/s that make the given statement incorrect. Write your final answers
in the answer sheet at the last page of each activity or assessment.
B. Multiple Choice
Kindly choose the correct answer from the given choices. If there is
no correct answer from the choices, please write “F” in the answer sheet provided at
the last page of each activity / assessment.
C. Problem Solving
Answer the problems based on the given data and write your final answers
in the answer sheet provided in the last page of each activity or assessment. Provide
solutions / computations to support your answer.
NOTE: There will be a deduction of 5 points to those students who will not follow
the above instructions.
27
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
MODULE 1: GENERAL PRINCIPLES AND CONCEPTS OF TAXATION
OVERVIEW:
The policy of taxation in the Philippines is governed chiefly by the Constitution of the
Philippines and Republic Acts issued by Congress.
Constitution: Article VI, Section 28 of the Constitution states that "the rule of taxation shall
be uniform and equitable" and that "Congress shall evolve a progressive system of taxation".
National law: National Internal Revenue Code (NIRC)—enacted as Republic Act No. 8424 or the
Tax Reform Act of 1997 and subsequent laws amending it; the law was most recently amended
by Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act; Tariff and
Customs Code for collection of customs duties from importations and, local laws: major sources
of revenue for the local government units (LGUs) are the taxes collected by virtue of Republic Act
No. 7160 or the Local Government Code of 1991 and those sourced from the proceeds collected
by virtue of a local ordinance.
Taxes imposed at the national level under the NIRC are collected by the Bureau of Internal
Revenue (BIR), custom duties are collected by Bureau of Custom or BOC and those imposed at
the local level (i.e., provincial, city, municipal, barangay) are collected by a local treasurer's office.
The taxes imposed by the national government of the Philippines under the NIRC include,
but are not limited to: Income tax, estate tax, donor’;s tax, Value Added tax, Percentage Tax,
excise tax and documentary stamp tax. On this course, we will discuss the income tax imposed
by BIR to Individuals and Corporations.
MODULE DURATION:
•
•
September 14-21, 2020 Synchronous Meeting and Asynchronous Learning.
For asynchronous learning inquiries, you may reach me through messenger
group/personal message.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1.
2.
3.
4.
5.
6.
7.
Learn the nature, scope, classification and essential characteristics of taxation
Explain the principles of a sound tax system
Define and explain the importance, purpose and basis of taxation
Identify the objects of taxation and stages or process of taxation.
Know the different types of escapes from taxation
Determine the Situs of taxation and its application
To gain knowledge of the Limitations of power of taxation (Inherent limitations and
Constitutional Limitations of the power to Tax.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
8. Be able to differentiate Taxation from police power, eminent domain and tax avoidance
and tax evasion
9. Know the powers of the commissioners.
10. Learns the nature of tax laws and its sources in the Philippines
11. Enumerate the BIR Commissioner Powers and Functions
12. Understand the penalties / additions to tax.
Course Materials:
Taxation
·
Taxation is a process or act of imposing a charge by the government authority on
property, individuals or transactions to raise money for public purposes.
·
It is also defined as the act of levying a tax, i.e. the process or means by which the
sovereign, through its law-making body, raises income to defray the necessary expenses of
government. It is a method of apportioning the cost of government among those who, in some
measure, are privileged to enjoy its benefits and must therefore bear its burdens.
Taxes
·
Taxes are the enforced proportional contributions from persons and property levied
by the law-making body of the State by virtue of its sovereignty for the support of the government
and all public needs.
Essential elements of a tax
1.
It is an enforced contribution.
2.
It is generally payable in money.
3.
It is proportionate in character.
4.
It is levied on persons, property, or the exercise of a right or privilege.
5.
It is levied by the State which has jurisdiction over the subject or object of taxation.
6.
It is levied by the law-making body of the State.
7.
It is levied for public purpose or purposes.
Purposes of taxation
1.
Revenue or fiscal: The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare and the protection of its
citizens and to enable it to finance its multifarious activities.
2.
Non-revenue or regulatory: Taxation may also be employed for purposes of regulation or
control.
a)
Imposition of tariffs on imported goods to protect local industries.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
b)
c)
Taxation 1: LML / VGL / GSJ
The adoption of progressively higher tax rates to reduce inequalities in wealth and income.
The increase or decrease of taxes to prevent inflation or ward off depression.
PAL v. Edu, 164 SCRA 320
·
The legislative intent and purpose behind the law requiring owners of vehicles to
pay for their registration is mainly to raise funds for the construction and maintenance of highways
and, to a much lesser degree, pay for the operating expenses of the administering agency. It is
possible for an exaction to be both a tax and a regulation. License fees are charges, looked to as
a source of revenue as well as a means of regulation. The fees may properly be regarded as
taxes even though they also serve as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is
properly called a tax.
Tio v. Videogram, 151 SCRA 208
·
PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax
on the gross receipts payable to the local government. SC upheld the validity of the law ruling that
the tax imposed is not only a regulatory, but also a revenue, measure prompted by the realization
that earnings of videogram establishments of around P600 million annually have not been
subjected to tax, thereby depriving the government of an additional source of revenue. It is a user
tax imposed on retailers for every video they make available for public viewing. The 30% tax also
served a regulatory purpose: to answer the need for regulating the video industry, particularly the
rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of
pornographic video tapes.
Caltex v. Commissioner, 208 SCRA 755
·
Taxation is no longer a measure merely to raise revenue to support the existence
of government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest as to
be within the police power of the State. The oil industry is greatly imbued with public interest as it
vitally affects the general welfare.
Sumptuary purpose of taxation
·
More popularly known as the non-revenue or regulatory purpose of taxation. While
the primary purpose of taxation is to raise revenue for the support of the government, taxation is
often employed as a devise for regulation by means of which certain effects or conditions
envisioned by the government may be achieved.
·
For example, government may provide tax incentives to protect and promote new
and pioneer industries. The imposition of special duties, like dumping duty, marking duty,
retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary purpose of
taxation.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Theory and basis of taxation
·
The power of taxation proceeds upon the theory that the existence of government
is a necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens and property within its limits to contribute.
·
The basis of taxation is found in the reciprocal duties of protection and support
between the State and its inhabitants. In return for his contribution, the taxpayer received benefits
and protection from the government. This is the so-called “benefits received principle.”
Life blood or necessity theory
·
The life blood theory constitutes the theory of taxation, which provides that the
existence of government is a necessity; that government cannot continue without means to pay
its expenses; and that for these means it has a right to compel its citizens and property within its
limits to contribute.
·
In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of
the government and should be collected without unnecessary hindrance. They are what we pay
for a civilized society. Without taxes, the government would be paralyzed for lack of motive power
to activate and operate it. The government, for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the people and enhance their
moral d material values.
Illustrations of lifeblood theory
1.
2.
3.
4.
Collection of taxes cannot be enjoined by injunction.
Taxes could not be the subject of compensation or set off.
A valid tax may result in destruction of the taxpayer’s property.
Taxation is an unlimited and plenary power.
Benefit-received principle
·
This principle serves as the basis of taxation and is founded on the reciprocal duties
of protection and support between the State and its inhabitants. Also called “symbiotic relation”
between the State and its citizens.
·
In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is compensation or
consideration for the other; protection for support and support for protection.
·
However, it does not mean that only those who are able to and do pay taxes can
enjoy the privileges and protection given to a citizen by the government.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
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·
In fact, from the contribution received, the government renders no special or
commensurate benefit to any particular property or person. The only benefit to which the taxpayer
is entitled is that derived from the enjoyment of the privileges of living in an organized society
established and safeguarded by the devotion of taxes to public purpose. The government
promises nothing to the person taxed beyond what may be anticipated from an administration of
the laws for the general good. [Lorenzo v. Posadas]
·
Taxes are essential to the existence of the government. The obligation to pay taxes
rests not upon the privileges enjoyed by or the protection afforded to the citizen by the
government, but upon the necessity of money for the support of the State. For this reason, no one
is allowed to object to or resist payment of taxes solely because no personal benefit to him can
be pointed out as arising from the tax. [Lorenzo v. Posadas]
TAX DIFFERENTIATED FROM OTHER TERMS
Tariff / Duties
·
The term tariff and custom duties are used interchangeably in the Tariff and Customs
Code or PD No. 1464.
·
Customs duties, or simply duties, are taxes imposed on goods exported from or
imported into a country. Custom duties are really taxes but the latter term is broader in scope.
·
On the other hand, tariff may be used in one of three senses:
1.
A book of rates drawn usually in alphabetical order containing the names of several kinds
of merchandise with the corresponding duties to be paid for the same; or
2.
The duties payable on goods imported or exported; or
3.
The system or principle of imposing duties on the importation or exportation of goods.
License or regulatory fee v. tax
1.
License fee is legal compensation or reward of an officer for specific services while a tax is
an enforced contribution from persons or property by the law-making body by virtue of its
sovereignty and for the support of the government and all public needs.
2.
License fee is imposed for regulation, while tax is levied for revenue.
3.
License fee involves the exercise of police power, tax of the taxing power.
4.
Amount of license fee should be limited to the necessary expenses of inspection and
regulation, while there is generally no limit on the amount of the tax to be imposed.
5.
License fee is imposed only on the right to exercise a privilege, while tax is imposed also
on persons and property.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
6.
Failure to pay a license fee makes the act or business illegal, while failure to pay a tax does
not necessarily make the act or business illegal.
Regulatory tax
·
Examples: motor vehicle registration fee, sugar levy, coconut levy, regulation of
non-useful occupations
·
PAL v. Edu: This involves the imposition of motor vehicle registration fees which
the Supreme Court ruled as taxes. Fees may be regarded as taxes even though they also serve
as instruments of regulation because taxation may be made the implement of the State’s police
power. But if the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.
Criteria for determining license fees
1.
Imposition must relate to an occupation or activity which involves the health, morals, safety
and development of the people and which needs regulation for the protection and promotion of
the public interest.
2.
Imposition must also bear a reasonable relation to the probable expenses of regulation,
taking into account the costs of direct regulation as well as the incidental expenses.
Instances when license fees could exceed cost of regulation, control or administration
1.
When the collection or the license fee is authorized under both the power of taxation and
police powe
2.
When the license fee is collected to regulate a non-useful occupation
Special assessment v. tax
1.
A special assessment is an enforced proportional contribution from owners of lands specially
or peculiarly benefited by public improvements
2.
A special assessment is levied only on land.
3.
A special assessment is not a personal liability of the person assessed; it is limited to the
land.
4.
A special assessment is based wholly on benefits, not necessity.
5.
A special assessment is exceptional both as to time and place; a tax has general application.
Republic v. Bacolod Murcia, 17 SCRA 632
·
A special assessment is a levy on property which derives some special benefit from
the improvement. Its purpose is to finance such improvement. It is not a tax measure intended to
raise revenues for the government. The proceeds thereof may be devoted to the specific purpose
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
for which the assessment was authorized, thus accruing only to the owners thereof who, after all,
pay the assessment.
Some rules:
·
·
An exemption from taxation does not include exemption from a special assessment.
The power to tax carries with it the power to levy a special assessment.
Toll v. tax
1.
Toll is a sum of money for the use of something. It is the consideration which is paid for the
use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are enforced
proportional contributions from persons and property levied by the State by virtue of its
sovereignty for the support of the government and all public needs.
2.
Toll is a demand of proprietorship; tax is a demand of sovereignty.
3.
Toll is paid for the use of another’s property; tax is paid for the support of government.
4.
The amount paid as toll depends upon the cost of construction or maintenance of the public
improvement used; while there is no limit on the amount collected as tax as long as it is not
excessive, unreasonable, or confiscatory.
5.
Toll may be imposed by the government or by private individuals or entities; tax may be
imposed only by the government.
Tax v. penalty
1.
Penalty is any sanction imposed as a punishment for violation of law or for acts deemed
injurious; taxes are enforced proportional contributions from persons and property levied by the
State by virtue of its sovereignty for the support of the government and all public needs.
2.
Penalty is designed to regulate conduct; taxes are generally intended to generate revenue.
3.
Penalty may be imposed by the government or by private individuals or entities; taxes only
by the government.
Obligation to pay debt v. obligation to pay tax
1.
A debt is generally based on contract, express or implied, while a tax is based on laws.
2.
A debt is assignable, while a tax cannot generally be assigned.
3.
A debt may be paid in kind, while a tax is generally paid in money.
4.
A debt may be the subject of set off or compensation, a tax cannot.
5.
A person cannot be imprisoned for non-payment of tax, except poll tax.
6.
A debt is governed by the ordinary periods of prescription, while a tax is governed by the
special prescriptive periods provided for in the NIRC.
7.
A debt draws interest when it is so stipulated or where there is default, while a tax does not
draw interest except only when delinquent.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Requisites of compensation
1.
That each one of the obligor be bound principally, and that he be at the same time a principal
creditor of the other.
2.
That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind and also of the same quality if the latter has been stated.
3.
That the two debts be due.
4.
That they be liquidated and demandable.
5.
That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtors.
Rules re: set off or compensation of debts
·
General rule: A tax delinquency cannot be extinguished by legal compensation.
This is so because the government and the tax delinquent are not mutually creditors and debtors.
Neither is a tax obligation an ordinary debt. Moreover, the collection of a tax cannot await the
results of a lawsuit against the government. Finally, taxes are not in the nature of contracts but
grow out of a duty to, and are the positive acts of the, government to the making and enforcing of
which the personal consent of the taxpayer is not required. [Francia v. IAC, 162 SCRA 754 and
Republic v. Mambulao Lumber, 4 SCRA 622]
·
Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re.
claim for payment of unpaid services of a government employee vis-a-vis the estate taxes due
from his estate. The fact that the court having jurisdiction of the estate had found that the claim of
the estate against the government has been appropriated for the purpose by a corresponding law
shows that both the claim of the government for inheritance taxes and the claim of the intestate
for services rendered have already become overdue and demandable as well as fully liquidated.
Compensation therefore takes place by operation of law.
Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)
·
Philex Mining Corporation wants to set off its claims for VAT input credit/refund for
the excise taxes due from it. The Supreme Court disallowed such set off or compensation.
·
Taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material distinction
between a tax and a debt. Debts are due to the government in its corporate capacity, while taxes
are due to the government in its sovereign capacity.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
SURVEY OF PHILIPPINE TAXES
A.
Internal revenue taxes imposed under the NIRC
1.
2.
Income tax
Transfer taxes
a.
Estate Tax
b.
Donor’s Tax
3.
4.
5.
Business / Percentage taxes
a.
Value Added Tax
b.
Other Percentage Taxes
Excise taxes
Documentary stamp tax
B.
C.
D.
Local/Municipal Taxes
Tariff and Customs Duties
Taxes/Tax incentives under special laws
CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER OR OBJECT
1.
Personal, poll or capitation tax
Tax of a fixed amount imposed on persons residing within a specified territory, whether
citizens or not, without regard to their property or the occupation or business in which they may
be engaged, i.e. community tax.
2.
Property tax
Tax imposed on property, real or personal, in proportion to its value or in accordance with
some other reasonable method of apportionment.
3.
Excise tax
A charge imposed upon the performance of an act, the enjoyment of a privilege, or the
engaging in an occupation.
AS TO PURPOSE
1.
General/fiscal/revenue tax
A general/fiscal/revenue tax is that imposed for the purpose of raising public funds for the service
of the government.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
2.
Special/regulatory tax
A special or regulatory tax is imposed primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for the purpose of raising public funds.
AS TO WHO BEARS THE BURDEN
1.
Direct tax
A direct tax is demanded from the person who also shoulders the burden of the tax. It is a tax
which the taxpayer is directly or primarily liable and which he or she cannot shift to another.
2.
Indirect tax
An indirect tax is demanded from a person in the expectation and intention that he or she shall
indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser
or consumer. A tax which the taxpayer can shift to another.
AS TO SCOPE OF THE TAX
1.
National tax
A national tax is imposed by the national government.
2.
Local tax
A local tax is imposed by municipal corporations or local government units (LGUs).
AS TO THE DETERMINATION OF AMOUNT
1.
Specific tax
A specific tax is a tax of a fixed amount imposed by the head or number or by some other standard
of weight or measurement. It requires no assessment other than the listing or classification of the
objects to be taxed.
2.
Ad valorem tax
An ad valorem tax is a tax of a fixed proportion of the value of the property with respect to which
the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value
of such property before the amount due from each taxpayer can be determined.
AS TO GRADATION OR RATE
1.
Proportional tax
Tax based on a fixed percentage of the amount of the property receipts or other basis to be
taxed. Example: real estate tax.
2.
Progressive or graduated tax
Tax the rate of which increases as the tax base or bracket increases. Example: income tax.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Digressive tax rate: progressive rate stops at a certain point. Progression halts at a
particular stage.
3.
Regressive tax
Tax the rate of which decreases as the tax base or bracket increases. There is no such tax
in the Philippines.
ASPECTS OF TAXATION
Processes that are included or embodied in the term “taxation”
1.
Levying or imposition of the tax which is a legislative act.
2.
Collection of the tax levied which is essentially administrative in character.
The first is taxation, strictly speaking, while the second may be referred to as tax administration.
The two processes together constitute the taxation system.
TAX SYSTEMS
Constitutional mandate
·
The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. [Section 28(1), Article VI, Constitution]
·
Tolentino v. Secretary of Finance: Regressivity is not a negative standard for courts
to enforce. What Congress is required by the Constitution to do is to “evolve a progressive system
of taxation.” This is a directive to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity. The provisions are put in the
Constitution as moral incentives to legislation, not as judicially enforceable rights.
Progressive system of taxation v. regressive system of taxation
·
A progressive system of taxation means that tax laws shall place emphasis on direct
taxes rather than on indirect taxes, with ability to pay as the principal criterion.
·
A regressive system of taxation exists when there are more indirect taxes imposed
than direct taxes.
Regressive tax rates
·
Tax the rate of which decreases as the tax base or bracket increases. There are
no regressive taxes in the Philippine jurisdiction.
·
Regressive tax rates should be differentiated from a regressive system of taxation
which exists when there are more indirect taxes imposed than direct taxes.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Three basic principles of a sound tax system
1.
Fiscal adequacy
It means that the sources of revenue should be sufficient to meet the demands of public
expenditures. [Chavez v. Ongpin, 186 SCRA 331]
2.
Equality or theoretical justice
It means that 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
It means that tax laws should be capable of convenient, just and effective administration.
NATURE AND LIMITATIONS OF THE POWER OF TAXATION
NATURE OF THE POWER OF TAXATION
Nature or characteristics of the State’s power to tax
1.
It is inherent in sovereignty; hence, it may be exercised although it is not expressly granted
by the Constitution.
2.
It is legislative in character; hence, only the legislature can impose taxes (although the
power may be delegated).
3.
It is subject to Constitutional and inherent limitations; hence, it is not an absolute power that
can be exercised by the legislature anyway it pleases.
Power to tax v. Police power v. Power of eminent domain
TAXATION
POLICE POWER
EMINENT DOMAIN
DEFINITION Power of the State to demand enforced contributions for public purposes Power
of the State to enact such laws in relation to persons and property as may promote public health,
safety, morals, and the general welfare of the public Power of the State to take private property
for public use upon paying to the owner a just compensation to be ascertained according to law
Authority Exercising the Power
Only the government or its political subdivisions
Only
the government or its political subdivisions May be granted to public service companies of
public utilities
PURPOSE
Enforced contribution is demanded for the support of the government
Use of
property is regulated for the purpose of promoting the general welfare
Property is taken for
public use
Persons Affected
Operates upon a community or class of individuals Operates upon a
community or class of individuals (usually) Operates on an individual as the owner of a
particular property
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
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Taxation 1: LML / VGL / GSJ
EFFECT
Money contributed in the concept of taxes becomes part of public funds No
transfer of title, at most, there is restraint on injurious use of the property Transfer of the right to
property whether it be ownership or a lesser right
BENEFITS RECEIVED
Assumed that the individual receives the equivalent of the tax in the
form of protection, and benefits received from the government as such
Person
affected
receives no direct and immediate benefit but only such as may arise from the maintenance of a
healthy economic standard of society
Person affected receives the market value of the
property taken from him
AMOUNT OF IMPOSITION Generally no limit on the amount of tax that may be imposed
Amount imposed should not be more than that sufficient to cover the cost of the license and the
necessary expenses of regulation No amount imposed but rather the owner is paid the market
value of the property taken
Relationship to the Constitution
Subject to certain Constitutional limitations Relatively free
from Constitutional limitations and is superior to the impairment provisions Subject to certain
Constitutional limitations (e.g. inferior to impairment of contracts clause)
Power to tax involves the power to destroy so it must be exercised with caution
·
Chief Justice Marshall declared that the power to tax is also called the power to
destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights
of the taxpayer. It must be exercised fairly, equally and uniformly, less the tax collector kills the
“hen that lays the golden egg.” And in order to maintain the general public’s trust and confidence
in the government, this power must be used justly and not treacherously. [Chief Justice Marshall
in McCulloch v. Maryland, reiterated in Roxas v. CTA, 23 SCRA 276]
·
Justice Holmes seemingly contradicted the Marshallian view by declaring in
Panhandle Oil Company v. Mississippi that “the power to tax is not the power to destroy while this
court sits.”
Domondon’s reconciliation of Marshall and Holmes
·
The imposition of a valid tax could not be judicially restrained merely because it
would prejudice taxpayer’s property.
·
An illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayer’s property.
·
Marshall’s view refers to a valid tax while Holmes’ view refers to an invalid tax.
Power to tax is exclusively legislative in nature
·
The power to tax is peculiarly and exclusively legislative and cannot be exercised
by the executive or judicial branches of the government. Hence, only Congress can impose taxes.
Matters within the competence of the legislature
1.
2.
The subject or object to be taxed.
The purpose of the tax so long as it is a public purpose.
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3.
4.
Taxation 1: LML / VGL / GSJ
The amount or rate of the tax.
The manner, means, and agencies of collection of the tax.
Commissioner v. Santos, 277 SCRA 617 (1997)
·
The Supreme Court held that it is within the province of the legislature whether to
tax jewelry or not. With the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects), and situs (place) of taxation.
·
It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that “inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no Constitutional limitation.”
Power to tax cannot be delegated
·
The power of taxation, being purely legislative, Congress cannot delegate such
power. This limitation arises from the doctrine of separation of powers among the three branches
of government.
Exceptions to the non-delegation rule
1.
2.
3.
Delegation to the President
Delegation to local government units
Delegation to administrative agencies
TAXPAYER’S SUIT
Taxpayer’s suit
·
A case where the act complained of directly involves the illegal disbursement of
public funds derived from taxation.
·
Taxpayers have locus standi to question the validity of tax measures or illegal
expenditures of public money. In such cases, they are parties in interest who will be prejudiced or
benefited by the avails of the suit.
·
On the other hand, public officials have locus standi because it is their duty to protect
public interest.
·
The general rule is that not only persons individually affected but also taxpayers
have sufficient interest of preventing the illegal expenditures of money raised by taxation. They
may, therefore, question in the proper court the constitutionality of statutes requiring the
expenditure of public funds.
