THE TAX CODE OF THE PHILIPPINES

Compiled by Alexander D. Daloga-og

Member, The TOP Barristers

Prefatory Statement

T hese annotated codal notes, though far from being comprehensive, is written only for
purposes of Taxation Law 1 Preliminary Exams based on the lectures of Hon. Judge
Gemma B. Madrid and other sources pertaining to the latest amendments introduced by
the TRAIN1 and CREATE2 Laws. Only the blue provisions are deemed relevant to the
exams, most especially the various concepts in blazing red color.

Republic Act No. 8424

(Signed into law on December 11, 1997; took effect on January 1, 1998)

AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE, AS

AMENDED, AND FOR OTHER PURPOSES

National taxes are mandatory contributions imposed by the government and

collected through the Bureau of Internal Revenue (BIR) pursuant to RA 8424,
as amended. Export and import tariffs are also referred to as national taxes
but these are levied by the Bureau of Customs (BOC), hence their exclusion
hereunder:

1. Estate Tax - is charged to your estate or properties upon death. At a rate of

6%, the heir apparent or the rightful beneficiary of the estate should settle this
tax before transferring the title to the heir or beneficiary’s name. Paid from the
estate, not from the account of the latter. Note, too, that under the TRAIN Law,
the inheritance tax is already scrapped but, if the inherited immovable assets
are sold by the heir/beneficiary, a transfer tax is imposed at 50% of 1%
(outside of Metro Manila) and 75% of 1% (within Metro Manila). Estate tax may
be on installment basis to the BIR.

2. Documentary Stamp Tax - is a tax on documents, instruments, loan

agreements and papers evidencing the acceptance, assignment, sale or
transfer of an obligation, right or property incident thereto. Tax rate depends
upon each type of transaction or tax base.

3. Percentage Tax - is a business tax imposed on merchants or businesses

that lease/sell products, services, and properties but which are not VAT-
registered.

4. Capital Gains Tax - refers to what an individual or a business pays upon

making profits out of selling a valuable asset. These sold assets subjected to
capital gains are pieces of jewelry, stocks, properties, and other goods
appraised with high value.

1 RA 10963 refers to the Tax Reform for Acceleration and Inclusion Act (TRAIN) which aims
to generate revenue to achieve the 2022 and 2040 vision of the Duterte administration, namely,
to eradicate extreme poverty, to create inclusive institutions that will offer equal opportunities to
all, and to achieve higher income country status. TRAIN corrects and simplifies the current tax
system, as well as make it fairer by lowering the PIT, reducing VAT exemptions, and adjusting
excise tax rates on petroleum products and automobiles.
2
RA 11534 is also known as the Corporate Recovery and Tax Incentives for Enterprises Act
(CREATE) which was enacted in response to the COVID-19 pandemic as a fiscal relief to
domestic and foreign corporations doing business in the Philippines.
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For capital gains from capital assets, no tax may be imposed; but, for the
sale or transfer of ordinary assets, capital gains tax is imposed at 6%. Under
the TRAIN Law, capital gains and estate taxes are now uniform at 6%. See
assigned cases as appended at the end pages of these notes for more
clarification of the concepts on capital or ordinary assets.

5. Income Tax - refers to the tax that is imposed on an individual’s earnings,

be it salary or profits, from his/her profession, business, trade, or properties at
rates ranging from 0% to 35% depending on their graduated income bracket.

● Section 28, Article VI of the 1987 Philippine Constitution provides that the
rule of taxation shall be uniform and equitable and that Congress shall
evolve a progressive system of taxation, whereby the tax rate increases
as the tax base increases. The progressive tax system ensures that all
taxpayers pay the same rates on the same levels of taxable income
(uniformity). The overall effect is that people with higher incomes pay higher
taxes. That means the higher your income level, the higher tax rate you pay.
Your tax bracket or tax burden becomes progressively higher (progressivity).
But there is another rate also that may be availed by the taxpayer- the optional
rate of 8%.

● The ability-to-pay principle of taxation suggests that the amount of tax

an individual or organization pays should be relative to the amount they earn,
as a means of easing the financial burden that taxes can create for low-income
households.

6. Withholding Tax - the amount from an employee’s wage deducted by the

employer and directly paid to the government for the employee’s partial income
tax.
● Substituted Filing - an individual taxpayer will no longer have to
personally file his own Income Tax Return (BIR Form 1700) but
instead the employer's Annual Information Return on Income Taxes
Withheld (BIR Form No. 1604-C) filed will be considered as the
"substitute" ITR of the employee.

7. Value-Added Tax (VAT) - serves as a consumption fee that is placed on a

product when there is an additional value to its manufacturing and final sale.
Since it is considered an indirect tax, the customers pay for VAT. So, the tax
burden is passable to the consumers.
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 ● Indirect taxes can be defined as taxation on an individual or
entity, which is ultimately paid for by another person. The entity that
collects the tax will then remit it to the government. But in the case
of direct taxes, the person immediately paying the tax is the person
that the government is seeking to tax. Sales tax, value-added tax,
excise tax, and customs duties are examples of indirect taxes.

● progressive vs regressive tax - a progressive tax is a tax where

the tax rate increases with increase in the taxpayer's income. On
the other hand, in the case of regressive tax, tax rate decreases
with increase in income.

8. Excise Tax -is placed on products sold in the country and considered an
indirect type of tax because this can be recovered by the seller/producer by
increasing the price of these products. This is emphasized in the TRAIN Law.
Example: placement of an excise tax can be cited from the products with health
risks such as liquors and tobacco. The latter is also known as ‘sin tax’.

9. Donor’s Tax - is placed on a gift, donation, or willful free-of-charge transfer

of property between the benefactor to recipients on their lifetime (donation
inter vivos). There are some cases where BIR would scrap this tax. An
example of this is the goods provided to the victims of the destructive typhoon
Yolanda.

● The donor's tax for each calendar year shall be six percent (6%)
computed on the basis of the total gifts in excess of Two Hundred
Fifty Thousand Pesos (P250,000).
● If the property is given after death (donation mortis causa),
estate tax of 6% is imposed. Under our law on succession, this form
of donation must be written in a will, with all the formalities for the
validity of wills; otherwise, it is void and cannot transfer ownership.
The transfer is likewise void, if the donor should survive the donee.

Local Taxes - I included the LGU-based tax impositions for purposes of

the Bar Exams only. You may skip this part if you want
to. These local taxes are grounded on Republic Act 7160,
also known as the Local Government Code of 1991.
Unlike the above cited national taxes, these taxes and
fees, on the other hand, are levied by the local
government units (provincial, city, municipality, and
barangay).

1. Franchise Tax

This refers to the tax imposed on franchise businesses at a maximum rate of 50%
of the 1% of the gross yearly receipts for the preceding year.

2. Basic Real Property Tax

Basic Real Property Tax cover covers six types of properties: agricultural,
commercial, industrial, mineral, residential, timberland.

3. Sand, Gravel and other Quarry Resources Tax

A maximum of 10% of fair market value in the location per cubic meter of quarry
resources (such as gravel, sand, common stones, earth, and sand prized from
public lands or waters) will be collected by LGUs.

