Tax Midterms Reviwer-Compressed

Genera l Prin c ip les o f T a x a tion
CPA, MBA
Allen Jonas D. Jaca,
Objectives
1. Understand the concept of taxation and its
necessity for every government
2. Distinguish the different inherent powers of the
State
3. Understand the scope of the taxation power and
its limitations
4. Comprehend the other general principles of
taxation
“There are two things
certain in life: death
and paying taxes.”
—Benjamin Franklin
What is Taxation?
1. As a STATE POWER: Taxation is an inherent power of the State
to enforce a proportional contribution from its subjects for public
purpose.
2. As a PROCESS: Taxation is a process of levying taxes by the

legislature of the State to enforce proportional contributions from
its subjects for public purpose.
3. As a MODE OF COST DISTRIBUTION: Taxation is a mode by

which the State allocates its costs or burden to its subjects who
are benefited by its spending.
“Every government provides a vast array of public
services including defense, public order and safety
health, education and social protection, among others.”
Theory of
Taxation
Basis of Taxation
The government provides
benefits to the people in the
form of public services.
Government People
The people provide the funds Provides Pays

that finance the government. public Taxes
services
Hence, there is mutuality of

support between the people and
the government, which ultimately
is the basis of taxation.
Receipt of Benefits
Can taxpayers avoid paying taxes
Do all citizens/residents
by arguing that they have not
benefit? received any direct benefits?
YES. Every citizen and NO. In taxation, the
residents of the State, receipt of these benefits
directly or indirectly, by the people is
benefits from the public conclusively presumed,
services rendered by the and they cannot avoid
government. paying taxes under the
defense of absence of
benefits received
Theory of Cost Allocation
Benefit Received Theory Ability to Pay Theory
Presupposes that the Presupposes that taxation
more benefits an should also consider the
individual receive from taxpayer’s ability to pay.
the government, the Taxpayers should be
required to contribute
more taxes he or she
based on their relative
should pay.
capacity to sacrifice for the
support of the
government.
Taxes are essential and
indispensable to the
continued subsistence of the
government. Without taxes,
the government would be
paralyzed for lack of motive
Lifeblood power to activate or operate
it. (CIR vs. Algue)
Doctrine
Upon taxation depends the
government’s ability to serve
the people for whose benefit
taxes are collected. (Vera vs.
Fernandez)
Implications of the Lifeblood Doctrine
1. Tax is imposed even in the absence of
Constitutional grant.
2. Claims for tax exemption are construed against
the taxpayers.
3. The government reserves the right to choose the
objects of taxation.
4. The courts are not allowed to interfere with the
collection of taxes.
Inherent Powers
Police Power
Taxation Power Eminent Domain
General power of the
Power of the State to State to enact laws to Power of the State
enforce proportional protect the well-being to take private
contributions from its of the people. property for public
subjects to sustain itself. use after paying just
compensation
Point of Comparison TAXATION POLICE POWER EMINENT DOMAIN
Government and private

Exercising authority Government Government
utilities
To support the
To protect the general To acquire private
Purpose operations of the
welfare of the people property for public use
government
Community or class of Community or class of

Persons affected Owner of the property
individuals individuals
Limited (Imposition is No amount imposed (the

Unlimited (Tax is based
Amount of imposition limited to cover cost of government pays just
on government needs)
regulation) compensation)
Importance Most important Most superior Important
Relationship with the Inferior to the non- Superior to the non- Superior to the non-
Constitution impairment clause impairment clause impairment clause
Constitutional and Public interest and due Public purposes and just
Limitation
inherent limitations process compensation
Similarities
Necessary attributes of sovereignty
Inherent powers of the State
Legislative in nature
Ways in which the State interferes with private rights and properties
Exist independently of the Constitution
Presuppose equivalent form of compensation
Exercise by the LGUs may be limited by the national government

Scope of the Taxation Power (“CUPS”)
COMPREHENSIVE UNLIMITED PLENARY SUPREME

Wide extent of
The State can Unqualified; Highest
tax on anything, Absolute degree
application anytime,
and imposition anywhere, and
at any amount
Limitations of the Taxation Power
Inherent Constitutio
na l
Limitations Limitations
Inherent Limitations
1. Territoriality of Taxation
• Generally, the State can only demand tax obligations
upon its subjects or residents within its territorial
jurisdiction.
• Two-fold obligations of taxpayers: (1) filing of returns
and payment of taxes; and (2) withholding of taxes on
expenses and its remittance to the government.
• Tax obligations can be demanded and enforced by the
Philippine government upon its citizens and residents.
1. Territoriality of Taxation
• Exceptions:
(1) In income taxation, resident citizens and
domestic corporations are taxable on their
income derived within or outside the
Philippines;
(2) In transfer taxation, residents or citizens are
taxable on transfer of properties located within
or outside the Philippines.
2. International Comity
• Mutual courtesy or reciprocity among the countries.
• Countries agreed to one fundamental concept of co-
equal sovereignty; no country is powerful than the
other.
• As such: (1) governments do not tax the income and
properties of other governments; and (2) governments
give primacy to their treaty obligations over their own
domestic tax laws.
3. Public Purpose
• Tax is intended for the common good.
• Taxation must be exercised absolutely for public
purpose, and cannot be exercised to further any
private interest.
4. Exemption of the Government
• The government does not tax itself as this will not raise
additional funds but will only impute additional costs.
• Government properties and income from essential
public functions are not subject to taxation.
• However, income from properties and activities
conducted for profit including income from GOCCs is
subject to tax.
5. Non-Delegation of the Taxing Power
• The legislative taxing power is vested exclusively in
Congress and is non-delegable pursuant to the doctrine
of separation of the branches of the government.
• The power of lawmaking, which includes taxation, is
delegated by the people to the legislative branch.
• Remember: what has been delegated cannot be further
be delegated.
5. Non-Delegation of the Taxing Power
• Exceptions:
(1) LGUs can exercise the power to tax to enable
them to exercise their fiscal autonomy.
(2) The President is empowered to fix the amount
of tariffs to be flexible to trade conditions.
(3) Other cases that require expedient and
effective administration and implementation of
assessment and collection of taxes.
Constitutional Limitations
1. Due process of law – no one shall be deprived of his/her life
liberty, or property without due process of law; tax laws should
neither be harsh nor oppressive.
2. Equal protection of the law – no person shall be denied the equal

protection of the law; taxpayers should be treated equally both in
terms of rights conferred and obligations imposed.
3. Uniformity rule in taxation – uniform and equitable; taxpayers

under dissimilar circumstances should not be taxed the same; they
shall be classified to commonality in attributes or circumstances;
“uniformity is relative equality”.
4. Progressive system of taxation – tax rates increase as the tax
base increases; consistent with the taxpayer’s ability to pay; the rich
are taxed more than the poor.
5. Non-imprisonment for non-payment of debt or POLL tax – no

one shall be imprisoned for mere inability to pay debt (must be
acquired in good faith) or poll tax (applicable only to basic community
tax and NOT to additional community tax).
NOTE: Non-payment of debt is not equivalent to non-
payment of tax. Taxes arises from law and are not
obligations; they are demands of sovereignty. Non-
payment of tax is similar to a crime.
6. Non-impairment of obligation and contract – The State shall not
set aside its obligations from contracts by the exercise of taxation
power; exemptions granted under a contract should be honored and
should not be cancelled by a unilateral action of the government.
7. Free Worship Rule – free exercise of religion and does not subject
its exercise to taxation; exemption does not extend to income from
properties or activities of religious institutions that are proprietary or
business in nature.
8. Exemption of religious, charitable or educational entities, non-
profit cemeteries, churches and mosques, lands, buildings and
improvements from PROPERTY taxes – properties must be actually,
directly and exclusively (ADE) used for charitable, religious and
educational purposes; “doctrine of use” is applied.
9. Non-appropriation of public funds or property for the benefit

of any church, sect or system of religion – separation of religion
and the State; the government shall not favor any religion; however,
compensation to priests, imams or religious ministers working with
the military, penal institutions, orphanages or leprosarium is NOT
considered religious appropriation.
10. Exemption from taxes of the revenues and assets of non-
profit, non-stock educational institutions including grants,
endowments, donations or contributions for educational
purposes – applies only on revenues and assets that are ADE
devoted for educational purposes.
11. Concurrence of the MAJORITY of all members of Congress for

the passage of a law granting tax exemption – absolute majority is
required (not relative or quorum majority) in approving a tax
exemption law; however, for the withdrawal of tax exemption, only a
relative majority is required.
12. Non-diversification of tax collections – tax collections should
be used only for public purposes; these should never be diversified or
used for private purpose.
13. Non-delegation of the power of taxation – taxation power is

vested exclusively in Congress; the DOF and BIR issue regulations,
circulars, memorandums and ruling only to interpret tax laws (they
are not allowed to introduce new legislations or laws).
14. Non-impairment of the jurisdiction of the Supreme Court to

review tax cases – despite the presence of the Court of Tax Appeals
(CTA), tax cases can be decided with finality by the SC.
15. Appropriations, revenue, or tariff bills shall originate
exclusively from the House of Representatives, but the Senate
may propose or concur with amendments.
16. Each LGU shall exercise the power to create its own sources
of revenue and shall have a just share in the national taxes –
constitutional recognition of the local autonomy of LGUs and an
express delegation of the taxing power (one of the exemptions in the
non-delegation of taxing power).
Stages of the Exercise of Taxation Power
I. Levy or II. Assessment

Imposition and Collection
The Impact of The Incidence of
Taxation; pertains Taxation; tax laws are
to the enactment of implemented by the
administrative branch
a tax law by the
by assessing and
Congress.
collecting taxes.
Situs of
Taxation
“Place of Taxation”
• It is the tax jurisdiction
that has the power to
levy taxes upon the
tax object.
• Situs rules serve as
reference to determine
if the tax object is
within or outside the (1) Business Tax Situs – where the business is conducted
(2) Income Tax Situs on Services – where services are rendered
jurisdiction of the
(3) Income Tax Situs on Sale of Goods – where the sale took place
taxing authority (4) Property Tax Situs – where the property is located
(5) Personal Tax Situs – where the individual is residing.
Other Fundamental Doctrines in Taxation
rshal
l ectivity
1 . M a 2. Holme’s osp s
ine 3. Pr ax Law
Doctr Doctrine of T
The power to tax Taxation power is An ex post facto

involves the not the power to law or a law that
power to destroy. destroy while the retroacts is
court sits. prohibited by the
Constitution.
-
n- es crip
4. No tion 5. Non- pr
en sa assignment of 6. Im ility in
Comp t-off tib
o r se tion
taxes taxa
Taxes are not Tax obligation The right of the

subject to automatic cannot be assigned government to collect
set-off or or transferred to taxes does not
compensation; another entity by prescribe unless the
taxes are not debts. contract. law itself provides for
such prescription.
Imprescriptibility of Taxation
Without as
With assessment sessm en t
Tax prescr
pre s c rib es if n ot collected ibes if not c
ollected
Tax by judicial
it hin fiv e y ea rs fr om the date years from
action with
in three
w t the date th
of its assessmen required to e return is
be filed.
Taxes due from taxpayers who did not file a return or

those who filed fraudulent returns do not prescribe.
of trict
o c trine 8. Judicial Non- 9. S tion of
7. D c
p el stru
Estop interference Con x Laws
Ta
The government is Generally, courts are Taxation is the

