I .

GENERAL PRINCIPLES

CONCEPT AND PURPOSE OF TAXATION

Taxation is the inherent power of the sovereign exercised through the legislature to impose burdens upon
subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects
of government.

It is the mode of raising revenue for public purposes.

It is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of
apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and
must bear its burden.

NATURE OF THE POWER OF TAXATION

1. AN INHERENT POWER

The power of taxation is inherent in the State, being an attribute of sovereignty. The power to tax is an incident
of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against
abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who
are to pay it. This is so because the very existence of the State is dependent on taxes.

2. LEGISLATIVE IN CHARACTER

Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption
in favor of legislative determination. Public policy decrees that since upon the prompt collection of revenue
depends the very existence of government itself, whatever determination shall be arrived at by the legislature
should not be interfered with, unless there be a clear violation of some constitutional inhibition.

It is a legislative power because it involves the promulgation of rules. The Constitution has allocated to the
legislative department the enactment of law.

•May the legislature enact a law to raise revenues even in the absence of a constitutional provision granting the
said body the power to tax?

Yes. The power to tax can be exercised by the government even if the Constitution is entirely silent on the
subject. There is no need for a constitutional grant for the State to exercise this power. The power to tax is
inherent in the State, being an attribute of sovereignty. This is so because the State can neither exist nor endure
without taxes.

•Why is the power to tax considered inherent in sovereignty?

Because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure.
The power to tax proceeds upon the theory that the existence of a government is a necessity. No sovereign State
can continue to exist without the means to pay its expenses, and, for those means, it has the right to compel
all citizens and properly within its limits to contribute; hence, the emergence of the power to tax.

C. CHARACTERISTICS OF TAXATION

(1) Comprehensive

(2) Unlimited

(3) Plenary and

(4) Supreme

PURPOSES OF TAXATION

1. Revenue purposes: The basic purpose of taxation is to raise revenues.

2. Sumptuary or regulatory purpose: to promote the general welfare and to protect the health, safety or morals
of inhabitants

Non-revenue (or sumptuary) objectives of taxation

1. Taxation can strengthen anemic enterprises:

2. Taxes may be increased in period of prosperity to curb spending power and halt inflation and lowered in
periods of slump to expand business and ward off depression

3. Taxes on imports may be increased to protect local industries

4. Taxes on imported goods may be used as a bargaining tool by a country by setting tariff rates first at a
relatively high level before trade negotiations

5. Taxes can discourage certain business (eg.tobacco and alcohol)

6. Taxes can also minimize inequity

•How do you determine if an imposition is a tax or a (regulatory) fee?

In determining whether an imposition is a tax or a regulatory fee, one must inquire into the following:

1. The purpose of the imposition

2. The amount of the exaction

3. The designation

DISTINCTION OF TAXES WITH SIMILAR ITEMS

TAX VS. REVENUE

Tax refers to the amount imposed by the government for public purpose.
Revenue refers to all income collections of the government which includes taxes, tari licenses, toll, penalties
and others.

The amount imposed is tax but the amount collected is revenue.

TAX VS. LICENSE FEE

Tax has a broader subject than license. Tax emanates from taxation power and is imposed upon any object
such as persons, properties, or privileges to raise revenue.

License fee emanates from police power and is imposed to regulate the exercise of a privilege such as the
commencement of a business or a profession.

Taxes are imposed after the commencement of a business or profession where license fee is imposed before
engagement in those activities. In other words/tax a post-activity imposition whereas license is a pre-activity
imposition.

TAX VS. TOLL

Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of other's property;
hence, it is a demand of ownership.

The amount of tax depends upon the needs of the government, but the amount of toll is dependent upon the
value of the property leased.

Both the government and private entities impose toll, but private entities cannot impose taxes.

TAX VS. DEBT

Tax arises from law while debt arises from private contracts. Non-payment of t leads to imprisonment, but non-
payment of debt does not lead to imprisonment. Debt can be subject to set-off but tax is not. Debt can be paid
in kind but tax is generally payable in money.

Tax draws interest only when the taxpayer is delinquent. Debt draws interest when it is so stipulated by the
contracting parties or when the debtor incurs legal delay.

TAX VS. SPECIAL ASSESSMENT

Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied by the
government on lands adjacent to a public improvement. It is imposed on land only and is intended to
compensate the government for a part of the cost of the improvement.

