BAM 031 – INCOME TAXATION

Basic Principles in Taxation

Definition of Taxation
 Taxation refers to the inherent power of the state to demand enforced contribution for
public purpose to support the government
 Taxation the legislative act of laying a tax to raise income for the government to defray
its necessary expenses

The Lifeblood Doctrine & Other Doctrines in Taxation

 Taxes are indispensable to the existence of the state. Without taxation the state cannot
raise revenue to support is operations

Inherent Powers of the State

 Power of Taxation – the power to take property for the support of the government and
for public purpose
 Police Power – the power to enact laws to promote the general welfare of the people. It
is wider in application because it is the general power to make laws.
 Power of Eminent Domain – the power to take private property for public use upon
payment of just compensation

Scope of Taxation
 Taxation is supreme, comprehensive, unlimited and plenary. It includes the power to
destroy

Limitations on the Power of Taxation

A. Constitutional Limitation
1. observance of due process of law
2. equal protection of the law
3. uniformity in taxation
4. progressive scheme of taxation
5. non-imprisonment for non-payment debt or poll tax
6. non-impairment of obligation and contract
7. free worship rule
8. non-appropriation of public funds or property for the benefit of any church, sect or
system of religion
9. exemption of religious, charitable or educational entities, non-profit cemeteries,
churches and mosque from property taxes.
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
11. concurrence of a majority of all members of Congress for the passage of a law
granting tax exemption
12. non-diversification of tax collections
13. non-delegation of the power of taxation
Exception:
a. power to tax was delegated to the President under the Flexibility Clause of the
Tariff and Customs Code
b. power to tax was delegated to the local government units under the Local
Government Code
 c. matters involving the expedient and effective administration and
implementations of assessment and collection of taxes or certain aspects of
taxing process that are not legislative in character
14. non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments
16. each local government unit shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes
B. Inherent Limitation
1. territoriality of taxation
2. subject to international comity or treaty
3. tax exemption of the government
4. tax is for public purpose
5. non-delegation of the power of taxation
*The last 2 limitations are also Constitutional limitations

Determine the situs/place of taxation

The place of taxation
 Factors that determine the situs of taxation
1. nature, kind or classification of the tax
2. subject matter of the tax
3. citizenship of the taxpayer
4. residence of the taxpayer
5. sources of income
6. place of exercise, business or occupation being taxed
7. place where income-producing activity was held or done

Explain double taxation

Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving
the same kind of tax by the same taxing authority
Kinds:
1. Direct Double Taxation – this objectionable and prohibited because it violates the
constitutional provision on uniformity and equality
2. Indirect Double Taxation – no constitutional violation. Ex: taxing the same property by two
different taxing authority

International Double Taxation –a double taxation caused by two different taxing authorities, one
domestic and one foreign

Remedies to Double Taxation:

1. provision for tax exemption
2. allowance for tax credit
3. allowance for principle of reciprocity
4. enter into treaties with and agreement with foreign government

Escapes from Taxation

A. Those that will not result in loss of revenue to the government
1. Shifting –the process of transferring the tax burden from the statutory taxpayer to another
without violating the law.
2. Capitalization – the seller is willing to lower the price of the commodity provided the taxes
will be shouldered by the buyers
 3. Transformation – the manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of lost of his market. Instead, it
increases quantity of production, thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through the medium of productions.
B. Those that will result to loss of revenue to the government
1. Tax Evasion – tax dodging – resorting to acts and devices that illegally reduces or totally
escape the payment of taxes that are due to the taxpayer. They are prohibited and are
therefore are not subject to penalties.
2. Tax Avoidance –tax minimization scheme – the reduction or totally escaping payment of
taxes through legally permissible means, that are not prohibited and therefore are not
subject to penalties.
3. Tax Exemption- an immunity, privilege or freedom from payment of a charge or burden to
which others are obliged to pay.

Taxes, Tax Laws and Tax Administration

Sources of laws and administrative issuances

Sources of Tax Laws:
1. Constitution
2. Administrative Issuances or BIR Rulings
3. Statutes and Presidential Decrees
4. Judicial Decisions
5. Executive Orders and Batas Pambansa
6. Local Ordinances
7. Tax Treaties and conventions with foreign countries
8. Revenue Regulation of by the DoF
Revenue Regulation
Formal pronouncement intended to clarify or explain the tax law and carry into effect its
general provisions by providing details of administration and procedure. They have the force
and effect of law.
Administrative issuances or BIR Rulings – these are the less general interpretations of the tax laws
at the administrative levels, being issued from time to time by the CIR, to clarify certain provisions
of the tax law. They are merely advisory or sort of an information service to the taxpayer such
that, none of them are binding except to the addressee and may be reversed by the BIR at
anytime.