NOT subject to not allowed to issue rule, exemption is
estoppel. The error of injunction against
any government
the exception.
the government’s
employee does not pursuit to collect tax.
bind the government.
Strict Construction of Tax Laws
• When the language of the law is clear and categorical, there is

no room for interpretation.
• When tax laws or exemptions are vague, the doctrine of strict
legal construction is observed.
o This means that vague tax laws are construed against the
government and in favor of the taxpayers; whereas vague
tax exemptions are construed against the taxpayers and in
favor of the government.
Dou bl e
Taxation
Occurs when the same taxpayer is taxed twice
by the same jurisdiction for the same thing.
Same Elements of
n
Double Taxatio
object
(Primary
Element)
Same
Same tax
type of
period tax
Double
Taxation
Same
Same
taxing
jurisdic- purpose
of tax
tion
Kinds of
Direct Double Taxation n
Double Taxatio
• All the elements of
double taxation exist
for both impositions NOTE: Nothing
under the law
expressly prohibits
double taxation.
However, direct
Indirect Double Taxation double taxation is
• At least one of the secondary discouraged
elements of double taxation is because it is
not common for both oppressive and
impositions.
burdensome to
taxpayers.
Escapes from Taxation
Means available to the taxpayer to limit or avoid the impact of taxation
Tax Avoidance
Also known as tax
to
Tax Evasion minimization; refers Tax Exemption
t
Also known as tax any act or trick tha
reduces or totally Also known as tax
dodging refers to escapes taxes by
any holiday; refers to the
any act or trick legally permissible immunity or freedom
than illegally means. from being subject
reduces or avoids to a tax which others
the payment of tax. are subjected to.
Escapes from Taxation
Means available to the taxpayer to limit or avoid the impact of taxation
Capitalization
The adjustment of
Shifting Transformation
the value of an
The process of
asset caused by The elimination of
transferring tax
the changes in tax
wastes or losses by
burden to other the taxpayer to form
rates. savings to compensate
taxpayers (forward,
for the tax imposition
backward or or increase in taxes.
onward)
Tax Amnesty vs. Tax Condonation
Tax Amnesty Tax Condonation

• General pardon that gives erring • Also referred to as tax remission.
taxpayer to reform and enable them • Forgiveness of the tax obligation
to have a fresh start. of a certain taxpayer.
• Absolute forgiveness or waiver of the • Prospective in application (portion
government on its right to collect already paid by the taxpayer will
• Retrospective in application. not be refunded)
• Covers both civil and criminal • Covers only the civil liabilities of
liabilities. the taxpayer.
• Conditional upon the taxpayer paying • Requires no payment.
the government a portion of tax.
Sources
ü Income Taxation: Laws, Principles and
Applications
By Rex B. Banggawan
2019 OBE Edition
ü CPAR and Online Handouts
ü BIR Website
Any
questions?
Tax and Tax
Administration
Inst. Allen Jonas D. Jaca, CPA, MBA

Objectives
1. To comprehend and demonstrate knowledge on
the type of taxation laws and their distinction to
revenue regulations and rulings;
2. To gain understanding of the tax system, its types
and how it can be considered as a sound system;
and
3. To study the powers of the BIR, its Commissioner
and the non-delegated powers.
Refers to any law that arises from
Taxation Law the exercise of the taxation power of
the State.
Types of Taxation Laws
I. Tax Laws II. Tax Exemption Laws
Laws that provide for the assessment and Laws that grant certain immunity from
collection of taxes. taxation.
Examples: Examples:
1. National Internal Revenue Code/Tax 1. Minimum Wage Law
Code 2. Omnibus Investment Code of 1997
2. Tariff and Customs Code 3. Barangay Micro-Business Enterprise
3. Local Tax Code (BMBE) Law
4. Real Property Tax Code 4. Cooperative Development Act
Sources of Taxation Laws
1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or Case Laws (Jurisprudence)
4. Executive Orders/Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties/Conventions with Foreign Countries
Types of Administrative Issuances
1. Revenue Regulations (RRs)
2. Revenue Memorandum Orders (RMOs)
3. Revenue Memorandum Rulings (RMRs)
4. Revenue Memorandum Circulars (RMCs)
5. Revenue Bulletins (RBs)
6. BIR Rulings
Revenue Regulations Revenue Memorandum Orders
Issuances signed by the Secretary of Issuances that provide directives or

Finance upon recommendation of instructions; prescribe guidelines;
the Commissioner of Internal and outline processes, operations,
Revenue (CIR) that specify, prescribe activities, workflows, methods and
or define rules ad regulations for the procedures necessary in the
effective enforcement of provisions implementation of stated policies,
of the Tax Code and related statutes. goals, objectives, plans, and
RRs have the force and effect of a law, programs of the BIR in all areas of
but they are NOT intended to expand operations, except auditing.
or limit the application of the law.
Revenue Memorandum Rulings Revenue Memorandum Circulars
Rulings, opinions and interpretations Issuances that publish pertinent

of the CIR with respect to the applicable portions as well as
provisions of the Tax Code and amplifications of laws, rules,
other tax laws as applied in specific regulations and precedents issued by
set of facts and which the CIR may the BIR and other agencies/offices.
issue for the purpose of providing
guidance to taxpayers on the
consequences in specific situations.
Revenue Bulletins BIR Rulings
Periodic issuances, notices and Official positions of the BIR to

official announcements of the CIR queries raised by taxpayers and
that consolidate the BIR’s position other stakeholders relative to
on certain specific issues of law or clarification and interpretation of tax
administration in relation to the laws. These are merely advisory or a
provisions of the Tax Code, relevant sort of information service to the
tax laws and other issuances for the taxpayer such that none of them is
guidance of the public. binding except to the addressee and
may be reversed by the BIR at
anytime.
GAAP Tax Laws
• GAAP are not laws; these are mere • Rules, regulations and rulings prescribe
conventions of financial reporting. the criteria for tax reporting, a special
• These are benchmarks for the fair and form of financial reporting which is
relevant valuation and recognition of intended to meet specific needs of tax
assets, liabilities, equity, income and authorities.
expense. • In the preparation and filing of tax
• GAAP accounting reports are intended returns, taxpayers are mandated to
to meet the common needs of a vast follow the tax law in cases of conflict
number of users in the general public with GAAP.
Nature of Philippine Tax Laws
● Philippine Tax Laws are civil and not political in nature.
○ As such, they are effective even during of enemy
occupation.
○ Tax payments made during occupations of foreign
enemies are valid.
● The internal revenue laws of the Philippines are not
penal in nature because they do not define crime.
○ The penalty provisions indicated in the Tax Code are
merely intended to secure the compliance of
taxpayers.
TAX
Tax
● Tax is an enforced proportional contribution levied by the
lawmaking body of the State to raise revenue for public purpose.
● Elements of a Valid Tax:
○ Enforced proportional contribution
○ Exacted pursuant to legislative authority
○ Must be for public purpose
○ Must be uniform and equitable
○ Generally payable in money
○ Imposed within the State’s jurisdiction
○ Personal to the taxpayer
Classification of Taxes
As to scope/imposing
As to subject matter As to incidence
authority
(1) Personal/Poll/Capitation
(1) National Tax Tax (1) Direct Tax
(2) Local Tax (2) Property Tax (2) Indirect Tax
(3) Excise/Privilege Tax
As to rate As to purpose As to amount

(1) Proportional Tax (1) General/Fiscal/Revenue
(2) Progressive/Graduated
Tax (1) Specific Tax
Tax
(3) Regressive Tax (2) Special Tax (Regulatory (2) Ad Valorem Tax
(4) Mixed Tax or Sumptuary)
As to Scope/Imposing Authority
National Tax Local Tax
Tax imposed by the national government. Examples:
a. Income Tax – tax on annual income, gains or Tax imposed by the municipal or local
profits government. Examples:
b. Estate Tax – tax on gratuitous transfer of a. Real Property Tax
properties by a decedent upon death b. Professional Tax
c. Donor’s Tax – tax on gratuitous transfer of
properties by a living donor c. Business Taxes, Fees and Charges
d. Value Added Tax – consumption tax collected by d. Community Tax
VAT business taxpayers e. Tax on banks and other financial
e. Other Percentage Tax – consumption tax institutions
collected by non-VAT business taxpayers
f. Excise Tax – tax on sin products and non-
essential commodities (fuel, alcohol)
g. Documentary Stamp Tax – tax on documents,
instruments, loan agreements and papers
evidencing the acceptance, assignment, sale or
transfer of an obligation, right or property
incident thereto.
As to Subject Matter
● Personal/Poll/Capitation Tax – tax on persons
who are residents of a particular territory
● Property Tax – tax on properties (real or
personal)
● Excise Tax – also called as “privilege tax”; tax
imposed upon the performance of an act,
enjoyment of a privilege or engagement in an
occupation
As to Incidence
● Direct Tax – both the impact and incidence of taxation rest
upon the same taxpayer
○ Tax is collected from the person who is intended to pay
the same, i.e. the statutory taxpayer (the one who is
required to pay) is also the economic taxpayer (the one
who actually pays)
○ Example: Income Tax
● Indirect Tax – the tax is paid by any person other than the one
who is intended to pay the same
○ The statutory taxpayer is not the economic taxpayer
○ Example: Value Added Tax
As to Rate
● Proportional tax – flat or fixed tax rate; all taxpayers are subject
with the same rate without regard to their ability to pay (e.g.
Regular Corporate Income Tax)
● Progressive/Graduated tax – a tax imposed in increasing rates as
the tax base increases; this results to a more equitable system of
taxation because it gets more tax from those who are more
capable (e.g. Income Tax)
● Regressive tax – a tax imposed in decreasing rates as the tax base
increases; a total reverse of progressive tax (this violates the
Constitutional guarantee of progressive taxation)
● Mixed tax – manifests tax rates which is a combination of any of
the above types of tax
Mixed Tax Rates
As to Purpose
Fiscal/Revenue Tax Special Tax
A tax imposed for general A tax imposed for special

purpose purpose
a. Regulatory – tax imposed to
regulate business, conduct,
Example: Income Tax acts or transactions (e.g.
Value Added Tax)
b. Sumptuary – tax levied to
achieve some social or
economic objectives (e.g.
Excise tax on cigarettes)
As to Amount
● Specific Tax – tax of a fixed amount imposed
on a per unit basis such as per kilo, liter,
meter, etc.
○ Example: Excise Tax on petroleum
products
● Ad Valorem Tax – tax of a fixed proportion
imposed upon the value of the tax object.
○ Example: Value Added Tax
Tax vis-à-vis Revenue
Tax Revenue
● Refers to
the amount ● Refers to all income
imposed by the collections of the
government for public government, which
purpose. includes taxes, tariffs,
licenses, tolls, penalties
and others.
● Refers to the amount ● Refers to the amount
imposed. collected.
Tax vis-à-vis License Fee
Tax License Fee
● Has a broader subject than ● More specific as compared to
license. a tax.
● Emanates from taxation power ● Emanates from the police
that is imposed upon any power and is imposed to
object (persons, properties or regulate exercise of a
privileges) to raise revenue. privilege such as the
commencement of business
or a profession.
● Imposed after the ● Imposed before engagement
commencement of a business in a business or profession.
or profession.
Tax vis-à-vis Toll
Tax Toll
● Levy of government; a demand ● Charge for the use of other’s
of sovereignty. property; demand of
ownership.
● Amount of tax depends upon ● Amount of toll is dependent
the needs of the government. upon the value of the
property leased.
● Can only be imposed by the ● Can be imposed by both
government. government and private
entities.
Tax vis-à-vis Debt
Tax Debt
● Arises from law. ● Arises from private contracts.
● Non-payment of tax leads to ● Non-payment of debt does
imprisonment. not lead to imprisonment.
● Tax is not subject to set-off or ● Debt can be subject to set-off
compensation. or compensation.
● Tax is generally payable in ● Can be paid in kind (i.e.
money. Dacion en Pago)
● Tax draws interest only when ● Debt draws interest only
the taxpayer is delinquent or when stipulated by the
delayed in paying the tax due. contracting parties or when
the debtor incurs legal delay.
Tax vis-à-vis Special Assessment
Tax Special Assessment
● Amount imposed upon persons, ● Levied by the government on
properties or privileges. lands adjacent to a public
improvement, i.e. imposed only to
land and intended to compensate
the government for a part of the
cost of the improvement.
● Direct proximate benefit is not a ● Basis is the benefit in terms of the
requirement for its imposition. appreciation in the value of the
land.
● Non-payment may result to ● Attaches to the land; non-
imprisonment to the taxpayer. payment will not cause
imprisonment to the
taxpayer/landowner.
Tax vis-à-vis Tariff
Tax Tariff
● Broader than tariff; ● More specific than tax;
amount imposed upon imposed on imported or
persons, privilege, exported commodities.
transactions or
properties. ● Mainly handled by the
● Mainly handled by the BOC.
BIR.
Tax vis-à-vis Penalty
Tax Penalty
● Amount imposed for the ● Amount imposed to
support of the discourage an act.
government.
● Imposed only by the ● May be imposed by
government. both the government
and private individuals.
● Arises only from law. ● May arise from both
law or contract.
Tax
Administration
Tax System
Ø Refers to the methods or schemes of imposing, assessing and
collecting taxes.
Ø Includes (1) all the tax laws and regulations; (2) the means of their
enforcement; and (3) the government offices, bureaus and
withholding agents which are part of the machineries of the
government in tax collection.
Ø The Philippine Tax System is divided into two:
○ National Tax System
○ Local Tax System
Types of Tax System: Imposition
Progressive Proportional Regressive
Employed in the Employed in taxation