·
But a taxpayer is not relieved from the obligation of paying a tax because of his
belief that it is being misappropriated by certain officials, for otherwise, collection of taxes would
be hampered and this may result in the paralyzation of important governmental functions.
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Republic of the Philippines
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Taxation 1: LML / VGL / GSJ
Lozada v. COMELEC
·
In this case, the petitioner filed a taxpayer’s suit to compel the COMELEC to
schedule a special election for vacancies in the Batasang Pambansa. The Supreme Court held
that this is not a taxpayer’s suit as nowhere is it alleged that tax is being illegally spent.
·
SC reiterated that it is only when an act complained of, which may include a
legislative enactment of a statute, involves the illegal expenditure of public money that the socalled taxpayer suit may be allowed.
INHERENT LIMITATIONS
Inherent limitations
1.
2.
3.
4.
5.
Purpose must be public in nature
Prohibition against delegation of the taxing power
Exemption of government entities, agencies and instrumentalities
International comity
Limitation of territorial jurisdiction
Public purpose in taxation
·
This is one of the inherent limitations of the power to tax and is synonymous to
“governmental purpose.” A tax must always be imposed for a public purpose, otherwise, it will be
declared as invalid.
·
The term “public purpose” has no fixed connotation. The essential point is that the
purpose of the tax affects the inhabitants as a community and not merely as inhabitants.
·
It has been said that the best test of rightful taxation is that the proceeds of the tax
must be used:
a)
b)
c)
for the support of the government; or
some of the recognized objects of government; or
to promote the welfare of the community.
Effect of incidental benefit to private interest
·
The purposes to be accomplished by taxation need not be exclusively public.
Although private individuals are directly benefited, the tax would still be valid provided such benefit
is only incidental.
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·
The test is not as to who receives the money, but the character of the purpose for
which it is expended; not the immediate result of the expenditure, but rather the ultimate results.
·
The appropriation of public money to construct a road on a private land is not a
public purpose. [Pascual v. Secretary of Public Works, 110 Phil. 331]
Exceptions to the non-delegation rule
1.
2.
3.
Delegation to the President
Delegation to local government units
Delegation to administrative agencies
Delegation to the President
·
Congress may authorize, by law, the President to fix, within specified limits and
subject to such limitations and restrictions as it may impose:
1.
2.
3.
4.
tariff rates;
import and export quotas;
tonnage and wharfage dues; and
other duties or imposts within the national development program of the government.
·
This authorization is embodied in Section 401 of the Tariff and Customs Code which
is also called the flexible tariff clause.
Flexible tariff clause
·
In the interest of national economy, general welfare and/or national security, the
President, upon recommendation of the National Economic and Development Authority, is
empowered:
1.
To increase, reduce, or remove existing protective rates of import duty, provided that the
increase should not be higher than 100% ad valorem;
2.
To establish import quota or to ban imports of any commodity; and
3.
To impose additional duty on all imports not exceeding 10% ad valorem.
Delegation to local government units
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·
The power of local government units to impose taxes and fees is always subject to
the limitations which Congress may provide, the former having no inherent power to tax. [Basco
v. PAGCOR]
·
Municipal corporations are mere creatures of Congress which has the power to
create and abolish municipal corporations. Congress therefore has power of control over local
government units. If Congress can grant to a municipal corporation the power to tax certain
matters, it can also provide for exemptions or even to take back the power.
Delegation to administrative agencies
·
With the growing complexities of modern life and the many technical fields of
governmental functions, as in matters pertaining to tax exemptions, delegation of legislative
powers has become the rule and non-delegation the exception. The legislature may not have the
competence, let alone the interest and the time, to provide direct and efficacious solutions to many
problems attendant upon present day undertakings. The legislature could not be expected to state
all the detailed situations wherein the tax exemption privilege would be restored. The task may
be assigned to an administrative body like the Fiscal Incentives Review Board (FIRB). [Maceda
v. Macaraig, 196 SCRA 771]
·
For delegation to be constitutionally valid, the law must be complete in itself and
must set forth sufficient standards.
·
Certain aspects of the taxing process that are not really legislative in nature are
vested in administrative agencies. In these cases, there really is no delegation, to wit: a) power
to value property; b) power to assess and collect taxes; c) power to perform details of computation,
appraisement or adjustment; among others.
Reasons for exempting governmental entities
·
Government will be taxing itself to raise money for itself.
·
Immunity is necessary in order that governmental functions will not be impeded.
What government entities are exempt from income tax?
1.
2.
3.
4.
5.
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Philippine Charity Sweepstakes Office (PCSO)**
Philippine Amusement and Gaming Corporation (PAGCOR)
**Under the TRAIN law (effective Jan 1, 2018), PCSO is removed from tax exempt GOCCs
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International comity
·
Courteous, friendly agreement and interaction between nations.
·
State.
Under international law, property of a foreign State may not be taxed by another
Reasons for exception
1.
Sovereign equality of States
2.
When one State enters the territory of another State, there is an implied understanding that
the former does not intend to denigrate its dignity by placing itself under the jurisdiction of the
other State
3.
Immunity from suit of a State
Limitation of a territorial jurisdiction
·
Tax laws cannot operate beyond a state’s territorial limits.
·
Property outside one’s jurisdiction does not receive any protection from the state.
CONSTITUTIONAL LIMITATIONS
Constitutional limitations
1.
Due process of law
2.
Equal protection of laws
3.
Rule of uniformity and equity in taxation
4.
Prohibition against imprisonment for non-payment of poll tax
5.
Prohibition against impairment of obligation of contracts
6.
Prohibition against infringement of religious freedom
7.
Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of
any church
8.
Prohibition against taxation of religious, charitable and educational entities
9.
Prohibition against taxation of non-stock, non-profit educational institutions
10. Others
a.
b.
Grant of tax exemption
Veto of appropriation, revenue, tariff bills by the President
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c.
d.
e.
f.
Taxation 1: LML / VGL / GSJ
Non-impairment of the SC jurisdiction
Revenue bills shall originate exclusively from the House of Representatives
Infringement of press freedom
Grant of franchise
Due process of law
·
There must be a valid law.
·
Tax measure should not be unconscionable and unjust as to amount to confiscation
of property.
·
Tax statute must not be arbitrary as to find no support in the Constitution.
Equal protection of laws
·
All persons subject to legislation shall be treated alike under similar circumstances
and conditions both in the privileges conferred and liabilities imposed.
·
The doctrine does not require that persons or properties different in fact be treated
in law as though they were the same. What it prohibits is class legislation which discriminates
against some and favors others.
·
As long as there are rational or reasonable grounds for so doing, Congress may
group persons or properties to be taxed and it is sufficient if all members of the same class are
subject to the same rate and the tax is administered impartially upon them.
Requisites of a valid classification
1.
It must be based on substantial distinctions which make real differences.
2.
The classification must be germane to the purpose of the law.
3.
The classification must not be limited to existing conditions only but must also apply to
future conditions substantially identical to those of the present.
4.
The classification must apply equally to all members of the same class. [Tiu v. Court of
Appeals, 301 SCRA 278 (1999)]
Tiu v. Court of Appeals, 301 SCRA 278 (1999)
·
The Constitutional right to equal protection of the law is not violated by an executive
order, issued pursuant to law, granting tax and duty incentives only to business within the “secured
area” of the Subic Special Economic Zone and denying them to those who live within the Zone
but outside such “fenced in” territory. The Constitution does not require absolute equality among
residents. It is enough that all persons under like circumstances or conditions are given the same
privileges and required to follow the same obligations. In short, a classification based on valid and
reasonable standards does not violate the equal protection clause.
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·
We find real and substantial distinctions between the circumstances obtaining inside
and those outside the Subic Naval Base, thereby justifying a valid and reasonable classification.
Uniformity v. equity in taxation
·
Section 28 (c), Article VI of the Constitution provides that “the rule of taxation shall
be uniform and equitable.”
·
The concept of uniformity in taxation implies that all taxable articles or properties of
the same class shall be taxed at the same rate. It requires the uniform application and operation,
without discrimination, of the tax in every place where the subject of the tax is found. It does not,
however, require absolute identity or equality under all circumstances, but subject to reasonable
classification.
·
The concept of equity in taxation requires that the apportionment of the tax burden
be, more or less, just in the light of the taxpayer’s ability to shoulder the tax burden and, if
warranted, on the basis of the benefits received from the government. Its cornerstone is the
taxpayer’s ability to pay.
Prohibition against imprisonment for non-payment of poll tax
·
No person shall be imprisoned for debt or non-payment of poll tax. [Section 20,
Article III, Constitution]
·
The non-imprisonment rule applies to non-payment of poll tax which is punishable
only by a surcharge, but not to other violations like falsification of community tax certificate and
non-payment of other taxes.
Poll tax
·
Poll tax is a tax of fixed amount imposed on residents within a specific territory
regardless of citizenship, business or profession. Example is community tax.
Prohibition against impairment of obligation of contracts
·
No law impairing the obligation of contracts shall be passed. [Section 10, Article III,
Constitution]
·
The obligation of a contract is impaired when its terms or conditions are changed
by law or by a party without the consent of the other, thereby weakening the position or rights of
the latter.
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·
An example of impairment by law is when a later taxing statute revokes a tax
exemption based on a contract. But this only applies when the tax exemption has been granted
for a valid consideration.
·
A later statute may revoke exemption from taxation provided for in a franchise
because the Constitution provides that a franchise is subject to amendment, alteration or repeal.
Prohibition against infringement of religious freedom
·
No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof.
The free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall be required for the exercise of civil or
political rights. [Section 5, Article III, Constitution]
·
The payment of license fees for the distribution and sale of bibles suppresses the
constitutional right of free exercise of religion. [American Bible Society v. Manila, 101 Phil. 386]
Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any
church
Section 29, Article VI, Constitution
1.
No money shall be paid out of the Treasury except in pursuance of an appropriation made
by law.
2.
No public money or property shall be appropriated, applied, paid, or employed directly or
indirectly, for the use, benefit, or support of any church, denomination, sectarian institution or
system of religion, or of any priest, preacher, minister or other religious teacher, or dignitary as
such except when such priest, preacher, minister or dignitary is assigned to the armed forces, or
to any penal institution, or government orphanage or leprosarium.
3.
All money collected on any tax levied for a special purpose shall be treated as a special
fund and paid out for such purpose only. If the purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
government.
Prohibition against taxation of real property actually, directly and exclusively used for religious,
charitable and educational purposes
·
Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly,
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and exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation. [Section 28 (3) , Article VI, Constitution]
·
This is an exemption from real property tax only.
·
The exemption in favor of property used exclusively for charitable or educational
purposes is not limited to property actually indispensable therefore, but extends to facilities which
are incidental to and reasonably necessary for the accomplishment of said purposes. [Abra Valley
College v. Aquino, 162 SCRA 106]
Prohibition against taxation of the revenues and assets of non-stock, non-profit educational
institutions
·
All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall
be disposed of in the manner provided by law. [Section 4, Article XIV, Constitution]
·
This exemption from corporate income tax is embodied in Section 30 of the NIRC
which includes a non-stock, non-profit educational institution.
·
Note however the last paragraph of Section 30 which states: “Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their property, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax
imposed under this Code.”
Department of Finance Order 145-85
·
Non-stock, non-profit educational institutions are exempt from taxes on all their
revenues and assets used actually, directly and exclusively for educational purposes.
·
However, they shall be subject to internal revenue tax on income from trade,
business or other activity, the conduct of which is not related to the exercise or performance by
such educational institution of its educational purposes or functions.
·
Interest income shall be exempt only when used directly and exclusively for
educational purposes. To substantiate this claim, the institution must submit an annual information
return and duly audited financial statement. A certification of actual utilization and the Board
resolution or the proposed project to be funded out of the money deposited in banks shall also be
submitted.
Department of Finance Order 137-87
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Republic of the Philippines
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Taxation 1: LML / VGL / GSJ
·
An educational institution means a non-stock, non-profit corporation or association
duly registered under Philippine law, and operated exclusively for educational purposes,
maintained and administered by a private individual or group offering formal education, and with
an issued permit to operate by the DECS.
·
Revenues derived from and assets used in the operation of cafeteria/canteens,
dormitories, and bookstores are exempt from taxation provided they are owned and operated by
the educational institution as ancillary activities and the same are located within the school
premises.
Commissioner of Internal Revenue v. Court of Appeals, et.al., 298 SCRA 83 (1998)
The Young Men’s Christian Association of the Philippines, Inc. (YMCA) was established as “a
welfare, educational and charitable non-profit corporation.” It conducts various programs and
activities that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.
In this case, the Supreme Court held that the income derived by YMCA from leasing out a portion
of its premises to small shop owners, like restaurant and canteen operators, and from parking
fees collected from non-members are taxable income.
First, the constitutional tax exemption granted to non-stock, non-profit educational institutions
does not find application because YMCA is not an educational institution. The term “educational
institution” or “institution of learning” has acquired a well known technical meaning. Under the
Education Act of 1982, such term refers to schools. The school system is synonymous with formal
education, which “refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which certification is required in order
for the learner to progress through the grades or move to the higher levels. A perusal of the articles
of incorporation of YMCA does not show that it established such a system.
Second, even if it be exempt under Section 30 of the NIRC as a non-profit, non-stock educational
corporation, the income from the rent of its premises and parking fees is not covered by the
exemption, according to the last paragraph of the same section. Section 30 provides that income
of whatever kind and character from any of its properties, real or personal, or from any of its
activities for profit are not exempt from income tax.
Finally, Section 28(3), Article VI of the Constitution does not apply as it extends exemption only
from real property taxes – not from income taxes.
Taxation of proprietary educational institutions
·
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for investment. [Section 4 (3), Article XIV, Constitution]
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·
Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except for passive
incomes which are subject to different tax rates.
Other constitutional limitations
1.
Grant of tax exemption
No law granting any tax exemption shall be passed without the concurrence of a majority of all
Members of Congress. [Section 28 (4), Article VI, Constitution]
2.
Veto of appropriation, revenue, or tariff bills by the President
The President shall have the power to veto any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.
[Section 27 (2) Article VI, Constitution]
An item in a bill refers to particulars, details, the distinct and severable parts of a bill. In budgetary
legislation, an item is an individual sum of money dedicated to a stated purpose. [Gonzales v.
Macaraig, 191 SCRA 452]
3.
Non-impairment of the jurisdiction of the Supreme Court
Congress cannot take away from the Supreme Court the power given to it by the Constitution as
the final arbiter of tax cases.
The Supreme Court shall have the following powers:
Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court
may provide, final judgments and orders of lower courts in:
All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto. [Section 5 (2) (b), Article VIII, Constitution]
4.
Revenue bills shall originate exclusively from the House of Representatives
All appropriation, revenue or tariff bills, bills authorizing an increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments. [Section 24, Article VI, Constitution]
The Constitution simply means that the initiative for the filing of bills must come from the House
of Representatives, on the theory that, elected as they are from the districts, the members of the
House can be expected to be more sensitive to the local needs and problems. It is not the law –
but the revenue bill – which is required by the Constitution to originate exclusively in the House
of Representatives, because a bill originating in the House may undergo such extensive changes
in the Senate that the result may be a rewriting of the whole, and a distinct bill may be produced.
[Tolentino v. Secretary of Finance]
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The Constitution does not also prohibit the filing in the Senate of a substitute bill in
anticipation of its receipt of the bill from the House, as long as action by the Senate is withheld
until receipt of said bill. [Tolentino v. Secretary of Finance]
5.
Infringement of press freedom
This limitation does not mean that the press is exempt from taxation. Taxation constitutes an
infringement of press freedom when it operates as a prior restraint to the exercise of this
constitutional right. When the tax is imposed on the receipts or the income of the press it is a valid
exercise of the sovereign prerogative.
6.
Grant of franchise
Tax exemptions included in the grant of a franchise may be revoked by another law as it is
specifically provided in the Constitution that the grant of any franchise is always subject to
amendment, alteration, or repeal by the Congress when the common good so requires.
SITUS IN TAXATION
Situs of taxation
·
Literally, situs of taxation means place of taxation. It is the State or political unit
which has jurisdiction to impose a particular tax.
·
The determination of the situs of taxation depends on various factors including the:
1.
2.
3.
4.
5.
Nature of the tax;
Subject matter thereof (i.e. person, property, act or activity;
Possible protection and benefit that may accrue both to the government and the taxpayer;
Residence or citizenship of the taxpayer; and
Source of the income.
Situs of tax on persons (poll tax
·
Poll tax may be properly levied upon persons who are inhabitants or residents of
the State, whether or not they are citizens.
Situs of tax on real property
·
Situs is where the property is located pursuant to the principle of lex rei sitae. This
applies whether or not the owner is a resident of the place where the property is located.
·
This is so because the taxing authority has control over the property which is of a
fixed and stationary character.
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·
The place where the real property is located gives protection to the real property,
hence, the owner must support the government of that place.
Lex rei sitae
·
This is a principle followed in fixing the situs of taxation of a property. This means
that the property is taxable in the State where it has its actual situs, specifically in the place where
it is located, even though the owner resides in another jurisdiction.
·
With respect to property taxes, real property is subject to taxation in the State where
it is located and taxable only there. Lex rei sitae has also been adopted for tangible personal
property under Article 16 of the Civil Code. A different rule applies to intangible personal property,
specifically, mobilia sequuntur personam.
Situs of tangible personal property
·
It is taxable in the State where it has actual situs although the owner resides in
another jurisdiction.
·
As stated above, lex rei sitae has also been adopted for tangible personal property
under Article 16 of the Civil Code.
Situs of taxation of intangible personal property
·
General rule: Situs is the domicile of the owner pursuant to the principle of mobilia
sequuntur personam. This rule is based on the fact that such property does not admit of any actual
location and that such property receives the protection and benefits of the law where they are
located.
·
1.
2.
Exceptions:
When it is inconsistent with the express provisions of the statute
When the property has acquired a business situs in another jurisdiction
Mobilia sequuntor personam
·
This Latin maxim literally means that the property follows the person. Thus, the
place where the owner is found is the situs of taxation under the rule that movables follow the
person. This is generally where the owner resides.
·
In taxation, this principle is applied to intangible personal property the situs of which
is fixed by the domicile of the owner. The reason is that this type of property rarely admits of
actual location.
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·
However, there are two exceptions to the rule. One is when it is inconsistent with
the express provisions of a statute. Two, when the interests of justice demand that it should not
be applied, i.e. where the property has in fact a situs elsewhere.
Wells Fargo v. Collector, 70 Phil 325
This case involves the collection of inheritance taxes on shares of stock issued by the Benguet
Consolidated Mining Corporation and owned by Lillian Eye. Said shares were already subjected
to inheritance taxes in California and are now being taxed by Philippine authorities.
Originally, the settled law in the United States is that intangibles have only one situs for the
purpose of inheritance tax – the domicile of the decedent at the time of death. But this rule has,
of late, been relaxed. The maxim mobilia sequuntur personam, upon which the rules rests, has
been decried as a mere fiction of law having its origin in considerations of general convenience
and public policy and cannot be applied to limit or control the right of the State to tax property
within its jurisdiction. It must yield to established fact of legal ownership, actual presence and
control elsewhere, and cannot be applied if to do so would result in inescapable and patent
injustice.
The relaxation of the original rule rests on either of two fundamental considerations:
1.
Upon the recognition of the inherent power of each government to tax persons, properties
and rights within its jurisdiction and enjoying the protection of its laws; or
2.
Upon the principle that as to intangibles, a single location in space is hardly possible,
considering the multiple, distinct relationships which may be entered into with respect thereto.
The actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein.
And besides, the certificates of stock have remained in this country up to the time when the
deceased died in California, and they were in the possession of the secretary of the Benguet
Corporation. The secretary had the right to vote, collect dividends, among others. For all practical
purposes, the secretary had legal title to the certificates of stock held in trust for Eye. Eye extended
in the Philippines her activities re: her intangible personal property so as to avail herself of the
protection and benefits of the Philippine laws.
Collector v. De Lara, 102 Phil 813
·
The Supreme Court did not subject to estate and inheritance taxes the shares of
stock issued by Philippine corporations which were left by a non-resident alien after his death.
Considering that he is a resident of a foreign country, his estate is entitled to exemption from
inheritance tax on the intangible personal property found in the Philippines. This exemption is
granted to non-residents to reduce the burden of multiple taxation, which otherwise would subject
a decedent’s intangible personal property to the inheritance tax both in his place of residence and
domicile and the place where those properties are found.
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·
This is, therefore, an exception to the decision of the Supreme Court in Wells Fargo
v. Collector. This has since been incorporated in Section 104 of the NIRC.
Theories re: situs of income tax
1.
Domicilliary theory
The location where the income earner resides is the situs of taxation. This is where he is given
protection, hence, he must support it.
2.
Nationality theory
The country of citizenship is the situs of taxation. This is so because a citizen is given protection
by his country no matter where he is found or no matter where he earns his income.
3.
Source law
The country which is the source of the income or where the activity that produced the income is
the situs of taxation.
Situs of income tax in the Philippines
·
The situs is where the income is derived.
·
The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient that
income is derived from an activity within the Philippines. In BOAC’s cases, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made in the Philippines. The flow of wealth proceeded from and
occurred in the Philippine territory, enjoying the protection accorded by the Philippine government;
in consideration of such protection, the flow of wealth should share the burden of supporting the
government.
The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. The test of taxability is the source of the income and the
source is that activity which produced the income. Even if the tickets sold covered the transport
of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the
sale of the tickets was derived from the Philippines. The word “source” conveys one essential
idea, that of origin, and the origin of the income is here in the Philippines. [Commissioner v. BOAC,
149 SCRA 395]
·
Situs of tax on interest income is the residence of the borrower who pays the interest,
irrespective of the place where the obligation was contracted. If the borrower is a resident of the
Philippines, the interest payment paid by him can have no other source than within the Philippines.
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Multiplicity of situs
·
Multiplicity of situs, or the taxation of the same income or intangible subject in
several taxing jurisdictions, arises from various factors:
1.
The variance in the concept of domicile for tax purposes;
2.
Multiple distinct relationships that may arise with respect to intangible personal property; or
3. The use to which the property may have been devoted all of which may receive the protection
of the laws of jurisdictions other than the domicile of the owner thereto.
·
The remedy to avoid or reduce the consequent burden in case of multiplicity of situs
is either to:
1.
2.
Provide exemptions or allowance of deduction or tax credit for foreign taxes; or
Enter into tax treaties with other States.
DOUBLE TAXATION
Double taxation in the strict sense v. double taxation in the broad sense
·
1.
2.
3.
4.
5.
6.
In its strict sense, referred to as direct duplicate taxation, double taxation means:
taxing twice;
by the same taxing authority;
within the same jurisdiction or taxing district;
for the same purpose;
in the same year or taxing period;
some of the property in the territory.
·
In its broad sense, referred to as indirect double taxation, double taxation is taxation
other than direct duplicate taxation. It extends to all cases in which there is a burden of two or
more impositions.
Constitutionality of double taxation
·
taxation.
Unlike the United States Constitution, our Constitution does not prohibit double
·
However, while it is not forbidden, it is something not favored. Such taxation should,
whenever possible, be avoided and prevented.