4. Business of Printing and Publication Tax

These taxes are also collected from publication or printing of books, posters,
pamphlets, cards, tarps, and other print materials.

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 5. Annual Fixed Tax for Delivery Trucks and Vans

Local government units collect P500 every year from delivery vehicles such as
trucks and vans handling products (beverages, food, cosmetics, tobacco,
etcetera).

6. Professional Tax

This type of tax applies to individuals whose professions require examination from
the government, such as board exams or licensure. These professionals include
lawyers, doctors, engineers, architects and others subjected to this tax.

7. Amusement Tax

Films, theatrical plays, concerts and all forms of entertainment shows are
subjected to tax. It is commonly added to the admission price or the entrance
tickets.

8. Community Tax

Community tax is a tax for the public where one must pay an amount depending
on your income bracket. The base fee is P5 and it has an additional increase of
P1 for each P1,000 of income. This is popularly known as ‘cedula’.

9. Barangay Tax

Micro-businesses such as retailers and “sari-sari stores” that earn a gross sale
of P50,000 every year have to pay the barangay tax. The tax will start to
accumulate from the very first day of the first month of each year.

10. Barangay Clearance

This certification from the barangay serves as legal proof of permission to conduct
an activity or start a business in a particular barangay. It is also used as a
documentary requirement on government transactions and employment.

Section 1. Short Title. - This Act shall be cited as the "Tax Reform Act of 1997".

Section 2. State Policies:

1. Administrative Efficiency: To promote sustainable economic growth through the

rationalization of the Philippine internal revenue tax system, including tax
administration;
2. Progressivity: To provide equitable relief to a greater number of taxpayers in
order to improve levels of disposable income and increase economic activity;
3. Necessity: To create a robust environment for business to enable firms to
compete better in the regional as well as the global market, at the same time that
the State ensures that Government is able to provide for the needs of those under
its jurisdiction and care.

Note:

1. The Title above refers to the primary purpose of taxation, that is, to generate revenue
for the government (fiscal);
2. The State policies under Section 2 hereof merely accentuate the secondary purpose
of taxation, that is, to impose regulation (regulatory/sumptuary) in order to:

a. Promote the general welfare

b. Reduce social inequality
c. Spur economic growth

3. These taxation principles – administrative efficiency, progressivity and necessity -

are also reiterated under the TRAIN Law of 2018 and CREATE Law of 2021.

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Section 3. Presidential Decree No. 1158, as amended by, among others, Presidential
Decree No. 1994 and Executive Order No. 273, otherwise known as the National Internal
Revenue Code, is hereby further amended.

Section 4. The Secretary of Finance shall, upon recommendation of the

Commissioner of Internal Revenue, promulgate and publish the necessary rules and
regulations for the effective implementation of this Act.

Note:

●The DOF is the parent agency of the BIR and the Bureau of Customs (BOC)
●Carlos Dominguez III- current DOF Secretary
●Caesar R. Dulay- current BIR Commissioner
●Ret. Gen. Rey Leonardo Guerrero (AFP)- current BOC Commissioner

TITLE I
ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE

Section 1. Title of the Code. - National Internal Revenue Code of 1997 (RA 8424)

Section 2. Powers and Duties of the BIR. - The Bureau of Internal Revenue shall be
under the supervision and control of the Department of Finance.

Note:

Supervision and control - include the authority of the DOF to act directly
whenever a specific function is entrusted by law or regulation; direct the
performance of duty; restrain the commission of acts; review, approve,
reverse or modify acts and decisions of subordinate officials or units such as
the BIR; and determine priorities.

Powers & Duties

1. Assessment and collection - all national internal revenue taxes, fees, and
charges.

● Under the current tax system, only the resident citizens (RCs) and
domestic corporations (DCs) are taxed based on their worldwide
income or income from sources within or without the Philippines. The rest
of the following natural and juridical persons are taxed only of their income
derived here in the country.

Classification of Taxpayers

A. Individual Person

Resident Citizen (RC) – Filipino citizen residing in the Philippines

Non-Resident Citizen (NRC)- permanent Filipino employees abroad,
OFWs/OCWs/Seamen; if the Filipino
citizen stays abroad for more than 183
days, then he/she is deemed to be an
NRC (183 days of stay rule)
Resident Alien (RA) – foreigner residing in the Philippines
Non-Resident Alien (NRA) – foreigner who is a non-resident in the
Philippines

a. Non-Resident Alien Engaged in Trade or Business

(NRAETB) – clear intention to do business in the
Philippines is already sufficient even if the alien has just
entered at the airport immigration; otherwise, apply the
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 180-day of stay rule. Here, a non-resident alien
individual who comes to the Philippines and stays for
more than 180 days during any calendar year will be
deemed as NRAETB.

If the aggregate stay in the Philippines does not

exceed 180 days, the individual is deemed as a non-
resident alien not engaged in trade or business in the
Philippines or NRANETB.

Expatriates (foreigners) assigned in the Philippines for

a definite period are generally regarded as non-
residents engaged in trade or business (NRAETB) in
the Philippines.

b. Non-Resident Alien Not Engaged in Trade or

Business (NRANETB)

B. Juridical Person

Domestic Corporation (DC) – business entity registered under

Philippine laws
Resident Foreign Corporation (RFC) – business entity
registered under foreign
laws doing business in the
Philippines
Non-Resident Foreign Corporation (NRFC) - business entity
registered under foreign
laws doing business in
the Philippines

● Territoriality Principle is the principle of levying tax only

within the territorial jurisdiction of a sovereign tax authority or
country.

Note: Be thoroughly familiar with these categories of natural

and juridical taxpayers. They will be useful later on in the
determination of the bases of their taxable income (net/gross
income), application of tax rates, and options (graduated or flat
rates).

2. Enforcement - all forfeitures, penalties, and fines, including the execution

of judgments in all cases decided in its favor by the Court of Tax Appeals
and the ordinary courts.

● Section 204 of the Tax Code provides two remedies to the taxpayer:
compromise and abatement.

Compromise - the payment of a certain percentage of tax liability,

especially in cases where the taxpayer is insolvent; and,

Abatement -the cancellation of tax liability pursuant to the broad powers

of the Commissioner under the Tax Code.

● Compromise Agreements- also known as abatement

Note: The power to levy/impose taxes is legislative, which means only

Congress can enact tax statutes to determine the subject matter (person,
property and rights or privileges), prescribe tax rates, broaden tax bases, and
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 grant tax incentives, while the authority to assess and collect, and enforce is
executive in character exercise only by the taxing authorities such as the BIR.

Section 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of Internal
Revenue shall have a chief to be known as Commissioner of Internal Revenue,
hereinafter referred to as the Commissioner and four (4) assistant chiefs to be known
as Deputy Commissioners.

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. – falls under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance and subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals (CTA):

● disputed tax assessments

● refunds of taxes, fees or other charges, penalties

Section 5. Power of the Commissioner to Obtain Information, and to Summon,

Examine, and Take Testimony of Persons (Investigatory). - In ascertaining the
correctness of any return, or in making a return when none has been made, or in
determining the liability of any person for any internal revenue tax, or in collecting any
such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material
to such inquiry;

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(B) To Obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the
Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records containing entries relating to the business of
the person liable for tax, or any other person, to appear before the Commissioner or his
duly authorized representative at a time and place specified in the summons and to
produce such books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of any
revenue district or region and inquire after and concerning all persons therein who may
be liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.