The basis of special assessment is the benefit in terms of the appreciation in land value caused by the public
improvement. On the other hand, tax is levied without expectation of a direct proximate benefit.

Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of the land
owner. Therefore, the non-payment of special assessment will not result to imprisonment of the owner (unlike
in non-payment of taxes).

TAX VS. TARIFF

Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or properties. Tariff
is the amount imposed on imported or exported commodities.
TAX VS. PENALTY

Tax is an amount imposed for the support of the government. Penalty is an amount imposed to discourage an
act. Penalty may be imposed by both the government and private individuals. It may arise both from law or
contract whereas tax arises from law.

B. DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

INHERENT POWERS OF THE STATE

1. TAXATION POWER

Is the power of the State to enforce proportional contribution from its subjects to sustain itself.

2. POLICE POWER

Is the general power of the State to enact laws to protect well-being of the people.

3. EMINENT DOMAIN

Is the power of the State to take private property for public use after paying just compensation.

Similarities of the three powers of the State

1. They are all necessary attributes of sovereignty.

2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the government even without a
Constitutional grant. However, the Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the persons affected by the
exercise of the power.
7. The exercise of these powers by the local government units may be limited by the national legislature.

•May a tax be validly imposed in the exercise of police power and not of the power to tax?

Yes. The power of taxation may be used as an implement of police power of the State with the end in view of
regulating a particular activity.

C. THEORY AND BASIS OF TAXATION

1. LIFEBLOOD THEORY

The existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses;
and for those means, the government has the right to compel all its citizens and property within its limits to
contribute in the form of taxes.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the
other hand, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good,
may be achieved.

The lifeblood theory can be manifested In the following cases:

1. The prohibition against set-off of taxes.

2. The prohibition against the issuance of an injunction to restrain the collection of taxes

3. Presumption of correctness of assessments

THE LIFEBLOOD DOCTRINE

Taxes are essential and indispensable to the continued subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power to activate or operate it. Taxes are the lifeblood of the
government, and their prompt and certain availability are an imperious need.

2. NECESSITY THEORY

Taxation is necessary to support the government and to provide for the general welfare of the people. Taxation
is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist
aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements
for the enjoyment of the citizenry, and those which come within the State’s territory and facilities and protection
which a government is supposed to provide

3. BENEFITS -RECEIVED THEORY

People should pay taxes in proportion to the benefits they receive from the government.

D. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

INHERENT LIMITATIONS

1. TERRITORIALITY OF TAXATION

The government can only demand tax obligations upon its subjects or residents within its territorial jurisdiction.
There is no basis in taxing foreign subjects abroad since they do not derive benefits from our government.

2. INTERNATIONAL COMITY

No country is powerful than the other. It is by this principle that each country observes international comity or
mutual courtesy or reciprocity between them. Hence,

•Governments do not tax the income and properties of other governments.

•Governments give primacy to their treaty obligations over their own domestic tax laws.

3.PUBLIC PURPOSE
Tax is intended for the common good. Taxes must be levied for a public purpose and cannot be exercised to
further any private interest.

4.EXEMPTION OF THE GOVERNMENT

The government does not tax itself as this will not raise additional funds but will only impute additional costs.

5.NON-DELEGATION OF THE TAXING POWER

The legislative taxing power is vested exclusively in Congress and is non delegable, pursuant to the doctrine of
separation of the branches of the government to ensure a system of checks and balances.

CONSTITUTIONAL LIMITATIONS

1.DUE PROCESS OF LAW

No one should be deprived of his life, liberty, or property without due process of law. Tax laws should neither
be harsh nor oppressive.

• Substantive due process

Tax must be imposed only for public purpose, collected only under authority of a valid law and only by the taxing
power having jurisdiction.

• Procedural due process

There should be no arbitrariness in assessment and collection of taxes, and the government shall observe the
taxpayer’s right to notice and hearing.

2.EQUAL PROTECTION OF THE LAW

No person shall be denied the equal protection of the law. Taxpayers should be treated equally both in terms
of rights conferred and obligations imposed.

3.UNIFORMITY RULE IN TAXATION

The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar circumstances should not be
taxed the same.

4.PROGRESSIVE SYSTEM OF TAXATION

Under the progressive system, tax rates increase as the tax base increases. The progressive system aids in an
equitable distribution of wealth to society by taxing the rich more than the poor.