Not employed in the
taxation of income of of corporate income
Philippines.
individuals. and business.
Types of Tax System: Impact
Progressive Regressive
• Emphasizes on direct taxes. • Emphasizes on indirect taxes.
• A direct tax cannot be shifted; • An indirect tax can be shifted by
hence, this system encourages businesses to consumers; hence,
economic efficiency as it leaves no the impact of taxation rests upon
other resort to taxpayers than to the bottom end of the society.
be efficient in paying their taxes.
• This system impacts more upon • This system is anti-poor.
the rich.
Principles of a Sound Tax System
I. Fiscal II. Theoretical III. Administrative
Adequacy Justice Feasibility
Requires that the sources Taxation should consider Tax laws should be
of government funds must the taxpayer’s ability to capable of efficient and
be sufficient to cover pay. This suggests that effective administration
government costs. A the exercise of taxation to encourage
deficit in funds paralyzes should not be compliance. The
the government’s ability to oppressive, unjust or Government should
deliver essential public confiscatory. make it easy for the
services to the people. taxpayer to comply by
Hence, taxes should avoiding administrative
increase in response to the bottlenecks and reducing
increase in government compliance costs.
spending
Tax Administration
Ø Refers to the management of the tax system.
Ø The BIR administers the national tax system of the Philippines.
Ø The BIR is under the supervision and administration of the DOF.
Ø The following are the chief officials of the BIR:
o 1 Commissioner (CIR)
o 4 Deputy Commissioners
a. Operations Group
b. Legal Enforcement Group
c. Information Systems Group
d. Resource Management Group
Powers of the BIR
1. Assessment and collection of taxes;
2. Enforcement of all forfeitures, penalties and fines and judgments in all cases
decided in its favor by the courts;
3. Giving effect to or administering the supervisory and police powers
conferred to it by the NIRC and other tax laws;
4. Assignment of internal revenue officers and other employees to other duties;
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to
proper officials;
6. Issuance of receipts and clearances; and
7. Submission of annual report, pertinent information to Congress and reports
to the Congressional Oversight Committee in matters of taxation;
Powers of the CIR
1. To interpret the provisions of the Tax Code (subject to review of DOF Secretary);
2. To decide tax cases (subject to exclusive appellate jurisdiction of CTA);
3. To obtain information and to summon, examine and take testimony of
persons to effect tax collection;
4. To make assessment and prescribe additional requirement for tax
administration and enforcement;
5. To examine tax returns and determine tax due thereon;
6. To conduct inventory taking or surveillance;
7. To prescribe presumptive gross sales and receipts for a taxpayer when: (a)
the taxpayer failed to issue receipts; or (2) the CIR believes that the books
or other records of the taxpayer do not correctly reflect the declaration in
the return;
Powers of the CIR
8. To terminate tax period when the taxpayer is: (a) retiring from business; (b) intending to
leave the Philippines; (c) intending to remove, hide or conceal his property; or (d)
intending to perform any act tending to obstruct the proceedings for the collection of
tax or render the same ineffective;
9. To prescribe real property values;
10. To compromise tax liabilities of taxpayers;
11. To inquire into bank deposits under the following circumstances: (a) determination of
the gross estate of a decedent; and (b) to substantiate the taxpayer’s claim of financial
incapacity to pay tax in an application for tax compromise;
12. To accredit and register tax agents;
13. To refund or credit internal revenue taxes;
14. To abate or cancel tax liabilities in certain cases;
15. To prescribe additional procedures or documentary requirements; and
16. To delegate his powers to subordinate officer with a rank equivalent to a division chief of an
office.
Non-Delegated Powers of the CIR
1. The power to recommend the promulgation of rules
and regulations to the DOF Secretary;
2. The power to issue rulings of first impression or to
reverse, revoke or modify any existing rulings of the
BIR;
3. The power to compromise or abate any tax liability;
4. The power to assign and reassign internal revenue
officers to establishments where articles subject to
excise tax are produced or kept.
Sources
ü Income Taxation: Laws, Principles and Applications
By Rex B. Banggawan
2019 OBE Edition
ü Handouts
Thank
you!
Individual Income
Taxation
Allen Jonas Jaca, CPA, MBA
Objectives
● Determination of the classification of

individual taxpayers.
● Determination of source of income for
● Discussion of allowable deductions for
Classification of
Individual Taxpayers
Classification of Individual Taxpayers
1. Resident Citizen (RC)
• A citizen of the Philippines residing therein.
• Under Section 1, Article IV of the 1987 Constitution, the following are
citizens of the Philippines:
• Those who are citizens of the Philippines at the time of the
adoption of the 1987 Constitution.
• Those whose fathers or mothers are citizens of the Philippines
• Those born before January 17, 1973, of Filipino mothers, who
elect Philippine citizenship upon reaching the age of majority;
and
• Those who are naturalized in accordance with law.
2. Non-Resident Citizen (NRC)
• A citizen of the Philippines whose physical presence abroad is with
a definite intention to reside therein – to the satisfaction of the
Commissioner of Internal Revenue (CIR)
• 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 (e.g. OFW who were issued an
overseas employment permit; for income tax purposes, a seaman is
considered as an Overseas Contract Worker)
• A citizen of the Philippines who works and derives income from
abroad and whose employment threat requires him/her to be
physically present abroad most of the time during the taxable year.
“Most of the time” meaning at least 183 days (Sec. 2 of RR No. 1-79)
3. Resident Alien (RA)
• An alien who lives in the Philippines with no definite
intention as to his/her stay (i.e. floating intention).
• One who comes to the Philippines for a definite purpose
which in its nature would require an extended stay and to
that end makes his/her home temporarily in the Philippines.
• An alien who has acquired residence in the Philippines and
retains his/her status as such until he/she abandons the
same and actually departs from the Philippines.
4. Non-Resident Alien (NRA)
• An alien who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished.
• One who may either be a:
• NRA Engaged in Trade or Business (NRAETB) in the

Philippines; or
• NRA Not Engaged in Trade or Business (NRANETB) in the
Philippines.
• NOTE: An NRA who shall come to the Philippines and
stay for an aggregate of more than 180 days shall be
deemed a NRAETB.
Classification Rules: Individual Taxpayers
1. Intention
• The intention of the taxpayer regarding the nature of his/her stay within or outside the
Philippines shall primarily determine his/her appropriate residency classification (i.e.
Resident or Non-Resident)
• The taxpayer shall submit to the CIR documentary proofs (e.g. visas, work contracts and
other similar documents) that indicates his/her intention.
• Examples:
o A citizen (i.e. a Filipino) is normally a resident. A citizen who would go abroad under
a tourist visa would still be considered a resident citizen. But if that citizen would go
abroad with a two-year working visa, he/she will be reclassified as a non-resident
citizen upon his/her departure.
o An alien (i.e. a foreigner) is normally a non-resident. An alien who come to the
Philippines with a tourist visa would still be classified as a non-resident alien. But if
that alien has an immigration visa or working visa, he/she will be reclassified as a
resident alien upon his/her arrival.
2. Length of Stay
• In the absence of any documentary proof, the length of stay of the taxpayer is
considered.
• Examples:
o Citizens staying abroad for a period of at least 183 days are considered non-
resident.
o Aliens who stayed in the Philippines for more than 1 year as of the end of the
taxable year are considered residents.
o Aliens who are staying in the Philippines for NOT more than 1 year but more
than 180 days are deemed NRAETB.
o Aliens who are staying in the Philippines for NOT more than 180 days are
deemed NRANETB.
Individual Length of Stay Classification Taxpayer
Citizen Staying in the Philippines Resident Resident Citizen
Citizen At least 183 days abroad Non-Resident Non-Resident Citizen

More than 1 year in the Philippines
Alien Resident Resident Alien
as of the end of the taxable year
Non-Resident
Non-Resident Alien Engaged
Not more than 1 year but more Engaged in
Alien in Trade or Business
than 180 days in the Philippines Trade or
(NRAETB)
Business
Non-Resident
Non-Resident Alien Not
Not more than 180 days in the Not Engaged in
Alien Engaged in Trade or
Philippines Trade or
Business (NRANETB)
Business
NOTE: These rules shall only apply in the absence of any documentary proofs.
Illustrations:
1. Tom Holland, an American actor, was contracted by a Philippine
television company to do a project in the Philippines. He arrived in the
country on January 4, 2021 and returned to America four weeks later upon
completion of the said project. What is Tom Holland’s classification?
Answer: Tom Holland shall be classified as a NRANETB in 2021. His stay

is for a definite purpose, which in its nature will be accomplished
immediately. Moreover, he is an alien who stayed in the Philippines for less
than 180 days.
Illustrations:
2. Bruno Mars, an American national, arrived in the Philippines on November 4, 2020.
He stayed in the Philippines since then without any working visa or work permit. What is
Bruno Mars’ classification in 2020? What about in 2021?
Answers:
• For the year 2020, Bruno Mars shall be classified as a NRANETB in 2020 because
he stayed in the Philippines for less than 180 days as of December 31, 2020 (i.e.
November 4, 2020 to December 31, 2020).
• However, if he did not leave and he is still in the Philippines until December 31, 2021,
he will already qualify as a resident alien for the year 2021 as he already stayed for
more than one year as of December 31, 2021 (November 4, 2020 to December 31,
2021).
Illustrations:
3. Without any definite intention as to the nature of his stay, Juan Dela Cruz, a
Filipino, left the Philippines and stayed abroad from March 15, 2020 to April 1, 2021
before returning to the Philippines. What is Juan Dela Cruz’ classification in 2020?
How about in 2021, assuming he is still in the Philippines until December 31, 2021?
Answers:
• For the year 2020, Juan Dela Cruz is a non-resident citizen because he is
absent for more than 183 days (i.e. March 15 2020 to December 31, 2020).
• But in 2021, he will be reclassified as a resident citizen because he is absent
for less than 183 days (i.e. January 1, 2021 to April 1, 2021).
Taxability of Individuals: In General
Tax Base Tax Rate
Income within or
Resident Citizens
outside the Philippines
Non-Resident Citizens Ordinary Income
Resident Alien Tax
Income within the
Non-Resident Alien Engaged in
Philippines only
Trade or Business
Non-Resident Alien Not 25% Final
Engaged in Trade or Business Withholding Tax
When is income considered taxable?
INDIVIDUAL TAXPAYERS
WHERE is income earned?