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·
In addition, where there is direct double taxation, there may be a violation of the
constitutional precepts of equal protection and uniformity in taxation.
·
The argument against double taxation may not be invoked where one tax is imposed
by the State and the other is imposed by the city, it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the
same occupation, calling, or activity by both the State and a political subdivision thereof. And
where the statute or ordinance in questions applies equally to all persons, firms and corporations
placed in a similar situation, there is no infringement of the rule on equality. [City of Baguio v. De
Leon, 25 SCRA 938]
Villanueva v. City of Iloilo, 265 SCRA 528
·
An ordinance imposing a municipal tax on tenement houses was challenged because
the owners already pay real estate taxes and also income taxes under the NIRC. The Supreme
Court held that there was no double taxation. The same tax may be imposed by the National
Government as well as the local government. There is nothing inherently obnoxious in the
exaction of license fees or taxes with respect to the same occupation, calling, or activity by both
the State and a political subdivision thereof. Further, a license tax may be levied upon a business
or occupation although the land used in connection therewith is subject to property tax.
·
1.
2.
3.
4.
5.
6.
7.
In order to constitute double taxation in the objectionable or prohibited sense:
the same property must be taxed twice when it should be taxed once;
both taxes must be imposed on the same property or subject matter;
for the same purpose;
by the same State, Government, or taxing authority;
within the same jurisdiction or taxing district;
during the same taxing period; and
of the same kind or character of tax.
·
At any rate, there is no constitutional prohibition against double taxation in the
Philippines. It is something not favored but is permissible, provided that some other constitutional
requirement is not thereby violated.
MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION
Six basic forms of escape from taxation
1.
2.
3.
Shifting
Capitalization
Evasion
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4.
5.
6.
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Exemption
Transformation
Avoidance
Note: With the exception of evasion, all are legal means of escape.
SHIFTING
Shifting
·
Shifting is the transfer of the burden of a tax by the original payer or the one on
whom the tax was assessed or imposed to someone else.
·
It should be borne in mind that what is transferred is not the payment of the tax but
the burden of the tax.
Taxes that can be shifted
·
Only indirect taxes may be shifted; direct taxes cannot be shifted.
Ways of shifting the tax burden
1.
Forward shifting
When the burden of the tax is transferred from a factor of production through factors of distribution
until it finally settles on the ultimate purchaser or consumer.
Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to
the retailer, who also shifts it to the final purchaser or consumer.
2.
Backward shifting
When the burden of the tax is transferred from the consumer or purchaser through the factors of
distribution to the factor of production.
Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing only
after the price is reduced, and from the latter to the wholesaler, and finally to the manufacturer or
producer.
3.
Onward shifting
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When the tax is shifted two or more times either forward or backward.
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser
by the retailer, we have three shifts in all.
Impact and incidence of taxation
·
Impact of taxation is the point on which a tax is originally imposed. In so far as the
law is concerned, the taxpayer is the person who must pay the tax to the government. He is also
termed as the statutory taxpayer – the one on whom the tax is formally assessed. He is the subject
of the tax.
·
Incidence of taxation is that point on which the tax burden finally rests or settle
down. It takes place when shifting has been effected from the statutory taxpayer to another.
Statutory taxpayer
·
The statutory taxpayer is the person required by law to pay the tax or the one on
whom the tax is formally assessed. In short, he or she is the subject of the tax.
·
In direct taxes, the statutory taxpayer is the one who shoulders the burden of the
tax while in indirect taxes, the statutory taxpayer is the one who pay the tax to the government
but the burden can be passed to another person or entity.
Relationship between impact, shifting, and incidence of a tax
·
The impact is the initial phenomenon, the shifting is the intermediate process, and
the incidence is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer)
who shifts the burden to the customer who finally bears the incidence of the tax.
·
Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence
is the setting or coming to rest of the tax.
TAX EVASION
Tax evasion
·
Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as “tax dodging.” It is punishable by law.
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Tax evasion is a term that connotes fraud through the use of pretenses or forbidden
devices to lessen or defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160]
·
Example: Deliberate failure to report a taxable income or property; deliberate
reduction of income that has been received.
Elements of tax evasion
·
Tax evasion connotes the integration of three factors:
1.
The end to be achieved. Example: the payment of less than that known by the taxpayer to
be legally due, or in paying no tax when such is due.
2.
An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate
and not accidental.”
3.
A course of action (or failure of action) which is unlawful.
Evidence to prove evasion
·
Since fraud is a state of mind, it need not be proved by direct evidence but may be
proved from the circumstances of the case.
·
In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment
of a deficiency tax against Gonzales, a private concessionaire engaged in the manufacturer of
furniture inside the Clark Air Base, for underdeclaration of his income. SC held that the failure of
the taxpayer to declare for taxation purposes his true and actual income derived from his business
for two (2) consecutive years is an indication of his fraudulent intent to cheat the government if its
due taxes.
TAX AVOIDANCE
Tax avoidance
·
Tax avoidance is the exploitation by the taxpayer of legally permissible alternative
tax rates or methods of assessing taxable property or income in order to avoid or reduce tax
liability. It is politely called “tax minimization” and is not punishable by law.
·
In Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA 349], the
Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a corporation which they themselves owned and
controlled. By virtue of the deed of exchange, the Pachecho co-owners saved on inheritance
taxes. The Supreme Court said the records do not point to anything wrong and objectionable
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about this estate planning scheme resorted to. The legal right of the taxpayer to decreased the
amount of what otherwise could be his taxes or altogether avoid them by means which the law
permits cannot be doubted.
TAX EXEMPTION
Tax exemption
·
It is the grant of immunity to particular persons or corporations or to persons or
corporations of a particular class from a tax which persons and corporations generally within the
same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a
financial charge or burden to which others are subjected.
·
Exemption is allowed only if there is a clear provision therefor.
·
It is not necessarily discriminatory as long as there is a reasonable foundation or
rational basis.
Rationale for granting tax exemptions
·
Its avowed purpose is some public benefit or interest which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption.
·
The theory behind the grant of tax exemptions is that such act will benefit the body
of the people. It is not based on the idea of lessening the burden of the individual owners of
property.
Grounds for granting tax exemptions
1. May be based on contract. In such a case, the public which is represented by the government
is supposed to receive a full equivalent therefor, i.e. charter of a corporation.
2.
May be based on some ground of public policy, i.e., to encourage new industries or to foster
charitable institutions. Here, the government need not receive any consideration in return for the
tax exemption.
3.
May be based on grounds of reciprocity or to lessen the rigors of international double or
multiple taxation
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear
provision therefor.
Nature of tax exemption
1.
It is a mere personal privilege of the grantee.
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2.
It is generally revocable by the government unless the exemption is founded on a contract
which is protected from impairment.
3.
It implies a waiver on the part of the government of its right to collect what otherwise would
be due to it, and so is prejudicial thereto.
4.
It is not necessarily discriminatory so long as the exemption has a reasonable foundation
or rational basis.
Kinds of tax exemption according to manner of creation
1.
Express or affirmative exemption
When certain persons, property or transactions are, by express provision, exempted from
all or certain taxes, either entirely or in part.
2.
Implied exemption or exemption by omission
When a tax is levied on certain classes of persons, properties, or transactions without
mentioning the other classes.
Every tax statute makes exemptions because of omissions.
Kinds of tax exemptions according to scope or extent
1.
Total
When certain persons, property or transactions are exempted, expressly or implied, from
all taxes.
2.
Partial
When certain persons, property or transactions are exempted, expressly or implied, from
certain taxes, either entirely or in part.
Does provision in a statute granting exemption from “all taxes” include indirect taxes?
·
NO. As a general rule, indirect taxes are not included in the grant of such exemption
unless it is expressly stated.
Nature of power to grant tax exemption
1.
National government
The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who
or what persons or property shall be taxed implies the power to prescribe who or what persons or
property shall not be taxed.
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It is inherent in the exercise of the power to tax that the sovereign state be free to select the
subjects of taxation and to grant exemptions therefrom.
Unless restricted by the Constitution, the legislative power to exempt is as broad as its power to
tax.
2.
Local governments
Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But
the moment the power to impose a particular tax is granted, they also have the power to grant
exemption therefrom unless forbidden by some provision of the Constitution or the law.
The legislature may delegate its power to grant tax exemptions to the same extent that it may
exercise the power to exempt.
Basco v. PAGCOR (196 SCRA 52): The power to tax municipal corporations must always yield
to a legislative act which is superior, having been passed by the State itself. Municipal
corporations are mere creatures of Congress which has the power to create and abolish municipal
corporations due to its general legislative powers. If Congress can grant the power to tax, it can
also provide for exemptions or even take back the power.
Chavez v. PCGG, G.R. No. 130716, 09 December 1998
·
In a compromise agreement between the Philippine Government, represented by
the PCGG, and the Marcos heirs, the PCGG granted tax exemptions to the assets which will be
apportioned to the Marcos heirs. The Supreme Court ruled that the PCGG has absolutely no
power to grant tax exemptions, even under the cover of its authority to compromise ill gotten
wealth cases. The grant of tax exemptions is the exclusive prerogative of Congress.
·
In fact, the Supreme Court even stated that Congress itself cannot grant tax
exemptions in the case at bar because it will violate the equal protection clause of the Constitution.
Interpretation of laws granting tax exemptions
·
General rule
In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris
against the taxpayer. The fundamental theory is that all taxable property should bear its share in
the cost and expense of the government.
Taxation is the rule and exemption is the exemption.
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He who claims exemption must be able to justify his claim or right thereto by a grant express in
terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly
mentioned in the law, it must be at least within its purview by clear legislative intent.
·
1.
Exceptions
When the law itself expressly provides for a liberal construction thereof.
2.
In cases of exemptions granted to religious, charitable and educational institutions or to the
government or its agencies or to public property because the general rule is that they are exempt
from tax.
Strict interpretation does not apply to the government and its agencies
·
Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation
of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in
the case of exemptions in favor of a political subdivision or instrumentality of the government.
[Maceda v. Macaraig]
Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
·
A tax cannot be imposed unless it is supported by the clear and express language
of a statute; on the other hand, once the tax is unquestionably imposed, “a claim of exemption
from tax payments must be clearly shown and based on language in the law too plain to be
mistaken.” Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax
exemption, it must be construed strictissimi juris against the grantee. Hence, petitioner’s claim of
refund on the basis of the specific taxes it actually paid must expressly be granted in a statute
stated in a language too clear to be mistaken.
Tax remission or tax condonation
·
The word “remit” means to desist or refrain from exacting, inflicting or enforcing
something as well as to restore what has already been taken. The remission of taxes due and
payable to the exclusion of taxes already collected does not constitute unfair discrimination. Such
a set of taxes is a class by itself and the law would be open to attack as class legislation only if
all taxpayers belonging to one class were not treated alike. [Juan Luna Subd. V. Sarmiento, 91
Phil 370]
·
The condonation of a tax liability is equivalent to and is in the nature of a tax
exemption. Thus, it should be sustained only when expressly provided in the law. [Surigao
Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728]
Tax amnesty
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Tax amnesty, being a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law, partakes of an absolute forgiveness or waiver by the government of its right to collect
what otherwise would be due it and, in this sense, prejudicial thereto. It is granted particularly to
tax evaders who wish to relent and are willing to reform, thus giving them a chance to do so and
thereby become a part of the new society with a clean slate. [Republic v. Intermediate Appellate
Court, 196 SCRA 335]
·
Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted
by statute. The terms of the amnesty must also be construed against the taxpayer and liberally in
favor of the government.
Tax amnesty v. tax condonation v. tax exemption
·
A tax amnesty, being a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect
what otherwise would be due it and, in this sense, prejudicial thereto, particularly to tax evaders
who wish to relent and are willing to reform are given a chance to do so and therefore become a
part of the society with a clean slate.
·
Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is
granted by statute. The terms of the amnesty must be strictly construed against the taxpayer and
liberally in favor of the government. Unlike a tax exemption, however, a tax amnesty has limited
applicability as to cover a particular taxing period or transaction only.
·
There is tax condonation or remission when the State desists or refrains from
exacting, inflicting or enforcing something as well as to restore what has already been taken. The
condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it
should be sustained only when expressed in the law.
·
Tax exemption, on the other hand, is the grant of immunity to particular persons or
corporations or to person or corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district are obliged to pay. Tax exemption
are not favored and are construed strictissimi juris against the taxpayer.
SOURCES, APPLICATION, INTERPRETATION AND ADMINISTRATION OF TAX LAWS
SOURCES OF TAX LAWS
Sources of tax laws
1.
2.
Constitution
National Internal Revenue Code
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3.
Tariff and Customs Code
4.
Local Government Code (Book II)
5.
Local tax ordinances/ City or municipal tax codes
6.
Tax treaties and international agreements
7.
Special laws
8.
Decisions of the Supreme Court and the Court of Tax Appeal
9.
Revenue rules and regulations and administrative rulings and opinions
Tax treaty
·
A tax treaty is one of the sources of our law on taxation. The Philippine Government
usually enters into tax treaties in order to avoid or minimize the effects of double taxation. A treaty
has the force and effect of law.
REVENUE RULES AND REGULATIONS AND ADMINISTRATIVE RULINGS AND OPINIONS
Authority to promulgate rules and regulations and rulings and opinions
·
The Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, shall promulgate needful rules and regulations for the effective enforcement of the
provisions of the NIRC.
·
This is without prejudice to the power of the Commissioner of Internal Revenue to
make rulings or opinions in connection with the implementation of the provisions of internal
revenue laws, including rulings on the classification of articles for sales tax and similar purposes.
Purpose of rules and regulations
1.
To properly enforce and execute the laws
2.
To clarify and explain the law
3.
To carry into effect the law’s general provisions by providing details of administration and
procedure
Requisites for validity of rules and regulations
1.
They must not be contrary to law and the Constitution.
2.
They must be published in the Official Gazette or a newspaper of general circulation.
Commissioner v. Court of Appeals, 240 SCRA 368
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·
The authority of the Minister of Finance, in conjunction with the Commissioner of
Internal Revenue, to promulgate rules and regulations for the effective enforcement of internal
revenue rules cannot be controverted. Neither can it be disputed that such rules and regulations,
as well as administrative opinions and rulings, ordinarily should deserve weight and respect by
the courts. Much more fundamental than either of the above, however, is that all such issuances
must not override, but must remain consistent with, the law they seek to apply and implement.
Administrative rules and regulations are intended to carry out, neither to supplant nor to modify,
the law.
La Suerte v. Court of Tax Appeals, 134 SCRA 29
·
When an administrative agency renders an opinion by means of a circular or
memorandum, it merely interprets existing law and no publication is therefore necessary for its
validity. Construction by an executive branch of the government of a particular law, although not
binding upon courts, must be given weight as the construction came from the branch of the
government which is called upon to implement the law.
Effectivity of revenue rules and regulations
·
Revenue Memorandum Circular 20-86 was issued to govern the drafting, issuance,
and implementation of revenue tax issuances, including:
1.
2.
3.
Revenue Regulations;
Revenue Audit Memorandum Orders; and
Revenue Memorandum Circulars and Revenue Memorandum Orders.
·
Except when the law otherwise expressly provides, the aforesaid revenue tax
issuances shall not begin to be operative until after due notice thereof may be fairly assumed.
·
Due notice of the said issuances may be fairly presumed only after the following
procedures have been taken:
1.
Copies of the tax issuance have been sent through registered mail to the following business
and professional organizations:
a.
Philippine Institute of Certified Public Accountants;
b.
Integrated Bar of the Philippines;
c.
Philippine Chamber of Commerce and Industry;
d.
American Chamber of Commerce;
e.
Federation of Filipino-Chinese Chamber of Commerce; and
f.
Japanese Chamber of Commerce and Industry in the Philippines.
2.
However, other persons or entities may request a copy of the said issuances.
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3.
The Bureau of Internal Revenue shall issue a press release covering the highlights and
features of the new tax issuance in any newspaper of general circulation.
4.
Effectivity date for enforcement of the new issuance shall take place thirty (30) days from
the date the issuance has been sent to the above-enumerated organizations.
BIR rulings
·
Administrative rulings, known as BIR rulings, are the less general interpretation of
tax laws being issued from time to time by the Commissioner of Internal Revenue. They are
usually rendered on request of taxpayers to clarify certain provisions of a tax law. These rulings
may be revoked by the Secretary of Finance if the latter finds them not in accordance with law.
·
The Commissioner may revoke, repeal or abrogate the acts or previous rulings of
his predecessors in office because the construction of the statute by those administering it is not
binding on their successors if, thereafter, such successors are satisfied that a different
construction of the law should be given.
·
Rulings in the form of opinions are also given by the Secretary of Justice who is the
chief legal officer of the Government.
EFFECTIVITY AND VALIDITY OF A TAX ORDINANCE
Tuazon v. Court of Appeals, 212 SCRA 739
·
If the resolution is to be considered as a tax ordinance, it must be shown to have
been enacted in accordance with the requirements of the Local Government Code. These would
include the holding of a public hearing on the measure and its subsequent approval by the
Secretary of Finance, in addition to the usual requisites for publication of ordinances in general.
INTERPRETATION AND APPLICATION OF TAX LAWS
Nature of internal revenue laws
1.
Internal revenue laws are not political in nature.
2.
Tax laws are civil and not penal in nature.
Not political in nature
·
Internal revenue laws are not political in nature. They are deemed to be the laws of
the occupied territory and not of the occupying enemy.
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·
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Thus, our tax laws continued in force during the Japanese occupation.
·
Hilado v. Collector, 100 Phil 288: It is well known that our internal revenue laws are
not political in nature and, as such, continued in force during the period of enemy occupation and
in effect were actually enforced by the occupation government. Income tax returns that were filed
during that period and income tax payments made were considered valid and legal. Such tax laws
are deemed to be the laws of the occupied territory and not of the occupying enemy.
Civil, not penal, in nature
·
Tax laws are civil and not penal in nature, although there are penalties provided for
their violation.
·
The purpose of tax laws in imposing penalties for delinquencies is to compel the
timely payment of taxes or to punish evasion or neglect of duty in respect thereof.
·
Republic v. Oasan, 99 Phil 934: The war profits tax is not subject to the prohibition
on ex post facto laws as the latter applies only to criminal or penal matters. Tax laws are civil in
nature.
Construction of tax laws
1.
Rule when legislative intent is clear
Tax statutes are to receive a reasonable construction with a view to carrying out their purpose
and intent.
They should not be construed as to permit the taxpayer easily to evade the payment of taxes.
2.
Rule when there is doubt
No person or property is subject to taxation unless within the terms or plain import of a taxing
statute. In every case of doubt, tax statutes are construed strictly against the government and
liberally in favor of the taxpayer.
Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly
declares.
3.
Provisions granting tax exemptions
Such provisions are construed strictly against the taxpayer claiming tax exemption.
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Application of tax laws
·
General rule: Tax laws are prospective in operation because the nature and amount
of the tax could not be foreseen and understood by the taxpayer at the time the transactions which
the law seeks to tax was completed.
·
Exception: While it is not favored, a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the legislative intent. But a tax law should not be
given retroactive application when it would be harsh and oppressive.
Directory and mandatory provisions of tax laws
·
Directory provisions are those designed merely for the information or direction of
officers or to secure methodical and systematic modes of proceedings.
·
Mandatory provisions are those intended for the security of the citizens or which are
designed to ensure equality of taxation or certainty as to the nature and amount of each person’s
tax.
·
The omission to follow mandatory provisions renders invalid the act or proceeding
to which it relates while the omission to follow directory provisions does not involve such
consequence. [Roxas v. Rafferty, 37 Phil 958]
POWERS AND DUTIES OF BIR:
Under the Tax Code, as amended, Section 2. Powers and duties of the Bureau of Internal
Revenue. –
The Bureau of Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of judgments in all cases decided in its favor
by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by this Code or other laws.
Section 3. Chief Officials of the Bureau of Internal Revenue. –
The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal
Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs to be known
as Deputy Commissioners.
Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. –
The power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
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The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Section 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons. –
In ascertaining the correctness of any return, or in making a return when none has been made,
or in determining the liability of any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be relevant or material to such
inquiry;
(B) To Obtain on a regular basis from any person other than the person whose internal revenue
tax liability is subject to audit or investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including the Bangko Sentral ng
Pilipinas and government-owned or -controlled corporations, any information such as, but not
limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and
the names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies, joint
accounts, associations, joint ventures of consortia and registered partnerships, and their
members;
(C) To summon the person liable for tax or required to file a return, or any officer or employee of
such person, or any person having possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the business of the person liable for tax, or
any other person, to appear before the Commissioner or his duly authorized representative at a
time and place specified in the summons and to produce such books, papers, records, or other
data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to time of any revenue
district or region and inquire after and concerning all persons therein who may be liable to pay
any internal revenue tax, and all persons owning or having the care, management or possession
of any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be
construed as granting the Commissioner the authority to inquire into bank deposits other than as
provided for in Section 6(F) of this Code.
Section 6. Power of the Commissioner to Make assessments and Prescribe additional
Requirements for Tax Administration and Enforcement. (A) Examination of Returns and Determination of Tax Due. - After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the correct
amount of tax: Provided, however; That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer.
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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive the same shall not be
withdrawn: Provided, That within three (3) years from the date of such filing , the same may be
modified, changed, or amended: Provided, further, That no notice for audit or investigation of such
return, statement or declaration has in the meantime been actually served upon the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and other Documents. - When a
report required by law as a basis for the assessment of any national internal revenue tax shall not
be forthcoming within the time fixed by laws or rules and regulations or when there is reason to
believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or
willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall
make or amend the return from his own knowledge and from such information as he can obtain
through testimony or otherwise, which shall be prima facie correct and sufficient for all legal
purposes.
(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive Gross Sales
and Receipts. - The Commissioner may, at any time during the taxable year, order inventorytaking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or
may place the business operations of any person, natural or juridical, under observation or
surveillance if there is reason to believe that such person is not declaring his correct income, sales
or receipts for internal revenue tax purposes. The findings may be used as the basis for assessing
the taxes for the other months or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in violation of the
requirements of Sections 113 and 237 of this Code, or when there is reason to believe that the
books of accounts or other records do not correctly reflect the declarations made or to be made
in a return required to be filed under the provisions of this Code, the Commissioner, after taking
into account the sales, receipts, income or other taxable base of other persons engaged in similar
businesses under similar situations or circumstances or after considering other relevant
information may prescribe a minimum amount of such gross receipts, sales and taxable base,
and such amount so prescribed shall be prima facie correct for purposes of determining the
internal revenue tax liabilities of such person.
(D) Authority to Terminate Taxable Period. _ When it shall come to the knowledge of the
Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the
Philippines or to remove his property therefrom or to hide or conceal his property, or is performing
any act tending to obstruct the proceedings for the collection of the tax for the past or current
quarter or year or to render the same totally or partly ineffective unless such proceedings are
begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated
at any time and shall send the taxpayer a notice of such decision, together with a request for the
immediate payment of the tax for the period so declared terminated and the tax for the preceding
year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable
immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the
time fixed in the demand made by the Commissioner.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
(E) Authority of the Commissioner to Prescribe Real Property Values. - The Commissioner is
hereby authorized to divide the Philippines into different zones or areas and shall, upon
consultation with competent appraisers both from the private and public sectors, determine the
fair market value of real properties located in each zone or area. For purposes of computing any
internal revenue tax, the value of the property shall be, whichever is the higher of;
(1) the fair market value as determined by the Commissioner, or
(2) the fair market value as shown in the schedule of values of the Provincial and City Assessors.