5.NON-IMPRISONMENT FOR NON-PAYMENT OF DEBT OR POLL TAX

As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere inability
to pay debt.

6.NON-IMPAIRMENT OF OBLIGATION AND CONTRACT

The State should set an example of good faith among its constituents. It should not set aside its obligations
from contracts by the exercise of its taxation power.
7.FREE WORSHIP RULE

The Philippine government adopts free exercise of religion and does not subject its exercise to taxation.
Consequently, the properties and revenues of religious institutions such as tithes or offerings are not subject
to tax.

8.EXEMPTION OF RELIGIOUS OR CHARITABLE ENTITIES, NON-PROFIT CEMETERIES, CHURCHES AND

MOSQUES, LANDS, BUILDINGS, AND IMPROVEMENTS FROM PROPERTY TAXES

The Constitutional exemption from property tax applies for properties actually, directly, and exclusively used
for charitable, religious, and educational purposes.

9.NON-APPROPRIATION OF PUBLIC FUNDS OR PROPERTY FOR THE BENEFIT OF ANY CHURCH, SECT, OR
SYSTEM OF RELIGION

This constitutional limitation is intended to highlight the separation of religion and the State. To support
freedom of religion, the government should not favor any particular system of religion by appropriating public
funds or property in support thereof.

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

The Constitution recognizes the necessity of education in state building by granting tax exemption on revenues
and assets of non-profit educational institutions.

11.CONCURRENCE OF A MAJORITY OF ALL MEMBERS OF CONGRESS FOR THE PASSAGE OF LAW GRANTING
TAX EXEMPTION

Tax exemption law counters against the lifeblood doctrine as it deprives the government of revenues. Hence,
the grant of tax exemption must proceed only upon a valid basis.

12.NON-DIVERSIFICATION OF TAX COLLECTIONS

Tax collections should be used only for public purpose. It should never be diversified or used for private
purpose.

13.NON-DELEGATION OF THE POWER OF TAXATION

The principle of checks and balances in a republican state requires that taxation power as part of lawmaking
be vested exclusively in Congress.

14.NON-IMPAIRMENT OF THE JURISDICTION OF THE SUPREME COURT TO REVIEW TAX CASES

Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all cases involving taxes
can be raised to and be finally decided by the Supreme Court of the Philippines

15.THE REQUIREMENT THAT APPROPRIATIONS, REVENUE, OR TARIFF BILLS SHALL ORIGINATE EXCLUSIVELY
IN THE HOUSE OF REPRESENTATIVES

Laws that add income to the national treasury and those that allows spending therein must originate from the
House of Representatives while Senate may concur with amendments.

16.THE DELEGATION OF TAXING POWER TO LOCAL GOVERNMENT UNITS

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. This is a constitutional recognition of the local autonomy of local governments and
an express delegation of the taxing power.

E. REQUISITES OF A VALID TAX

1. The tax should be within the jurisdiction of the taxing authority.

2. Tax must not violate Constitutional and inherent limitations.

3. Tax must be uniform and equitable.

4. Tax must be for public purpose.

5. Tax must be proportional in character.

6. Tax is generally payable in money.

F. STAGES OR ASPECTS OF TAXATION

1. LEVY OR IMPOSITION

The enactment of a tax law by Congress and is called impact of taxation. It is also referred to as the legislative
act in taxation.

Congress is composed of 2 bodies:

1. The House of Representatives, and

2. The Senate

As mandated by the Constitution, tax bills must originate from the House of Representatives. Each may,
however, have their own versions of a proposed law which is approved by both bodies, but tax bills cannot
originate exclusively from the Senate.

2. ASSESSMENT AND COLLECTION

The tax law is implemented by the administrative branch of the government. Implementation involves
assessment or the determination of the tax liabilities of taxpayers and collection. This stage is referred to as
incidence of taxation or the administrative act of taxation.
G. PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY

The source of government revenue must be sufficient to meet governmental expenditures and other public
needs.

2. THEORETICAL JUSTICE

A good tax system must be based on the taxpayer’s ability to pay

3.ADMINISTRATIVE FEASIBILITY

Taxes should be capable of being effectively enforced.

H. GENERAL CONCEPTS IN TAXATION

1. PROSPECTIVITY OF TAX LAWS

•Are tax statutes prospective in its application?