Principles of a Sound Tax System

a. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public
expenditure
b. Administrative Feasibility- tax laws must be capable of convenient, just and effective
administration
c. Theoretical Justice- tax must be imposed with equity and certainty and must consider the
taxpayers ability to pay and benefits received
-Non-observance of the principles does not necessarily render a tax levy unconstitutional.

Tax Administration
Describe the organization of the Bureau of Internal Revenue, its powers and the power of CIR
Classification of taxpayers for purposes of tax administration
The Bureau of Internal Revenue
The Bureau of Internal Revenue is tasked with tax administration function of the government.
Together with the Bureau of Customs, they are under the supervision and control of the
Department of Finance.
Chief Officials of the Bureau
a. 1 chief officer: The Commissioner of Internal Revenue
b. 4 assistant chief: Deputy Commissioners

Powers of the Bureau

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 effects to and administering the supervisory and police powers conferred to it by
the NIRC and or other laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provisions and distribution to proper officials of forms, receipts, certificates, stamps; etc
6. Issuances of receipts and clearances
7. Submit annual report, pertinent information to Congress and reports to the Congressional
Oversight Committee in matters of taxation

Introduction to Income Taxation

The concept of income and gross income

INCOME
All wealth which flows into the taxpayer other than a mere return of capital and includes gains

Why is income taxed?

Income is the best measure of a taxpayer’s ability to pay.

Basic Definitions:
 Gross Income – refers to what is income for taxation purposes
 Taxable Income – as the pertinent items of gross income that are subject to tax after
allowable deductions
 Tax Base – the value of a certain goods, or property for taxation purposes

Types of income taxpayers

Who shall file income tax returns?
1. Every resident Filipino citizen
2. Every non-resident Filipino citizen on his income from sources within the Philippines
3. Every resident alien on income from sources within the Philippines; and
4. Every non-resident alien engaged in trade or business or in the exercise of profession in
the Philippines, on income from sources within the Philippines

Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and additional
exemptions, except those engaged in business or profession
2. An individual with respect to pure compensation income, derived from sources in the
Philippines, the income tax on which has been correctly withheld, except those with
concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individuals who is exempt from filing income tax returns in pursuant to other provisions
of the Tax Code and other laws.

Individual income taxpayers

Classification of Individual Income Taxpayers
A. Citizen
1. Resident – a citizen of the Philippines residing herein
2. Non-resident – a citizen of the Philippines residing abroad or who left the Philippines
during the year and have shown proof to the CIR of his extended stay abroad. In default
of intention, the presence of a citizen for at least 183 days qualifies him as non-resident
citizen.
B. Alien
1. Resident – an alien who showed proof of his extended stay or who have stayed in the
Philippines for more than one year with indefinite purpose
2. In- business/engaged in trade or business in the Philippines – an alien who stayed in the
Philippines for more than 180 days is deemed doing business in the Philippines
3. Not engaged in trade or business – an alien who stayed in the Philippines for 180 days or
less

Taxable estates and trusts and corporate taxpayers

Estate and Trust Income Taxation
Estate and Trusts are taxable as an individual
 Estate – the totality of the property left by a deceased person, whether real, personal or
intangible. An estate is considered a separate taxpayer only when it is subject to court
proceeding (i.e. under judicial settlement).
 Trust – the totality of the property conveyed by a person, trustor, to another, trustee, for
the purpose of enabling the latter to safeguard the property for the benefit of another
person, the beneficiary. A trust is considered a separate taxpayer only when it is
irrevocably designated. A revocable trust is considered to be an extention of the grantor
and; hence, taxable upon the grantor.