Note: The authority to inquire into bank deposits is limited only to Section 6 (F) of this
Code (a depositor’s waiver is necessary)

Section 6. Power of the Commissioner to Make assessments and Prescribe

additional Requirements for Tax Administration and Enforcement
(Administrative/Enforcement).

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however; That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from
the Commissioner or from his duly authorized representative (due process limitation).

● Section 1, Article III of the Constitution: “No person shall be deprived of

life, liberty, or property without due process of law, nor shall any person be
denied the equal protection of the laws.”

Any return, statement of declaration filed in any office authorized to receive the same
shall not be withdrawn: Provided, That within three (3) years from the date of such filing,
the same may be modified, changed, or amended: Provided, further, That no notice for
audit or investigation of such return, statement or declaration has in the meantime been
actually served upon the taxpayer.

(B) Failure to Submit Required Returns, Statements, Reports and other Documents. -
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations
or when there is reason to believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best evidence obtainable.

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In case a person fails to file a required return or other document at the time prescribed by
law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.

(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive

Gross Sales and Receipts. - The Commissioner may, at any time during the taxable
year, order inventory-taking of goods of any taxpayer as a basis for determining his
internal revenue tax liabilities, or may place the business operations of any person,
natural or juridical, under observation or surveillance if there is reason to believe that such
person is not declaring his correct income, sales or receipts for internal revenue tax
purposes.
The findings may be used as the basis for assessing the taxes for the other months or
quarters of the same or different taxable years and such assessment shall be deemed
prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation of the
requirements of Sections 113 and 237 of this Code, or when there is reason to believe
that the books of accounts or other records do not correctly reflect the declarations made
or to be made in a return required to be filed under the provisions of this Code, the
Commissioner, after taking into account the sales, receipts, income or other taxable base
of other persons engaged in similar businesses under similar situations or circumstances
or after considering other relevant information may prescribe a minimum amount of
such gross receipts, sales and taxable base, and such amount so prescribed shall
be prima facie correct for purposes of determining the internal revenue tax
liabilities of such person.

Note:

Gross Sales – sum of all sales unadjusted for the costs of goods, sales
returns and other allowable deductions (sale of goods); or
excluding the cost of manufacturing the goods such as
labor, materials and overhead.
Gross Receipts – sum of all revenues (sale of services); include all
revenue in whatever form received or accrued, in
accordance with the entity's accounting method, from
whatever source, including the sales of products or
services, interest, dividends, rents, royalties, fees or
commissions, reduced by returns and allowances.
Accounting Methods- The taxable income of a taxpayer shall be computed
in accordance with the method of accounting he regularly employs in keeping
his books. Recognized methods under the Tax Code:

● Cash Basis is a method of accounting whereby all items of gross

income received during the year shall be accounted for such taxable year
and that only expenses actually paid for shall be claimed as deductions
during the year. This is generally used by taxpayers who do not keep
regular books of accounts.

Under this method, income is realized upon receipt of cash or its

equivalent including those constructively received but not including gifts
or donations. Users of cash basis accounting are mostly individuals
engaged in business and practice of profession, professional partnerships
and professional service organizations.

● Accrual Basis is a method of accounting for income in the period it

is earned regardless of whether it has been received or not. In the same
manner, expenses are accounted for in the period they are incurred and
not in the period they are paid.
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Here, net income is being measured by the excess of income earned
during the period over the expenses incurred. Expenses not being
claimed as deductions in the current year cannot be claimed as deduction
from income for the succeeding year.

Thus, a taxpayer who is authorized to deduct certain expenses and other

allowable deductions for the current year but failed to do so cannot deduct
the same for the next year. The accrual basis of accounting is being used
by taxpayers whose nature of business uses inventories since this method
of accounting will correctly reflect income by matching purchases and
expenses against sales (matching principle). This method is being
applied by most medium and large corporations.

● Completion of Contract Basis - an accounting method applicable to

contractors in the construction of building, installation of equipment and
other fixed assets, or other construction work covering a period in excess
of one year.

Under this method, gross income is to be reported in the taxable year in

which the contract is fully completed and accepted by the contractee, if
the taxpayer elected it as a consistent practice to treat such income,
provided that such method clearly reflects the net income.

Under this method, all expenditures are deducted from gross income
during the life of the contract which are properly allocated thereto, taking
into consideration any materials and supplies charged to the work under
the contract but remaining on hand at the time of the completion.

However, pursuant to Republic Act No. 8424 which took effect on January
1, 1998, contractors are no longer allowed to adopt this method of
reporting their income derived in whole or in part from long-term contracts.
What is allowed today is the method under Sub-Paragraph D below. This
concept already came out in the past Bar Exams.

● Percentage of Completion Basis - a method applicable in the case of

a building, installation or construction contract covering a period in
excess of one year whereby gross income derived from such contract
may be reported upon the basis of percentage of completion. In
determining the percentage of completion of a contract, generally one
of the following methods is used:

1. The costs incurred under the contract as of the end of the tax year are
compared with the estimated total contract costs; or
2. The work performed on the contract as of the end of the tax year is
compared with the estimated work to be performed.

In such case, the return should be accompanied by a certificate of the

architect or engineer showing the percentage of completion during the
taxable year of the entire work performed under contract. There should be
deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the
materials and supplies on hand at the beginning and end of the taxable
period for use in connection with the work under the contract but not yet
so applied.

Note: Beginning January 1, 1998 income from log-term contracts are

required to be reported using this method only.

● Installment Basis - method considered appropriate when collections

extend over relatively long periods of time and there is a strong possibility
that full collection will not be made. As customers make installment
payments, the seller recognizes the gross profit on sale in proportion to
the cash collected.

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(D) Authority to Terminate Taxable Period. When it shall come to the knowledge of the
Commissioner that a taxpayer is retiring from business subject to tax, or is intending to
leave the Philippines or to remove his property therefrom or to hide or conceal his
property, or is performing any act tending to obstruct the proceedings for the collection of
the tax for the past or current quarter or year or to render the same totally or partly
ineffective unless such proceedings are begun immediately, the Commissioner shall
declare the tax period of such taxpayer terminated at any time and shall send the
taxpayer a notice of such decision, together with a request for the immediate payment
of the tax for the period so declared terminated and the tax for the preceding year or
quarter, or such portion thereof as may be unpaid, and said taxes shall be due and
payable immediately and shall be subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand made by the Commissioner. Here, notice
is important to conform to the due process clause of Section 1, Article III of the
Constitution.

(E) Authority of the Commissioner to Prescribe Real Property Values. - The

Commissioner is hereby authorized to divide the Philippines into different zones or areas
and shall, upon consultation with competent appraisers both from the private and public
sectors, determine the fair market value of real properties located in each zone or area.
For purposes of computing any internal revenue tax, the value of the property shall be,
whichever is the higher of;

(1) the fair market value (FMV) as determined by the Commissioner (Zonal Value), or

(2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors (Assessed Value).