Type of Taxpayer Within/Inside the Without/Outside the
Philippines Philippines
Resident Citizen a a
Non-Resident Citizen a X
Resident Alien a X
Non-Resident Alien a X
Taxable Estates and Trusts
Estate
• Refers to the properties, rights and obligations of a deceased person
not extinguished by his/her death.
• Estates under judicial settlement are treated as individual taxpayers.
o As such, these estates are taxable on the income of the
properties left by the decedent.
• Estates under extra-judicial settlement are exempt entities.
o As such, the income of these estates under extra-judicial
settlement is taxable to the heirs.
Taxable Estates and Trusts
Trust
• A trust is an arrangement whereby one person (called the grantor
or trustor) transfers (i.e. donates) property to another person (called
the beneficiary), which will be under the management of a third
party (called the trustee or fiduciary).
• An irrevocable trust is treated as an individual taxpayer. The income
of the property under an irrevocable trust is taxable to the trust.
• A revocable trust is not a taxable entity, and therefore not
considered as an individual taxpayer. As such, the income of this
property is taxable to the grantor or trustor.
Source of Income for
Sources of Income for Individual Taxpayers
1. Compensation Income
• All remuneration received for services performed by an employee for his/her
employer under an employee-employer relationship (Sec. 2.78.1 (A) of RR No.
2-98)
• This includes the following:
• Salaries, wages, emoluments and honoraria, allowances, commissions
(e.g. transportation, representation, entertainment and the like);
• Fees including director’s fees, if the director is at the same time an
employee of the employer/corporation;
• Taxable bonuses and fringe benefits, except those which are subject to
the fringe benefits tax under Sec. 33 of the Tax Code;
• Taxable pensions and retirement pay; and
• Other income of a similar nature.
2. Business or Professional Income
• Income earned by an individual form his/her sole proprietorship business,
from the practice of profession, or share in the income of a general
professional partnership subject to Income Tax and Expanded Withholding
Tax, whenever applicable.
• ”Professional” is a person the activities formally certified by a professional
body to a specific profession by virtue of having completed a required
examination or course of studies and/or practice, whose competence can
usually be measured against an established set of standards (e.g. CPAs,
Lawyers, Doctors).
• A professional likewise includes a person who engages in some art or sport
for money, as a means of livelihood, rather than as a hobby, such as athletes,
artists, bookkeeping agents, and other recipients of professional, promotional
or talent fees (RR No. 8-2018).
2. Business or Professional Income
• Income owned in common with the spouse: If there is a disposal of an
asset which is conjugally owned by the spouses, the gain therefrom
shall be divided equally to both the husband and the wife.
• Same is true with expenses incurred conjugally, which are deductible,
and it is not determinable who among the spouses actually incurred
the same, they shall share in such deduction equally.
• NOTE: There are no other rules applicable to spouses with regard
income tax, since they compute for their own income tax liabilities;
however, spouses can opt to report their income separately but in
ONE tax return, which provides for separate columns and sections for
the spouse.
3. Passive Income
• Income generated without any active conduct.
• These are income generated by assets which can be in the form
of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from
savings (Chamber of Real Estate and Builders Associations, Inc.
vs. The Hon. Executive Secretary Alberto Romulo, et. al.)
• Specific rates of final withholding tax are provided for certain
passive incomes (e.g. interest from deposits, dividends, royalties).
• However, if they are not covered by such rate, it will form part of
the taxpayer’s gross income subject to income tax.
4. Gains from Disposition of Property
• Those arising from the sale or disposition of asset or
property which may either be capital gains or ordinary
gains depending on the asset sold.
Allowable Deductions for
Allowable Deductions for Individual Taxpayers
1. For those earning compensation income

• For individuals earning purely compensation
income, the only allowable deductions are the
mandatory government contributions (i.e. SSS,
Pag-Ibig and Philhealth) and union dues.
• However, a taxable income of NOT exceeding
P250,000 is subject to 0% tax.
2. For those earning business income and/or

income from practice of profession
• The individual is allowed to claim (a) itemized
deductions OR (b) the optional standard
deduction.
A. Itemized Deductions (Sec. 34 of the Tax Code)

• Expenses incurred in conducting the business
or in the practice of profession are allowed as
deductions for income tax purposes provided
that they meet ALL the requirements for
deductibility.
B. Optional Standard Deduction (OSD)
• In lieu of the itemized (per item) expenses, the individual
may opt to claim OSD.
• Accordingly, no other deductions for expenses (e.g. Cost of
Sales, Cost of Services, Rent, Selling or any Administrative
Expenses, Other Business Expenses, or those incurred in the
practice of profession) shall be allowed.
• Purpose: To make the BIR audit a little less complex since the
BIR need not go through all the documents evidencing, and
necessary to support itemized deductions.
B. Optional Standard Deduction (OSD)
• Basis of Computation: The OSD is 40% of Gross Sales or
Receipts. If the individual has mixed income (i.e. from
business and compensation), the basis for 40% will NOT
include compensation income. Note that the basis for the
OSD is gross sales or receipts, which is the amount BEFORE
any deductions for cost of sales or cost of services.
• Non-Resident Aliens CANNOT claim OSD.
• Period to elect: As to option to use OSD or Itemized
Deductions, it shall be made on the first quarter of the
taxable year, upon filing of the first quarter return, and shall
be irrevocable for the said year (BIR RR No. 2-10)
C. Special Allowable Itemized Deductions
• In addition to the regular itemized deductions, these
are the deductions allowed by regular and special
laws, such as Rooming-in and Breast Feeding Practices
under RA No. 9700, Adopt a School Program under RA
No. 8525, Senior Citizen Discount under RA No. 9257,
etc.
D. Individuals earning PURELY from business and/or profession
availing of the 8% flat rate
• None of the abovementioned deductions (A to C) are
available as deductions since the tax base for 8% flat rate of
income tax is the gross sales/receipts.
• Further, it must be noted that for those earning purely from
business and/or profession, the first P250,000 of the sales or
receipts is not taxable.
• However, if the individual is a mixed income earner (i.e. with
compensation), the first P250,000 exempt is not applicable
since the compensation income is subjected to graduated
rates which already incorporates the P250,000 exemption.
Basic Format of
Computations
Basic Format of Computations
Pure Compensation Income
Gross Compensation Income P XXX
Less: Non-Taxable Compensation Income* (XXX)
Taxable Income P XXX
Less: Withholding Tax on Compensation/Wages (XXX)
Tax Payable (Refundable) P XXX
*Non-Taxable Compensation Income includes those benefits provided by

the employer, which are considered de minimis or otherwise exempted
from income tax such as mandatory government and other contributions,
union dues and exempt bonuses up to P90,000.
Pure Business or Professional Income Availing of the
Graduated Rates
Gross Sales/Receipts from Business/Profession* P XXX
Less: Costs and Allowable Deductions (OSD or Itemized) (XXX)
Taxable Income P XXX
Income Tax Due P XXX
Less: Withholding Tax P XXX
Creditable Tax XXX (XXX)

Pure Business or Professional Income Availing of the
8% Income Tax
Gross Sales/Receipts from Business/Profession* P XXX
Add: Other Non-Operating Income XXX
Less: First P250,000 Exempt from Income Tax (250,000)
Taxable Sales/Receipts P XXX
Tax Rate 8%
Income Tax Due XXX
Less: Withholding Tax P XXX
Creditable Tax XXX (XXX)
Mixed Income Earners (from compensation AND
income from business or practice of profession)
a. Compensation Income portion – ALWAYS subject to

the graduated rates.
b. Income from Business/Practice of Profession – would

depend if the taxpayer is eligible to avail the 8% flat tax
rate
i. If the taxpayer’s gross sales/receipts, together with

other non-operating income do NOT exceed
P3,000,000, either:
(1) 8% income tax rate without the first P250,000

exempt (since this will be considered in the application
of the graduated rates for income from compensation);
or
On income from business/practice of profession:
Gross Sales/Receipts P XXX

Add: Other Non-Operating Income XXX Aggregate
Taxable Sales/Receipts P XXX Income Tax Due from Compensation P XXX
Tax Rate 8% Income Tax Due from Business/Profession XXX
Income Tax Due from Business/Profession P XXX Total Income Tax Due P XXX
Less: Withholding Taxes/Tax Credits (XXX)

On compensation income
Gross taxable compensation income P XXX
Less: Non-taxable compensation income (XXX)
Taxable income P XXX

Tax Rate XXX
Income Tax Due from Compensation P XXX

(2) Graduated rates (taxable income from

business/profession will be added to the compensation
income before determining applicable bracket)
Gross Compensation Income P XXX
Less: Non-Taxable Compensation Income (XXX)
Taxable Income from Compensation P XXX
Sales/Receipts P XXX
Less: Costs/Deductions (Itemized Deductions/OSD) (XXX)
Taxable Income from Business/Profession XXX
Total Taxable Income P XXX
Tax Rate XX%
Income Tax Due P XXX
Less: Withholding Taxes/Tax Credits (XXX)
ii. If the taxpayer’s gross sales/receipts, together with

other non-operating income, exceeds P3,000,000 –
graduated rates
Income Tax Rates
Graduated Income Tax Rate for Individuals
• Sometimes referred to as basic income tax or

schedular income tax or regular income tax of
individuals.
• Under Section 24 (A)(2) of the Tax Code, the tax
shall be computed in accordance with and at the
rates established in the following schedule:
Taxable Income 2018 – 2022 2023 onwards
P250,000 and below 0% 0%
Above P250,000 to P400,000 20% of the excess over P250,000 15% of the excess over P250,000
P30,000 + P22,500 +
Above P400,000 to P800,000
25% of the excess over P400,000 20% of the excess over P400,000
P130,000 + P102,500 +
Above P800,000 to P2,000,000
30% of the excess over P800,000 25% of the excess over P800,000
P490,000 + P402,500 +
Above P2,000,000 to P8,000,000
32% of the excess over P2,000,000 30% of the excess over P2,000,000
P2,410,000 + P2,202,500 +
Above P8,000,000
35% of the excess over P8,000,000 35% of the excess over P8,000,000
NOTE: This progressive tax table covers all individuals, including taxable estates and trusts, except NRANETB
who is subject to 25% final tax on gross income.
The said rates shall apply to:
1. Purely compensation income earners
2. Mixed income earners as regards their compensation income
3. Those earning income from business or practice of profession, whose
sales/receipts and other income exceeds P3,000,000
4. Those earning income from business or practice of profession whose
sales/receipts and other income does NOT exceed P3,000,000 and
the taxpayer opted to avail of the graduated income tax rates or
opted to avail of optional VAT registration
5. Those who failed to signify that they are availing the 8% flat rate in
their 1st quarter income tax return.
6. Those who are not allowed to avail the 8% flat rate of income tax.
The 8% Income Tax Rate
• This income tax rate applies only to income from business or practice of
profession, where the gross sales or receipts, including non-operating income,
do not exceed P3,000,000 and only beginning taxable year 2018.
• The following are the rules applicable to the 8% income tax rate:
1. The tax base shall be the gross sales/receipts, including other non-
operating income (unlike the graduated rates which are based on taxable
income).
• Rule on Returnable Deposits: In general, all deposits received are
included in the definition of gross receipts under Section 2(g) of RR No.
8-2018. However, returnable deposits HELD IN TRUST and recorded as
liability (e.g. security deposit) are EXCLUDED.
2. For those earning purely from business or practice of profession, the tax
base shall be that in excess of P250,000.
ILLUSTRATION: Ms. Hermione operates a convenience store while she offers
bookkeeping services to her clients. In 2021, her gross sales amounted to
P800,000, in addition to her receipts from bookkeeping services of P300,000 and
incurred costs and expenses of P300,000 and P100,000 respectively. How much is
her tax due using the 8% tax rate?
Gross Sales – Convenience Store P 800,000
Gross Sales – Bookkeeping Services 300,000
Total Sales/Receipts P 1,100,000
Less: Non-Taxable Portion (250,000)
Taxable Income P 850,000
Tax Rate 8%
Income Tax Due P 68,000
3. If the taxpayer is a mixed-income earner, i.e. he/she earns compensation
income too, the first P250,000 treated as non-taxable is not applicable.
ILLUSTRATION: In the previous given, assume that Ms. Hermione also earns
P1,000,000 from employment with XYZ Company for which P180,000 was the
tax withheld and remitted to the BIR. How much is her income tax due and
still payable? On income from business/practice of profession:
Gross Sales – Convenience Store P 800,000

Gross sales – Bookkeeping Services 300,000
Taxable Sales/Receipts P 1,100,000
Tax Rate 8%
On her compensation income
Compensation Income P 1,000,000
Tax on the first P800,000 (refer to table) P 130,000

Tax on the excess (P1M-P800K x 30%) 60,000
Total Income Tax Liability

Income Tax on Income from Self-Employment P 88,000
Income Tax on Compensation Income 190,000
Total Income Tax Due P 278,000