General rules in income taxation

Income Taxable in the Philippines
Type of Taxpayers Earned Earned
Philippines Abroad
I. Individuals
A. Citizens
1. Resident  
2. Non-resident 
B. Aliens
1. Resident 
2. Non-resident
a. In business 
b. Not in business 
C. Estate and Trusts same rule with individuals

II. Corporations
A. Domestic  
B. Foreign 
1. Resident 
2. Non-resident 

Situs of income
 Applications
 1. persons – residence of the taxpayer
2. community development tax – residence or domicile of the taxpayer
3. business taxes – where the business was conducted or place where the
transaction took place
4. privilege or occupation tax – where the privilege is exercised
5. real property tax – where the property is located
6. personal property taxes –
i. tangible – where they are physically located
ii. intangible – domicile of the owner unless the property has acquired a situs
elsewhere
7. Income – place where the income is earned or residence or citizenship of the
taxpayer
8. Transfer Taxes – residence or citizenship of the taxpayer or location of the
property
9. Franchise Taxes – State that grants the franchise
10. Corporate Taxes – depend on the law of incorporation

Tax Schemes, Periods, and Methods and Reporting

Income taxation schemes

 Final income taxation
 Capital gains taxation
 Regular income taxation

Accounting Period
There are two types of tax accounting periods:
1. Calendar year – the 12-month period ending December 31 and is applicable to:
a. Individuals
b. taxpayers who do not keep books
c. taxpayers with no annual accounting period
d. taxpayers with accounting periods other than the fiscal year
2. Fiscal period – any 12 months period ending the last day of any month other than
December 31st. This is Not available to non-corporate taxpayers.

Accounting Methods
1. The general methods
a. Accrual basis
b. Cash basis
2. Installment and deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis

Tax Reporting
Types of Returns to the Government
1. Income tax returns
2. Withholding tax returns
3. Information returns

Mode of filing income tax returns

1. Manual filing system
2. e-BIR Forms
 3. Electronic Filing and Payment System (eFPS)

Payment of taxes
1. Outright
2. Installments (for individual taxpayers)

Penalties related to filing and payment of taxes

1. Surcharge
There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases:
a. Failure to file any return and pay the tax due thereon as required under the provisions of
this Code or rules and regulations on the date prescribed; or
b. Unless otherwise authorized by the Commissioner, filing a return with an internal revenue
officer other than those with whom the return is required to be filed; or
c. Failure to pay the deficiency tax within the time prescribed for its payment in the notice
of assessment; or
d. Failure to pay the full or part of the amount of tax shown on any return required to be
filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.
2. Interest
In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the
rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the amount is fully paid.
3. Compromise

Final Income Taxation

Features of Final Income Taxation

Final withholding tax is imposed to certain passive income. Under the final withholding tax
system, the taxpayer actually shoulders the tax but it is the income payor who withholds and
pays the tax. The amount of tax withheld is final. The taxpayer has no more responsibility to file
an income tax return for the passive income covered subject to final withholding tax.

The Final Withholding Tax System

It is considered as an effective tool in the collection of taxes for the following reasons:
 It encourages voluntary compliance;
 It reduces cost of collection effort;
 It prevents delinquencies and revenue loss; and
 It prevents dry spell in the fiscal conditions of the government by providing revenues
throughout the taxable year.

Taxpayers subject to final income tax

1. The final taxes on the passive income are restrictive in application. They are applicable
only on the items of passive income that are expressly listed by the NIRC.
2. Final taxes are withheld at source by the income payor; hence, the income received by
the taxpayer is net of the final tax. The income taxpayer therefore need not file a return
for the passive income.
3. Final taxes apply only on specified passive income by the law earned in the Philippines.

Items of passive income subject to final tax

1. Interest income
 2. Dividend income
3. Royalty
4. Prizes
5. Winnings
6. Informer’s reward
7. Fringe benefits
8. Others
a. Interest payments to FCDUs/OBUs
b. Tax-free covenant bonds
c. Petroleum service contractors

Final tax to individuals and corporations

Final withholding tax return
Please refer to the book for the tax rates

Capital Gains Taxation

Classification of taxpayer's properties and asset classification rules

The assets of the business are classified as:
1. Ordinary assets – includes:
a. stock in trade of the taxpayer, or other property of a kind which would properly be
included in an inventory of the taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business;
c. properties used in trade or business of a character which is subject to allowance for
depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
2. Capital assets – any other assets that does not fall under the definition of ordinary assets
Examples: investment properties, notes receivables and investment in equity or debt securities
(for a non-security dealer taxpayer)

Types of gains on dealings in properties & Scope of capital gains taxation

 Capital gains tax on sale, barter, exchange and other disposition of domestic shares of
stock directly to buyer
 Sale, exchange or other disposition of real property in the Philippines classified as capital
asset

Capital Gains on the sale of stocks directly to buyer

Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.