● An assessed value helps local government units determine how much property tax
(amilyar) a homeowner will pay. On the other hand, the market value refers to the actual
value of your property when placed at sale in the open market. It is determined by buyers
and defined as the amount they are willing to pay for the purchase of property.

(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. -

Notwithstanding any contrary provision of RA 1405 (Bank Secrecy Law) and other
general or special laws such as RA 6426 (Foreign Currency Deposit Law), the
Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate (for estate tax liability); and

(2) any taxpayer who has filed an application for compromise of his tax liability under
Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability
(insolvency).

● Tax Compromise – agreement whereby the taxpayer offers to pay something less
than what is due and the government (Commissioner) accepts it as a full settlement of
his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on
his claim that his financial position demonstrates a clear inability to pay the tax assessed,
his application shall not be considered unless and until he waives in writing his
privilege under RA 1405 or under other general or special laws (waiver), and such waiver
shall constitute the authority of the Commissioner to inquire into the bank deposits of the
taxpayer.

Note: There are other instances where the Bank Secrecy Law may be
waived/exempted:

1. Upon written permission of the depositor

2. In cases of impeachment

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 3. Upon order of competent court
4. In cases involving money laundering

(G) Authority to Accredit and Register Tax Agents. - The Commissioner shall accredit
and register, based on their professional competence, integrity and moral fitness,
individuals and general professional partnerships and their representatives who prepare
and file tax returns, statements, reports, protests, and other papers with or who appear
before, the Bureau for taxpayers. Within one hundred twenty (120) days from January 1,
1998, the Commissioner shall create national and regional accreditation boards, the
members of which shall serve for three (3) years, and shall designate from among the
senior officials of the Bureau, one (1) chairman and two (2) members for each board,
subject to such rules and regulations as the Secretary of Finance shall promulgate upon
the recommendation of the Commissioner.

Individuals and general professional partnerships and their representatives who are
denied accreditation by the Commissioner and/or the national and regional accreditation
boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal
within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to
rule on the Appeal within the prescribed period shall be deemed as approval of the
application for accreditation of the appellant.

(H) Authority of the Commissioner to Prescribe Additional Procedural or

Documentary Requirements. - The Commissioner may prescribe the manner of
compliance with any documentary or procedural requirement in connection with the
submission or preparation of financial statements accompanying the tax returns.

Section 7. Authority of the Commissioner to Delegate Power. - The Commissioner

may delegate the powers vested in him under the pertinent provisions of this Code to any
or such subordinate officials with the rank equivalent to a division chief or higher, subject
to such limitations and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner:
Provided, However, That the following powers of the Commissioner shall not be
delegated:

(a) The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;

(c) The power to compromise or abate (cancel), under Sec. 204 (A) and (B) of this Code,
any tax liability: Provided, however, That assessments issued by the regional offices
involving basic deficiency taxes of Five Hundred Thousand Pesos (P500,000) or less,
and minor criminal violations, as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner,
discovered by regional and district officials, may be compromised by a regional evaluation
board which shall be composed of the Regional Director as Chairman, the Assistant
Regional Director, the heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

Section 8. Duty of the Commissioner to Ensure the Provision and Distribution of

forms, Receipts, Certificates, and Appliances, and the Acknowledgment of
Payment of Taxes.-

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(A) Provision and Distribution to Proper Officials. - It shall be the duty of the
Commissioner, among other things, to prescribe, provide, and distribute to the proper
officials the requisite licenses internal revenue stamps, labels all other forms, certificates,
bonds, records, invoices, books, receipts, instruments, appliances and apparatus used in
administering the laws falling within the jurisdiction of the Bureau. For this purpose,
internal revenue stamps, strip stamps and labels shall be caused by the Commissioner
to be printed with adequate security features.

Internal revenue stamps, whether of a bar code or fusion design, shall be firmly and
conspicuously affixed on each pack of cigars and cigarettes subject to excise tax in the
manner and form as prescribed by the Commissioner, upon approval of the Secretary of
Finance.

(B) Receipts for Payment Made. - It shall be the duty of the Commissioner or his duly
authorized representative or an authorized agent bank to whom any payment of any tax
is made under the provision of this Code to acknowledge the payment of such tax,
expressing the amount paid and the particular account for which such payment was made
in a form and manner prescribed therefor by the Commissioner.

Section 9. Internal Revenue Districts. - With the approval of the Secretary of Finance, the
Commissioner shall divide the Philippines into such number of revenue districts as may
from time to time be required for administrative purposes. Each of these districts shall be
under the supervision of a Revenue District Officer (RDO).

● General Functions of the 19 RDOs in the Philippines

Administer and enforce internal revenue laws including the assessment and
collection of all internal revenue taxes, charges and fees from taxpayers
within the region's jurisdiction.

Section 10. Revenue Regional Director. - Under rules and regulations, policies and
standards formulated by the Commissioner, with the approval of the Secretary of Finance,
the Revenue Regional director shall, within the region and district offices under his
jurisdiction, among others:

(a) Implement laws, policies, plans, programs, rules and regulations of the department or
agencies in the regional area;

(b) Administer and enforce internal revenue laws, and rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and fees.

(c) Issue Letters of Authority for the examination of taxpayers within the region;

● A Letter of Authority (LOA) is the authority given to the appropriate

revenue officer assigned to assess functions pursuant to Section 6(A) of
the National Internal Revenue Code (NIRC) of 1997, as amended.
Without the LOA, the examination or assessment can be nullified.

(d) Provide economical, efficient and effective service to the people in the area;

(e) Coordinate with regional offices or other departments, bureaus and agencies in the
area;

(f) Coordinate with local government units in the area;

(g) Exercise control and supervision over the officers and employees within the region;
and

(h) Perform such other functions as may be provided by law and as may be delegated by
the Commissioner.
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Section 11. Duties of Revenue District Officers and Other Internal Revenue Officers.
- It shall be the duty of every Revenue District Officer or other internal revenue officers
and employees to ensure that all laws, and rules and regulations affecting national
internal revenue are faithfully executed and complied with, and to aid in the prevention,
detection and punishment of frauds of delinquencies in connection therewith.

It shall be the duty of every Revenue District Officer to examine the efficiency of all officers
and employees of the Bureau of Internal Revenue under his supervision, and to report in
writing to the Commissioner, through the Regional Director, any neglect of duty,
incompetency, delinquency, or malfeasance in office of any internal revenue officer of
which he may obtain knowledge, with a statement of all the facts and any evidence
sustaining each case.

Section 12. Agents and Deputies for Collection of National Internal Revenue Taxes.
- The following are hereby constituted agents of the Commissioner:

(a) The Commissioner of Customs and his subordinates with respect to the collection of
national internal revenue taxes on imported goods;

(b) The head of the appropriate government office and his subordinates with respect to
the collection of energy tax; and

(c) Banks duly accredited by the Commissioner with respect to receipt of payments
internal revenue taxes authorized to be made thru bank.