Yes. The general rule under the Civil Code that laws shall have prospective application applies to tax laws.

•Can tax statutes be applied retroactively?

Yes. While, as a general rule, taxes must only be imposed prospectively, taxes, as an exception, may be
imposed retroactively if the law expressly provides and if it will not amount to a denial of due process.

2. IMPRESCRIPTIBLY

•Are taxes imprescriptible?

As a general rule, taxes are imprescriptible. However, as an exception, the tax law may provide otherwise. In
particular, the NIRC and LGC provides for prescriptive periods for assessment and collection of taxes.

•What is the rationale behind providing for a statute of limitations in the collection of taxes?

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the period of prescription citizens would have
a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of
taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest
peaceful, law-abiding citizens.

3.SITUS OF TAXATION

The situs of taxation is the place or authority that has the right to impose and collect taxes.
•Basis or determinants of the situs of taxation

1. The symbiotic relationship

2. Jurisdiction, state or political unit that gives protection has the right to demand support

A. Situs of Income tax

1. From sources within the Philippines: all kinds of taxpayers are subject to income tax on income derived from
sources within the Philippines.

2. From sources without the Philippines: only Resident Citizens and Domestic Corporations are liable to
income tax on income derived from sources without the Philippines

3. Income partly within and partly without the Philippines: Taxable income attributable to sources within the
Philippines may be determined by processes or formulas general apportionment of prescribed by the Secretary
of Finance.

B. Situs of property taxes

(1) Taxes on real property

The situs of taxes on real property is where the property is located (lex situs)

(2) Taxes on personal property

If the personal property is tangible: where the property is physically located although the owner resides in
another jurisdiction

If the personal property is intangible: As a general rule, the situs is the domicile of the owner (mobilia sequuntur
personam).

C. Situs of excise taxes

The situs of excise taxes is where the transaction was performed. It is the place where the business or
occupation is being conducted.

(1) Estate Tax

(2) Donor’s Tax

•What is the situs of estate and donor’s taxes?

Same rule applies to both.

For citizens, whether resident or non-resident, and resident aliens: taxed on properties wherever situated.

For non-resident aliens: taxed on properties situated in the Philippines

D. Situs of business taxes

•Situs of sales of real property

Where the real property is located

•Situs of sales of personal property

The place where the sales are perfected and consummated

•Situs of VAT

The place where the transaction is made. It is either where the property is sold and consumed or where the
service is to be performed.

4.DOUBLE TAXATION

Double taxation is defined as taxing the same property twice when it should be taxed but once. It has also been
defined as taxing the same person twice by the same jurisdiction over the same thing. It is sometimes known
as “duplicate taxation.”

STRICT SENSE

Direct double taxation. The same property is taxed twice when it should be taxed only once and that both taxes
are imposed on the same subject matter for the same purpose, by the same taxing authority within the same
jurisdiction during the same taxing period and covering the same kind of tax.

BROAD SENSE

Indirect double taxation. Some elements of direct double taxation are absent. It applies to all cases in which
there are two or more pecuniary impositions.

TAX TREATIES AS RELIEF FROM DOUBLE TAXATION

Elements of double taxation

1. Primary element: Same object

2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period

Elements of (direct) double taxation

1. On the same subject matter

2. For the same purpose

3. By the same taxing authority

4. Within the same jurisdiction

5. During the same taxing period

6. The taxes must be of the same kind or character

•Is double taxation prohibited under the Constitution?

It depends. The Constitution does not prohibit the imposition of double taxation in the broad sense. However,
if double taxation amounts to a direct double taxation, then it becomes legally objectionable for being
oppressive and inequitable. It violates the equal protection and uniformity clauses of the Constitution.

Modes of elimination double taxation

The usual methods of avoiding the occurrence of double taxation are:

1. Allowing reciprocal exemption either by law or by treaty

2. Allowance of tax credit for foreign taxes paid

3. Allowance of deduction for foreign taxes paid; and

4. Reduction of the Philippine tax rate

5.ESCAPE FROM TAXATION

A.SHIFTING OF TAX BURDEN

The process by which the burden of a tax is transferred from the statutory taxpayer or the one whom the tax
was assessed or imposed to another without violating the law.