(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. –
Notwithstanding any contrary provision of Republic Act No. 1405 and other general or
special laws, the Commissioner is hereby authorized to inquire into the bank deposits of:
(1) a decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204
(A) (2) of this Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim
that his financial position demonstrates a clear inability to pay the tax assessed, his application
shall not be considered unless and until he waives in writing his privilege under Republic act NO.
1405 or under other general or special laws, and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
TAX REMEDIES:
CHAPTER III - PROTESTING AN ASSESSMENT, REFUND, ETC.
Section 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: provided, however, That a preassessment notice shall not be required in the following
cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation
of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax
for a taxable period was determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred
to non-exempt persons.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
The taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as
may be prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become
final, executory and demandable.
Section 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid
Watch:
https://www.youtube.com/watch?v=ydFOoNUEMsY
https://www.youtube.com/watch?v=1aLwKtRnc1Q
https://www.youtube.com/watch?v=boRXVpPxKf4
https://www.youtube.com/watch?v=QMUw-mlIEBI
Read:
https://www.studocu.com/ph/document/pontifical-and-royal-university-of-santo-tomas-thecatholic-university-of-the-philippines/income-taxation/summaries/1-general-principles-oftaxation/5946513/view
https://www.slideshare.net/fimportado/general-principles-of-taxation
Activities/Assessments:
True or False (1 point each)
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
1.A. For the existence of power to tax, the state can tax anything at any time.
B. No person shall be imprisoned for non payment of poll tax.
2. A. Taxation is essentially legislative. Even in absence of any constitution provision, taxation
power falls on Congress as part of general law-making power.
B. An inherent limitation of taxation may be disregarded by application of constitutional
limitations.
3. A. Equality in taxation means, taxes must be based on taxpayer’s ability to pay.
B. A country which was conquered by foreign country will automatically extinguish its power to
tax.
4. A. There is no regressive tax system in the Philippines.
B. Opinions of authors of taxations are considered source of tax rulings
5. A. The provision of constitution are grants of power to tax.
B. If the Phil Govt incurred a deficit, the primary remedy is to increase taxes to increase
revenues of the Phil Govt.
Multiple Choice (1 point each). Write letter E if there is no correct answer from the given choices.
1. A tax must be imposed for public purpose. Which of the following is not a public purpose?
a. national defense
c. Improvement of sugar industry and coconut industries
b. Public education
d. Public health care
2. The aspects of taxation are
a. Legislative in character
c. Shared by the legislative and executive dept
b. Executive in character
d. Judicial in nature
3. It is the privilege of not being imposed of financial obligation to which others are subject:
a. Tax incentive
c. Tax amnesty
b. Tax exemption
d. Tax credit
4. The following are agents and deputies for the collection of National Internal revenue taxes,
except:
a. The Commissioner of Customs with respect to collection of taxes on imported goods
b. City and municipal treasurers with respect to collection of real property taxes.
c. The head of appropriate government office with respect to collection of energy tax.
d. Bank duly accredited by the CIR with respect to receipt of payments of internal revenue taxes
authorized to be made thru banks.
5. The powers and duties of the BIR, except:
a. The issuance of rules and regulations and enactment of revenue bills to ensure that the State
can provide for the needs of those under its jurisdiction
b. The assessment and collection of all national taxes
c. Enforcement of all forfeitures, penalties and fines connected with assessment and collection of
national internal revenue taxes.
d. The execution of judgment in all cases decided by the CTA (Court of Tax Appeals)
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
MODULE 2: ADMINISTRATIVE PROVISIONS FOR INDIVIDUAL INCOME TAXATION
OVERVIEW:
Taxation is the inherent power by which the sovereign, through its law-making body, raises
revenue to defray the necessary expenses of the government. It is a manner of apportioning the
costs of the government among those who, in some measure, are privileged to enjoy its benefits
and must bear its burdens.
Taxation is both a power and a process. As power, it refers to inherent power of the State,
co extensive with sovereignty to demand contributions for public purposes to support the
government. As a process, it passes a legislative undertaking through the enactment of tax laws
which will be implemented by the Executive branch of the government through Bureau of Internal
revenue or BIR, to raise revenues from the inhabitants in order to pay the necessary expenses of
the government.
Taxes collected by BIR are called national taxes which includes the following: income tax,
estate tax, donor’s ta, Value Added tax, percentage tax and Documentary Tax. These taxes are
imposed to different classes of taxpayers or persons. Taxpayers includes individuals and
businesses such as partnership and corporations
This module will discuss the administrative provisions of the Tax Code, as amended to
Individual Income taxation which includes filing and payment of income taxes and other provisions
provided by the New Tax Code.
MODULE DURATION:
•
•
September 14-30, 2020 Synchronous Meeting and Asynchronous Learning.
For asynchronous learning inquiries, you may reach me through messenger
group/personal message.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1. Be able to know where the place and due date of the Income Tax Returns (Annual, Quarterly,
as applicable) & other administrative provisions of the Bureau of Internal Revenue.
2. Be able to know the compliance requirements of BIR on keeping of book of accounts,
prescriptive period and administrative requirements.
3. To gain knowledge of the tax return preparation and filing and tax payments.
4. Be able to know different accounting periods an accounting method for income recognition in
accounting (PFRS) vs Tax accounting
5. Enumerate the requisites of taxable income
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
6. Identify the different classes of Income and Taxpayer
Course Materials:
Administrative provisions on Individual Income Taxation:
Income Tax is a tax on a person's income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any, authorized
for such types of income, by the Tax Code, as amended, or other special laws.
Compliance Requirements:
Any merchant or business organization in whatever form or nature, if liable for any national tax as
provided by the Tax Code, are mandated to comply with the following requirements:
a.
b.
c.
d.
e.
Registration with BIR
Keeping of accounting records and books
Issuance of sales invoice and official receipts
Filing of tax returns and payment of related taxes
Withholding of taxes on specified payment to suppliers-sellers.
Required to File Income Tax Returns
A. Individuals
1. Resident citizens receiving income from sources within or outside the Philippines
➢ Employees deriving purely compensation income from two or more employers,
concurrently or successively at any time during the taxable year
➢ Employees deriving purely compensation income regardless of the amount,
whether from a single or several employers during the calendar year, the income tax
of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld)
resulting to collectible or refundable return
➢ Self-employed individuals receiving income from the conduct of trade or business
and/or practice of profession
➢ Individuals deriving mixed income, i.e., compensation income and income from the
conduct of trade or business and/or practice of profession
➢ Individuals deriving other non-business, non-professional related income in
addition to compensation income not otherwise subject to a final tax
➢ Individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose spouse is not
entitled to substituted filing
2. Non-resident citizens receiving income from sources within the Philippines
3. Aliens, whether resident or not, receiving income from sources within the Philippines
B. Non-Individuals
1. Corporations including partnerships, no matter how created or organized.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
2. Domestic corporations receiving income from sources within and outside the
Philippines
3. Foreign corporations receiving income from sources within the Philippines
4. Estates and trusts engaged in trade or business
Persons who are Not required to file Income Tax returns:
1. An individual earning purely compensation income whose taxable income does not exceed
P250,000.00
2. An individual whose income tax has been withheld correctly by his employer, provided that
such individual has only one employer for the taxable year
3. An individual whose sole income has been subjected to final withholding tax or who is exempt
from income tax pursuant to the Tax Code and other special laws.
4. An individual who is a minimum wage earner
5. Those who are qualified under “substituted filing”. However, substituted filing applies only if all
of the following requirements are present:
➢ the employee received purely compensation income (regardless of amount) during the
taxable year;
➢ the employee received the income from only one employer in the Philippines during the
taxable year;
➢ the amount of tax due from the employee at the end of the year equals the amount of tax
withheld by the employer;
➢ the employee’s spouse also complies with all 3 conditions stated above;
➢ the employer files the annual information return (BIR Form No. 1604-CF); and
➢ the employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.
The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived
from sources within the Philippines.
Annual Income Tax For Individuals Earning Purely Compensation Income (Including NonBusiness/Non-Profession Related Income)
File the BIR Form 1700 - Annual Income Tax For Individuals Earning Purely Compensation
Income (Including Non-Business/Non-Profession Related Income)
Documentary Requirements
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316)
2. Duly approved Tax Debit Memo, if applicable
3. Proofs of Foreign Tax Credits, if applicable
4. Income Tax Return previously filed and proof of payment, if filing an amended return for the
same taxable year.
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Procedures for Filing of Income Tax returns:
1.For Electronic Filing and Payment System (eFPS) Filer
a.Fill-up applicable fields in the BIR Form No. 1700
b.Pay electronically by clicking the "Proceed to Payment" button and fill-up the required fields in
the "eFPS Payment Form" click "Submit" button.
c.Receive payment confirmation from eFPS-AABs for successful e-filing and e-payment.
2.For Non-eFPS Filer
a.Fill-up applicable fields in the BIR Form No. 1700 in the downloaded Electronic Bureau of
Internal Revenue Form (eBIRForm) Package
b.Print the duly accomplished BIR Form No. 1700
c.Proceed to the nearest Authorized Agent Bank (AAB) under the jurisdiction of the Revenue
District Office where you are registered and present the duly accomplished BIR Form 1700,
together with the required attachments and your payment.
d.In places where there are no AABs, proceed to the Revenue Collection Officer or duly
Authorized City or Municipal Treasurer located within the Revenue District Office where you are
registered and present the duly accomplished BIR Form 1700, together with the required
attachments and your payment.
e.Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue
Collection Officer/duly Authorized City or Municipal Treasurer.
3.For Manual Filer
a.Fill-up the BIR Form No. 1700 in triplicate copies.
b.Proceed to the Revenue District Office where you are registered or to any Tax Filing Center
established by the BIR and present the duly accomplished BIR Form 1700, together with the
required attachments.
c.Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center
representative.
Deadline for Filing of Annual ITR
On or before the 15th day of April of each year covering taxable income for calendar
year 2018 and thereafter
Annual Income Tax For Individuals, Estates, and Trusts
BIR Form 1701 - Annual Income Tax Return Individuals, Estates and Trusts
Documentary Requirements
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if applicable
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
2. Certificate of Income Payments Not Subjected to Withholding Tax (BIR Form 2304), if
applicable
3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
4. Duly approved Tax Debit Memo, if applicable
5. Proof of Foreign Tax Credits, if applicable
6. Income Tax Return previously filed and proof of payment, if filing an amended return for the
same year
7. Account Information Form (AIF) or the Certificate of the independent Certified Public
Accountant (CPA) with Audited Financial Statements if the gross annual sales, earnings,
receipts or output exceed three million pesos (P3,000,000.00)
8. Account Information Form or Financial Statements not necessarily audited by an independent
CPA if the gross annual sales, earnings, receipts or output do not exceed P3,000,000.00 and
is subject to graduated income tax rates under Section 24(A)(2)(a)
9. Proof of prior year’s excess tax credits, if applicable
Procedures
1.For eFPS Filer
a.Fill-up applicable fields in the BIR Form No. 1701
b.Pay electronically by clicking the “Proceed to Payment” button and fill-up the required fields in
the “eFPS Payment Form” then click “Submit” button.
c.Receive payment confirmation from eFPS-AABs for successful e-filing and e-payment.
2.For Non-eFPS Filer
a.Fill-up fields in the BIR Form No. 1701 in the downloaded Electronic Bureau of Internal Revenue
Form (eBIRForm) Package
b.Print the duly accomplished BIR Form No. 1701
c.Proceed to the nearest Authorized Agent Bank (AAB) under the jurisdiction of the Revenue
District Office where you are registered and present the duly accomplished BIR Form 1701,
together with the required attachments and your payment.
d.In places where there are no AABs, proceed to the Revenue Collection Officer or duly
Authorized City or Municipal Treasurer located within the Revenue District Office where you are
registered and present the duly accomplished BIR Form 1701, together with the required
attachments and your payment.
e.Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue
Collection Officer/duly Authorized City or Municipal Treasurer.
3.For Manual Filer
a.Fill-up the BIR Form No. 1701 in triplicate copies.
b.Proceed to the Revenue District Office where you are registered or to any Tax Filing Center
established by the BIR and present the duly accomplished BIR Form 1701, together with the
required attachments.
c.Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center
representative.
Deadline for filing the Annual ITR
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Final Adjustment Return or Annual Income Tax Return - On or before the 15th day
of April of each year covering income for calendar year 2018 and thereafter
Account Information Form For Self-Employed Individuals, Estates And Trusts (Including Those
With Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of
Profession)
BIR Form 1701 AIF - Account Information Form for Self-Employed Individuals, Estates and Trusts
(Including those with Mixed Income, i.e., Compensation Income and Income from Business and/or
Practice of Profession) and Estates and Trusts (Engaged in Trade or Business)
NOTE: Pursuant to Sec. 71 of RA 10963, otherwise known as Tax Reform Acceleration and
Inclusion Act, amending Sec. 232 of the Tax Code, as amended, in relation to Revenue
Memorandum Circular No. 6 – 2001, corporations, companies or persons whose gross annual
sales, earnings, receipts or output exceed P3,000,000 may not accomplish this form. In lieu
thereof, they may file their annual income tax returns accompanied by balance sheets, profit and
loss statement, schedules listing income-producing properties and the corresponding income
therefrom, and other relevant statements duly certified by an independent CPA.
Quarterly Income Tax For Individuals, Estates And Trusts Including Those With Mixed Income,
i.e., Compensation Income and Income from Business and/or Practice of Profession
BIR Form 1701Q - Quarterly Income Tax Return For Individuals, Estates and Trusts
Documentary Requirements
1. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
2. Duly approved Tax Debit Memo, if applicable
3. Proof of other payment/s made, if applicable
4. Summary Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax
at Source (SAWT), if applicable
Procedures
1.For eFPS Filer
a.Fill-up applicable fields in the BIR Form No. 1701Q
b.Pay electronically by clicking the “Proceed to Payment” button and fill-up the required fields in
the “eFPS Payment Form” then click “Submit” button.
c.Receive payment confirmation from eFPS-AABs for successful e-filing and e-payment.
2.For Non-eFPS Filer
a.Fill-up applicable fields in the BIR Form No. 1701Q in the downloaded Electronic Bureau of
Internal Revenue Form (eBIRForm) Package
b.Print the duly accomplished BIR Form No. 1701Q
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
c.Proceed to the nearest Authorized Agent Bank (AAB) under the jurisdiction of the Revenue
District Office where you are registered and present the duly accomplished BIR Form 1701Q,
together with the required attachments and your payment.
d.In places where there are no AABs, proceed to the Revenue Collection Officer or duly
Authorized City or Municipal Treasurer located within the Revenue District Office where you are
registered and present the duly accomplished BIR Form 1701Q, together with the required
attachments and your payment.
e.Receive your copy of the duly stamped and validated tax return and BIR prescribed deposit slip
from the teller of the AABs or Electronic Revenue Official Receipt (eROR) from the Revenue
Collection Officer/duly Authorized City or Municipal Treasurer.
3.For Manual Filer
a.Fill-up the BIR Form No. 1701Q in triplicate copies (Compensation Income need not be reported
in the Quarterly Income Tax Return and is to be declared only on the Annual Income Tax Return).
b.Proceed to the Revenue District Office where you are registered or to any Tax Filing Center
established by the BIR and present the duly accomplished BIR Form 1701Q, together with the
required attachments.
c.Receive your copy of the duly stamped and validated form from the RDO.
Deadlines for Filing of Quarterly Income Tax returns:
•May 15 of the current taxable year– for the first quarter
•August 15 of the current taxable year – for the second quarter
•November 15 of the current taxable year – for the third quarter
Income Tax For Individuals Deriving Purely Compensation Income:
The yearly Income tax return shall be filed on or before April 15 of the following
year.
SUBSTITUTED FILING
An individual taxpayer will no longer have to personally file his own Income Tax Return
(BIR Form 1700) but instead the employer's Annual Information Return on Income Taxes Withheld
(BIR Form No. 1604-C) filed will be considered as the "substitute" ITR of the employee.
REQUISITES FOR INDIVIDUALS QUALIFIED FOR SUBSTITUTED FILING OF BIR FORM NO.
1700
1. Receives purely compensation income regardless of amount;
2. Compensation from only one employer in the Philippines for the calendar year;
3. Income tax has been withheld correctly by the employer (tax due equals tax withheld);
4. the employee's spouse also complies with all the three conditions stated above;
5. Employer files the BIR Form No. 1604-C; and
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
6. The employer issues each employee BIR Form No. 2316 (latest version)
NOTE:
All the above requisites must be present. The annual Information Return of Income Taxes
Withheld on Compensation (BIR Form No. 1604-C) filed by their respective employers filed their
respective employers duly submitted to the eSubmission facility of the BIR.
REQUISITES FOR INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED FILING OF BIR FORM
NO. 1700
1. Individuals with two or more employers concurrently and/or successively at anytime during
the taxable year.
2. Employees whose income tax have not been withheld correctly resulting to collectible or
refundable return.
3. Individuals deriving other non-business, non-profession-related income in addition to
compensation income not otherwise subject to final tax.
4. Individuals receiving purely compensation income from a single employer whose income tax
has been correctly withheld but whose spouse does not qualify tor substituted filing.
5. Non-resident aliens engaged in trade or business in the Philippines deriving purely
compensation income or compensation income and other non-related business, nonprofession-related income.
SUBMISSION OF BIR FORM NO. 2316
The employer are required to submit the duplicate original copy of BIR Form No. 2316 to
the Revenue District Office where they are registered on or before February 28
For Large Taxpayer or other Non-LT Taxpayers who opted to submit thru the Digital
Versatile Disk (DVD) prescribed under RR2-2015 shall use Universal Storage BUS (USB)
memory stick or other similar storage devices may be used in the absence or unavailability of the
DVD's provided that the scanned copies of the said forms shall be made uneditable format.
For Large Taxpayer or Non-LT taxpayers shall use the prescribed format (Annex F) in RR
11-2018 for the preparation of the Certified List of Employees Qualified for Substituted Filing of
ITR.
AMENDED INCOME TAX RETURNS:
The individual income tax return maybe amended on any day within 3 years from its filing
or from the last day prescribed by law for filing, provided that no notice of assessment or tax audit
has been actually served to the taxpayer in the meantime.
Under Section 51 of RA 8424, as amended:
(C) When to File. –
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(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day
of April of each year covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock exchange
as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction
and a final consolidated return on or before April 15 of each year covering all stock transactions
of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a return
within thirty (30) days following each sale or other disposition.
Section 51; Filing of Husband and Wife:
(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who
do not derive income purely from compensation, shall file a return for the taxable year to include
the income of both spouses, but where it is impracticable for the spouses to file one return, each
spouse may file a separate return of income but the returns so filed shall be consolidated by the
Bureau for purposes of verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived
from properly received from a living parent shall be included in the return of the parent, except (1)
when the donor's tax has been paid on such property, or (2) when the transfer of such property is
exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be
made by his duly authorized agent or representative or by the guardian or other person charged
with the care of his person or property, the principal and his representative or guardian assuming
the responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return
shall be prima facie evidence for all purposes that the return was actually signed by him.
Self-Assessment System:
As mandated by law, an income taxpayer is required to file his / her ITR, computing such
declarable gross income with claimable allowed deductions by himself /herself or with the
assistance of accountant based on their knowledge / interpretation of income tax laws.
Taxable Year:
There are two kinds of taxable year or accounting period which may be adopted y taxpayer
namely: Calendar year and Fiscal year.
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The term 'taxable year' means the calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year'
includes, in the case of a return made for a fractional part of a year under the provisions of this
Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the commissioner, the period for which such return is made.
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the last
day of any month other than December
An individual taxpayer whether an employee or self employed only may only employ
calendar year for filing of ITR.
Section 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one
fiscal year to another, the net income shall, with the approval of the Commissioner, be computed
on the basis of such new accounting period, subject to the provisions of Section 47
Methods of Accounting Allowed by law:
1. Cash basis
2. Accrual basis
3. Accounting for Long term Contracts- Must used Percentage of Completion method to
recognize income.
Section 48. Accounting for Long-term Contracts. - Income from long-term contracts
shall be reported for tax purposes in the manner as provided in this Section. As used herein,
the term 'long-term contracts' means building, installation or construction contracts covering a
period in excess of one (1) year. Persons whose gross income is derived in whole or in part
from such contracts shall report such income upon the basis of percentage of completion. The
return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under contract.
There should be deducted from such gross income all expenditures made during the taxable
year on account of the contract, account being taken of the material and supplies on hand at
the beginning and end of the taxable period for use in connection with the work under the
contract but not yet so applied. If upon completion of a contract, it is found that the taxable net
income arising thereunder has not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return
4. Installment basis method.
Section 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, a person who regularly
sells or otherwise disposes of personal property on the installment plan may return as
income therefrom in any taxable year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be realized when payment is
completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other
casual disposition of personal property (other than property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year), for
a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of
real property, if in either case the initial payments do not exceed twenty-five percent (25%)
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of the selling price, the income may, under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, be returned on the
basis and in the manner above prescribed in this Section. As used in this Section, the term
'initial payments' means the payments received in cash or property other than evidences
of indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who
sells or disposes of real property, considered as capital asset, and is otherwise qualified to
report the gain therefrom under Subsection (B) may pay the capital gains tax in installments
under rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner
Preservation of Accounting Books:
Taxpayer shall preserve the accounting books and other pertinent documents for a period
of ten years (before 2016, it was for 3 years from the last entry in each books)
Requisites of Taxable Income:
Taxation is an act of levying a tax or the process by which government raises revenue to
defray expenses of government. Income Tax is imposed on income earned by taxpayer
1. There must be a profit or gain
2. The gain or profit must be realized or received actually or constructively.
3. The gain or profit must not be excluded or exempted by law from income taxation.
Section 22. Definitions - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or corporation.
(B) The term 'corporation' shall include partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participacion), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government. 'General professional partnerships' are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
(C) The term 'domestic,' when applied to a corporation, means created or organized in the
Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic.
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
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(3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered as nonresident 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.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving
the Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purpose of this Section.
(F) The term 'resident alien' means an individual whose residence is within the Philippines and
who is not a citizen thereof.
(G) The term 'nonresident alien' means an individual whose residence is not within the Philippines
and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or
business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade
or business within the Philippines.
(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator
or any person acting in any fiduciary capacity for any person.
(K) The term 'withholding agent' means any person required to deduct and withhold any tax under
the provisions of Section 57.
(L) The term 'shares of stock' shall include shares of stock of a corporation, warrants and/or
options to purchase shares of stock, as well as units of participation in a partnership (except
general professional partnerships), joint stock companies, joint accounts, joint ventures taxable
as corporations, associations and recreation or amusement clubs (such as golf, polo or similar
clubs), and mutual fund certificates.