Any officer or employee of an authorized agent bank assigned to receive internal revenue
tax payments and transmit tax returns or documents to the Bureau of Internal Revenue
shall be subject to the same sanctions and penalties prescribed in Sections 269 and 270
of this Code.

Section 13. Authority of a Revenue Offices. - subject to the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a
Revenue Officer assigned to perform assessment functions in any district may, pursuant
to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers
within the jurisdiction of the district in order to collect the correct amount of tax, or to
recommend the assessment of any deficiency tax due in the same manner that the said
acts could have been performed by the Revenue Regional Director himself.

Section 14. Authority of Officers to Administer Oaths and Take Testimony. - The
Commissioner, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs,
Revenue Regional Directors, Assistant Revenue Regional Directors, Chiefs and Assistant
Chiefs of Divisions, Revenue District Officers, special deputies of the Commissioner,
internal revenue officers and any other employee of the Bureau thereunto especially
deputized by the Commissioner shall have the power to administer oaths and to take
testimony in any official matter or investigation conducted by them regarding matters
within the jurisdiction of the Bureau.

Section 15. Authority of Internal Revenue Officers to Make Arrests and Seizures. -
The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the
Revenue District Officers and other internal revenue officers shall have authority to make
arrests and seizures for the violation of any penal law, rule or regulation administered
by the Bureau of Internal Revenue. Any person so arrested shall be forthwith brought
before a court, there to be dealt with according to law.

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Note: Section 2 of Article III of the Constitution expressly provides that the
right of the people to be secure in their persons, houses, papers, and effects
against unreasonable searches and seizures of whatever nature and for any
purpose shall be inviolable, and no search warrant or warrant of arrest shall
issue except upon probable cause to be determined personally by the judge
after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be searched
and the persons or things to be seize. By this provision, therefore, the authority
to make arrests and seizures by the BIR is premised upon the issuance of
warrant by the court. The latter merely enforces what the court has judicially
determined.

Example of tax cases with penal sanctions:

Where the payment of tax is avoided though by complying with the

provisions of law but defeating the intension of the law is known as tax
avoidance. Where the payment of tax is avoided through illegal means
or fraud is termed as tax evasion.

Tax Avoidance —the use of legal methods to modify an individual's

financial situation to lower the amount of income tax owed. This is
generally accomplished by claiming the permissible deductions and
credits. This practice differs from tax evasion, which uses illegal methods,
such as under reporting income to avoid paying taxes.

It is using one’s knowledge of the tax code in finding loopholes to lessen

the payment of taxes. So what are some of the ways to avoid paying large
amount of taxes? You can either decrease your income or increase your
deductions. In short, tax avoidance is an action taken to lessen tax liability
and maximize after-tax income.

Tax Evasion (illegal) —an illegal practice where a person, organization

or corporation intentionally avoids paying his true tax liability. Those
caught evading taxes are generally subject to criminal charges and
substantial penalties. According to Revenue Regulations No. 13-2021,
taxpayers who are found guilty of evading taxes may face imprisonment
of not less than 6 years but not more than 10 years and will be fined
not less than P500,000 but not more than P10 million. The fine and
the imprisonment mentioned are just additional penalties on top of the
main sanction for taxpayers who are evading taxes. The BIR's final
amount of assessment will also be subjected to a 50% surcharge and
daily 12% interest rate computed until the date of payment of the
assessment. Accordingly, the government through its administrative
bodies, the BIR can assess taxes of fraudulent tax returns of up to 10
years from the date such fraud was discovered.

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 Differences Between Tax Avoidance & Tax Evasion

Avoidance Evasion
There is compliance with tax laws but Tax payment is avoided through illegal or
defeating the intension of the law fraudulent means
Tax liability is avoided by taking advantage Undertaken by taking unfair means
of the legal loopholes
Tax avoidance may form part of tax It is a blatant fraud and is done after the
planning and done before tax liability tax liability has arisen
arises

Section 16. Assignment of Internal Revenue Officers Involved in Excise Tax

Functions to Establishments Where Articles subject to Excise Tax are Produced or
Kept. - The Commissioner shall employ, assign, or reassign internal revenue officers
involved in excise tax functions, as often as the exigencies of the revenue service may
require, to establishments or places where articles subject to excise tax are produced or
kept: Provided, That an internal revenue officer assigned to any such establishment shall
in no case stay in his assignment for more than two (2) years, subject to rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

Section 17. Assignment of Internal Revenue Officers and Other Employees to Other
Duties. - The Commissioner may, subject to the provisions of Section 16 and the laws on
civil service, as well as the rules and regulations to be prescribed by the Secretary of
Finance upon the recommendation of the Commissioner, assign or reassign internal
revenue officers and employees of the Bureau of Internal Revenue, without change in
their official rank and salary, to other or special duties connected with the enforcement or
administration of the revenue laws as the exigencies of the service may require: Provided,
That internal revenue officers assigned to perform assessment or collection function shall
not remain in the same assignment for more than three (3) years; Provided, further, That
assignment of internal revenue officers and employees of the Bureau to special duties
shall not exceed one (1) year.

Section 18. Reports of Violation of Laws. - When an internal revenue officer discovers
evidence of a violation of this Code or of any law, rule or regulations administered by the
Bureau of Internal Revenue of such character as to warrant the institution of criminal
proceedings, he shall immediately report the facts to the Commissioner through his
immediate superior, giving the name and address of the offender and the names of the
witnesses if possible: Provided, That in urgent cases, the Revenue Regional director or
Revenue District Officer, as the case may be, may send the report to the corresponding
prosecuting officer in the latter case, a copy of his report shall be sent to the
Commissioner.

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Section 19. Contents of Commissioner's Annual Report. - The annual Report of the
Commissioner shall contain detailed statements of the collections of the Bureau with
specifications of the sources of revenue by type of tax, by manner of payment, by revenue
region and by industry group and its disbursements by classes of expenditures.

In case the actual collection exceeds or falls short of target as set in the annual national
budget by fifteen percent (15%) or more, the Commissioner shall explain the reason for
such excess or shortfall.

Section 20. Submission of Report and Pertinent Information by the Commissioner.

(A) Submission of Pertinent Information to Congress. - The provision of Section 270

of this Code to the contrary notwithstanding, the Commissioner shall, upon request of
Congress and in aid of legislation, furnish its appropriate Committee pertinent information
including but not limited to: industry audits, collection performance data, status reports in
criminal actions initiated against persons and taxpayer's returns: Provided, however, That
any return or return information which can be associated with, or otherwise identify,
directly or indirectly, a particular taxpayer shall be furnished the appropriate Committee
of Congress only when sitting in Executive Session, unless such taxpayer otherwise
consents in writing to such disclosure.

(B) Report to Oversight Committee. - The Commissioner shall, with reference to

Section 204 of this Code, submit to the Oversight Committee referred to in Section 290
hereof, through the Chairmen of the Committee on Ways and Means of the Senate and
House of Representatives, a report on the exercise of his powers pursuant to the said
section, every six (6) months of each calendar year.

SEC. 21. Sources of Revenue. - The following taxes, fees and charges are deemed to
be national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of
Internal Revenue.

Note: Already defined at the preliminary pages hereof but extensively discussed
under Title II to VII of this Code.