Less: Tax Withheld (190,000)

4. The 8% income tax shall be in lieu of the percentage tax under Sec.
116. Accordingly, the taxpayer shall not be subject to the 3% other
percentage tax on his/her gross sales/receipts.
5. Availment of the 8% income tax rate shall be made on the 1st quarter
Income Tax Return or on the initial quarter return of the taxable year
after the commencement of a new business or practice of profession.
Such election shall be irrevocable, and no amendment of option shall
be made for the said taxable year. Accordingly, the taxpayer shall
compute for the final annual income tax due using such rate.
6. Otherwise, if the taxpayer failed to make such election, the taxpayer
shall be considered to have availed of the graduated rates.
• ILLUSTRATION: In the given illustration, if Ms. Hermione failed to signify
her intention to be subjected to the 8% income tax rate, she shall be
subject to the graduated tax and her income tax liability shall be
computed as follows: On income from business/practice of profession:
Total Sales/Receipts P 1,100,000
Less: Cost of Sales (300,000)
Gross Income P 800,000
Less: Operating Expenses (100,000)
Income Tax Due
On the first P400,000 P 30,000
On the excess (P700LK – P400K) x 25%) 75,000
7. The financial statements are not required to be attached to the final
income tax return. However, existing rules and regulations on
bookkeeping and invoicing/receipting shall still apply.
8. If the taxpayer’s gross sales/receipts and other non-operating
income exceeds P3,000,000, he/she shall be automatically subjected
to the graduated rates. In such case, his/her income tax shall be
computed under the graduated income tax rates and shall be
allowed a tax credit for the previous quarter/s income tax payment/s
under the 8% income tax rate option.
ILLUSTRATION: Mr. Harry earned P3,000,000 on his practice of profession for the first three
quarters of 2021 for which he filed quarterly income tax returns and availed of the 8% income
tax rate. On the fourth quarter, he earned P3,500,000. For the taxable year, he incurred cost of
sales and operating expenses amounting to P3,000,000 and P1,440,000, respectively. How
much is his tax due and tax still payable for taxable year 2021?
Total Sales P 6,500,000
Less: Cost of Sales (3,000,000)
Gross Income P 3,500,000
Less: Operating Expenses (1,440,000)
Taxable Income P 2,060,000
Income Tax Due
Tax Due based on graduated rates P 509,200
Less: 8% Income Tax paid for the first three
(220,000)
quarters ((P3,000,000 – P250,0000) x 8%)
Income Tax Payable P 289,200
9. The following are not allowed to avail of the 8% flat rate of income tax:
a. Purely compensation income earners
b. VAT-registered taxpayers, regardless of the amount of gross
sales/receipts and other non-operating income.
c. Non-VAT taxpayers whose gross sales/receipts exceed the
P3,000,000 VAT threshold.
d. Taxpayers who are subject to percentage taxes other than the 3%
Other Percentage Tax (OPT) under Sec. 116 (example: those subject
to common carrier’s tax, amusement tax, gross receipts tax, etc.)
9. The following are not allowed to avail of the 8% flat rate of income tax:
e. Partners of General Professional Partnerships as to their share in
the net income thereof. However, they can still claim the 8% flat tax
rate of income tax as to their own business income, provided the
gross sales/receipts thereof do not exceed P3,000,000. This is
because their share is already net of applicable costs and expenses
f. Individuals enjoying income tax exemption such as those
registered under the Barangay Micro Business Enterprises
(BMBEs), etc. since taxpayers are not allowed to avail of double or
multiple tax exemptions under different laws unless specifically
provided by law.
Special Aliens
Special Aliens
• Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies – 15% of gross
income received from such establishment. Provided, that the
same tax treatment shall apply to Filipinos employed and
occupying the same position as those of aliens employed by
these multinational companies (Sec. 25C)
• Offshore Banking Units (OBUs) – 15% of gross income
therefrom. Provided, that the same treatment shall apply to
Filipinos employed and occupying the same position as those
aliens employed by these OBUs (Sec. 25D)
Special Aliens
• Petroleum Service Contractor and Subcontractor – 15% of the
salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances
received from such contractor or subcontractor with the same
preferential treatment for Filipino employees therein. (Sec. 25E)
• Any other income from all sources within the Philippines by the
aforementioned alien employees shall be subject to the
pertinent income tax, as the case may be, imposed under the
Tax Code.
Special Aliens
• Multinational Companies – means foreign firms or entities engaged in
international trade with affiliates or subsidiaries or branch offices in the
Asia-Pacific Region and other foreign markets.
• Requirements: For a Filipino employed by an ROHQ/AHQ/RHQ to qualify
for the 15% preferential tax rate, the following requisites must be
present:
1. The employee must be performing managerial and technical
position.
2.The gross compensation, exclusive of fringe benefits subject to fringe
benefits tax, must be at least P975,000.
3.The employee must be exclusively working for the RHQ or ROHQ as a
regular employee and not just a consultant or contractual personnel
(RR No. 11-10)
Special Aliens
• The President vetoed certain parts of the TRAIN Law and left
the 15% preferential tax rate (provided under Sec. 25 C to E)
untouched but limiting its availment to entities already
availing of the same PRIOR to the TRAIN Law.
• However, the BIR, under RR No. 8-2018 and RR No. 11-2018,
deemed the veto a valid removal of the preferential rate;
thus, treating special aliens and their Filipino counterparts
as subject to graduated rates.
Non-Resident Aliens
Not Engaged in Trade
or Business
Non-Resident Aliens Not Engaged in Trade or Business
• Except for sale of capital assets (i.e. shares of stock and real
property) covered by Sec. 24 (C) and (D) of the Tax Code, the
entire income received from all sources within the Philippines
by every NRANETB, such as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments or other fixed or
determinable annual or periodic or casual gains, profits and
income, and capital gains – the applicable tax rate is 25% (Sec.
25B), except that interest income earned from a foreign
currency deposit is exempt.
Thank you!
Fringe Benefits
Taxation
Objectives
u Understanding the nature of fringe benefits
u Understanding the characteristics of fringe benefits tax
u Understanding the procedures of fringe benefit tax
computation
u Determining the list of exempt fringe benefits.
o Prior to the enactment of the Tax Code,
the only forms of employee income that
were taxed were those given in cash.
o Reason is because an income tax was
automatically withheld and collected at
source by the government.
o Additional compensation (non-cash
Introduction benefits) were virtually untaxed, which
gives rise to inequity in the distribution of
the tax burden.
o This is the reason why Fringe Benefits Tax
(FBT) was introduced: to enhance the
progressivity of the income tax and to
broaden the tax based, subjecting non-cash
benefits to tax.
Fringe Benefits: Definition
u Fringe Benefit: Any goods, service or other benefits furnished or
granted by an employer in cash or in kind, in addition to basic
salaries.
u It is a form of pay which may be in the form of property, services,
cash or cash equivalent to supplement a stated pay for the
performance of services.
u The Tax Code subjects fringe benefits to Fringe Benefits Tax (FBT).
FBT is imposed to fringe benefits given or furnished to a managerial
or supervisory employee.
u The regulations do not cover those benefits which are part of taxable
compensation income because such incomes are subject to
withholding tax on compensation (RR No. 2-1998)
Part of Basic
Subject to Basic
Fringe Benefits Salaries or
Tax and CWT on Subject to FBT?
given to: *Taxable
Compensation?
Compensation?
Rank & File

Yes Yes No
Employee
Supervisory and
Managerial No** No Yes
Employee
*Taxable compensation income in the table refers to salaries

presented in the ITR of an individual taxpayer.
**Fringe benefits given to supervisor and managerial employees
are taxable. It Is subject to FBT, a final withholding tax (i.e. not
the graduated tax rate for compensation income)
FBT: Its Nature
u FBT is a monetary burden imposed by the sovereignty on any
good, service or other benefit furnished or granted by an
employer (in cash or in kind), in addition to basic salaries, to
an individual employee other than a rank and file employee.
u Elements of FBT:
1. Final tax on the employee;
2. Withheld by the employer;
3. Computed at 35% (beginning January 1, 2018) on the
grossed-up monetary value (GUMV) of the fringe benefit
granted by the employer to an employee;
4. Who is a managerial or supervisory employee
1) Housing
2) Expense account
3) Vehicle of any kind
4) Household personnel (maid, driver and
others)
Items of Fringe Benefits
5) Interest on loan at less than market rate
Subject to Tax to the extent of the difference between
the market rate and actual rate granted
Unless exempt, the 6) Membership fees, dues and other
expenses born by the employer for the
following items of fringe employee in social and athletic clubs
benefits received by a and similar organizations
supervisory or managerial 7) Expenses for foreign travel

employee shall be subject 8) Holiday and vacation expenses
to FBT: 9) Educational assistance to the employee

or his dependents
10) Life or health insurance and other non-
life insurance premiums or similar
amounts in excess of what the law
allows.
Illustration 1
u Ana was hired by Earl to be the latter’s secretary and
personal assistant. To enable her to perform her
duties well, Earl provided a condo unit (adjacent to
his unit), which Ana could use as her temporary
residence. Is the FMV of the use of the condo by Ana
a “fringe benefit” that is subject to FBT imposed
under the Tax Code?
u Answer: NO. Ana is neither a managerial nor a
supervisory employee. Only fringe benefits granted to
managerial or supervisory employees are subject to
FBT.
Tax Exempt Fringe Benefits
1. Fringe benefits which are authorized and
exempted from income tax under any special law,
such as:
o Contributions required under SSS law
o Contributions required under GSIS law
o Similar contributions under an existing law
o Premiums for group insurance of employees
2. If the grant of fringe benefits to the
employee is required by the nature of,
or necessary to the trade, business or
profession of the employer.
Illustration 2
u Outstation allowance (covers meals and trip-related
expenses) are granted to the managerial and
supervisory employees of Philippine Gaming
Management Corporation (PGMC) who will be away
from the office for at least 8 hours to visit lotto
franchise holders for repairs and/or inspection of
equipment leased by PGMC from PCSO. Should the
said allowance be subjected to tax?
Illustration 2
u Answer: NO. The allowance is required by the nature
of or necessary to the trade or business of PGMC;
hence, not subject to FBT.
u By the same effect, the said allowance, which may be
incurred or expected to be incurred by the
managerial and supervisory employees in the
performance of their duties cannot be considered as
part of compensation subject to withholding tax even
if the employees fail to account/liquidate the same,
considering that said expenses are pre-computed on a
daily basis and are paid to employees while on an
assignment or duty (BIR Ruling No. 13-2002)
3. De Minimis Benefits (next topic)
4. If the grant of benefits is for the
convenience or advantage of the
employer.
Illustration 3
Case A: Ana was hired by Earl to be the latter’s secretary
and personal assistant. To enable her to perform her
duties well, Earl provided a condo unit (adjacent to his
unit), which Ana could use as her temporary residence.
Question 1: Is the FMV of the use of the condo by Ana a
“compensation income” that is subject to basic tax under
the Tax Code and consequently to creditable withholding
tax on compensation income?
ANSWER: NO. The condo unit is provided for the
convenience of the employer; hence, does not constitute
a taxable fringe benefit. Being his personal secretary, it is
necessary for Ana to be accessible to Earl anytime.
Illustration 3
Question 2: Assuming Ana is a managerial or
supervisory employee, is the FMV of the use of the
condo by Ana a “fringe benefit” subject to FBT?
ANSWER: NO. As explained in question no. 1, if the
grant of benefits is for the convenience or
advantage of the employer, irrespective of the
employee’s rank, the benefit shall not be subject to
FBT and basic tax on compensation income.
Illustration 3
Case B: Arthur Henderson and Marie Henderson filed their annual
income tax with the BIR. Arthur is president of American
International Underwriters for the Philippines, Inc., which is a
domestic corporation engaged in the business of general non-life
insurance, and represents a group of American insurance
companies engaged in the business of general non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their
computation, the BIR included as part of taxable income:
• Arthur’s allowances for rental, residential expenses,
subsistence, water, electricity and telephone expenses;
• Entrance fee to the Marikina Gun and Country Club which
was paid by his employer for his account; and
• Travelling allowance of his wife.
Illustration 3
Ruling: The Supreme Court ruled that the claims are NOT part of taxable income
because no part of the allowances in question redounded to their personal
benefit nor were such amounts retained by them.
• The bills were paid directly by the employer-corporation to the creditors.
• The rental expenses and subsistence allowances are to be considered not
subject to income tax.
• The taxpayer’s high executive position and social standing, demanded and
compelled the couple to live in a more spacious and expensive quarters.
• Such “subsistence allowance” was a separate account from the account
for salaries and wages of employees.
• The company did not charge rentals as deductible from the salaries of the
employees. These expenses are company expenses, not income by
employees which are subject to tax (CIR vs. Henderson)
Computation of FBT
u In general, FBT rate is 35% (beginning
January 1). However, FBT rate for a
NRANETB is 25%.
u The computation of FBT is done by:
1. Evaluating the value of the benefit
granted or determining the monetary
value;
Computation 2. Determining the proportion or
percentage (gross monetary factor) of
of FBT the benefit which is subject to FBT;
3. Determining the grossed-up monetary
value of the fringe benefit by dividing
the monetary value of the fringe
benefit by the gross monetary value
factor; and
4. Multiplying the grossed-up monetary
value factor by the FBT rate.
FBT Rates
The rates of FBT vary depending on how the employees are taxed. The
reason is that the FBT tends to recover the income tax of the employee
so the rate follows the income taxation of such employee.
Classification of Taxpayers RC, NRC, NRANETB