(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or option/s
to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a
partnership (except general professional partnerships) in a joint stock company, a joint account,
a taxable joint venture, a member of an association, recreation or amusement club (such as golf,
polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, jointstock company, or insurance company.
(N) The term 'taxpayer' means any person subject to tax imposed by this Title.
(O) The terms 'including' and 'includes', when used in a definition contained in this Title, shall not
be deemed to exclude other things otherwise within the meaning of the term defined.
(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the method
of accounting upon the basis of which the net income is computed under this Title.
(S) The term 'trade or business' includes the performance of the functions of a public office.
(T) The term 'securities' means shares of stock in a corporation and rights to subscribe for or to
receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence
or indebtedness, issued by any corporation, including those issued by a government or political
subdivision thereof, with interest coupons or in registered form.
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(U) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the
purchase of securities and the resale thereof to customers; that is, one who, as a merchant, buys
securities and re-sells them to customers with a view to the gains and profits that may be derived
therefrom.
(V) The term 'bank' means every banking institution, as defined in Section 2 of Republic Act No.
337, as amended, otherwise known as the General banking Act. A bank may either be a
commercial bank, a thrift bank, a development bank, a rural bank or specialized government bank.
(W) The term 'non-bank financial intermediary' means a financial intermediary, as defined in
Section 2(D)(C) of Republic Act No. 337, as amended, otherwise known as the General Banking
Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities.
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal
or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt
instruments of any kind other than deposits for the borrower's own account, or through the
issuance of certificates of assignment or similar instruments, with recourse, or of repurchase
agreements for purposes of relending or purchasing receivables and other similar obligations:
Provided, however, That commercial, industrial and other non-financial companies, which borrow
funds through any of these means for the limited purpose of financing their own needs or the
needs of their agents or dealers, shall not be considered as performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the public
(the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any
one time) other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrowers own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to bankers' acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered
into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments with recourse: Provided,
however, That debt instruments issued for interbank call loans with maturity of not more than five
(5) days to cover deficiency in reserves against deposit liabilities, including those between or
among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which is
not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange
of property which is treated or considered, under other provisions of this Title, as 'ordinary income'
shall be treated as gain from the sale or exchange of property which is not a capital asset as
defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange
of property which is not a capital asset. Any loss from the sale or exchange of property which is
treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as
loss from the sale or exchange of property which is not a capital asset.
(AA) The term 'rank and file employees' shall mean all employees who are holding neither
managerial nor supervisory position as defined under existing provisions of the Labor Code of the
Philippines, as amended.
(BB) The term 'mutual fund company' shall mean an open-end and close-end investment company
as defined under the Investment Company Act.
(CC) The term 'trade, business or profession' shall not include performance of services by the
taxpayer as an employee.
(DD) The term 'regional or area headquarters' shall mean a branch established in the Philippines
by multinational companies and which headquarters do not earn or derive income from the
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Philippines and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
(EE) The term 'regional operating headquarters' shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following services:
general administration and planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance advisory services; marketing
control and sales promotion; training and personnel management; logistic services; research and
development services and product development; technical support and maintenance; data
processing and communications; and business development.
(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of time deposit
or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments with a maturity period of not less than
five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and
issued by banks only (not by nonbank financial intermediaries and finance companies) to
individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may
be prescribed by the BSP.
Classification of Income as to Source:
1.Compenasation income
2. Income from Business
3. Other income- Income or profits earned or derived from sale of properties or personal
transactions of taxpayers such as royalty income, gain on sale of assets.
CLASSIFICATION OF TAXPAYERS:
1.Special Individual taxpayers- Are individual whose income from Philippines are taxed at
preferential or single rate, hence are no longer required to file ITR.
a. Special Aliens
b. Nonresident alien not engaged in business in the Phil (NRANEBP)- means foreigners who
are resident of foreign country and who are not authorized to engage in business in the
Philippines. Also refers to aliens who shall come to the Philippines for definite purpose which
in nature maybe accomplished promptly.
c. MIE (Minimum Wage Earner)- refers to worker in private or public sector receiving
compensation of not more than the statutory minimum wage in agricultural and non
agricultural sector where he is assigned.
2. Ordinary Individual taxpayer- Those individuals whose income are subject to income tax and
required to file Income tax return.
(a) A resident citizen - on his income from all sources; A Filipino individual with residence in
the Philippines
Persons Considered Citizen of the Philippines are natural born citizen of the Philippines,
naturalized citizen of the Phil and Citizen of the Philippines at the time of adoption of the
Philippine Constitution.
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(b) A nonresident citizen - on his income derived from sources within the Philippines;
Example are OFW or OCW (Overseas Contract Worker). Who stayed outside the Philippines
for more than 183 days.
(c) A resident alien - on his income derived from sources within the Philippines; means an
individual whose residence is within the Philippines and who is not a citizen thereof.. Also
refers to a foreigner who come to the Philippines for definite purpose which requires extended
stay.
(d) A nonresident alien engaged in trade or business in the Philippines - on his income
derived from sources within the Philippines. An alien who is not resident of the Philippines
but authorized to engaged in trade / business therein. Taxable based on its income less
allowed deductions.
Non resident alien engaged in business are individual who is not citizen of Philippines and is
not resident thereof but has a business operating and established within the Philippines AND;
A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during the calendar year.
(e) A nonresident alien not engaged in trade or business in the Philippine- taxable at Gross
income (without allowed deductions)
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MODULE 3: INDIVIDUAL INCOME TAXATION
OVERVIEW:
Income tax is a type of tax that governments impose on income generated by businesses
and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually
to determine their tax obligations. Income taxes are a source of revenue for governments. They
are used to fund public services, pay government obligations, and provide goods for citizens.
The Philippines follows a pay-as-you-file system for income tax, so the quarterly and
annual income tax payments would fall due on the same filing deadlines. Under this module, we
will determine the income tax due / payable of different classes of individual taxpayer. With the
enactment of TRAIN law or RA 10963 on January 1, 2018, there are amendments in the
computation of income tax due of individuals.
MODULE DURATION:
•
•
October 1-15, 2020 Synchronous Meeting and Asynchronous Learning.
For asynchronous learning inquiries, you may reach me through messenger
group/personal message.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1. Know the due dates filing income tax return as per NIRC, as amended
2. Be able to identify the different classification of Income and the applicable tax rates.
3. Identify the different classification of taxpayer and their tax situs.
4. Be able to know how to compute for the taxable net income of an individual taxpayer
5. Compute the income tax due for taxable estate and trust
Course Materials:
Taxable Income means the pertinent items of gross income specified in tax Code
less allowed deductions as authorized by law or special laws.
The basic income tax shall be computed based on the basic income tax rates of 0% to 35% as
follows: NIRC Formula of Individual ITR:
Gross Income
750,000
Less; Allowed Deductions
295,000
Taxable Net Income
455,000
Income tax Due (based on Graduated tax rate table)
43,750*
Less: Income tax Credit (given)
26,000
Income Tax payable
17,750
* Please see the table below, taxable net income is 455,000 which is in the 3rd layer (400,000 to
800,000). Formula: 455,000 less 400,000= 55,000 X 25%= 13,750; Then add 30,000. So, income
tax due is 13,750 plus 30,000 or 43,750.
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Classification of Income of Individual:
1. Income subject to Graduated tax rate table or to regular / Personal Income Tax (Basic Income
Tax). Examples are compensation income and business income
2. Income subject to Final Income Tax.
a) Final Income Tax on Capital Assets (Capital Gain Tax). Gain on sale of shares and
Sale of real properties held as capital assets
b) Final Income tax on Passive Income. Examples are interest income from banks and
royalty income.
3. Income exempted / excluded from Income Tax. Example is 13th month pay (up to 90,000 limit)
Income Tax Rates (for Income Subject to Basic Income Tax)
I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession
A. For Purely Compensation income earner: Graduated Income Tax Rates under Section
24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963
Effective January 1, 2018 to December 31, 2022:
Taxable Net
Taxable
Income Over
Net Income NOT
Over
-
P250,000
0%
P250,000
P400,000
20% of the excess over P250,000
P400,000
P800,000
P30,000 + 25% of the excess over P400,000
P800,000
P2,000,000
P130,000 + 30% of the excess over P800,000
P2,000,000
P8,000,000
P8,000,000
P490,000 +
P2,000,000
32%
of
the excess
over
P2,410,000 + 35% of the excess over
P8,000,000
Effective January 1, 2023 onwards
Taxable Net
Taxable
Income Over
Net Income NOT
Over
-
P250,000
0%
P250,000
P400,000
15% of the excess over P250,000
P400,000
P800,000
P22,500 + 20% of the excess over P400,000
P800,000
P2,000,000
P102,500 + 25% of the excess over P800,000
P2,000,000
P8,000,000
P402,500 +
P2,000,000
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30%
of
the excess
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P8,000,000
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P2,202,500 + 35% of the excess over
P8,000,000
B. For Purely Self-Employed Individuals and/or Professionals Whose Gross
Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold of
P3,000,000, the tax shall be, at the taxpayer’s option:
1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in
Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
C. For Individuals Earning Both Compensation Income and Income from Business and/or
Practice of Profession (Mixed Income Earner / MIE), their income taxes shall be:
1.
For Income from Compensation: Based on Graduated Income Tax Rates; and
2.
For Income from Business and/or Practice of Profession:
a.
If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of P3,000,000,
the Individual Taxpayer May Opt to Avail:
i.
8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu
of the Graduated Income Tax Rates and the Percentage Tax; Or
ii.
Income Tax Based on Graduated Income Tax Rates
b.
i.
If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000
Income Tax Based on Graduated Income Tax Rates
II. For Non-Resident Aliens Engaged in Trade or Business
A. For taxable net income from business / trade, the taxable income is subject to
graduated tax rate same as the resident / citizen taxpayer.
III. For Non-resident Aliens Not Engaged in Trade or Business
1. Gross amount of income derived from all sources within the
Philippines
25%
2. Capital gains from the exchange or other disposition of real
property located in the Philippines
6%
3. Net Capital gains from the sale of shares of stock not traded in the
Stock Exchange
- Not Over P100,000
5%
- Any amount in excess of P100,000
10%
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IV. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and
Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking Units
(OBUs), Petroleum Service Contractor and Subcontractor (Special Aliens)
On the gross income consisting of salaries, wages, annuities,
Graduated
compensation, remuneration and other emoluments, such as Income
Tax
honoraria and emoluments derived from the Philippines
Rates
V. For Minimum Wage Earner (MWE)- minimum wage earners as defined in Section 22(HH) of
this Code shall be exempt from the payment of income tax on their taxable income: Provided,
further, That the holiday pay, pay received by such minimum wage earners shall likewise be
exempt from income tax.
1.
2.
3.
4.
5.
Income items (Statutory minimum Wage Items) of MWE that are exempt from income tax:
Basic pay / Daily minimum wage
Holiday pay
Hazard pay
Overtime pay
Night shift differential
However, MWE shall be subject to basic income tax rate of 0% to 35% on ‘other taxable
income” such income from business and other profits not included in the exemptions.
Section 79 of Tax Code provides: Requirement of Withholding. - Every employer making
payment of wages shall deduct and withhold upon such wages a tax determined in accordance
with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation
of the Commissioner: Provided, however, That no withholding of a tax shall be required where the
total compensation income of an individual does not exceed the statutory minimum wage, or five
thousand pesos (P5,000.00) per month, whichever is higher.
SUMMARIZED RULES ON INCOME TAXATION (After TRAIN LAW)
Classes of Individuals
Tax base
Tax Source
1. Resident Citizen (RC)
Taxable Net Income
Within the Philippines Graduated tax
and Abroad
rate 0% to 35%
2. Resident Alien (RA)
Taxable Net Income
Within the Philippines Graduated tax
only
rate 0% to 35%
3. Nonresident Citizen Taxable Net Income
(NRC)
Within the Philippines Graduated tax
only
rate 0% to 35%
4.Nonresident
Alien Taxable Net Income
engaged in Business
(NRAEB)
Within the Philippines Graduated tax
only
rate 0% to 35%
94
Tax rate
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
5. Nonresident Alien Not Taxable
engaged in Business Income
(NRENEB)
6. Special Alien*
Gross Within the Philippines 25% rate
only
Gross Compensation Within the Philippines Graduated tax
income
only
rate 0% to 35%
*Under RA 10963 (TRAIN Law), pertaining to “Special Alien”:
Subsections C, D and E pertains to preferential tax rate of Special Aliens which is 15% of
their gross income. However, as provided by RA 10963 under paragraph (F) as stated below:
"(F) The preferential tax treatment provided in Subsections (C), (D), and (E) of this Section
shall not be applicable to regional headquarters (RHQs), regional operating headquarters
(ROHQs), offshore banking units (OBUs) or petroleum service contractors and subcontractors
registering with the Securities and Exchange Commission (SEC) after January 1, 2018: Provided,
however, That existing RHQs/ROHQs, OBUs or petroleum service contractors and
subcontractors presently availing of preferential tax rates for qualified employees shall continue
to be entitled to avail of the preferential tax rate for present and future qualified employees."
OTHER INFORMATION on Different Clauses of Taxpayers under the Tax Code:
Section 24 provides that: For married individuals, the husband and wife, subject to the
provision of Section 51 (D) hereof, shall compute separately their individual income tax based on
their respective total taxable income: Provided, That 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.
"Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further, That the
holiday pay, pay received by such minimum wage earners shall likewise be exempt from income
tax.
Illustration 1:
Asta has the following taxable income in 2019:
Income
Within the Philippines
Abroad- USA
Gross income- business
500,000
800,000
Allowed Deductions
200,000
100,000
Interest income from banks
10,000
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Compute the Basic Income tax due of Asta based on different scenarios under the Graduated Tax
rate:
Resident Citizen
Non-resident
Citizen /
Resident Alien
Non-resident
alien engaged in
Business/Trade
Gross Income- Phil
500,000
500,000
500,000
Gross Income-Abroad
800,000
0
0
Less:
Allowed Deductions-Phil
Allowed Deductions-Abroad
200,000
100,000
200,000
0
200,000
0
Taxable Net Income
1,000,000
300,000
300,000
Income Tax Due**
190,000
10,000
10,000
Note: The interest income from banks is subject to Final Tax; thus excluded from the computation
of Basic Income Tax. Please see the next module for details.
•
Resident Citizen are taxable for income earned within the Phil and Abroad.
** For resident citizen, using the graduated tax rate table, the formula is: (1,000,000-800,000) x
30% PLUS 130,000 = 190,000; For resident Alien or NRC or NRAEBT, the formula is: (300,000250,000) X 20% = 10,000.
Illustration 2:
Yuno is an Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies in 2019. He received the following: Salaries of P
900,000 and honoraria and allowances of P 300,000. Assuming that the Corporation where does
not avail the preferential tax rate. What is the income tax due of Yuno?
Solution: Using the graduated tax rate table, the income tax due is :
Salaries
900,000
Honoraria
300,000
Total Gross Income
1,200,000
Income tax due using the Graduated tax rate 250,000
Table
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Assuming that the Company of Yuno (Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies) avails the preferential rate of 15%, then, the income
tax due of Yuno will be:
Salaries
900,000
Honoraria
300,000
Total Gross Income
1,200,000
Income tax due using Preferential tax rate of 180,000
15%
Illustration 3:
Asta, a nonresident alien not engaged in business (NRANEB), earned the following:
Philippines
Abroad-Canada
Allowances
50,000
40,000
Dividend income
30,000
90,000
Other profits
10,000
50,000
What is the income tax due of Asta?
Solution:
Philippines
Allowances
50,000
Dividend income
30,000
Other profits
10,000
Total
90,000
Multiply by tax rate
25%
Income tax Due
22,500
Since Asta is NRANEB, he is taxable at gross income at a tax rate of 25% fr all income earned
within the Philippines only.
Illustration 4:
Asta, a minimum wage earner, employed in ABC Corp, earned the following:
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Philippines
Allowances
50,000
Overtime pay
30,000
Hazard pay
10,000
What is the income tax due of Asta?
Solution:
Philippines
Allowances
50,000
Dividend income
30,000
Other profits
10,000
Total
90,000
Income tax Due
P0
No income tax because Asta is a minimum wage earner
Illustration 5:
The following data are available for Mr Asta, self-employed individual, married, with 3 dependent
children for CY 2019:
Sales
2,500,000
Other non-operating income
200,000
Cost of Sales / Expenses
1,300,000
Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax) under
section 116.
A. Compute the normal tax (income tax due) assuming that Asta opted/selected to be taxed
at graduated tax rate:
Sales
2,500,000
Other non-operating income
200,000
Cost of Sales / Expenses
1,300,000
Taxable Net Income
1,400,000
Income tax Due at Graduated tax rate
310,000
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
(1,400,000 minus 800,000) X 30% PLUS 130,000
B. Assuming that, Asta selected/opted to be taxed at 8% optional income tax rate, compute
the tax due of Asta.
Sales
2,500,000
Other non-operating income
200,000
Total Gross Sales and other income
2,700,000
Less: 250,000
250,000
Net:
2,450,000
Tax rate
8%
Income tax and business tax due:
196,000
Note: To avail the 8% Optional tax rate, the taxpayer must meet the following requirements:
a. Sales and other non-operating income do not exceed P 3,000,000
b. The taxpayer is subject to OPT under Section 116
c. Has business income or engaged in business / trade
Illustration 6:
The following data are available for Mr Asta, mixed income earner, married, with 3 dependent
children for CY 2019:
Sales
2,500,000
Other non-operating income
200,000
Cost of Sales / Expenses
1,300,000
Compensation income
520,000
Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax) under
section 116.
A. Compute the normal tax (income tax due) assuming that Asta opted/selected to be taxed
at graduated tax rate:
Sales
2,500,000
Other non-operating income
200,000
Cost of Sales / Expenses
1,300,000
Taxable Net Income
1,400,000
Add; Compensation Income
520,000
Taxable Net Income
1,920,000
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Income tax Due at Graduated tax rate
Taxation 1: LML / VGL / GSJ
466,000
(1,920,000 minus 800,000) X 30% PLUS 130,000
B. Assuming that, Asta selected/opted to be taxed at 8% optional income tax rate, compute
the tax due of Asta.
Sales
2,500,000
Other non-operating income
200,000
Total Gross Sales and Other income
2,700,000
Tax rate
8%
Income tax from business income
216,000
Compensation Income
520,000
Income tax Due from Compensation income
60,000
(520,000 minus 400,000) X 25% PLUS 30,000
Tax from Business income
216,000
Tax from Compensation Income
60,000
Income tax due of Asta under 8% Optional tax rate
276,000
Passive Income subject to Final Tax (FT)
I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession
A.
On Certain Passive Income of Individual Citizens and Resident Aliens
Passive Income
1. Interest from currency deposits, trust funds and deposit
substitutes
2. Royalties (on books as well as literary & musical
compositions)
- In general
3. Prizes (P10,000 or less )
Tax rate
20%
10%
20%
Graduated
Income Tax Rates
- Over P10,000
20%
4. Winnings including PCSO winnings (except from PCSO
20%
and Lotto amounting to P10,000 or less )
- From PCSO and Lotto amounting to P10,000 or less
exempt
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5. Interest Income from a Depository Bank under the
Expanded Foreign Currency Deposit System
6. Cash and/or Property Dividends received by an
individual from a domestic corporation/ joint stock company/
insurance or mutual fund companies/ Regional Operating
Headquarter of multinational companies
7. Share of an individual in the distributable net income
after tax of a partnership (except GPPs)/ association, a joint
account, a joint venture or consortium taxable as corporation of
which he is a member or co-venture
8. Interest Income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be
imposed on the entire income from the proceeds of the long-term
deposit based on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years
- Three (3) years to less than four (4) years
- Less than three (3) years
II.
15%
10%
10%
Exempt
5%
12%
20%
For Non-Resident Aliens Engaged in Trade or Business
Certain passive Income
1. Interest from currency deposits, trust funds and deposit
substitutes
2. Royalties (on books as well as literary & musical
compositions)
- In general
3. Prizes (P10,000 or less )
Tax rates
20%
10%
20%
Graduated
Income
Tax
Rates
- Over P10,000
20%
4. Winnings (except from PCSO and Lotto)
20%
- From PCSO and Lotto
exempt
5. Cash and/or Property Dividends received from a domestic
20%
corporation/ joint stock company/ insurance/ mutual fund companies/
Regional Operating Headquarter of multinational companies
6. Share of a non-resident alien individual in the distributable
20%
net income after tax of a partnership (except GPPs) of which he is a
partner or from an association, a joint account, a joint venture or
consortium taxable as corporation of which he is a member or coventure
7. Interest Income from long-term deposit or investment in the
Exempt
form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced
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COLLEGE OF ACCOUNTANCY & FINANCE
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by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed
on the entire income from the proceeds of the long-term deposit based
on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years
- Three (3) years to less than four (4) years
- Less than three (3) years
III.
5%
12%
20%
For Non-resident Aliens Not Engaged in Trade or Business
1. Gross amount of income derived from all sources within the
Philippines
2. Capital gains from the exchange or other disposition of real
property located in the Philippines
3. Net Capital gains from the sale of shares of stock not traded in the
Stock Exchange
- Not Over P100,000
- Any amount in excess of P100,000
25%
6%
5%
10%
Illustration:
Asta earned the following income for year 2019:
•
•
•
•
•
Interest income from banks 20,000
Royalty income from books of P 30,000
Interest income from a depository bank under expanded Foreign currency deposit system
in Phil of P 10,000 (under EFCDS)
Dividend income from Domestic Corporation of 40,000
Compensation Income of P 900,000
Compute the Final Income tax due from Asta:
Case 1: Asta is a resident Citizen
Interest income
Royalty- books
Interest EFCDS
Divided Income
Income
20,000
30,000
10,000
40,000
Tax Rate
20%
10%
15%
10%
Final Tax
4,000
3,000
1,500
4,000
*The compensation income is subject to basic Income tax at Graduated Tax rate; not subject
to Final tax.
Total Final Income Tax due for Asta is 12,500
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Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Case 2: Asta is a Nonresident alien engaged in business
Interest income
Royalty- books
Interest EFCDS
Divided Income
Income
20,000
30,000
10,000
40,000
Tax Rate
20%
10%
0% / Exempted
20%
Final Tax
4,000
3,000
0
8,000
*The compensation income is subject to basic Income tax at Graduated Tax rate; not subject
to Final tax.
Total Final Income Tax due for Asta is 15,000
Case 3: Asta is a Non-resident Citizen
Interest income
Royalty- books
Interest EFCDS
Divided Income
Income
20,000
30,000
10,000
40,000
Tax Rate
20%
10%
0% /exempted
10%
Final Tax
4,000
3,000
0
4,000
*The compensation income is subject to basic Income tax at Graduated Tax rate; not subject
to Final tax.
Total Final Income Tax due for Asta is 11,000
Income Subject to Final Capital Gain Tax (CGT)
A.