•Forward shifting – When the burden of the tax is transferred from a factor of production through the factors of
distribution until it finally settles on the ultimate purchaser or consumer.

•Backward shifting When the burden of the tax is transferred from the consumer or purchaser through the
factors of distribution to the factors of production.

•Onward shifting – When the tax is shifted either forward two or more times or backward.

~What taxes can be shifted?

Only indirect taxes may be shifted.

~How do you determine if a tax is direct or indirect?

Direct taxes are taxes wherein the impact or liability for the payment of the tax as well as the incidence or
burden of the tax falls on the same person. On the other hand, indirect tax are taxes wherein the impact or the
tax liability for the payment of the tax falls on one person but the incidence or burden thereof can be shifted or
passed to another.
B.DISTINGUISH: TAX AVOIDANCE AND TAX EVASION

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation.

TAX AVOIDANCE is the tax saving device within the means sanctioned by law. This method should be used by
the taxpayer in good faith and at arms length. An example is when a taxpayer avails of deductions allowed by
law.

TAX EVASION is a scheme used outside of those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities.

3 factors to be considered in determining if a scheme is designed to evade taxes

1. The end to be achieved (which is payment of less taxes than that known by the taxpayer to be legally due or
non-payment of a tax when it is shown that a tax is due);

2. An evil or deliberate state of mind; and

3. A course of action which is unlawful

6.EXEMPTION FROM TAXATION

A tax exemption is defined as a grant of immunity, express or implied, to particular persons or corporations
from the obligation to pay taxes.

•Who has the power to grant tax exemptions?

Both the power to tax and to exempt certain persons are vested in the legislature.

•Nature of Tax Exemption

1. Mere personal privileges to the grantees;

2. Generally revocable by the government unless founded on contract which is protected by the non-
impairment clause:

3. Implies a waiver on the part of the Government of its right to collect what otherwise would be due;

4. Not necessarily discriminatory so long as the exemption has a rational basis.

•Grounds of tax exemption

Tax exemption may be based on:

1. Contract,

2. Some ground of public policy, and

3. Treaty created on grounds of reciprocity or to lessen the rigors of international double or multiple taxation
•May a tax exemption be revoked?

Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be withdrawn at
the pleasure of the taxing authority.

7. EQUITABLE RECOUPMENT

The doctrine provides that where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer
is barred by prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against
the tax whose refund is now barred by prescription. This doctrine is inapplicable in the Philippines in light of the
lifeblood theory.

8.PROHIBITION ON COMPENSATION AND SET-OFF

•Can taxes be the subject of compensation between the government and the taxpayer?

No. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other. A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off. Taxes cannot be the subject of set-off because they are not in the nature of contracts
between parties but grow out of a duty to, and, are positive acts, of the Government, to the making and
enforcing of which, the personal consent of the taxpayer is not required.

9.COMPROMISE

•Can taxes be the subject of compromise?

Yes. Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being
compromised and the person entering into it is duly authorized to do so. In fact, under SECTION 204 OF THE
TAX CODE, payment of internal revenue taxes may be compromised on the grounds of (1) doubtful validity of
the assessment or (2) financial incapacity.

10.TAX AMNESTY

A general pardon or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax.

TAX CONDONATION/ REMISSION -The condonation of a tax liability is equivalent and is in the nature of a tax
exemption. Hence, it is a grant of immunity, express or implied, to particular persons or corporations from the
obligation to pay taxes.
 II. INCOME TAX

A. INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM

Taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set
of income tax rates on these different items of income. -One rate for all types of gross income.

SCHEDULAR TAX SYSTEM

There are different tax treatments of different types of income so that a separate tax return is required to be
filed for each type of income and the tax is computed on a per return or per schedule basis. -Varying taxes are
imposed on passive income.

Semi-schedular or semi-global tax system

The tax system is either:

(a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or
professional income or mixed income compensation and business or professional income) or

(b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or other income subject to final
withholding tax) or

(C) both global and schedular may be applied depending on the nature of the income realized by the taxpayer
during the year.

The current method of taxation under the Tax Code belongs to a system which is partly scheduler and partly
global.

B. FEATURES OF THE PHILIPPINE INCOME TAX LAW

DIRECT TAX

The tax burden is borne by the income recipient upon whom the tax is imposed.

PROGRESSIVE
The tax base increases as the tax rate increases.