RA, NRAETB
Monetary value P XXXX P XXXX
Divided by: Gross Monetary Value Factor 65% 75%
Gross-up Monetary Value P xxxx P xxxx
Multiply by: FBT Rate 35% 25%
Fringe Benefit Tax P xxxx P xxxx
u P39,000 grocery allowance for the
personal consumption of an
executive of ABC Corporation.
u P40,800 expenses paid by an
executive of ABC Corporation duly
receipted for in the name of ABC
Corporation and is not in the
nature of personal expense.
Illustration 4 u P40,800 expenses incurred by an
executive of ABC Corporation in
connection with attending
business meeting or convention.
u P40,800 grocery allowance for the
personal consumption of one of
ABC Corporation’s rank and file
employees.
Valuation of Fringe Benefits
u If granted in money, the value is the amount granted.
u If granted in property and ownership is transferred to
the employee, the value is the fair market value of
the property.
u If granted in property but ownership is not
transferred to the employee, the value is equal to the
depreciation value of the property.
Income Tax on Other
Taxable Entities
Estate
Income Taxation of Estates
• An estate pertains to all the property, rights and obligations of a deceased person, including those
that accrue since the opening of succession.
• Taxability: An estate is taxable during the judicial settlement; that is, during the time the estate is
the subject of judicial testamentary or intestate proceedings.
• Estates are taxed similar to an individual; hence, the rules on taxable income, those subject to final
tax, capital gains tax and the deductions and the rates are similar EXCEPT THE FOLLOWING:
o An estate is required to obtains its own Tax Identification Number (TIN)
o Distribution of the income to the heirs shall be deductible for purposes of computing
taxable income.
Ø Such distribution shall be subject to a 15% creditable withholding tax and will be
reported by the heir as part of his personal taxable income.
Ø If what was given to the heir is not part of the income but part of the estate itself,
there is no deduction for the estate and no additional taxable income on the part of
the heir who received the same.
Income Taxation of Estates
• Period to start: The estate is taxed only on its income from the death of
the decedent. Any income for the year which was earned prior to death is
reported separately in the deceased individual’s income tax return (ITR)
for the year.
• Those estates NOT under judicial settlement shall be treated as a co-
ownership for tax purposes or if the heirs actively participated in its
management or invested additional capital thereto, it may be considered
a partnership and is taxable as such.
• Liability to pay the income tax: the administrator or executor will be
liable to pay the income tax liability of the estate.
Trusts
Income Taxation of Trusts
• A trust is the arrangement created by will or an arrangement
under which title to property is passed to another for
consideration or investment with the income therefrom and
ultimately the corpus to be distributed in accordance with the
directions of the creator as expressed in the governing
instrument.
• Parties to a trust include the trustor (the one who establishes
the trust); the trustee (the one in whom confidence is reposed
as regards the property for the benefit of another person); and
the beneficiary (the one for whose benefit the trust has been
established.
• Kinds of Trust:
1. Revocable – one where at any time the power to revest
(return) in the grantor title to any part of the corpus of the

trust is vested; the trust is not considered as a separate
taxable entity and the income from the corpus forms part of
the taxable income of the grantor/trustor.
2. Irrevocable – where no such right (to revest or return) exists
or cannot be exercised after an agreed period here, the trust

itself is considered a separate taxable entity from the grantor
and is taxed similar to an estate under judicial settlement
• Rules on Taxability of Trusts:
1. If the income is distributed regularly, such will form part of the taxable
income of the beneficiary.
2. If the trust is revocable, the income of the trust forms part of the taxable
income of the trustor.
3. Only when the trust is irrevocable and the income is kept in the trust,
would there be a need to compute for the income tax liability of the trust.
4. If the trust is treated as a separate taxable unit, the rules on individuals are
the same, except that the distribution of income to the beneficiary shall be
deductible for the purposes of computing the taxable income of the trust
subject to 15% creditable withholding tax, and the amount distributed
(gross of the withholding tax) will form part of the beneficiary’s taxable
income (similar to an estate’s distribution of income to heirs).
• Illustration: G transferred property to F, in trust, and under the terms of the
transfer, F should accumulate the income for the benefit of B until the latter
reaches the age of majority. During 2021, the property earned P1,000,000
and incurred expenses of P350,000. P50,000 of the income was distributed to
B while case of P300,000 from the trust (not the income) was transferred to
B. How much is the income tax?
Gross income P 1,000,000

Less: Deduction for
Expenses P 350,000
Distribution of Income to Beneficiary 50,000 400,000
Income Tax 80,000
• Two or more trusts: In the event that a Fiduciary holds two
or more trusts from the same grantor with the same
beneficiary, the income tax shall be consolidated for such
trusts.
• Accordingly, the gross income and deductions are
consolidated as if they are from one property.
Partnerships and
Partners
Income Taxation of Partnerships and Partners
• Kinds of Partnerships:
1. General Professional Partnerships – are formed by
persons for sole purpose of exercising their common
profession, no part of the income of which is derived
from engaging in any trade or business.
2. Taxable Partnerships – are those formed by persons for
purposes of distributing profits among themselves.
General Professional Partnerships (GPP)
• A GPP as such shall not be subject to income tax.
• Persons engaged in busines as partners in a GPP shall be liable
for income tax only in their separate and individual capacities.
• For purposes of computing the distributive share of the
partners, the net income of the partnership shall be computed
in the same manner as a corporation.
• Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership (Section 26, Tax Code)
• In relation thereto, Sec. 2.57.5 (4) of RR No. 2-1998, as
amended, provides that GPPs are exempt from the Expanded
Withholding Tax (EWT).
• However, Sec. 2.57.2 (H) of the same regulations provide that
the income payments made periodically or at the end of the
taxable year by a GPP to the partners, such as drawings,
advances, sharings and allowances, stipends, etc. shall be
subject to 15% EWT if the income payments to the partner for
the current year exceeds P720,000; and 10% if otherwise. This
is still the applicable withholding tax rates even under RR No.
11-2018.
• Every GPP shall file, in duplicate, a return of its income, except income
exempt under the Tax Code, setting forth the items of gross income and
deductions and the names, TIN, address and shares of each partner.
• Illustration 1: Arthur is a partner of a GPP. The partnership had the following
information for taxable year 2020:
Gross Income 1,000,000
Expenses 100,000
Interest income, net of final taxes 20,000
Dividend income from a domestic corporation 10,000
How much is the partnership’s income tax due? P0 since the partnership is a
GPP, it is exempt from the regular corporate income tax.
How much is the partnership’s distributable income? P930,000,
computed as:
Gross Income 1,000,000
Expenses (100,000)
Gross Income from Operations 900,000
Interest Income, net of final taxes 20,000
Dividend income from a domestic corporation 10,000
Distributable Income 930,000
Arthur’s share in the partnership income is 1/3 and he also has a trading
business of his own. The following data pertaining to taxable year 2020
were provided:
Gross income, trading business 500,000

Expenses, trading business 100,000
Interest income, Maybank 20,000
Salaries as part-time teacher, gross of withholding tax 100,000
How much is Arthur’s share in the partnership profits?
P300,000. The amount to be included in the partners’ taxable
income shall be based only on the income from operations of
the partnership and not the actual distributable income.
Hence, the P20,000 interest income, net of final taxes and
dividend income from domestic corporation will not be
included in determining the partner’s taxable share.
How much is Arthur’s taxable income?
Gross income, trading business 500,000
Expenses, trading business (100,000)
Salaries as part-time teacher, gross of withholding tax 100,000
Share in the Net Income of GPP (P1,000,000 –
P100,000 x 1/3) 300,000
Taxable Income 800,000
Taxable Partnerships
• For tax purposes, taxable partnerships are taxed, in all
respects, similar to a corporation.
• Accordingly, it may claim itemized and optional standard
deductions subject to the same applicable rules for
corporations.
• They are also subject to the rules on Final Tax, Capital Gains
Tax and Minimum Corporate Income Tax except Improperly
Accumulated Earnings Tax, which has now been repealed
under the CREATE Law.
• Illustration: A business partnership organized by partners
Tom and Jerry, equal partners, has the following data for the
calendar year ended 2019:
Gross business income 1,000,000
Deductible expenses 300,000
Yield from deposit substitutes 62,500
Withdrawals on the share in the net income of the
partners 150,000
Rent income 300,000
Quarterly payments of income tax 120,000
Taxable income, income tax and distributable income is
computed as follows:
Gross business income 1,000,000
Deductible expenses (300,000)
Rent income 300,000
Taxable income 1,000,000
Income tax (30%) (300,000)
Net income from operation, net of tax 700,000
Yield from deposit substitutes, net 50,000
Distributable Income 750,000
• The Income Tax of P300,000 is 30% (now 20% under the CREATE Law) of the
taxable income (P1,000,000), applying the regular corporate income tax rate.
• Distributable income will be the net income (taxable income), after tax, plus
passive income net of tax and income exempt from tax, if any.
• The distributable income shall be distributed to the partners based on their
profit-sharing agreement. In this case, Tom and Jerry will each get P375,000
as their share in the income of the partnership.
• The share in the net income of the taxable partnership shall be subject to a
final tax of 10% (similar to dividends) since a taxable partnership is treated as
a corporation in all material respects. Thus, the share of a partner in the net
income of a taxable partnership is no longer included in the computation of
the individual income tax of the partners.
• Accordingly, Tom and Jerry would each receive cash of P337,500,
their share in the profit of the partnership (P375,000) less 10% final
tax P37,500, which is remitted by the partnership to the BIR; if the
partner is a non-resident alien engaged in trade or business in the
Philippines, it is subject to 25% final tax.
• The withdrawals of the partners would not affect the amount of
distributable income, only the CASH remittance.
• A share in the profit of a partnership is deemed received by the
partner even if no ACTUAL payment was made, under the principle of
constructive receipt. This is why the Improperly Accumulated
Earnings Tax does not apply to a partnership, even before its repeal.
Joint Ventures
Joint Ventures
• Similar to a taxable partnership, taxable joint ventures are
taxed similar to a corporation and the rules on deductions, as
well as Capital Gains Tax, Final Tax and Minimum Corporate
Income Tax are likewise applicable.
• On the other hand, if the joint ventures is considered as
exempt, its taxation is similar to a general professional

partnership.
Joint Ventures
• The following are the exempt joint ventures:
1. If it formed for the purpose of undertaking
construction projects
2. Engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating
consortium agreement under a service contract with
the government.
Joint Ventures
• As to joint ventures formed for the purpose of undertaking
construction projects, RR No. 10-2012 provides the following
requisites for them to be considered exempt joint ventures:
a. It must be for the undertaking of a construction project;
b. Should involve joining or pooling of resources by licensed local
contracts; and
c. Licensed as general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the DTI.
Joint Ventures
• Example: San Miguel Construction and Asia Construction formed a
joint venture to undertake a construction project. Profits are to be
shared equally. The following information relate to the individual
operations of SMC and AC, as well as the operations of the joint
venture for 2019:
San Miguel
Asia Construction Joint Venture
Corporation
Gross Income 20,000,000 30,000,000 150,000,000
Expenses 5,000,000 10,000,000 50,000,000