On Certain Passive Income of Individual Citizens and Resident Aliens
1. Capital gains from sale, exchange or other disposition
of real property located in the Philippines, classified as capital
asset. (6% of Fair market value or Sales price whichever is
higher)
2. Net Capital gains from sale of shares of stock not traded
in the stock exchange (15% of net capital gain)
6%
15%
B. For Non-Resident Aliens Engaged in Trade or Business
1. Capital from the sale, exchange or other disposition of real
property located in the Philippines classified as capital asset
2. Net Capital gains from sale of shares of stock not traded in
the Stock Exchange*
- Not over P100,000
- Any amount in excess of P100,000
B.
For Non-resident Aliens Not Engaged in Trade or Business
103
6%
5%
10%
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
2. Capital gains from the exchange or other disposition of real
property located in the Philippines
3. Net Capital gains from the sale of shares of stock not traded in the
Stock Exchange
- Not Over P100,000
- Any amount in excess of P100,000
6%
5%
10%
Rules for the determination of amount and recognition of gain or loss in the sale, barter, or
exchange of shares of stock not traded through the Local Stock exchange.
A. “Determination of Selling Price. — In determining the selling price, the following rules shall
apply:
a.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale.
a.2) If the total consideration of the sale or disposition consists partly in money and partly in kind,
the selling price shall be sum of money and the fair market value of the property received.
a.3) In the case of exchange, the selling price shall be the fair market value of the property
received.” [Sec. 7 (c) (c.1) RR No. 6-2008]
a.4) “Where property, other than real property referred to in Section 24(D), is transferred for less
than an adequate and full consideration in money or money's worth, then the amount by which
the fair market value of the property exceeded the value of the consideration shall be deemed a
gift, and shall be included in computing the amount of gifts made during the calendar year:
Provided, however, that a sale, exchange, or other transfer of property made in the ordinary
course of business (a transaction which is a bona fide, at arm’s length, and free from any donative
intent) will be considered as made for an adequate and full consideration in money’s worth.” (Sec.
16, RR No. 12-2018)
B.) Definition of "fair market value" of the Shares of Stock.
b.1) “In the case of listed shares which were sold, transferred or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares
are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the
day when the Listed shares are sold, transferred, or exchanged, the closing price on the day
nearest to the date of sale, transfer or exchange of the shares shall be the fair market value.”
[Sec. 7 (c.2.1) RR No. 6-2008]
b.2) “In the case of shares of stock not listed and traded in the local stock exchanges, the value
of the shares of stock at the time of sale shall be the fair market value. In determining the value
of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are
adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated
value of the equity.
The appraised value of real property at the time of sale shall be the higher of –
1. The fair market value as determined by the Commissioner of Internal Revenue, or
2. The fair market value as shown in the schedule of valued fixed by the Provincial and City
Assessors, or
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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
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3. The fair market value as determined by Independent Appraiser.” (Sec. 2, RR No. 6-2013)
b.3) In the case of a unit of participation in any association, recreation or amusement club (such
as golf, polo, or similar clubs), the fair market value thereof shall be its selling price or the bid price
nearest published in any newspaper or publication of general circulation, whichever is higher.
[Sec. 7 (c.2.3) RR No. 6-2008]
C.) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. — The gain from
the sale or other disposition of Shares of Stock. — The gain from the sale or other disposition of
shares of stock shall be the excess of the amount realized therefrom over the basis or adjusted
basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other disposition
of property shall be the sum of money received plus the fair market value of the property (other
than money) received, if any. [Sec. 7 (c.3) RR No. 6-2008]
Applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue Code of
1997, as amended by Republic Act No. 10963/ TRAIN Law
–
A. For Real Properties
Six percent (6%)
B. For Shares of Stocks Not Traded in the Stock Exchange:
Effective January 1, 2018 to present (Republic Act No. 10963 or TRAIN Law)
B.1 For Individual
-
15 %
B.2. For Corporation:
B.1 Domestic
15 %
B.2 Foreign:
B.2.1 Not Over P100,000
5.0 %
B.2.2 On any amount in excess of P100,000
10 %
Effective January 1, 1998 to December 31, 2017 (Republic Act No. 8424/NIRC)
•
Not over P 100,000 – Five percent (5%)
•
On any amount in excess of P 100,000 – Ten percent (10%)
Exempt from the payment of Final Capital Gains Tax:
1.Dealer in securities, regularly engaged in the buying and selling of securities
2.An entity exempts from the payment of income tax under existing investment
incentives and other special laws
3.An individual or non-individual exchanging real property solely for shares of stocks
resulting in corporate control
4.A government entity or government-owned or controlled corporation selling real
property
5.If the disposition of the real property is gratuitous in nature
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COLLEGE OF ACCOUNTANCY & FINANCE
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6.Where the disposition is pursuant to the CARP law
Conditionally exempt from the payment of Final Capital Gains Tax:
1. Natural persons who dispose their principal residence, provided that the following criteria are
met:
• The proceeds of the sale of the principal residence have been fully utilized in acquiring or
constructing new principal residence within eighteen (18) calendar months from the date
of sale or disposition;
• The historical cost or adjusted basis of the real property sold or disposed will be carried
over to the new principal residence built or acquired;
• The Commissioner of Internal Revenue has been duly notified, through a prescribed
return, within thirty (30) days from the date of sale or disposition of the person’s intention
to avail of the tax exemption;
• Exemption was availed only once every ten (10) years;
• In case there is no full utilization of the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or disposition will be subject to Capital
Gains Tax.
• In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from
the seller and shall deduct from the agreed selling price/consideration the 6% capital gains
tax which shall be deposited in cash or manager’s check in interest-bearing account with
an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned
Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the
amount so deposited, including its interest yield, shall only be released to such Transferor
upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in
fact, been utilized in the acquisition or construction of the Seller/Transferor’s new principal
residence within eighteen (18) calendar months from date of the said sale or disposition.
The date of sale or disposition of a property refers to the date of notarization of the
document evidencing the transfer of said property. In general, the term “Escrow” means a
scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third
person, to be held by the latter until the happening of a contingency or performance of a
condition, and then by him delivered to the grantee, promise or obligee.
OTHER TOPICS RELATED TO CGT:
What is meant by capital asset?
Capital assets shall refer to all real properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included among the real properties considered as
ordinary assets under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003]
What is meant by ordinary asset?
Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets under Sec. 39(A)(1) of the Code, namely:
1.
Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
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2.
Real property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business; or
3.
Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the
Code; or
4.
Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as ordinary assets.
[Sec. 2(b) of RR No. 7-2003]
What is meant by "Stock classified as Capital Asset"?
“Stock Classified as “Capital Asset” means all stocks and securities held by taxpayers other than
dealers in securities. [Sec. 2(a) of RR No. 6-2008]
What is meant by "Dealer in Securities"?
“Dealer in Securities” refers to a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the
purchase of securities and the resale thereof to customers; that is one, who as merchant buys
securities and re-sells them to customers with a view to the gains and profits that may be derived
therefrom. "Dealer in securities" means any person who buys and sells securities for his/her own
account in the ordinary course of business (Sec. 3.4, SRC). [Sec. 2(b) of RR No. 6-2008]
What is meant by real property?
Real property shall have the same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the Civil Code of the Philippines. [Sec. 2(c) of RR No. 7-2003]
6.) What does a real estate dealer refer to?
A real estate dealer shall refer to any person engaged in the business of buying and selling or
exchanging real properties on his own account as a principal and holding himself out as a full or
part-time dealer in real estate. [Sec. 2(d) of RR No. 7-2003]
NOTE: To subject 6% Capital Gain Tax, the asset sold must be:
a. A capital asset
b. Located in the Philippines
c. A real property
d. Assets not held by dealer or seller of properties / engage din business / trade
Illustration:
A, RC, sold his house and lot, located in manila, held as capital asset. The sales price is 750,000
and cost is 500,000. The FMV is 900,000.
Case 1: if not a principal residence the sale is subject to CGT; 900,000 x 6% = 54,000 final income
tax or capital gain tax.
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COLLEGE OF ACCOUNTANCY & FINANCE
Case 2: If a principal residence but violated any of the requisites for exemptions, sale is subject
to CGT; 900,000 x 6% = 54,000 final income tax or capital gain tax.
Case 3; If a principal residence and no violations any of the requisites for exemptions, sale is NOT
subject to CGT. CGt is zero.
Case 4: If a principal residence and no violations any of the requisites for exemptions EXCEPT
that only 80% of the proceeds was used to purchase a new home, the sale is PARTIALLY subject
to CGT. CGT is 900,000 x 6% x 20%= 10,800. (Note: One of the requisite is, ALL or 100% of the
proceeds must be used to purchase a new home)
Watch:
https://www.youtube.com/watch?v=HWpoEBSUfIwRead:
https://www.bir.gov.ph/index.php/tax-information/income-tax.html
Assessment / Activity:
Problem Solving (2 points each)
1.A, non-resident alien not engaged in business in the Philippines, has the following
income within and without the Philippines for 2018:
Within the
Abroad
100,000
90,000
50,000
150,000
60,000
40,000
Phil
Salary and allowances
Dividend income
Royalty income
What is the income tax due / payable of A?
2-3. A, resident alien, has the following income within and without the Philippines for 2018:
Within
the Phil
Salary and allowances
300,000
Dividend income
90,000
Royalty income-others
50,000
Business income-net of
200,000
expenses
Interest
income-bank
30,000
deposits
What is the total final income tax due of A?
3. What is the basic income tax due of A?
108
Abroad
150,000
60,000
40,000
300,000
40,000
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
4. A, non-resident citizen, has the following income within and without the Philippines for
2018:
Within
the Phil
Interest income from depository
70,000
bank under expanded foreign currency
deposit system in Philippines
Dividend income
90,000
Royalty income-others
50,000
Business income-net of expenses
200,000
Interest income-bank deposits
30,000
Abroad
60,000
40,000
300,000
40,000
What is the total final income tax due of A?
5. A, non-resident alien engaged in business in the Philippines, has the following income
within and without the Philippines for 2018:
Within
the Phil
Interest income from depository
70,000
bank under expanded foreign currency
deposit system in Philippines
Dividend income
90,000
Royalty income-others
50,000
Business income-net of expenses
250,000
Interest income-bank deposits
30,000
Prizes / winnings
9,000
Abroad
60,000
40,000
300,000
40,000
20,000
What is the total final income tax due of A?
6. Based on number 5, what is the basic income tax due of A?
7. A, resident alien engaged in business in the Phil, sold his house and lot (principal
residence) costing P 1,000,000 to B for proceeds of P 1.8M. The fair market value of the property
is 2M. He filed the final income tax return to BIR after 10 days. Within 12 months, A purchased a
new house and lot for P 2.2M. What is the final capital gain tax?
8. Z, minimum wage earner, received the following for 2018: basic salary of P 140,000,
overtime pay of P 20,000, night shift differential of P 10,000 and 13th month pay of 100,000. What
is the taxable net income of Z?
109
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
MODULE 4: INCOME TAX CREDITS AND FRINGE BENEFIT TAX
OVERVIEW:
Income tax due is determined based on taxable net income of individual. The tax
computed is reduced by income tax credits to arrive at Income tax payable to BIR. The filing and
payment of income tax payable by the Individual to BIR is made in a quarterly basis and an Annual
ITR filed on or before April 15 of the following year. The quarterly ITR is prepared in a cumulative
basis.
On the other hand, Fringe Benefits already subjected to FBT are no longer included in the
Quarterly and Annual ITR of individual. Fringe benefits’ are defined as any goods, services, or
other benefits furnished or granted in cash or in kind by an employer to an individual employee,
except rank and file employees, Fringe benefits furnished to managerial and supervisory-level
employees by the employer are subject to Fringe Benefit Tax (FBT). Benefits subjected to FBT
are no longer included in the employees’ taxable income reported in the Quarterly and Annual
ITR.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Identify the sources of income tax credits of Individual
Compute the income tax still due of individual taxpayer
Determine the rules on application of income tax credits
Prepare a quarterly ITR and compute the related income tax due per quarter
Identify the benefits subject to FBT
Enumerate the de minimis benefits
Rule son fringe benefits and De minimis benefits
Compute taxable income of Individual
Compute the Fringe benefit tax of different classes of Taxpayer
Course Materials:
INCOME TAX CREDIT:
Income tax credits are directly deducted from the income tax due to arrive at income tax
payable. The Income Tax return of individual is filed on a cumulative quarterly basis and a Annual
Income tax return (cumulative).
The income tax credits are as follows:
110
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
st
Tax Credits
1 Quarter
nd
2 Quarter
rd
3 Quarter
Annual ITR
1.Withlding taxes on wages Not deducted/ Not deducted/ Not
Yes.Deducted
(Creditable)
NA
NA
deducted/ NA
2.Witholding tax at Source
Yes
yes
yes
yes
3. Prior Quarter payments
None/NA
yes
yes
yes
in yes
yes
yes
Yes
5. Excess tax Credit in Prior yes
year
yes
yes
Yes
6.Income Tax paid abroad*
Yes if RC
Yes if RC
Yes if RC
4.Income tax
original return
paid
Yes if RC
*Income tax paid abroad is applicable only to Resident Citizen because this taxpayer is subject to
income tax for income earned within the Phil and Abroad. However, this tax credit is subject to
limit.
NOTE: The compensation income is reported / included in the Annual ITR only. It is not included
in the Quarterly ITR of Individual.
Two types of Withholding Taxes:
1. Final Withholding tax or Non Creditable Withholding Taxes- refers to icome tax withheld on
specific or certain income type subject to final taxes. Example, passive income subjected to
Final Income Tax.
FINAL WITHHOLDING TAX
The amount of income tax withheld by the withholding agent is constituted as a full and
final payment of income tax due from the payee of the said income.
The liability for payment of tax rests primarily on the payor as a withholding agent.
Failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected
from payor/withholding agent.
The payee is not required to file an income tax return for the particular income.
2. Creditable Withholding taxes- income tax withheld on income payments which per law is
allowed to be a deduction against the basic income tax due.
•
•
Withholding tax on wages- is the tax withheld from income payments to individuals
arising from an employer-employee relationship.
Expanded Withholding Tax/ Withholding tax at Source / Expanded – is a kind of
withholding tax which is prescribed on certain income payments and is creditable
against the income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
WITHHOLDING TAX TABLE on WAGES
REVISED WITHHOLDING TAX TABLE
111
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Effective January 1, 2018 to December 31, 2022
DAILY
1
2
3
4
5
6
Compen
P68
P68
P1,09
P2,19
P5,47
P21,91
sation Range
5 and below 5 -P1,095 6 – P2,191
2 – P5,478
9 – P21,917 8 and above
Prescrib
0.00
P82.1
P356.
P1,34
P6,602.
ed Withholding
0.00 +20% over 9 +25% over 16 +30% over 2.47
+32% 74 +35% over
Tax
P685
P1,096
P2,192
over P5,479 P21,918
WEEKL
1
2
3
4
5
6
Y
P4,8
Compen
P4,8
P7,69
P15,3
P38,4
P153,8
08
and
sation Range
08 – P7,691 2 – P15,384 85 – P38,461 62 – P153,845 46 and above
below
Prescrib
0.00
P576.
P2,50
P9,42
P46,34
ed Withholding
0.00 +20% over 92 +25% over 0.00
+30% 3.08
+32% 6.15 +35% over
Tax
P4,808
p7,692
over p15,385 over P38,462 P153,846
SEMI1
2
3
4
5
6
MONTHLY
P10,
P10,
Compen
P16,6
P33,3
P83,3
P333,3
417
and 417
–
sation Range
67 – P33,332 33 – P83,332 33 – P333,332 33 and above
below
P16,666
Prescrib
0.00
P1,25
P5,41
P20,4
P100,4
ed Withholding
0.00 +20% over 0.00
+25% 6.67
+30% 16.67
+32% 16.67
+35%
Tax
P10,417
over P16,667 over P33,333 over P83,333 over P333,333
MONTH
1
2
3
4
5
6
LY
P20,
P20,
P166,
Compen
P33,3
P66,6
P666,6
833
and 833
–
667
–
sation Range
33 – P66,666 67 – P166,666
67 and above
below
P33,332
P666,666
Prescrib
0.00
P2,50
P10,8
P40,8
P200,8
ed Withholding
0.00 +20% over 0.00
+25% 33.33
+30% 33.33
+32% 33.33
+35%
Tax
P20,833
over 33,333 over P66,667 over P166,667 over P666,667
EXPANDED WITHHOLDING TAX
The Withholding of Creditable Tax at Source or simply called Expanded Withholding Tax
is a tax imposed and prescribed on the items of income payable to natural or juridical persons,
residing in the Philippines, by a payor-corporation/person which shall be credited against the
income tax liability of the taxpayer for the taxable year.
Example of Income payments and related w/tax rates:
W/tax rate for Goods
1%
W/tax for services
2%
Rental payments
INCOME TAX RETURN:
BIR form to be used:
112
5%
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
Employee Individual Only
BIR form 1700
Self Employed Individual only
BIR form 1701Q and 1701
Mixed Income Earner
BIR form 1701Q and 1701
Income tax return of Self Employed Individual and Mixed Income Earner is filed on a
quarterly basis and; filed a Annual ITR on a cumulative basis.
Illustration:
Asta, self employed individual, has the following data for CY 2019:
1st Q
2nd Q
3rd Q
4th Q
Gross
Income 800,000
per Quarter
700,000
900,000
1,200,000
Deductions
Quarter
400,000
650,000
750,000
3,000
0
1,000
per 500,000
W/tax at source 2,000
per quarter
Compute the income tax due per quarter of Asta under the Graduated tax rate:
1st Q
2nd Q
3rd Q
4th Q
Gross Incomecumulative
800,000
1,500,000
2,400,000
3,600,000
Deductions
Quarter
per
500,000
900,000
1,550,000
2,300,000
Taxable
income
Net
300,000
600,000
850,000
1,300,000
Income Tax Due
10,000
80,000
145,000
280,000
Income Tax paid
in
previous
quarter
0
8,000
75,000
140,000
W/tax at source
per quarter
2,000
5,000
5,000
6,000
Incme
tax
payable/paid
8,000
67,000
65,000
134,000
Less: Tax Credit
113
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
Module 5: Fringe Benefits Tax (FBT)
Fringe benefits furnished to managerial and supervisory-level employees by the employer
are subject to a final FBT of 35%* (for RC, RA. NRC) on the grossed-up monetary value of the
benefits.
Managerial employees are those who may mandate and execute management policies to
hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees. Supervisory
employees are those who effectively recommend such managerial actions if the exercise of
authority on behalf of the employer is not merely routine or clerical in nature but requires the use
of independent judgement.
The FBT is a final tax payable on a calendar quarterly basis by the employer and deductible
as part of fringe benefit expense. Benefits subjected to FBT are no longer included in the
employees’ taxable income
FRINGE BENEFITS GRANTED TO EMPLOYEES (EXCEPT RANK AND FILE EMPLOYEES)
Fringe Benefit means any good, service or other benefits furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file) such as but not limited to the
following:
a.
b.
c.
d.
e.
Housing
Expense account
Vehicle of any kind
Household personnel (maid, driver and others)
Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted
f. membership fees, dues and other expenses borne by the employer for the employee in social
and athletic clubs or other similar organizations
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to employee or his dependents; and
j. Life or health insurance and other non-life insurance premiums or similar amounts in excess
of what the law allows.
Monetary value versus Actual value of Benefits
Actual value of benefits pertains to benefits received by the employee. The monetary value
of benefits is the tax base to compute for the FBT. Pls see illustration below for the computation.
Sometimes, the actual value of benefits is not equal to monetary value.
The monetary value of benefits in the form of housing and motor vehicles used for both
personal and business purposes is equal to 50% of the lease payment or the depreciation value
of the property, whichever is applicable. However, if the housing unit is situated in or adjacent
(within 50 metres) to the business premises, the benefit is not taxable. Likewise, a motor vehicle
used normally for business purposes is not taxable.
114
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
In general, if a fringe benefit is granted in money or directly paid for by the employer, the
value of the fringe benefit is the amount granted or paid for. If furnished in property and ownership
thereof is transferred to the employee, the value of the fringe benefit is the fair market value of
the property as determined by the Commissioner of Internal Revenue, pursuant to the
Commissioner’s power to prescribe real property values. If the fringe benefit is granted or
furnished by the employer in the form of a property but ownership is not transferred to the
employee, the value of the fringe benefit is equal to the depreciation value of the property.
Fringe benefits (as listed above; those subject to FBT) given to employees other
than rank and file employees are subject to Fringe Benefit Tax (FBT). Fringe benefits
subjected to FBT are no longer subject to Basic Income tax, thus, not included in the
taxable net income of Individual. On the other hand, fringe benefits given to rank and file
employees are NOT subject to FBT but shall be included in their gross income subject to
basic income tax.
The FBT rate and computation of FBT is as follows:
Illustration:
RC, NRC, NRAEBP, NRA NOT engaged in Special Alien
RA
business
Monetary value
Fringe benefits
of 160,000
150,000
250,000
Divided by grossed 65%
Up rates
75%
85%
Gross Up Monetary 246,154
value
200,000
294,118
FBT rates
35%
25%
15%
Fringe Benefit tax
86,154
50,000
44,118
The following fringe benefits are not taxable:
1. Fringe benefits required by the nature of or necessary to the trade, business, or profession or
for the convenience or advantage of the employer.
2. Benefits authorised by and exempted from tax under special laws.
3. Employer contributions for the benefit of the employee to retirement, insurance, and
hospitalisation benefit plans.
4. Benefits given to rank and file employees, whether or not granted under a collective bargaining
agreement. However, these are subject to WHT on compensation, unless otherwise tax
exempt.
5. De minimis (small value) benefits as defined and enumerated in the rules and regulations.
DE MINIMIS BENEFITS NOT SUBJECT TO FRINGE BENFIT TAX AND WITHHOLDING TAX
115
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
a. Monetized unused vacation leave credits to private employees not exceeding ten (10) days
during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee
per semester of P250 per month;
d. Rice subsidy of P2,000 or one sack of 50kg rice per month amounting to not more than P2,000;
e. Uniform and clothing allowance not exceeding P6,000 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum;
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g. for length of service or safety achievement, which in the
form of a tangible personal property other than cash or gift certificate, with an annual monetary
value not exceeding P10,000 received by the employee under an established written plan
which does not discriminate in favor of highly paid employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic
minimum wage;
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from
both CBA and productivity incentive schemes combined do not exceed ten thousand pesos
(Php 10,000.00)per employee per taxable year;
RULE on TAX TREATMNET ON ANY AMOUNT OF DE MINIMIS BENEFIT IN EXCESS OFTHE
RELATED / IMPOSED AMOUNT OF CAP OR CEILING, EARNED RECEIVED BY AN
EMPLOYEE:
•
•
If received by rank and file employee, such excess amount of de minimis benefits over the
cap / ceiling shall be treated as part of “other benefits” also known as “13th month and
other incentive pay” where the first 90,000 or less is exempt from income tax. However
the excess amount of the “other benefits” over the 90,000 per year cap shall be subject o
basic income tax of said rank and file employee.
If received by managerial or supervisory employee, such excess amount of de minimis
benefits over the cap / ceiling shall be treated as part of “other benefits” also known as
“13th month and other incentive pay” where the first 90,000 or less is exempt from income
tax. However the excess amount of the “other benefits” over the 90,000 per year cap shall
be subject to FBT.