COMPREHENSIVE

The Philippines has adopted the most comprehensive system of imposing Income tax by adopting the
citizenship principle, resident principle and the source principle.

SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM

The Philippines follows the semi-schedular or semi-global system of income taxation.

C. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX

CITIZENSHIP OR NATIONALITY PRINCIPLE

A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the
Philippines (b) only on his Philippine source income, if he qualifies as a non-resident citizen where his foreign-
source income shall be tax-exempt.

RESIDENCE PRINCIPLE

An alien is subject to Philippine income tax because of his residence in the Philippines. A resident alien is liable
to pay Philippine income tax only from his income from Philippine sources but is tax-exempt from foreign-
source income.

SOURCE PRINCIPLE

An alien is subject to Philippine income tax because he derives income from sources within the Philippines.
Thus, non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income
from sources within the Philippines.

D. TYPES OF PHILIPPINE INCOME TAX

1. Graduated income tax on individuals

2. Normal corporate income tax on corporations

3. Minimum corporate income tax on corporations

4. Special income tax on certain corporations (e.g. private educational institutions, FCDUs, and international
carriers)

5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a
capital asset

6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital
asset

7. Final withholding tax on certain passive investment incomes

8. Fringe benefit tax

9. Branch profit remittance tax; and 10. Tax on improperly accumulated earnings.

E. TAXABLE PERIOD

CALENDAR PERIOD OR CALENDAR YEAR

An accounting period which starts from January 1 and ends on December 31. This is available to both
corporate taxpayers and individual taxpayers.

•In what Instances shall taxable income be computed on the basis of calendar year?

1. Taxpayer’s accounting period is other than fiscal year

2. Taxpayer has no annual accounting period

3. Taxpayer does not keep books

Taxpayer is an individual

5. Taxpayer is a general professional partnership

6. Taxpayer is an estate or a trust

FISCAL PERIOD OR FISCAL YEAR

Accounting period of 12 months ending on the last day of any month other than December 31.

It is available only to corporate taxpayer and not allowed to individual taxpayers.

SHORT PERIOD

An accounting period wherein income shall be computed on the basis of a period less than 12 months.

The general rule is that the taxable period is always 12 months. The exceptions (where a taxpayer may have a
taxable period of less than 12 months) are:

1. Taxpayer, other than an individual, changes his accounting period from fiscal to calendar year or from
calendar year to fiscal year or from one fiscal year to another.

2. Taxpayer dies

3. Corporation is newly organized

4. Corporation is dissolved

5. Tax period is terminated by the CIR by authority of law

•General rule for computing the taxpayer’s taxable income

The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period – fiscal year
or calendar year as the case may be.

•Can a taxpayer change his accounting period?

Yes, but this applies only to corporate taxpayers. If the corporate taxpayer wishes to change his accounting
period from fiscal to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net
income shall, with the approval of the CIR, be computed on the basis of such new accounting period.

Deadline of Filing the Income Tax Return

On the 15th day of the 4th month following the close of the taxable year.

F. KINDS OF TAXPAYERS

I. INDIVIDUAL TAXPAYERS

1. CITIZENS

Under the Constitution, citizens are:

a. Those who are citizens of the Philippines at the time of adoption of the Constitution on February 2, 1987

b. Those whose fathers or mothers are citizens of the Philippines

c. Those born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the
age of majority

d. Those who are naturalized in accordance with the law

a) RESIDENT CITIZENS

A citizen of the Philippines without the intention of transferring his physical presence abroad whether to stay
permanently or temporarily as an overseas contract worker.

b) NON-RESIDENT CITIZENS

The term “non-resident citizen” means a citizen of the Philippines:

1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with
intention to reside therein

2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment
on a permanent basis

3. one 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. who has been previously considered a non- resident citizen and who arrives in the Philippines at any time
during the taxable year to reside permanently in the Philippines with respect to his income derived from
sources abroad

1. Immigrant- one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been
secured

2. Permanent employee -one who leaves the Philippines to reside abroad for employment on a more or less
permanent basis

3. Contract worker- one who leaves the Philippines on account of a contract of employment which is renew
from time to time under such circumstance as to require him to be physically present abroad most of the time
(not less than 183 days)

~Non-resident citizens are not required to file an income tax return or information return covering their income
derived from sources outside the Philippines.