Joint Ventures
• In the illustration, assuming all the requisites of RR No. 10-2012 are present, the JV shall
be treated as tax-exempt and the taxability is similar to a GPP.
• Accordingly, the net income of P100M (P150M – P50M) is exempt from tax and is
therefore distributable income to the JV parties.
• SMC and AC, sharing equally the profits would receive P50M each.
• Since the JV is exempt from income tax, the share in the distributable income of SMC
and AC shall form part of the parties to the joint venture’s computation of taxable
income. Accordingly, taxable income of the companies are as follows:
Asia Construction San Miguel Corporation
Gross Income 20,000,000 30,000,000
Share in the income of exempt JV 50,000,000 50,000,000
Expenses (5,000,000) (10,000,000)
Taxable Income 65,000,000 70,000,000

Joint Ventures
• If, however, the joint venture entered into is for a purpose other than those which are
exempt, then the joint venture shall be taxable as a corporation and is therefore liable for
P30M Income Tax ([P150M – P50M]*30%) – NOTE: The rate of regular corporate income tax is
now 25% under the CREATE Law.
• The share of AC and SMC in the net income of the joint venture shall be based on the
distributable income, after tax, that is, P70M (P100M taxable income less P30M tax), or P35M
each.
• The share of AC and SMC from the income of the taxable joint venture shall be treated as
inter-corporate dividends and is therefore exempt from income tax and final tax. Accordingly,
it is not included in their separate taxable income, as computed below:
Asia Construction San Miguel Corporation
Gross Income 20,000,000 30,000,000
Share in the income of exempt JV - -
Expenses (5,000,000) (10,000,000)
Taxable Income 15,000,000 20,000,000

Co-Ownerships
Co-Ownerships
• There is co-ownership whenever the ownership of an undivided thing
or right belongs to different persons (Art. 484, Civil Code).
• This shall likewise be the treatment of an estate under extra-judicial
settlement, where the estate is NOT treated as a separate taxpayer.
• Taxability: Co-ownerships are generally NOT taxable because the
activities of the co-owners are usually limited to the preservation of
the property owned in common and collection of the income
therefrom.
• The income of the property owned in common is divided among the
co-owners who shall then report in their respective ITRs their shares
of the income of the co-ownership.
Co-Ownerships
• When treated as a partnership: there must be unmistakable intention
to form a partnership.
• The mere sharing of gross returns does not in itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from the returns are divided
(Article 1769 (3), Civil Code).
• However, when the income of the co-ownership is invested by the co-
owners in business or other income producing properties, the co-
ownership becomes taxable as a corporation because the co-owners
have constituted a partnership.
Thank you!
Income Tax on
Corporations
Income Taxation Schemes
Final Capital Regular

Income Gains Income
Taxation Taxation Taxation
Item of Gross
Income
Regular
Final Income Capital Gains
Income
Taxation Taxation
Taxation
● Gross Income earned by taxpayers may be subject to any of the above schemes,
depending on the nature/type of income earned. Hence, gross income may be
subject to: (1) Gross income subject to FINAL tax; (2) Gross income subject to
CAPITAL GAINS tax; and (3) Gross income subject to REGULAR tax.
● It is important to identify the: (1) type of taxpayer and (2) income earned.
Final Income Taxation (FIT)
1. Characterized by FINAL TAXES wherein full taxes are withheld by the income payor
at source.
2. The payee (i.e. recipient of the income) receives his or her income net of taxes.
3. The payor (i.e. the one who paid) is the one required by law to remit the tax to the
government.
4. As such, the payee does NOT need to file income tax returns because the tax
withheld by the payor constitutes the full tax due and are considered “final”
payments.
5. This system is called as the final withholding tax system.
6. Applicable only on certain passive income listed under the Tax Code.
7. However, take note that not all items of passive income are subject to final tax.
ACTIVE Income PASSIVE Income
● Also called as “regular income” ● Income earned with very

● Arises from transactions minimal or even without active
requiring a considerable degree involvement of the taxpayer in
of effort or undertaking from the earning process (hence the
the taxpayer term “passive”)
● It is the direct opposite of ● Examples: Interest income from
passive income banks; Dividends from domestic
● Examples: Compensation corporations; Royalties
Income (salary, wages);
business income (sales);
professional income
Capital Gains Taxation (CGT)
1. Imposed on the gain realized on the (1) sale, (2) exchange and (3) other
dispositions of certain capital assets.
2. Capital assets: not used in business, trade or profession; these are the
opposite of ordinary assets which are assets used in business, trade or
profession (e.g. inventory, supplies or property, plant and equipment.
3. “Certain” – not all dispositions of capital assets will result to CGT; some
dispositions of capital assets are subject to regular income tax.
4. CGT only applies to two types of capital assets: (1) Domestic Stocks and (2)
Real Properties
5. CGT employs the self-assessment method (i.e. the taxpayer is required to file
an income tax return.
Regular Income Taxation (RIT)
1. This is considered as the general rule in income taxation.
2. The following are subject to RIT:
1. Active Income
2. Other Income, which can either be:
i. Gains from dealing in properties that are NOT SUBJECT TO
CGT
ii. Other passive income NOT SUBJECT TO FIT
NOTE: From this, it can be said that income subject to RIT are
those not subject to CGT and FIT.
3. Similar to CGT, RIT employs the self-assessment method.
Income Tax on Corporations
• Under Section 2 of the Revised Corporation Code (RA No. 11232),
which amended the Corporation Code (BP 68), a “corporation” is an
artificial being created by operation of law, having the rights of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.
• But for income tax purposes, the term ”corporation” shall include”
1. Partnerships (no matter how created or organized);
2. Joint stock companies;
3. Joint accounts (cuentas en participacion);
4. Associations;
5. Insurance companies; and
6. One person corporations (included by the CREATE Law)
Income Tax on Corporations
• However, the following are not considered as a corporation
for income tax purposes:
a. General Professional Partnerships; and
b. Joint venture or consortium formed:
i. For the purpose of undertaking construction
projects or
ii. Engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating
or consortium agreement under a service contract
with the government (Sec. 22B of the Tax Code)
Definition of Terms
Partnership A partnership is one created when two or more persons contribute money,
property or industry to a common fund with the intention of dividing the profit
among themselves. (Article 1767 of the Civil Code)
General Partnerships formed by persons for sole purpose of exercising their common
Professional profession, no part of the income of which is derived from engaging in any trade
Partnerships or business.
Joint Venture A commercial undertaking by two or more persons, differing from a partnership
in that it relates to the disposition of a single lot of goods or the completion of a
single project.
Joint Stock Constituted when a group of individuals, acting jointly, establish and operate a
Companies business enterprise under an artificial name, with an invested capital divided
into transferrable shares, an elected board of directors and other corporate
characteristics, but operating without formal governmental authority.
Joint Accounts Constituted when one interest himself in the business of another by contributing
capital thereto, and sharing in the profits or losses in the proportion agreed
upon. They are not subject to any formality and may be privately contracted
orally or in writing.
Associations Include all organizations which have substantially the salient features of a
corporation to be taxable as such.
Classification of Corporations
1. Domestic Corporation – is a corporation created and
organized under the laws of the Philippines. Examples
are: San Miguel Corporation, Jollibee Foods Corporation
2. Foreign Corporation – is a corporation created and

organized under foreign laws. It can either be:
2a. Resident Foreign Corporation – has a permanent

establishment/branch in the Philippines, acquiring
residency for tax purposes or doing business in the
Philippines (e.g. Apple, Unilever, Procter & Gamble)
2b. Non-Resident Foreign Corporation – has no

permanent establishment in the Philippines; not
regularly engaged in trade or business in the Philippines
(e.g. international airlines)
Other Corporate Income Taxpayers
I. PARTNERSHIP
• A business organization owned by two or more persons, who contribute their
industry or resources to a common fund for the purpose of dividing the profits
from the venture.
• Types:
a. General Professional Partnership (GPP) – a partnership formed for the
exercise of a common profession. All partners must below to the same
profession (e.g. accounting firms, law firms)
NOTE: A GPP is not treated as a corporation and therefore NOT a taxable
entity (i.e. it is exempt from income tax). However, the partners are
taxable in their individual capacity with respect to their share in the income
of the partnership.
b. Business Partnership – one formed for profit. It is taxable as a corporation.
II. JOINT VENTURE
• A business undertaking for a particular purpose. It may be organized as a
partnership or a corporation.
• Types:
a. Exempt Joint Ventures – 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.
NOTE: Similar to a GPP, these joint ventures are not treated as a
corporation and is tax-exempt on its regular income; but the venturers are
taxable to their share in the net income of the joint venture.
b. Taxable Joint Ventures – all other joint ventures are taxable as corporations.
III. CO-OWNERSHIP
• A joint ownership of a property formed for the purpose of
preserving the same and/or dividing its income
• A co-ownership that is limited to (a) property preservation or (b)
income collection is NOT a taxable entity. As such, it is exempted but
the co-owners are taxable on their share on the income of the co-
owned property.
• But a co-ownership that reinvests the income of the co-owned
property to other income-producing properties or ventures will be
considered an unregistered partnership that is taxable as a
corporation (i.e. like a business partnership).
When is income considered taxable?
CORPORATE TAXPAYERS
WHERE is income earned?

Type of Taxpayer Within/Inside the Without/Outside the
Philippines Philippines
Domestic Corporation a a
Resident Foreign
Corporation a X
Non-Resident
Foreign Corporation a X
Classification of Corporations
Corporation Tax Base
Domestic Corporation Taxable income from

sources within and
outside the Philippines
Resident Foreign Taxable income from
Corporation sources within the
Philippines
Non-Resident Foreign Gross sales/receipts
Corporation from sources within the
Philippines
Tax Base
• The tax base for Regular Corporate Income Tax (RCIT)
purposes is taxable income, which is the gross income
less allowable deductions.
• For Minimum Corporate Income Tax (MCIT), the tax
base is the gross income. Gross income, as
contemplated in the Tax Code, is Net Sales or Receipts
(i.e. gross sales or receipts less sales returns, discounts
and allowances) less any Cost of Sales or Cost of
Services.
• For Non-Resident Foreign Corporations, the tax base is
the Gross Sales/Receipts which generally connotes
Sales/Receipts less Discounts, Returns and Allowances
(or Net Sales/Receipts)
Tax Base
• The formula below is presented for reference:
Gross Sales/Receipts P XXXX
Less: Discounts/Returns XXXX
Net Sales P XXXX
Less: Cost of Goods Sold/Cost of Sales XXXX
Gross Income P XXXX
Less: Itemized Deductions/OSD XXXX
Taxable Income P XXXX
• Gross income excludes items which are subject to Capital

Gains Tax or Final Tax and those which are exempt by law.
Tax Rates: Regular Corporate Income Tax
• Income tax rate (or the RCIT or Normal Corporate
Income Tax or Normal Income Tax) for all corporations
is 30%, notwithstanding if they are domestic or foreign.
• However, beginning July 1, 2020, the effective rate shall
be 25% under the CREATE Law. A reduced rate of 20%
will apply to a domestic corporation with:
1. Net taxable income not exceeding P5,000,000; and
2. Total assets not exceeding P100,000,000 (exclusive
of land).
● In case of corporations adopting the fiscal year accounting
period, the taxable income shall be computed without regard
the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally
for each month of the period.
● The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by
the new rate within the fiscal year by the taxable income of
the corporation for the period, divided by twelve (Sec. 27A of
the Tax Code, as amended by the CREATE Law)
● RR 5-2011, implementing the said amendments, provides that
for the taxable year 2020, the following steps will be taken:
1. Divide the taxable income for the year by 12 months.
2. Multiply the number of months applicable to the old rate
by the resulting monthly taxable income; then multiply by