TITLE II

TAX ON INCOME
(As Amended by RA Nos. 9294, 9337, 9504, 10021, 10026, 10653 & 10963)

CHAPTER I

DEFINITIONS

SEC. 22. Definitions. - When used in this Title:

(A) The term 'person’ – refers to the following:

1. individual- pertains to either natural or artificial/juridical person.

2. trust -means holding property for the use, benefit, or on behalf of others. In this
fiduciary relationship, there are three parties, namely: the trustor who
establishes the trust, the trustee with whom the confidence is reposed,
and the beneficiary with whom the benefit is ultimately conferred.
Page 17 of 31
 3. estate - is a juridical entity that has a personality of its own (Limjoco v. Intestate
Estate of Fragrante/G.R. No. L-770 [1948])
4. corporation- an artificial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law
or incidental to its existence. A corporation is formed or organized under the
amended Corporation Code may be stock or nonstock. Stock corporations are
those which have capital stock divided into shares and are authorized to distribute
to the holders of such shares, dividends, or allotments of the surplus profits on the
basis of the shares held. All other corporations are nonstock (Secs. 2 & 3 of RA
11232, Revised Corporation Code of the Philippines)

Note:

1. For taxation purposes, trust and estate are treated as an ‘individual’

taxpayer.
2. The general professional partnership is one created for the practice of a
common profession of the partners and no income is derived from trade or
business. The individual partners are treated as ‘resident citizens’. All other
partnerships are treated as ‘domestic corporations’.
3. Both partnerships, however, are treated as ‘corporate taxpayers’.

(B) The term 'corporation' shall include one person corporations, partnerships, no matter
how created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service
contract with the Government.
'General professional partnerships’ are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.

(C) The term 'domestic’, when applied to a corporation, means created or organized in
the Philippines or under its laws.

(D) The term 'foreign’, when applied to a corporation, means a corporation which is not
domestic; incorporated in foreign countries under their respective laws.

(E) The term 'nonresident citizen' means;

(1) A citizen of the Philippines who establishes to the satisfaction of

the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.

(4) A citizen who has been previously considered as nonresident

citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall likewise
be treated as a nonresident citizen for the taxable year in which he
arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.

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 (5) The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or
to return to and reside in the Philippines as the case may be for
purpose of this Section.

Note: The 183-day of stay rule applies here. The so-called 183-day
rule serves as a ruler and is the simplest guideline for determining
tax residency. It basically states that if a Filipino citizen spends more
than half of the year (183 days) in a single country, then he/she will
become a tax resident of that country.

(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.

(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.

Note: Here, the 180-day rule applies. If the individual stays in the Philippines
for an aggregate period of 180 days or less, the individual is considered as a
non-resident alien not engaged in trade or business (NRANETB). Otherwise,
he is considered as a non-resident alien engaged in trade or business
(NRAETB).

(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in
trade or business within the Philippines.

(I) The term 'nonresident foreign corporation' applies to a foreign corporation not
engaged in trade or business within the Philippines.

(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver,
conservator or any person acting in any fiduciary capacity for any person.

(K) The term 'withholding agent' means any person required to deduct and withhold any
tax under the provisions of Section 57.

● Withholding Agent - any person or entity who is in control of the payment subject
to withholding tax and therefore is required to deduct and remit taxes withheld to the
government (Employer).
● Compensation - the tax withheld from income payments to individuals arising
from an employer-employee relationship.

(L) The term 'shares of stock' shall include shares of stock of a corporation, warrants
and/or options to purchase shares of stock, as well as units of participation in a
partnership (except general professional partnerships), joint stock companies, joint
accounts, joint ventures taxable as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.

Note: A stock is a general term used to describe the ownership certificates of any
company. A share, on the other hand, refers to the stock certificate of a particular
company. Holding a particular company's share makes you a shareholder.

Stocks are of two types—common and preferred. The difference is while the holder
of the former has voting rights that can be exercised in corporate decisions, the latter
doesn't. However, preferred shareholders are legally entitled to receive a certain
level of dividend payments before any dividends can be issued to other shareholders.

Page 19 of 31
(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or
option/s to purchase shares of stock of a corporation, as well as a holder of a unit of
participation in a partnership (except general professional partnerships) in a joint stock
company, a joint account, a taxable joint venture, a member of an association, recreation
or amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund
certificate, a member in an association, joint-stock company, or insurance company.

(N) The term 'taxpayer’ means any person subject to tax imposed by this Title.

Note: There are three (3) subject matter of taxation, namely: person,
property and right/privilege (excise). The person referred to here
means ‘natural person’ or ‘juridical person’.

(O) The terms 'including’ and 'includes', when used in a definition contained in this Title,
shall not be deemed to exclude other things otherwise within the meaning of the term
defined.

(P) The term 'taxable year' means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed under this Title.
'Taxable year' includes, in the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, the period for which such return is
made. Note: Calendar Year refers to a 12-month period beginning January 1 and ending
December 31.

(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on
the last day of any month other than December. Note: If a company chooses the fiscal
year, it must do so by signifying its intention with the BIR. This is a past Bar question.

(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to
the method of accounting upon the basis of which the net income is computed under
this Title. Note: See the previous pages’ citations for more clarification on accrual
basis.

(S) The term 'trade or business' includes the performance of the functions of a public
office.

(T) The term 'securities' means shares of stock in a corporation and rights to subscribe
for or to receive such shares. The term includes bonds, debentures, notes or certificates,
or other evidence or indebtedness, issued by any corporation, including those issued by
a government or political subdivision thereof, with interest coupons or in registered form.

(U) The term 'dealer in securities' means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers; that is, one
who, as a merchant, buys securities and re-sells them to customers with a view to the
gains and profits that may be derived therefrom.

(V) The term 'bank' means every banking institution, as defined in Section 2 of Republic
Act No. 337, as amended, otherwise known as the “General Banking Act.” A bank may
either be a commercial bank, a thrift bank, a development bank, a rural bank or
specialized government bank.

(W) The term 'non-bank financial intermediary' means a financial intermediary, as

defined in Section 2(D)(C) of Republic Act No. 337, as amended, otherwise known as the
“General Banking Act,” authorized by the Bangko Sentral ng Pilipinas (BSP) to perform
quasi-banking activities.

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(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower's own
account, or through the issuance of certificates of assignment or similar instruments, with
recourse, or of repurchase agreements for purposes of relending or purchasing
receivables and other similar obligations: Provided, however, That commercial, industrial
and other non-financial companies, which borrow funds through any of these means for
the limited purpose of financing their own needs or the needs of their agents or dealers,
shall not be considered as performing quasi-banking functions.

(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from
the public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowers own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko
Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

(Z) The term 'ordinary income' includes any gain from the sale or exchange of
property which is not a capital asset or property described in Section 39(A)(1). The
term 'ordinary loss' includes any loss from the sale or exchange of property which is not
a capital asset. Any loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss
from the sale or exchange of property which is not a capital asset.

Note: Capital assets are generally properties that are not used in trade or business of
the taxpayer. On the other hand, ordinary assets are properties used in trade or
business or primarily held for sale by the taxpayer.