Illustration:
A, accounting staff, resident citizen, received the following benefits for year 2019:
Rice subsidy
50,000
Uniform allowance
116
20,000
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
th
13 month pay
50,000
Compensation income
500,000
Laundry allowance
Taxation 1: LML / VGL / GSJ
10,000
Compute the income tax due of A.
Solution:
Actual per year
Limit per year
Excess
Rice subsidy
50,000
2,000x 12= 24,000
26,000
Uniform allowance
20,000
6,000 per yr
14,000
Laundry allowance
10,000
300/mo x 12= 3,600/yr
6,400
Total Excess over Cap/ limt to become part of Other benefits
th
46,400
13 month pay
50,000
Total 13th month pa and other incentives
96,400
Non taxable / Exempted
90,000
Taxable benefits
6,400
Compensation income
500,000
Taxable Income
506,400
Income tax Due based on graduated tax rate
56,600
Assessment / Activity:
1. ABC Corp’s staff is processing an invoice and other related documents for disbursements. The
invoice pertains to CLOVER Corp for the goods/inventories purchased by ABC. The invoice
amount is 80,000.
How much should ABC withheld, as withholding tax agent, on payment to Clover Corp?
2. Z Corp provides the following benefits to its employees:
•
Household personnel benefit of P 30,000 to B, Finance manager
•
Local travel expenses paid by the company for A, Finance staff
•
Rental payments of P 100,000 for the apartment rented/leased by the company for C,
Chief Financial Officer, as his usual place of residence.
What is the fringe benefit tax (All employees are resident citizen)?
3-5. A, resident citizen, engaged in business in the Philippines, has the following for 2018:
117
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
st
3 Q
4th Q
Gross
Income 600,000
per Quarter
740,000
980,000
1,450,000
Deductions
Quarter
430,000
610,000
850,000
W/tax at source 2,000
per quarter
3,000
0
1,000
Interest income - 40,000
bank
20,000
10,000
10,000
Compensation
income
200,000
200,000
200,000
6,000
6,000
8,000
per 280,000
200,000
W/tax
on 5,000
compensation
rd
Taxation 1: LML / VGL / GSJ
2 Q
1 Q
nd
What is the income tax due / payable of A per quarter?
118
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
MODULE 6: GROSS INCOME AND ALLOWED DEDUCTIONS
OVERVIEW:
Income taxes are computed based on taxable net income for resident / citizen and
Corporations. Taxable net income is derived deducting the allowed deductions from the Gross
income of the taxpayer. The are income items and deductions that are not allowed by law to be
part of gross income and deductions, respectively. On this module, we will discuss in detail the
inclusion and exclusion including limits of gross income items and allowed deductions under the
Tax Code.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
Enumerate the income items that are included on taxable gross income
Enumerate the income items that are excluded on taxable gross income
Define gross income and taxable net income under the Tax Code
Compute the total gross income
Determine the provisions of Tax Code for reporting of gross income and capital losses.
Enumerate and understand the allowed deductions under the Tax code
Determine the deductions not allowed under the Tax Code
Compute the taxable net income under Itemized and Optional Standard deductions for
Individual and Corporations.
Course Materials:
Definitions:
Compensation income-remunerations earned by an employee from an employee-employer
relationship such as salaries and wages, allowances.
Gross income means all income derived from whatever source.
Net income- refers to amount remaining from the gross income after deducting allowed deductions
permitted by law.
Taxable income-refers to the income subject to tax, either gross income or taxable net income.
Formula of Individual Income Tax Returns:
119
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Gross income
1,250,000
Less: Allowed Deductions
750,000
Taxable Net income
500,000
Basic Income tax due
55,000
Less: Income Tax credit
35,000
Income Tax still due / payable
20,000
Taxation 1: LML / VGL / GSJ
Gross income includes, but is not limited to the following:
1. Compensation for services, in whatever form paid, including but not limited to fees, salaries,
wages, commissions and similar items
2. Gross income derived from the conduct of trade or business or the exercise of profession
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of the general professional partnerships
Some of the exclusions from gross income
Exclusions from Gross Income. - The following items shall not be included in gross income and
shall be exempt from taxation under this title:
(1) Life Insurance. - 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, but if such amounts are held by
the insurer under an agreement to pay interest thereon, the interest payments shall be included
in gross income.
(2) Amount Received by Insured as 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.
(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such property, as well as gift, bequest, devise or
descent of income from any property, in cases of transfers of divided interest, shall be included in
gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts, 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.
120
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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least ten (10) years and is not less than fifty
(50) years of age at the time of his retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee only once. For purposes of this
Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or employees, or
both, for the purpose of distributing to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part
of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer because
of death sickness or other physical disability or for any cause beyond the control of the said official
or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by resident or nonresident
citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under
the laws of the United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the
provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity
received by government officials and employees.
(7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines
in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any
public utility or from the exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or proceeding;
and
(ii) The recipient is not required to render substantial future services as a condition to receiving
the prize or award.
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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
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(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local
and international sports competitions and tournaments whether held in the Philippines or abroad
and sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this subparagraph
Ninety thousand pesos (₱90,000)
(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this
Code
Requisites of Taxable Income:
Taxation is an act of levying a tax or the process by which government raises revenue to
defray expenses of government. Income Tax is imposed on income earned by taxpayer
4. There must be a profit or gain
5. The gain or profit must be realized or received actually or constructively.
6. The gain or profit must not be excluded or exempted by law from income taxation.
INCOME FROM SOURCE WITHIN THE PHILIPPINES:
SITUS of TAXATION
Interest income
Criteria is residence of Debtor
Compensation income
Criteria is place of service
Rental income
Place of property
Royalty
Place where it was use / has right
Sale of real property
Place of property
Sale of personal property
Place of property
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COLLEGE OF ACCOUNTANCY & FINANCE
Dividend Income
From Domestic Corp
Always within the Philippines
From resident Foreign If silent, 100% within the Philippines,
Corp
RULE ON GAINS AND LOSSES FROM SALE, BARTER OR EXCHANGE OF CAPITAL
ASSETS:
A. Sale of real property held as capital asset in the Philippines
The sale of real property held as capital asset located in the Philippines is subject to
Capital gain Tax of 6% of FMV or Gross selling price whichever is higher.
B. Sale of other property (other than Real property) held as capital asset
B.1. Sale of shares of stocks of Domestic Corporation sold in the Philippines
B.1.1. Sales of stocks thru Local Stock Exchange- Subject to OPT of 6/10 of 1%
of the gross Selling price
B.1.2. Sale of stocks not thru local stock exchange- subject to Capital gain tax of
15% of net capital gain
B.2 Sale of other property (other than Real property and stocks)-the Net capital gain will
be part of gross income and will be subject to basic Income tax
RULE ON TAXABILITY OF CAPITAL GAIN OR LOSS ON SALE OF OTHER CAPITAL
ASSETS (OTHER THAN REAL PRPERTY AND SHARES OF STOCKS OF DOMESTIC
CORPORATION)
Individual
Holding Period
Corporation
If the capital asset is held for 100% recognized the gain or
less than 1 year= recognize loss regardless of holding
100% gain/loss (called Shor period
term gain /loss)
If the capital asset is held for
more than 1 year= recognize
50% gain/loss (Caleld Long
term Gain / Loss)
Capital loss
Deductible only to Capital
gain. Cannot be deducted
from other income nor in
ordinary gain; nor in gross
income
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Deductible only to Capital
gain. Cannot be deducted
from other income nor in
ordinary gain; nor in gross
income
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
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Capital Gain
Added to gross income- net of Added to gross income- net of
capital loss
capital loss
Net capital Loss
Cannot be deducted from Cannot be deducted from
gross income / disregard / not gross income / disregard / not
part of deductions
part of deductions
Net Capital Loss carryover
Net Capital Loss can be Cannot be carried over to next
carried over as deduction to year.
capital gain only in the
immediately following year
only.
However, the amount net
capital loss carry over shall be
lower amount between actual
net capital loss incurred OR
the net income in the period
where the capital loss
incurred.
ALLOWED DEDUCTIONS;
Allowable deductions from gross income:
a) *Optional Standard Deduction – In lieu of itemized allowable deductions, an individual, other
than a non-resident alien, may elect an optional standard deduction (OSD) not exceeding 40%
of gross business or professional income.
•
•
an amount not exceeding 40% of the gross sales/receipts for individuals
an amount not exceeding 40% gross income for corporations;
A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP
or the partners comprising the partnership
OR;
b) Itemized Deductions
In the case of individuals engaged in business or the practice of a profession, and who
opted to be taxed at the regular graduated income tax rates, the following expenses are allowed
as deductions from gross income:
•
Expenses- All ordinary and necessary expenses paid or incurred during the taxable year
in connection with the trade, business, or profession, including raw materials, supplies,
and direct labour
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•
Interest- Interest paid or incurred within a taxable year in connection with the conduct of a
taxpayer's profession, trade, or business, less an amount equal to 33% of the interest
income subject to final tax.
•
Taxes- Corporate taxpayers can claim a deduction for all taxes paid or accrued within the
taxable year in connection with their trade or business, except for the following:
➢ Philippine CIT.
➢ Income taxes imposed by authority of any foreign country, unless the taxpayer
elects to take a deduction in lieu of a foreign tax credit. For a resident foreign
corporation, the only option is to deduct; foreign tax credit is not allowed to be
claimed (see Foreign
➢ tax credit in the Tax credits and incentives section for more information).
➢ Donor's tax and estate tax
➢ Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed.
➢ In the case of a foreign corporation, deductions for taxes are allowed only if they
are connected with income from sources within the Philippines.
•
•
Losses
Bad Debts- Bad debts are deductible expenses when written-off, subject to certain
requirements.
•
Depreciation- Depreciation is generally computed on a straight-line basis, although any
reasonable method may be elected if the aggregate amount of depreciation, plus salvage
value at the end of the useful life of the property, will equal the cost of the property. Gain
on the sale of depreciated property is taxable as ordinary income. Generally, tax
depreciation should conform to book depreciation, unless the former includes incentives.
➢ Properties used in petroleum operations may be depreciated over a period of ten
years using the straight-line or declining-balance method, at the option of the
service contractor. Properties used in mining operations with expected life of more
than ten years may be depreciated over any number of years between five years
and their expected life.
•
Charitable Contributions and Other Contributions- Research and Development- The
deduction for charitable contributions ordinarily may not exceed 5% of taxable income for
Corporations and 10% of taxable net income for Individual. However, contributions to
certain institutions are 100% deductible, subject to certain conditions.
•
Pension Trusts
•
Entertainment, amusement, and recreation expenses, not to exceed the following ceilings:
➢ 0.50% of net sales for taxpayers engaged in sale of goods or properties.
➢ 1% of net revenue for taxpayers engaged in sale of services, including
professionals and lessors of properties.
•
Net operating losses
A net operating loss for any taxable year immediately preceding the current taxable year,
which had not been previously offset as a deduction from gross income, may be carried
over as a deduction from gross income for the next three consecutive taxable years
immediately following the year of this loss (except losses during the period when the
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taxpayer was tax-exempt), provided there has been no substantial change in the
ownership of the business or enterprise where 75% of the paid up capital or nominal value
of the shares are held by the same persons.
For mines, other than oil and gas wells, a net operating loss calculated without the benefit
of incentives provided for under EO No. 226, or the Omnibus Investments Code of 1987,
as amended, incurred in any of the first ten years of operation may be carried over as a
deduction from taxable income for the next five years immediately following the year of
such loss.
DEDUCTIONS UNDER THE TAX CODE:
Section 34. Deductions from Gross Income. - Except for taxpayers earning compensation
income arising from personal services rendered under an employer-employee relationship where
no deductions shall be allowed under this Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B)
and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;
(A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefit furnished
or granted by the employer to the employee: Provided, That the final
tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade, business or
profession;
(iii) A reasonable allowance for rentals and/or other
payments which are required as a condition for the continued use
or possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a lessee, user or
possessor;
(iv) A reasonable allowance for entertainment, amusement
and recreation expenses during the taxable year, that are directly
connected to the development, management and operation of the
trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade,
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business or exercise of a profession not to exceed such ceilings as
the Secretary of Finance may, by rules and regulations prescribe,
upon recommendation of the Commissioner, taking into account the
needs as well as the special circumstances, nature and character
of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment,
amusement or recreation that is contrary to law, morals public policy
or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income
shall be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii)
the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction
from gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local government
unit, or to an official or employee of a government-owned or -controlled
corporation, or to an official or employee or representative of a foreign
government, or to a private corporation, general professional partnership,
or a similar entity, if the payment constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to
the expenses allowable as deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code, may at its option elect
either: (a) to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F)
hereof.
D) Losses. (1) In General. - Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if
the loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the
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taxpayer shall submit a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable year: Provided,
however, That the time limit to be so prescribed in the rules and regulations
shall not be less than thirty (30) days nor more than ninety (90) days from
the date of discovery of the casualty or robbery, theft or embezzlement
giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if
at the time of the filing of the return, such loss has been claimed as a
deduction for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign
corporation, the losses deductible shall be those actually sustained during the year
incurred in business, trade or exercise of a profession conducted within the
Philippines, when such losses are not compensated for by insurance or other
forms of indemnity. The secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, That the time to be so prescribed
in the rules and regulations shall not be less than thirty (30) days nor more than
ninety (90) days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
(4) Capital Losses. - (b) Securities Becoming worthless. - If securities as
defined in Section 22 (T) become worthless during the taxable year and are capital
assets, the loss resulting therefrom shall, for purposes of this Title, be considered
as a loss from the sale or exchange, on the last day of such taxable year, of capital
assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash
sales' of stock or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed
only to the extent of the gains from such transactions.
(7) Abandonment Losses. (a) In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated exploration
and development expenditures pertaining thereto shall be allowed as a
deduction: Provided, That accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated costs of equipment
directly used therein , shall be allowed as a deduction in the year such well,
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equipment or facility is abandoned by the contractor: Provided, That if such
abandoned well is reentered and production is resumed, or if such
equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration
and shall be amortized or depreciated, as the case may be.
(E) Bad Debts. (1) In General. - Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year except those not connected with
profession, trade or business and those sustained in a transaction entered into
between parties mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the preceding years shall
be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22
(T), are ascertained to be worthless and charged off within the taxable year and
are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other
than a bank or trust company incorporated under the laws of the Philippines a
substantial part of whose business is the receipt of deposits, for the purpose of this
Title, be considered as a loss from the sale or exchange, on the last day of such
taxable year, of capital assets.
(F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business. In the case
of property held by one person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of property held in trust,
the allowable deduction shall be apportioned between the income beneficiaries
and the trustees in accordance with the pertinent provisions of the instrument
creating the trust, or in the absence of such provisions, on the basis of the trust
income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance'
as used in the preceding paragraph shall include, but not limited to, an allowance
computed in accordance with rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, under any of the following
methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the
rate which would have been used had the annual allowance been
computed under the method described in Subsection (F) (1);
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(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of
Finance upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. Where under rules and regulations prescribed by the Secretary of Finance upon
recommendation of the Commissioner, the taxpayer and the Commissioner have
entered into an agreement in writing specifically dealing with the useful life and
rate of depreciation of any property, the rate so agreed upon shall be binding on
both the taxpayer and the national Government in the absence of facts and
circumstances not taken into consideration during the adoption of such agreement.
The responsibility of establishing the existence of such facts and circumstances
shall rest with the party initiating the modification. Any change in the agreed rate
and useful life of the depreciable property as specified in the agreement shall not
be effective for taxable years prior to the taxable year in which notice in writing by
certified mail or registered mail is served by the party initiating such change to the
other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life
and depreciation rate for any depreciable and claimed the depreciation expenses
as deduction from his gross income, without any written objection on the part of
the Commissioner or his duly authorized representatives, the aforesaid useful life
and depreciation rate so adopted by the taxpayer for the aforesaid depreciable
asset shall be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An
allowance for depreciation in respect of all properties directly related to production
of petroleum initially placed in service in a taxable year shall be allowed under the
straight-line or declining-balance method of depreciation at the option of the
service contractor.
However, if the service contractor initially elects the declining-balance
method, it may at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum
shall be ten (10) years of such shorter life as may be permitted by the
Commissioner.
Properties not used directly in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated useful life
of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance
for depreciation in respect of all properties used in mining operations other than
petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10)
years or less; or
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(b) Depreciated over any number of years between five (5) years
and the expected life if the latter is more than ten (10) years, and the
depreciation thereon allowed as deduction from taxable income: Provided,
That the contractor notifies the Commissioner at the beginning of the
depreciation period which depreciation rate allowed by this Section will be
used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or
Business or Resident Foreign Corporations. - In the case of a nonresident alien
individual engaged in trade or business or resident foreign corporation, a
reasonable allowance for the deterioration of Property arising out of its use or
employment or its non-use in the business trade or profession shall be permitted
only when such property is located in the Philippines.
(G) Depletion of Oil and Gas Wells and Mines. (1) In General. - In the case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in accordance with the costdepletion method shall be granted under rules and regulations to be prescribed by
the Secretary of finance, upon recommendation of the Commissioner. Provided,
That when the allowance for depletion shall equal the capital invested no further
allowance shall be granted: Provided, further, That after production in commercial
quantities has commenced, certain intangible exploration and development drilling
costs: (a) shall be deductible in the year incurred if such expenditures are incurred
for non-producing wells and/or mines, or (b) shall be deductible in full in the year
paid or incurred or at the election of the taxpayer, may be capitalized and amortized
if such expenditures incurred are for producing wells and/or mines in the same
contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in
petroleum operations which in itself has no salvage value and which is incidental
to and necessary for the drilling of wells and preparation of wells for the production
of petroleum: Provided, That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the allowance for depreciation
except that the allowances for depreciation on such property shall be deductible
under this Subsection.
Any intangible exploration, drilling and development expenses allowed as
a deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In
computing taxable income from mining operations, the taxpayer may at his option,
deduct exploration and development expenditures accumulated as cost or
adjusted basis for cost depletion as of date of prospecting, as well as exploration
and development expenditures paid or incurred during the taxable year: Provided,
That the amount deductible for exploration and development expenditures shall
not exceed twenty-five percent (25%) of the net income from mining operations
computed without the benefit of any tax incentives under existing laws. The actual
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exploration and development expenditures minus twenty-five percent (25%) of the
net income from mining shall be carried forward to the succeeding years until fully
deducted.
The election by the taxpayer to deduct the exploration and development
expenditures is irrevocable and shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean
gross income from operations less 'allowable deductions' which are necessary or
related to mining operations. 'Allowable deductions' shall include mining, milling
and marketing expenses, and depreciation of properties directly used in the mining
operations. This paragraph shall not apply to expenditures for the acquisition or
improvement of property of a character which is subject to the allowance for
depreciation.
In no case shall this paragraph apply with respect to amounts paid or
incurred for the exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred
for the purpose of ascertaining the existence, location, extent or quality of any
deposit of ore or other mineral, and paid or incurred before the beginning of the
development stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred
during the development stage of the mine or other natural deposits. The
development stage of a mine or other natural deposit shall begin at the time when
deposits of ore or other minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon commencement of actual commercial
extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident
Alien individual or Foreign Corporation. - In the case of a nonresident alien
individual engaged in trade or business in the Philippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines under paragraph
(1) of this Subsection shall be authorized only in respect to oil and gas wells or
mines located within the Philippines.
(H) Charitable and Other Contributions. (1) In General. - Contributions or gifts actually paid or made within the
taxable year to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public purposes, or to
accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to non-government organizations, in accordance with rules
and regulations promulgated by the Secretary of finance, upon recommendation
of the Commissioner, no part of the net income of which inures to the benefit of
any private stockholder or individual in an amount not in excess of ten percent
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(10%) in the case of an individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income derived from trade, business or
profession as computed without the benefit of this and the following
subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the
preceding subparagraph, donations to the following institutions or entities shall be
deductible in full;
(a) Donations to the Government. - Donations to the Government
of the Philippines or to any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to finance, to provide for,
or to be used in undertaking priority activities in education, health, youth
and sports development, human settlements, science and culture, and in
economic development according to a National Priority Plan determined by
the National Economic and Development Authority (NEDA), In consultation
with appropriate government agencies, including its regional development
councils and private philantrophic persons and institutions: Provided, That
any donation which is made to the Government or to any of its agencies or
political subdivisions not in accordance with the said annual priority plan
shall be subject to the limitations prescribed in paragraph (1) of this
Subsection;
(b) Donations to Certain Foreign Institutions or International
Organizations. - donations to foreign institutions or international
organizations which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the Government
of the Philippines and the foreign institutions or international organizations
or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the
term 'nongovernment organization' means a non profit domestic
corporation:
(1) Organized and operated exclusively for scientific,
research, educational, character-building and youth and sports
development, health, social welfare, cultural or charitable purposes,
or a combination thereof, no part of the net income of which inures
to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after
the close of the accredited nongovernment organizations taxable
year in which contributions are received, makes utilization directly
for the active conduct of the activities constituting the purpose or
function for which it is organized and operated, unless an extended
period is granted by the Secretary of Finance in accordance with
the rules and regulations to be promulgated, upon recommendation
of the Commissioner;
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(3) The level of administrative expense of which shall, on an
annual basis, conform with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed thirty percent (30%) of
the total expenses; and
(4) The assets of which, in the even of dissolution, would be
distributed to another nonprofit domestic corporation organized for
similar purpose or purposes, or to the state for public purpose, or
would be distributed by a court to another organization to be used
in such manner as in the judgment of said court shall best
accomplish the general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be prescribed by the
Secretary of Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative
expenses) paid or utilized to accomplish one or more purposes for
which the accredited nongovernment organization was created or
organized.
(ii) Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for which the
accredited nongovernment organization was created or organized.
An amount set aside for a specific project which comes within one
or more purposes of the accredited nongovernment organization may be
treated as a utilization, but only if at the time such amount is set aside, the
accredited nongovernment organization has established to the satisfaction
of the Commissioner that the amount will be paid for the specific project
within a period to be prescribed in rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner,
but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of
funds.
(3) Valuation. - The amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
(I) Research and Development.(1) In General. - a taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable year in
connection with his trade, business or profession as ordinary and necessary
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expenses which are not chargeable to capital account. The expenditures so
treated shall be allowed as deduction during the taxable year when paid or
incurred.
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to
provide for the payment of reasonable pensions to his employees shall be allowed as a
deduction (in addition to the contributions to such trust during the taxable year to cover
the pension liability accruing during the year, allowed as a deduction under Subsection
(A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the
taxable year in excess of such contributions, but only if such amount (1)has not theretofore
been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten
(10) consecutive years beginning with the year in which the transfer or payment is made.