30%
3. Multiply the number of months applicable to the new rate
by the resulting monthly taxable income; then multiply by

either 25% or 20%, as applicable
4. Add the computed regular income tax under items 2 and
3 (the same formula was provided for MCIT reduction

from 2% to 1%)
Illustration: ABC Corporation, a domestic retailer, has
taxable income of P690M for the calendar year ended
December 31, 2020. Its total assets is P180M inclusive of
land and building, amounting to P50M and P25M,
respectively. How much is the income tax due?
Since ABC Corporation does not qualify for the reduced

rate of 20% the applicable rate will be 25% beginning July
1, 2020. Accordingly, the computation of the RCIT shall be
as follows:
Net Taxable Income P 690,000,000
Divided by: 12 months 12
Taxable Income per Month P 57,500,000
Tax Due:
January 1, 2020 to June 30, 2020 (P57.5M x 6mos. x 30%) P 103,500,000
July 1, 2020 to December 31, 2020 (P57.5M x 6 months x 25%) 86,250,000
Total RCIT Due P 189,750,000

Tax Rates: Capital Gains Tax Rates
● Domestic Corporations
Transaction Rate Tax Base

Sale of shares of stock of a domestic
corporation not listed and not traded
15% On the net capital gain
through a local stock exchange, held
as a capital asset (Sec. 27 (D)(2))
On the gross selling
Sale of land and/or building in the price, or the current fair
Philippines held as capital asset (Sec. 6% market value at the time
27 (D)(5)) of sale, whichever is
higher
Tax Rates: Capital Gains Tax Rates
● Foreign Corporations (Resident or Non-Resident)
Transaction Rate Tax Base

Sale of shares of stock of a domestic
corporation not listed and not traded
15% On the net capital gain
through a local stock exchange, held
as a capital asset (Sec. 27 (D)(2))
Tax Rates: Final Withholding Tax Rates
● Domestic Corporations
Income Rate
Interest from any currency bank deposit; yield or other monetary
benefit from deposit substitutes and from trust funds and similar 20%
arrangements; and royalties (Sec. 27 (D)(1) and Sec. 28 (A)(7)(A))
Interests from depository banks under the Foreign Currency Deposit
15%
System (Sec. 27 (D)(3) and Sec. 28 (A)(7)(B))
Cash and/or property dividends from a domestic corporation Exempt
20% FWT
Interest income from long term deposit or investment or
30% RCIT
● Foreign-sourced dividends are generally subject to RCIT. However, the
same may be treated as exempt upon meeting two conditions:
a. Such dividends actually received or remitted into the Philippines are
reinvested in the business operations of the domestic corporation in
the Philippines within the next taxable year from the time the
foreign-sourced dividends were received.
b. The foreign sourced dividends shall only be used to fund the working
capital requirements, capital expenditures, dividend payments,
investment in domestic subsidiaries and infrastructure projects; and
c. The domestic corporation holds directly at least 20% of the
outstanding shares of the foreign corporation and has held the
shareholdings for a minimum of 2 years at the time of dividend
distribution (Sec. 27 (D)(4) of the Tax Code, as amended by the
CREATE Law, as implemented by RR No. 5-2020)
● Interest from long-term deposits: note that interest income from long-
term deposit or investment earned by individuals is exempt, subject to
tax only in case of pre-termination. Under Revenue Regulations No. 14-
2012, such exemption is limited only to individuals. Accordingly, the
interest earned by corporations from long-term deposits is subject to the
following tax:
a. 20% FWT – for interest income from long-term deposits issued by
banks or investment certificates considered as deposit substitutes
b. 30% RCIT – for interest income from long-term deposits NOT issued
by banks or investment certificates NOT considered as deposit
substitutes.
● Resident Foreign Corporations – the rate applicable to
resident corporations are the same with domestic
corporations, except for interests from depository banks
under the Foreign Currency Deposit System, which is subject
still to the old rate of 7.5% since the TRAIN did not amend the
provisions pertaining to RFCs. However, this has already been
amended to 15% under the CREATE Law.
● Non-Resident Foreign Corporations
Income Rate
All sources of income: interests, dividends, rents, royalties, salaries,
premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income and capital 25%
gains, except capital gains subject to capital gains tax and those
provided below (30% prior to the CREATE Act)
Interest on foreign loans 20%
Intercorporate dividends provided that the country where the
company is domiciled provides for 15% credit on Philippine taxes 15%
deemed paid
Interests from depository banks under the Foreign Currency Deposit
Exempt
System
General Concepts
INCOME SITUS RULES
Type of Income Situs of Taxation
Interest Income Debtor’s residence
Royalties Where the intangible is employed
Rent Income Location of the property
Service Income Place where the service is rendered
Gain on sale of If domestic securities, presumed earned within the Philippines

PERSONAL property If other personal properties, place where the property is sold
Gain on sale of
Place where the property is located
REAL property
Income from merchandising
Where the property is sold
business
Example (1)
A taxpayer had the following income:
Interest income from deposits in a foreign bank 300,000
Interest from domestic bonds 50,000
Royalties from books published in the Philippines 100,000
Rent income from properties abroad (the lease contracts

150,000
were executed in the Philippines)
Professional fees for services rendered in the Philippines to
non-resident clients (paid in US dollars, converted to 400,000
Philippine Peso)
Example (1)
Applying the situs rules, the following are the situs of the
aforementioned
Within the Without the
Income Item World
PH PH
Interest income on foreign deposits - 300,000 300,000
Interest income from domestic bonds 50,000 - 50,000
Royalties from books in the Philippines 100,000 - 100,000
Rent income on foreign properties - 150,000 150,000
Professional fees 400,000 - 400,000
TOTAL 550,000 450,000 1,000,000

NOTE: If the taxpayer is a Resident Citizen or Domestic Corporation, the taxpayer is taxable in
his/her/its WORLD income; if not, then the taxpayer is taxable only to his/her/its income WITHIN
Example (2)
A taxpayer had the following income:
Gain on sale of domestic stocks 200,000
Gain on sale of foreign bonds 100,000
Gain on sale of a commercial lot in Manila 500,000
Gain on sale of car in USA 200,000
Gain on sale of machineries in Bulacan 250,000
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000
Goods purchased and sold within the Philippines 200,000
Goods purchased and sold abroad 350,000
Goods purchased within the Philippines and sold abroad 100,000
Goods purchased abroad and sold within the Philippines 150,000
NOTE: Try to answer this on your own. Identify which income is earned within the Philippines,
and which are earned without the Philippines.
General Concepts
INCOME SITUS RULES – MANUFACTURING BUSINESS
Production Distribution Situs of Taxation

Total income from production and distribution is earned
Within Within within the Philippines
Total income from production and distribution is earned

Without Without without the Philippines
Production income is earned within the Philippines,

Within Without Distribution income is earned without the Philippines
Production income is earned without the Philippines,

Without Within Distribution income is earned within the Philippines
Example (3)
Mapapel Corporation manufactures paper products and sells them through its branch. Mapapel
bills its branch at established market prices. Accordingly, Mapapel reported the following gross
income:
Home
Branch Total
Office
Sales 4,000,000 2,000,000 6,000,000
Less: Cost of Goods Sold 2,400,000 1,200,000 3,600,000
Gross Income 1,600,000 800,000 2,400,000
What is the situs of the income earned by Mapapel Corporation? (We shall assume different
scenarios)
Example (3)
Scenario Home Office Branch Within Without
1 Philippines Philippines 2,400,000 -
2 Abroad Abroad - 2,400,000
3 Philippines Abroad 1,600,000 800,000
4 Abroad Philippines 800,000 1,600,000
NOTES:
1. Both production and distribution are conducted by Mapapel Corporation
2. The branch is NOT a separate taxable entity, but it is an integral part of Mapapel Corporation;
hence, the branch’s income is taxable to Mapapel.
General Concepts
For a manufacturing business, the gross income recognized by the parent
corporation is taxable to the parent corporation, while the gross income
recognized by the subsidiary corporation is taxable to the subsidiary corporation.
Hence, the gross income recognized by each corporation is taxable to each

corporation because each corporation is a separate taxpayer.
Hence, the situs of taxation shall be the place of sale without regard to the seller
or supplier.
NOTE: See the next example for your guide.

Example (4)
Ina Corporation has a subsidiary, Anak Corporation. Assuming production is conducted by Ina
Corporation, and the distribution is conducted by Anak Corporation.
Ina Anak Total
Sales 4,000,000 2,000,000 6,000,000
Less: Cost of Goods Sold 2,400,000 1,200,000 3,600,000
Gross Income 1,600,000 800,000 2,400,000

Example (4)
What is the situs of income for INA CORPORATION?
Scenario Parent Subsidiary Within Without
1 Philippines Philippines 1,600,000 -
2 Abroad Abroad - 1,600,000
3 Philippines Abroad 1,600,000 -
4 Abroad Philippines - 1,600,000

Example (4)
What is the situs of income for ANAK CORPORATION?
Scenario Parent Subsidiary Within Without
1 Philippines Philippines 800,000 -
2 Abroad Abroad - 800,000
3 Philippines Abroad - 800,000
4 Abroad Philippines 800,000 -

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Genera l Prin c ip les o f T a x a tion

2. As a PROCESS: Taxation is a process of levying taxes by the

3. As a MODE OF COST DISTRIBUTION: Taxation is a mode by

The people provide the funds Provides Pays

Hence, there is mutuality of

Government and private

Community or class of Community or class of

Limited (Imposition is No amount imposed (the

Importance Most important Most superior Important

Inherent powers of the State

Exist independently of the Constitution

Presuppose equivalent form of compensation

Exercise by the LGUs may be limited by the national government

COMPREHENSIVE UNLIMITED PLENARY SUPREME

2. Equal protection of the law – no person shall be denied the equal

3. Uniformity rule in taxation – uniform and equitable; taxpayers

5. Non-imprisonment for non-payment of debt or POLL tax – no

9. Non-appropriation of public funds or property for the benefit

11. Concurrence of the MAJORITY of all members of Congress for

13. Non-delegation of the power of taxation – taxation power is

14. Non-impairment of the jurisdiction of the Supreme Court to

I. Levy or II. Assessment

The power to tax Taxation power is An ex post facto

Taxes are not Tax obligation The right of the

Taxes due from taxpayers who did not file a return or

The government is Generally, courts are Taxation is the

• When the language of the law is clear and categorical, there is

Tax Amnesty Tax Condonation

ü CPAR and Online Handouts

Inst. Allen Jonas D. Jaca, CPA, MBA

I. Tax Laws II. Tax Exemption Laws

Issuances signed by the Secretary of Issuances that provide directives or

Rulings, opinions and interpretations Issuances that publish pertinent

Periodic issuances, notices and Official positions of the BIR to

As to rate As to purpose As to amount

A tax imposed for general A tax imposed for special

Progressive Proportional Regressive

Employed in the Employed in taxation

● Determination of the classification of

• NRA Engaged in Trade or Business (NRAETB) in the

Citizen Staying in the Philippines Resident Resident Citizen

Citizen At least 183 days abroad Non-Resident Non-Resident Citizen

Answer: Tom Holland shall be classified as a NRANETB in 2021. His stay

WHERE is income earned?

1. For those earning compensation income

2. For those earning business income and/or

A. Itemized Deductions (Sec. 34 of the Tax Code)

Less: Non-Taxable Compensation Income* (XXX)

Taxable Income P XXX

Less: Withholding Tax on Compensation/Wages (XXX)

Tax Payable (Refundable) P XXX

*Non-Taxable Compensation Income includes those benefits provided by

Less: Costs and Allowable Deductions (OSD or Itemized) (XXX)

Taxable Income P XXX

Income Tax Due P XXX

Less: Withholding Tax P XXX

Creditable Tax XXX (XXX)

Tax Payable (Refundable) P XXX

a. Compensation Income portion – ALWAYS subject to