(AA) The term 'rank and file employees' shall mean all employees who are holding neither
managerial nor supervisory position as defined under existing provisions of the Labor
Code of the Philippines, as amended.

Note: Both the rank-and-file employees and supervisory/managerial employees are

entitled to de minimis benefits. These are relatively small value benefits given by the
company to the employees besides their regular compensation. These are subject to a
law or governed by special laws. As of January 1, 2018, under the TRAIN Tax Law, here
are the new de minimis benefits:

-Convertible unused vacation leave credits of private employees not

exceeding ten days during a year;

-The convertible value of vacation and sick leave credits paid to government
officials and employees;

-Medical cash allowance to dependents of employees not exceeding 1,500

per semester (before it was 750.00) or 250.00 per month (before 125.00);

-Rice subsidy of 2 000.00 (replaced the amount of 1500.00) or one sack of

50 kg. Rice per month amount to not over 2, 000.00;

-Uniform and clothing allowance not exceeding 6 000 per year (replaced the
amount of 5 000);
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 -Actual medical assistance, e.g., a therapeutic benefit to cover medical and
healthcare needs, annual medical/executive check-ups, maternity
assistance, and routine consultations, not exceeding 10 000 yearly;

-Laundry allowance not exceeding 300 per month;

Other De Minimis Benefits Philippines

-Employees’ achievement awards, e.g., for a length of service or safety

achievement, employees’ achievement awards must be as tangible
personal property other than cash or gift certificates. It has an annual
monetary value not exceeding 10,000 received by the employee under an
established written plan. This benefit does not discriminate in favor of highly
paid employees;

-Any gifts received during Christmas and major anniversary celebrations not
exceeding 5 000 per employee once a year;

-Daily meal allowance for overtime work and nigh/graveyard shift not
exceeding 25% of the basic minimum wage on per region basis;

-Last, benefits received by an employee by a collective bargaining annual

monetary value received from both this and productivity incentive schemes
combined do not exceed 10 000 per employee per taxable year.

De Minimis Benefits- generally not taxable. But if the same exceed the
prescribed ceiling, the excess amount shall be added to the 13th month pay
cap of P90,000. In excess thereof, then it becomes taxable as a basic
compensation income of the concerned employee. On the other hand,
Fringe Benefits (RR 8-2018) granted to the supervisory/managerial
employees are taxable at the rate of 35%. These Fringe Benefits include:

1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the
difference between the market rate and actula rate granted;
6. Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar
organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.

(BB) The term 'mutual fund company' shall mean an open-end and close-end
investment company as defined under the Investment Company Act.

(CC) The term 'trade, business or profession' shall not include performance of services
by the taxpayer as an employee.

Note: The latter type of employee earns compensation income based on the employer-
employee relationship. The former type of income earner belongs to the self-employed,
those who provide contract-based services, those who practice their craft/profession, and
those who are engaged in commercial or business activities.

Page 22 of 31
(DD) The term 'regional or area headquarters' shall mean a branch established in the
Philippines by multinational companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region
and other foreign markets.

(EE) The term 'regional operating headquarters' shall mean a branch established in
the Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and coordination;
sourcing and procurement of raw materials and components; corporate finance advisory
services; marketing control and sales promotion; training and personnel management;
logistic services; research and development services and product development; technical
support and maintenance; data processing and communications; and business
development.

(FF) The term 'long-term deposit or investment certificate' shall refer to certificate of
time deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments with a
maturity period of not less than five (5) years, the form of which shall be prescribed by the
Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial
intermediaries and finance companies) to individuals in denominations of Ten thousand
pesos (P10,000) and other denominations as may be prescribed by the BSP.

(GG) The term ‘statutory minimum wage’ shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). [10]

(HH) The term “minimum wage earner” shall refer to a worker in the private sector
paid the statutory minimum wage or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned.

CHAPTER II

GENERAL PRINCIPLES

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines (Worldwide Income);

● Worldwide income - income earned anywhere in the world and is used to determine
taxable income for resident citizens (RCs).

(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;

Note: Here apply any of the 2 requisites: 1) Intention to reside/work abroad for a longer
period of time or permanently, or 2. Follow the 183-day rule, if the intention is unclear.

(C) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from sources
within the Philippines: Provided, That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as an
overseas contract worker;

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(D) An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and
without the Philippines (like the RC); and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines,
is taxable only on income derived from sources within the Philippines.

CHAPTER III

TAX ON INDIVIDUALS
Note: Income tax is a type of tax that the government imposes on income
generated by businesses and individuals within its jurisdiction.

"Sec. 24. Income Tax Rates. -

"(A) Rates of Income Tax on Individual Citizen and Individual, Resident Alien of the
Philippines -

"(1) An income tax is hereby imposed:

"(a) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year
from all sources within and without the Philippines by every individual citizen of the
Philippines residing therein;

"(b) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers referred to in
Subsection (C) of Section 23 hereof; and

"(c) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the
Philippines.

"(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in
accordance with and at the rates established in the following schedule:

"(a) Tax Schedule Effective January 1, 2018 until December 31, 2022:

Note: The date of effectivity for the graduated income tax rates
applicable to individual taxpayers differs from the date of
effectivity for corporate income taxes prescribed among non-
resident foreign corporations.

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"For married individuals, the husband and wife, subject to the provision of Section 51(D)
hereof, shall compute separately their individual income tax based on their respective
total taxable income: Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses for the purpose of determining their
respective taxable income.

"Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, pay received by such minimum wage earners shall likewise be
exempt from income tax.

"(b) Rate of Tax on Income of "Purely Self-employed Individuals and/ or Professionals

Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not
Exceed the Value-added Tax (VAT) Threshold (P3M) as Provided in Section 109(BB).—
Self-employed individuals and/or professionals shall have the option to avail of an eight
percent (8%) tax on gross sales or gross receipts (not net taxable income) and other
non-operating income in excess of two hundred fifty thousand pesos (₱250,000) in lieu
of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the
percentage tax now (1% under CREATE) under Section 116 of this Code.

"(c) Rate of Tax for Mixed Income Earners.— Taxpayers earning both compensation
income and income from business or practice of profession shall be subject to the
following taxes:

"(1) All Income from Compensation – The rates prescribed under Subsection (A)(2)(a) of
this Section (Graduated Tax).

"(2) All Income from Business or Practice of Profession –

"(a) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Do Not
Exceed the VAT Threshold (P3M) as Provided in Section 109(BB) of this Code.— The
rates prescribed under Subsection (A)(2)(a) of this Section on taxable income, or eight
percent (8%) income tax based on gross sales or gross receipts and other non-operating
income in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section
and the percentage tax under Section 116 of this Code.

"(b) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income
Exceeds the VAT Threshold as Provided in Section 109(BB) of this Code.— The rates
prescribed under Subsection (A)(2)(a) of this Section.

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"(B) Rate of Tax on Certain Passive Income.

● Passive income - income that is earned passively. This means that the income is
earned with very little or no additional work. Typically, this income is made through
investments or passive businesses. It is paid for as a Final Tax and thus excluded
from the computation of individual income tax returns.