Illustration:
ABC has the following data for 2019;
Sales
2,000,000
Operating expenses
500,000
Sales return
100,000
Interest income-bank
10,000
Royalty -Philippines
300,000
Cost of Sales
900,000
Compute the taxable net income of ABC:
Case A; Individual, resident citizen, opted / selected Itemized deductions:
Sales
Less Sales return
Net Sales
2,000,000
100,000
1,900,000
Less: Cost of Goods sold
900,000
Gross profit
1,000,000
Add; other income
0
Gross Income
1,000,000
Operating expenses
500,000
Taxable Net Income
500,000
Case B; Individual, resident citizen, opted / selected Optional Standard Deduction (OSD)
Sales
Less Sales return
Net Sales
2,000,000
100,000
1,900,000
Multiply by OSD rate
40%
Optional Standard Deduction
760,000
Net sales
1,900,000
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OSD
760,000
Taxable Net Income
1,140,000
Taxation 1: LML / VGL / GSJ
Case B; Domestic Corporation, opted / selected Optional Standard Deduction (OSD)
Sales
Less Sales return
Net Sales
2,000,000
100,000
1,900,000
Less: Cost of Goods sold
900,000
Gross income
1,000,000
OSD rate
40%
OSD
400,000
Gross Income
1,000,000
OSD
400,000
Taxable Net Income
600,000
Regular Corporate income Tax (RCIT) at 180,000
30%
Minimum Corporate Income Tax (MCIT) at 20,000
2% of gross income
Income tax Due of Corporation (which ever 180,000
is higher between RCIT and MCIT)
Read:
https://www.bir.gov.ph/index.php/tax-information/income-tax.html
Assessment / Activity:
1. Mr Asta, resident citizen, revealed the following data for 2019:
Gross income from business is P 800,000
Business expenses allowed for deduction is P 600,000 (excluding contributions)
Charitable contributions:
To Govt for priority activities of P 50,000
To Govt for public purposes (not priority) of P 60,000
To church of P 15,000
What is the taxable net income?
2. Mr Asta, domestic corporation, revealed the following data for 2019:
Gross income from business is P 800,000
Business expenses allowed for deduction is P 600,000 (excluding contributions)
Charitable contributions:
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To Govt for priority activities of P 50,000
To Govt for public purposes (not priority) of P 60,000
To church of P 15,000
What is the taxable net income?
3. ABC corp paid the following taxes which is incurred in connection with business;
Community tax of 1,000; surcharge of P 250 plus interest of 125. Real property tax of 5,000 plus
surcharge of 1,250 and interest of 500. Income tax expense of 90,000 plus surcharge of 25,000
and interest of 10,000.
How much is the deductible tax expense for 2019 of ABC Corp?
4-5. Asta, Corp has the following data:
•
•
•
•
•
•
•
•
•
Gross income of P 400,000
Interest expenses-business amounting to 50,000
Interest income subject to final tax-net amounting to 9,600
Ordinary loss of P 10,000
Bad debts of 30,000 ( 10,000 is guaranteed by an insurance company and 5,000 was
set as provision for bad debts expenses)
Wagering losses of P 3,000
Loss on wash sales of P 1,000
Donors tax expenses of P 2,000
Percentage tax (sec 116 OPT rate) of P 5,000
What is the allowed deductions for Asta?
10. What is the taxable net income of Asta?
THANK YOU!!!
NEVER GIVE UP COZ TIME PASSES ANYWAY!!--- GSJ
Answer Sheet
Name:_____________________________________
Section:______________
1.
2.
3.
4.
5.
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MODULE 7: INCOME TAXATION OF CORPORATIONS:
OVERVIEW:
In Corporate income taxation, we must classify first the different types of corporate
taxpayer because they are subject to different tax rates. Same with Individuals, Corporation’s
income is subject to income taxes depending on the type of income. Passive income of
Corporations is also subject to Final tax and those active income or income from business
operations are subject to regular Corporate Tax or MCIT. On this module, we will discuss the
different classification of Corporations and their different income earned with their corresponding
tax rates as provided by the Tax Code, as amended.
MODULE OBJECTIVES:
After successful Completion of this module, you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
Enumerate the income items that are included on taxable gross income
Enumerate the income items that are excluded on taxable gross income
Define gross income and taxable net income under the Tax Code
Know the classification of Corporations and their income.
Know the different income tax rates applicable to Corporations.
Enumerate and understand the allowed deductions under the Tax code
Determine the deductions not allowed under the Tax Code
Compute the taxable net income under Itemized and Optional Standard deductions for
Individual and Corporations.
Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"), the term
"corporation" includes partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participation), associations, or insurance companies, but excluding
general professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the
Government.
Under the Tax Code, there are three (3) types of taxable corporations –
1. a domestic corporation,
2. a resident foreign corporation and
3. a non-resident foreign corporation.
A domestic corporation is a corporation created or organized under Philippine law. A domestic
corporation is taxable on all income derived from sources within and without the Philippines.
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A foreign corporation is corporation organized, authorized, or existing under the laws of any
foreign country. A foreign corporation is either a resident - a corporation engaged in trade or
business in the Philippines, or a non-resident - a corporation not engaged in trade or business in
the Philippines. Note, however, that a foreign corporation who wishes to engage in trade or
business in the Philippines should first secure a license from the Philippine Securities and
Exchange Commission.
A foreign corporation, whether resident or non-resident, is taxed only on income derived from
sources within the Philippines. The following items are, among others, deemed income from
sources within the Philippines:
a.
b.
c.
d.
Interests;
Dividends;
Compensation for labor or personal services performed in the Philippines;
Rentals and Royalties from property located in the Philippines or from any interest in such
property, including rentals or royalties for:
• The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
• The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;
• The supply of scientific, technical, industrial or commercial knowledge or information;
• The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned in paragraph (c);
• The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident person;
• Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and
• The use of or the right to use:
✓
Motion picture films;
✓
Films or video tapes for use in connection with television; and
✓
Tapes for use in connection with radio broadcasting.
• Gains, profits and income from the sale of real property located in the Philippines; and
• Gains, profits and income derived from the sale within the Philippines of personal property.
•
However, gains from the sale of shares of stock in a domestic corporation shall be treated
as derived from sources within the Philippines regardless of where said shares are sold.
Taxation of Domestic Corporations
Except for certain passive incomes and incomes of domestic non-profit proprietary educational
institutions and hospitals, a domestic corporation is taxed at thirty per cent (30%) of its taxable
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income; that is, its gross income from all sources within and without the Philippines less allowable
deductions. These allowable deductions are:
•
•
•
•
•
•
•
•
•
•
•
Ordinary and necessary trade or business expenses;
Interests paid or incurred within a taxable year on indebtedness in connection with the
taxpayer's trade or business;
Taxes except income tax, estate and donor's taxes, and taxes assessed against local
benefits of a kind tending to increase the value of the property assessed.
Income tax imposed by authority of any foreign country is allowed either as a deduction or
tax credit. However, a foreign corporation shall not be allowed a tax credit for the taxes
imposed by foreign countries;
Losses actually sustained during the taxable year and not compensated for by insurance
or other forms of indemnity and incurred in trade or business, including casualty losses
The excess of allowable deductions over gross income of the business or enterprise for
any taxable year immediately preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be carried over as a deduction from
gross income for the next three (3) consecutive taxable years immediately following the
year of such loss, provided, that there has been no substantial change in the ownership
of the corporation (known as NOLCO or Net Operating Loss Carry-over)
Bad Debts except those sustained in certain transactions entered into between related
parties;
Depreciation ;
Charitable and Other Contributions or gifts actually paid or made within the taxable year
to, or for the use of the Government of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to accredited domestic corporations
or associations organized and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to nongovernment organizations;
Research and Development expenditures;
Amounts transferred or paid to Pension Trusts (in addition to the contributions to such
trusts during the taxable year which contributions are deductible as ordinary expenses).
However, beginning the fourth taxable year immediately following the taxable year in which a
corporation commenced its business operations, a minimum corporate income tax ("MCIT") of
two per cent (2%) of the gross income as of the end of said taxable year shall be imposed instead
of the foregoing "normal corporate tax" if such MCIT is greater than the normal income tax. Any
excess of the MCIT over the normal income tax shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding taxable year.
The Secretary of the Department of Finance may suspend the imposition of the MCIT on any
corporation which:
1. suffers losses on account of prolonged labor dispute,
2. or because of force majuere, or
3. because of legitimate business reverses.
In addition to the foregoing taxes, an improperly accumulated earnings tax ("IAET") shall
be imposed which tax is equivalent to ten per cent (10%) of the improperly accumulated taxable
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income. The IAET, however, shall not apply to publicly-held corporations, banks and other
nonbank financial intermediaries, and insurance companies.
Taxation of Resident Foreign Corporations
In general, a resident foreign corporation is taxed in the same manner as a domestic
corporation on its income derived from all sources within the Philippines. That is, a resident foreign
corporation shall be subject to the normal income tax rate of thirty per cent (30%) of its taxable
Philippine-sourced income.
In the computation of taxable income, there shall be deducted from the Philippine-sourced
gross income, such allowable expenses, losses and other deductions properly allocated thereto
and a ratable part of expenses, interests, losses and other deductions effectively connected with
the business or trade conducted exclusively within the Philippines which cannot definitely be
allocated to some items or class of gross income.
However, the following shall be subject to a different tax rate:
1. International carriers doing business in the Philippines shall be taxed at two and onehalf per cent (2 1/2 %) of gross Philippine billings;
2. Income derived by offshore banking units from foreign currency transactions with local
commercial banks and branches of foreign banks and interest derived from foreign
currency loans to residents shall be subject to a final tax at the rate of ten per cent
(10%) of such income;
3. Regional operating headquarters shall pay a tax of ten per cent (10%) of their taxable
income. A Regional operating headquarter refers to a branch established in the
Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and coordination;
sourcing and procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training and personnel
management; logistic services; research and development services and product
development; technical support and maintenance; data processing and
communication; and business development .
Taxation of Non-Resident Foreign Corporations
In general, a non-resident foreign corporation shall pay a tax equal to thirty per cent (30%)
of the gross income received during each taxable year from all sources within the Philippines.
However, the following non-resident foreign corporations shall be subject to a different tax rate27:
1. Nonresident Cinematographic Film Owner, Lessor or Distributor - twenty-five per cent (25%)
of its gross income from all sources within the Philippines.
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2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals - four and onehalf per cent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry Authority.
3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment - seven and onehalf per cent (7 1/2%) of gross rentals or fees.
The following passive incomes of a nonresident foreign corporation are subject to a final tax as
follows:
1. Twenty per cent (20%) on the amount of interest on foreign loans contracted on or after August
1, 1986;
2. The net capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or disposed of
through the stock exchange are, in the same manner as domestic and resident foreign
corporations, taxed at the rate of five per cent (5%) for the 1st P 100,000 and ten per cent
(10%) for amount in the excess of P 100,000. (Old Tax Code)
3. Fifteen per cent (15%) on the amount of cash and/or property dividends received from a
domestic corporation subject to the condition that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to seventeen per
cent (17%), which represents the difference between the regular income tax of thirty-two per
cent (32%) on corporations and the fifteen per cent (15%) tax on dividends as provided herein;
The income of nonresident foreign corporations from transactions with depository banks under
the expanded foreign currency deposit system shall be exempt from income tax.
There are special laws which provides favorable tax treatments to corporations
involved in any of the activities listed in the Philippines Investment Priority Plan or those locating
in special economic zones throughout the Philippines (i.e. those locating in Subic Bay Freeport,
pay 5% of gross income in lieu of income taxes plus tax free importations). Furthermore, where a
foreign element is involved, applicable tax treaties with which the Philippines is a signatory may
likewise provide a preferential tax treatment. Presently, the Philippines has the tax treaties with
other countries.
Annual Income Tax For Corporations And Partnerships
BIR Form 1702 – Annual Income Tax Return (For Corporations and Partnerships)
Documentary Requirements
1.Certificate of Income Payments Not Subjected to Withholding Tax (BIR Form 2304), if applicable
2.Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
3.Duly approved Tax Debit Memo, if applicable
4.Proof of Foreign Tax Credits, if applicable
5.Income tax return previously filed and proof of payment, if amended return is filed for the same
taxable year
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6.Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial
Statements, if the gross annual sales, earnings, receipts or output exceed P3,000,000.
7.Proof of prior year’s excess tax credits, if applicable
Deadline for Filing
Final Adjustment Return or Annual Income Tax Return – On or before the 15th day of the fourth
month following the close of the taxpayer’s taxable year
Quarterly Income Tax For Corporations And Partnerships
BIR Form 1702Q – Quarterly Income Tax Return (For Corporations and Partnerships)
Documentary Requirements
1.Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
2.Duly approved Tax Debit Memo, if applicable
3.Previously filed return, if an amended return is filed for the same quarter
Deadline
Corporate Quarterly Declaration or Quarterly Income Tax Return – On or before the 60th day
following the close of each of the quarters of the taxable year
Account Information Form For Corporations And Partnerships
BIR Form 1702 AIF – Account Information Form (For Corporations and Partnerships)
NOTE: Pursuant to Sec. 71 of RA 10963, otherwise known as Tax Reform Acceleration and
Inclusion Act, amending Sec. 232 of the Tax Code, as amended, in relation toRevenue
Memorandum Circular No. 6 – 2001, corporations, companies or persons whose gross annual
sales, earnings, receipts or output exceed P3,000,000 may not accomplish this form. In lieu
thereof, they may file their annual income tax returns accompanied by balance sheets, profit and
loss statement, schedules listing income-producing properties and the corresponding income
therefrom, and other relevant statements duly certified by an independent CPA.
Income Taxation of Corporations:
Domestic and Resident Foreign Corporations are subject to RCIT or MCIT (whichever is higher).
RCIT or regular Corporate Income Tax is 30% of taxable net income while Minimum Corporate
Income Tax is 2% of gross income which is applicable only on the fourth year of operation of the
corporation and so on. Domestic Corporations are subject to income tax for all income earned
within and without the Philippines; while Foreign Corporation, resident or nonresident are subject
to income tax for income earned within the Philippines only.
In addition to Income tax, Corporations are also subject to Final tax on passive income and Capital
Gain Tax on sale of real property and stocks. Also, they are subject to withholding taxes.
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Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income tax?
No, the MCIT is not an additional tax. An MCIT of 2% of the gross income as of the end of taxable
year (whether calendar or fiscal year, depending on the accounting period employed) is imposed
on a corporation taxable under Title II of the Tax Code, as amended, beginning on the 4th taxable
year immediately following the taxable year in which such corporation commenced its business
operations when the MCIT is greater than the regular income tax. The MCIT is compared with
the regular income tax, which is due from a corporation. If the regular income is higher than the
MCIT, then the corporation does not pay the MCIT but the amount of the regular income tax.
Corporations covered by MCIT
The MCIT covers domestic and resident foreign corporations which are subject to the regular
income tax. The term “regular income tax” refers to the regular income tax rates under the Tax
Code. Thus, corporations which are subject to a special corporate tax or to preferential rates
under special laws do not fall within the coverage of the MCIT.
For corporations whose operations or activities are partly covered by the regular income tax and
partly covered by the preferential rate under special law, the MCIT shall apply the regular income
tax rate on its operations not covered by the tax incentives. Newly established corporations or
firms which are on their first 3 years of operations are not covered by the MCIT.
When does a corporation start to be covered by the MCIT
A corporation starts to be covered by the MCIT on the 4th year following the year of the
commencement of its business operations. The period of reckoning which is the start of its
business operations is the year when the corporation was registered with the BIR. This rule will
apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable
year.
When is the MCIT reported and paid.
The MCIT is paid on an annual basis and quarterly basis. The rules are governed by Revenue
Regulations No. 12-2007.
How is MCIT computed
The MCIT is 2% of the gross income of the corporation at the end of the taxable year.
The computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly
corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as
amended. Thus, in the computation of the tax due for the taxable quarter, if the computed
quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such
taxable quarter at the time of filing the quarterly income tax return shall be the MCIT which is two
percent (2%) of the gross income as of the end of the taxable quarter.
“Gross income” means gross sales less sales returns, discounts and cost of goods sold. Passive
income, which have been subject to a final tax at source do not form part of gross income for
purposes of computing the MCIT.
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Cost of goods sold includes all business expenses directly incurred to produce the merchandise
to bring them to their present location and use.
For trading or merchandising concern, cost of goods sold means the invoice cost of goods sold,
plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.
For a manufacturing concern, cost of goods manufactured and sold means all costs of production
of finished goods such as raw materials used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.
For sale of services, gross income means gross receipts less discounts and cost of services which
cover all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including:
o
Salaries and employees benefits of personnel, consultants and
specialists directly rendering the service;
o
Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used;
o
Cost of supplies
Interest Expense is not included as part of cost of service, except in the case of banks and other
financial institutions.
“Gross Receipts” means amounts actually or constructively received during the taxable year.
However, for taxpayers employing the accrual basis of accounting, it means amounts earned as
gross income.
Carry forward provision under the MCIT
Any excess of the MCIT over the normal income tax may be carried forward and credited against
the normal income tax for the three (3) immediately succeeding taxable years.
Recording of MCIT for accounting purposes
Any amount paid as excess minimum corporate income tax should be recorded in the
corporation’s books as an asset under account title “Deferred charges-MCIT”
CORPORATE TAX RATES:
I.
For Domestic Corporations
Income tax due of Corporation is equal to: 30% of taxable net income (RCIT) or 2% of
gross income, whichever is higher (MCIT)*.
Tax Rates on passive Income
Rate
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1. Interest from currency deposits, trust funds, deposit substitutes
and similar arrangements received by domestic corporations
2. Royalties from sources within the Philippines
3. Interest Income from a Depository Bank under Expanded
Foreign Currency Deposit System
4. Cash and Property Dividends received by a domestic
corporation from another domestic corporation
5. Capital gains from the sale, exchange or other disposition of
lands and/or building
6. Net Capital gains from sale of shares of stock not traded in the
stock exchange
II.
III.
20%
20%
15%
0%
6%
15%
MCIT. *Beginning on the 4th year immediately following the year in which such
corporation commenced its business operations, when the minimum corporate income
tax is greater than the tax computed using the normal income tax.
For Resident Foreign Corporation
1) a. In General – on taxable income derived from sources within
the Philippines
b. Minimum Corporate Income Tax – on gross income
c. Improperly Accumulated Earnings – on improperly
accumulated taxable income
2) International Carriers – on gross Philippine billings
3) Regional Operating Headquarters of Multinational
Companies– on taxable income
4.) Regional or Area Headquarters of Multinational Companies
5) Corporation Covered by Special Laws
30%
2%
10%
2½%
10%
exempt
Rate
specified under
the respective
special laws
6) Offshore Banking Units (OBUs)
10%
In general – Income derived by OBUs from foreign currency
Exempt
transactions with non-residents, other OBUs, local commercial banks
and branches of foreign banks authorized by BSP
On interest income derived from foreign currency loans
10%
granted to residents other than offshore banking units or local
commercial banks, local branches of foreign banks authorized by BSP
to transact business with OBUs
7) Income derived under the Expanded Foreign Currency Deposit
System
Interest income derived by a depository bank under the
7½%
expanded foreign currency deposit system.
On Income derived by depository banks under the expanded
exempt
foreign currency deposit systems from foreign currency transactions with
non-residents, OBUs in the Philippines, local commercial banks
including branches of foreign banks that may be authorized by BSP
On interest income derived from foreign currency loans
10%
granted by depository banks under the expanded foreign currency
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deposit systems to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system
8.) Branch Profit Remittances – on total profits applied or
earmarked for remittance without any deduction for the tax component
thereof (except those activities which are registered with the Philippines
Economic Zone Authority)
9.) Interest from currency deposits, trust funds, deposit
substitutes and similar arrangements
10. Royalties derived from sources within the Philippines
15%
20%
20%
Assessment / Activity:
True or False (1 point each)
1.Under TRAIN, interest earned from depository bank under expanded foreign currency deposit
system received by corporations shall be subject to 7.5% final tax.
2. Dividend received from a domestic corporation by a non resident foreign corporation shall be
subject to 15% final tax subject to the condition that the country where the nonresident foreign
corporation is domiciled allows a credit for taxes deemed paid in the Philippines equivalent to
15%.
3. The computation and payment of MCIT shall apply at the time of filing quarterly and annual
corporate income tax returns.
4. Special domestic corporations such as proprietary educational institutions shall not be covered
by MCIT as long as they are taxed at preferential rate of 10%.
5. Profits which have been subjected to IAET when finally declared as dividends shall be subject
to tax on dividends.
6. A general professional partnership and the partners comprising such partnership may avail
the OSD only once by the general professional partnership and only once by the partner.
7. Corporations that avail of OSD are allowed to deduct the cost of sales or cost of services.
8. Proprietary educational institutions and nonprofit hospitals may be subject to preferential tax
rates of 10% on their net income from sources within the Phil only.
9. Regional operating headquarters (ROHQ) is a branch of multinational company which is
engaged in different services and is subject to Phil income tax at 10% of its net income within
and without the Philippines. ROHQ is different from Regional Area headquarters; the latter is tax
exempt.
10. Gross Philippines billings refers to gross revenue derive from carriage of persons, excess
baggage or mail originating from Phil in continuous and uninterrupted flight provided the ticket
was sold in the Phil.
Problem Solving (2 points each):
11-12. A resident foreign Corp has the following data: Gross Sales in Phil is 9M; Cost of salesPhil is 2M; Gross sales in USA is 7M; cost of sales USA is 2M; Business expenses in Phil is 2M;
business expenses in USA is 1M; Royalties on Phil copyrights is 500K; interest income from bank
deposits in Phil is 100K; Remittances of profit during the year-net amounting to P 170K and
payment for the first three quarters to BIR of P 100K.
11.
What is the Phil income tax due and payable using OSD?
12.
What is the tax on branch profit remittances?
147
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Taxation 1: LML / VGL / GSJ
COLLEGE OF ACCOUNTANCY & FINANCE
13-14. SAN JOSE Corp has the following data for two year period CY 2019-2020:
CY 2019: Income tax due is 250,000 while tax credits is 300,000.
CY 2020:
Sales,
gross of 1% CWT
Cost
of
Sales
Expenses
1st Q
500,000
2ndQ
1,100,000
3rd Q
1,500,000
4th Q
2,200,000
250,000
650,000
800,000
1,200,000
50,000
150,000
300,000
500,000
13. What is the income tax payable in third quarter using OSD?
14. What is the income tax payable in the 2nd quarter using itemized deductions?
15. The following data are available for SAN JOSE CORP:
4th year
2,000,000
1,500,000
600,000
Gross Sales
Cost of Sales
OPEX
5th year
4,000,000
2,000,000
1,000,000
What is the income tax payable in the 5th year?
Answer Sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11
12
13
14
15
Watch:
https://www.youtube.com/watch?v=updXWJU8D88-
148
Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY & FINANCE
Taxation 1: LML / VGL / GSJ
REFERENCES:
Book/E-book:
✓ Philippine Laws on Transfer and Business Taxes; 2018 edition by Dean Lilian M, Litonjua,
CPA and Prof Virgilio G. Litonjua, CPA.
✓ RA 10963 / RA 8424
Online resources:
✓ https://www.bir.gov.ph/index.php/legal-matters/tax-guide-on-philippine-taxation.html
✓ https://taxsummaries.pwc.com/philippines/individual/taxes-on-personal-income
✓ https://www.gov.ph/tax
✓ https://www.mondaq.com/income-tax/9710/corporate-taxation-under-the-nationalinternal-revenue-code-of-the-philippines
✓ https://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
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