Transactional compliance and annualize capital gains tax

When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transactions
2. Annual basis:
a. For individuals – On or before April 15 of the following year
b. For corporations – On or before the 15th day of the fourth month following the close of
the taxable year
Capitals Gains tax on the sale of real property
Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.

Regular Income Taxation

The regular income tax and its characteristics

Regular Income Tax applies to all other items of gross income that are not subjected to final tax
or capital gains tax on certain passive income. Most of these items of gross income are derived
in the regular conduct of business, trade, profession or employment.

Determination of taxable income: Individual Income Tax & Corporate Income Tax

Income Tax Returns

 BIR Form 1700 - Annual Income Tax For Individuals Earning Purely Compensation Income
(Including Non-Business/Non-Profession Related Income)
 BIR Form 1701 - Annual Income Tax Return Individuals, Estates and Trusts
 BIR Form 1701Q - Quarterly Income Tax Return For Individuals, Estates and Trusts
 BIR Form 1702 - Annual Income Tax Return (For Corporations and Partnerships)
 BIR Form 1702Q - Quarterly Income Tax Return (For Corporations and Partnerships)

Exclusions in Gross Income

1. Life Insurance
2. Amount Received by Insured as Return of Premium
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness
5. Income Exempt under Treaty
6. Retirement Benefits, Pensions, Gratuities, etc
7. Miscellaneous Items.
a. Income Derived by Foreign Government
b. Income Derived by the Government or its Political Subdivisions
c. Prizes and Awards
d. Prizes and Awards in sports Competition
e. 13th Month Pay and Other Benefits
f. GSIS, SSS, Medicare and Other Contributions
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
h. Gains from Redemption of Shares in Mutual Fund

Inclusions in Gross Income

Gross income means all income derived from WHATEVER SOURCE, including, but not limited to
the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
 7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional partnership.

Compensation Income
Derived from employment and includes all income arising form employer-employee relationship
whether monetary or not

Fringe Benefits Taxation

means any good, service or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees).

Dealings in Properties
This covers:
a. sale or exchange of property, and
b. other disposition such as conditional sale or pacto de retro sale

Principles of Deductions
General characteristics of allowable deductions:
1. The deductions are legal, ordinary, actual and necessary expenses of business or profession.
2. The deductions pertains income which are subject to regular tax.
3. The deductions are not incurred with related parties to the taxpayer.

Regular Allowable Itemized Deductions

Itemized deduction includes also interest, taxes, losses, bad debts, depreciation, depletion,
charitable and other contributions, research and development, pension trust, premium
payments on health and/or hospitalization insurance.

Special Allowable Itemized Deductions and Net Operating Loss Carry-Over

Net Operating Loss Carry Over (NOLCO)
Any excess of allowable deductions over gross income of a business in a taxable year
immediately preceding the current taxable year shall be carried over as a deduction from gross
income for the next consecutive taxable years immediately following the year of such loss
provided there is no substantial change in the ownership of the business.

Optional Standard Deduction

 This deduction equivalent to 40% of the gross income (corporations) or sales (individuals)
may be opted to in lieu of the itemized deductions as discussed above.
 Can be claimed only by individual taxpayers only, self-employed or engaged in a profession,
except non-resident aliens (whether engaged in business or not).
 The qualified individual taxpayer must signify in his annual income tax return his intention to
elect the optional standard deduction.
 Election of OSD shall be irrevocable for the taxable year for which the return was made.
 Cannot be chosen by to by the taxpayer simply because he cannot substantiate his items of
deductions already claimed. The choice must be made and indicated in the return.
 Also apply to other items of gross income received by the taxpayer even not actually
engaged in business, for example: share of the net income of a co-ownership if the
individual has no business expenses.

Individual Income Taxation

Pure compensation income earners
Inclusions:
a. salaries, wages, compensation, tips, commissions, emoluments and honoraria
b. bonuses
c. allowances (including straight allowances such as representation and transportation
allowances (RATA))
d. fringe benefits
e. retirement and separation benefits
f. fees, including director’s fees
g. pensions
h. other income of a similar nature

Pure business and or professional income earners

Business of Professional Income- derived from activities which a person is habitually engaged in
such as trading, rentals, fees in the ordinary course of business.

Mixed income earners

Mixed Income Earners are those with income from compensation as employee of a company at
the same time having a business by providing professional services examples are registered
physicians, lawyers and accountants.