"(1) Interests, Royalties, Prizes, and Other Winnings.— A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and. similar arrangements; royalties, except on books, as well as other literary
works and musical compositions, which shall be imposed a final tax of ten percent (10%);
prizes (except prizes amounting to Ten thousand pesos (₱10,000) or less which shall
be subject to tax (graduated income tax) under Subsection (A) of Section 24; and other
winnings (except winnings amounting to Ten thousand pesos (₱10,000) or less from
Philippine Charity Sweepstakes and Lotto which shall be exempt), derived from
sources within the Philippines:

Provided, however, That interest income received by an individual taxpayer (except a

nonresident individual) from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate of fifteen percent (15%)
of such interest income: Provided, further, That interest income from long-term deposit
or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and shall be deducted and withheld
by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:

"x x x."

"(2) Cash and/or Property Dividends. - A final tax at the rate of ten percent (10%) shall
be imposed upon the cash and/or property dividends actually or constructively received
by an individual from a domestic corporation or from a joint stock company,
insurance or mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of which
he is a partner, or on the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a corporation of
which he is a member or co-venturer.

"(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.
- The provisions of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent
(15%) is hereby imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange.

Note: If sold thru the Philippine Stock Exchange (PSE), the tax imposed is called as
Stock Transaction Tax (6/10 of 1%) based on the gross selling price or gross value
in money of the shares of stock sold. More, if the transfer of shares accrues to a foreign
corporation:

Capital gains not over P100,000 – 5%

Any amount in excess of P100,000- 10%

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● Capital Gains Tax is also imposed on the sale/disposition of real property at the
rate of 6%. It shall be borne by the seller and payable to the BIR 30 days after the sale.

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales
or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall
be determined either under Section 24 (A) or under this Subsection, at the option of the
taxpayer (graduated income tax table).

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the Commissioner shall have been
duly notified by the taxpayer within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax exemption herein mentioned:
Provided, still further, That the said tax exemption can only be availed of once every ten
(10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this purpose, the gross selling price
or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be
imposed thereon.

SECTIONS 25 AND UP, EXCEPT FOR SECTION 30, TO FOLLOW.

Note: Domestic Corporations are classified for tax purposes as:

1. Exempt – see Section 30, NIRC; these include government agencies, LGUs and
other instrumentalities; certain GOCCs are also exempt such as SSS, GSIS,
PhilHealth and Pagibig

Note: These domestic corporations are exempt only if they derive income from
related activities. Otherwise, they must pay the RCIT. Exemption is not
automatic. Per RMO No. 38-2019, they must secure a Certificate of Tax Exemption
which is valid for three years. Likewise, they must pass the ‘organizational test’
(SEC registration) and ‘operational test’ (must be for non-profit).

For government GOCCs and LGUs, they are taxable of their incomes derived from
proprietary functions or enterprises rather than governmental functions.

As to cooperatives, they must transact with their members only; otherwise, they
are taxable.

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 2. Special- these corporations enjoy preferential tax rates such as private
educational institutions and non-profit hospitals at 1% per CREATE Law. They are
subject to ‘predominance test’, meaning if they derive income exceeding 50% of
the total gross income from unrelated activities for which they must pay regular
taxes or RCIT at 25%.

PEZA and BOI-registered corporations likewise enjoy Income Tax Holidays (ITHs);
for PEZA (4-7 years), for BOI-registered companies (4-10 years). If ITH expires,
pay 5% of gross income (PEZA), while the BOI-registered companies must pay
25% RCIT.

3. Regular – these corporations must pay regular corporate income taxes (RCITs) at
25% (20% if the taxable income is P5M or less and with assets less than P100M
(Threshold for Small and Medium Enterprises)

Section 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit (non-
profit);

(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes and
without profit (non-profit);

(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents (self-help);

(D) Cemetery company owned and operated exclusively for the benefit of its members
(exclusive for members);

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inures to the benefit of any
member, organizer, officer or any specific person (non-stock);

(F) Business league chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stock-holder, or
individual (non-profit);

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare (non-profit);

(H) A nonstock and nonprofit educational institution (except for unrelated activities
which generate income);

(I) Government educational institution (State Us/Colleges/HS/Elems);

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected
from members for the sole purpose of meeting its expenses (mutual help orgs); and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them (mutual associations);
Page 28 of 31
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax (meaning, RCIT) imposed
under this Code.

CHAPTER V

COMPUTATION OF TAXABLE INCOME

Section 31. Taxable Income Defined. - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other
special laws.

Note: Taxable income is actually the gross income minus the allowable deductions. If
the applicable tax rates are multiplied (RCIT – 25%/20% for corporations with less than
P5 M income for the taxable year and with P100M assets; MCIT-1% until July 1, 2023).
Below are the changes made upon the enactment of CREATE Law in 2021:

Republic Act 11534, signed into law on March 26, 2021 and took effect on April 11, 2021,
the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act- enacted
by Congress in response to COVID-19 pandemic as a fiscal relief and to attract local and
foreign investments for:

1. Domestic Corporation (DC)

2. Resident Foreign Corporations (RFCs)

Corporate Income Tax (CIT)

The corporate income tax (CIT) rate is (DC/RFC) reduced from the current 30% to 25%,
and retroactive to July 1, 2020. The CIT will be reduced further by 1% annually in the next
six years. And shall eventually reach 20% by 2027 onwards. Note:

1. DC - If income is less than 5M and asset is less than 100M- CIT

is only 20%
-In the valuation of assets, land is excluded.
-SMEs threshold, hence 100M asset. In the Philippines, SMEs are
defined as any enterprise with 10 to 199 employees and/or assets
valued from P3 million to P100 million. SMEs and micro enterprises
combined make up 99.6% of establishments in the country.

Note: For the latest CREATE amendments of tax rates, please refer to the matrix in the
next succeeding page.

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Corporate Income Tax (CIT) Incentives

● Income Tax Holiday (ITH) granted for a period of 4 to 7 years, followed by

the Special Corporate Income Tax Rate of 5% on gross income earned
(GIE), in lieu of all national and local taxes, or enhanced deductions (ED)
for 5 or 10 years (the incentive period varies depending on which area the
registered project or activity will be located)

● Duty exemption on importation of capital equipment, raw materials, spare

parts, or accessories
● VAT exemption on importation and VAT zero-rating on local purchase
(partly vetoed by the President)
● The Strategic Investment Priority Plan (SIPP) shall define the coverage of
the tiers and provide the conditions for qualifying activities:

Value-Added Tax (VAT) Exemptions

● Sale or distribution, importation, printing, or publication of any educational

material covered by the UNESCO agreement including digital and electronic
format

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● All drugs, vaccines, and medical devices prescribed and used for the
treatment of COVID-19
● Capital equipment, its spare parts, and raw materials for the production of
personal protective equipment for COVID-19 prevention
● Drugs for the treatment of COVID-19 approved by the FDA for use in clinical
trials, including raw materials directly necessary for the production of such
drugs
● Sale of prescription drugs and medicines for cancer, mental illness,
tuberculosis, diabetes, high cholesterol, hypertension, and kidney disease
(beginning January 1, 2021 instead of January 1, 2023)

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