The 8% option income tax

Considered as one of TRAIN Law’s most intriguing provisions ever since its effectivity was the 8%
income tax rate option.
Not only did it became one of TRAIN’s most talked about rules as mentioned by most individuals,
but even businesses were also interested about any developments regarding this new tax rate.
This filing option is available for self employed individuals whose gross sales/receipts and other
non-operating income for the year does not exceed the three million peso (3,000,000 PHP) Value
Added Tax (VAT) threshold, and are not subject to Percentage tax. In this case, they have the
option to avail any of the following:
a.) Use graduated income tax rates (follow the regular rates for individuals)
b.) Avail for an 8% tax on gross sales/receipts in excess of 250,000 PHP

Taxpayers subject to percentage tax

Persons, who are not VAT-registered, who sell goods, properties or services, whose annual gross
sales and/or receipts do not exceed three million pesos (Php3,000,000.00) and are exempt from
value-added tax (VAT)
Filing and payment of Income Tax Returns
Taxpayers who shall file manually or who shall use the Offline eBIRForms Package or who are
currently enrolled under the Electronic Filing and Payment System (eFPS) are mandated to file
and pay in accordance with the guidelines provided.

Income tax returns through manual payment shall be made to the following:
 Any authorized agent bank (AAB); or
 In places where there are no AABs, the tax due shall be paid with the concerned
Revenue Collection Officer (RCO) under the Revenue District Office (RDO).
As for taxpayers who will pay through online payment methods, such payments can be made
through any of the following means:
 Mobile payment (GCash/Pay Maya);
 Landbank of the Philippine (LBP) Link.BizPortal, for taxpayers who have ATM Accounts
with LBP and/or are holders of Bancnet ATM/Debit card or for taxpayers utilizing PesoNet
(depositors of Rizal Commercial Banking Corporation (RCBC) and Robinsons Bank);
 Development Bank of the Philippines (DBP) Tax Online, for taxpayers-holders of
VISA/Master Credit Cards and/or Bancnet ATM/Debit Card; or
 Union Bank Online Web and Mobile Payment Facility, for taxpayers who have an
account with Union Bank.
 In addition, taxpayers who decide to pay their tax due through online means are
required to file their corresponding Annual Income Tax Return (AITR) online through the
Offline eBIRForms Package v7.6.
Lastly, efPS filers can course payment of their tax due through the efPS Facility.

Amendment of Income Tax Return

An amended retgiurn is a form filed in order to make corrections to a tax return from a previous
year. An amended return can be used to correct errors and claim a more advantageous tax
status—such as a refund. For example, one might choose to file an amended return in instances
of misreported earnings or tax credits.

Corporate Income Taxation - Special Corporations

General classification and tax rules for corporations

The corporate income tax rate both for domestic and resident foreign corporations is 30% based
on net taxable income. Excluded from the income tax are dividends received from domestic
corporations; interest on Philippine currency bank deposit and yield from trust funds. It is
important to note that foreign corporations, whether resident or nonresident, are taxable only on
income derived from sources within the Philippines.

Special Domestic Corporations

 Proprietary educational institutions and non-profit hospitals
 Foreign currency deposit units (FCDUs) and Expanded FCDUs
 PEZA or BOI-registered enterprises

Tax on international carriers

General rule: 2 ½% of the Gross Philippine Billings
Exception rule: Preferential rate or exemption on the basis of reciprocity applicable tax treaty or
reciprocity

Corporate Income Taxation - Regular Corporations

The Regular Corporate Income Tax (RCIT)

The regular corporate income tax (RCIT) is 30% on net taxable income. 20% or 25% on net
taxable income starting July 1, 2020 (CREATE LAW).

The Corporate Gross Income Tax (GIT)

Optional tax rate of 15% of gross income subject to certain conditions

The minimum corporate income tax (MCIT)

A minimum corporate income tax (MCIT) of 2 percent (1% starting July 1, 2021) is imposed on the
gross income of both domestic and resident foreign corporations, on an annual basis. It is
imposed from the beginning of the fourth taxable year immediately following the
commencement of the business operations of the corporation.

The Improperly Accumulated Earnings Tax (IAET)

In simple and plain language, improperly accumulated earnings tax is a penalty tax upon a
corporate taxpayer for accumulating so much net income after tax beyond the reasonable
needs of the business.

The branch profit remittance tax

Profits of a Philippine branch remitted to its parent company are subject to 15% branch profits
remittance tax. A lower rate may be provided under the applicable tax treaty.