2. ALIENS

a) RESIDENT ALIENS

An individual whose residence is within the Philippines and who is not a citizen.

b)NON-RESIDENT ALIENS

An individual whose residence is not within the Philippines, and who is not a citizen thereof

A . Engaged in trade or business

His total aggregate stay for a taxable year exceeds 180 days

B. Not engaged in trade or business

•How is the residency of an alien determined?

An alien is considered a non-resident if he stays here for a definite short period of time.

An alien will be considered a resident if the stay here is either

1. definite and extended:

2. indefinite

3. SPECIAL CLASS OF INDIVIDUAL EMPLOYEES

a) MINIMUM WAGE EARNER

•Is the income of minimum wage earners subject to the graduated income tax rates?
No. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Further,
their holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall likewise be
exempt from income tax.

3.ESTATES AND TRUSTS

ESTATE refers to the mass of properties and assets left behind by the deceased.

TRUST is an agreement whereby one person (grantor) transfers property to another person (beneficiary), which
will be held under the management of a third party (trustee/fiduciary).

•To whom shall the income of a trust be taxable to?

If the trust instrument is irrevocable, the income shall be taxable to the fiduciary. If the trust instrument is
revocable, the income shall be taxable to the grantor.

II. CORPORATIONS

A. DOMESTIC CORPORATIONS

Created or organized in the Philippines or under its laws.

B. FOREIGN CORPORATIONS

Created or organized under the laws of a foreign country

a.Resident foreign corporations

Engaged in trade or business within the Philippines or having an office or place of business therein

b.Non-resident foreign corporations

Not engaged in trade or business within the Philippines and not having any office or place of business therein.

III. PARTNERSHIPS

A business organization owned by 2 or more persons who contribute their industry or resources to a common
fund for the purpose of dividing the profits from the venture.

• Is a partnership liable for income tax?

Yes. The term “corporations” includes partnerships, no matter how created or organized.

Kinds of partnerships under the Tax Code

1. Taxable partnerships- these are business partnerships or partnerships which are organized for the purpose
of engaging in trade or business. They are subject to income tax as if they were corporations whether or not
registered with the SEC as a partnership
2. Exempt partnerships these are partnerships not considered as taxable entities for income tax purposes
(ex.General Professional Partnerships).

Elements of a taxable partnership

1. An intent to form the same

2. Generally participating in both profits and losses

3. Such a community of interest, as far as third persons are concerned as enables each party to make contract,
manage he business. And dispose of the whole property.

-GPP

General professional partnership (GPP) 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.

•Is a GPP liable for income tax?

No. A GPP is not considered a taxable entity for income tax purposes. Section 26 of the NIRC provides that
persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and
individual capacities computed on their respective distributive shares of the partnership profit.

-JOINT VENTURE

A business undertaking for a particular purpose. It may be organized as a partnership or a corporation.

a. Exempt Joint Venture

Those formed for the purpose od undertaking construction projects or engaging in petroleum operations. It is
not treated as a corporation and is tax-exempt on its regular income.

b. Taxable Joint Venture

All other joint ventures are taxable as corporations.

•Are joint ventures taxable?

Generally, yes. However, a joint venture or consortium undertaking construction projects or engaged in
petroleum operations with an operating contract with the government are not liable for income tax.

Requirements in order for a joint venture formed for construction purposes be not liable for income tax

Corporation should be:

1. For the undertaking of a construction project

2. Should involve joining or pooling of resources by licensed local contractors, licensed by the Philippine
Contractors Accreditation Board (PCAB) of the DTI
3. The local contractors are engaged in construction business

4. The joint venture itself must likewise be duly licensed as such by the PCAB.

Requisites of a joint venture

1. Contribution by each party

2. Profits are shared among the parties.

3. There is joint right of mutual control over the subject

4. There is a single business transaction rather than a general or continuous transaction.

-CO-OWNERSHIP

A joint ownership of a property formed for the purpose of preserving the same and dividing its income.

• Is a co-ownership taxable as a corporation?

No. The common ownership of property does not by itself create a partnership between the owners, though
they may use it for purposes of making gains. Article 1769(3) of the Civil Code provides that “the sharing of
gross returns does not by itself establish a partnership whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived.

G. INCOME TAXATION

INCOME TAX is a tax on all yearly profits arising from property, professions, trades and offices.

An amount of money coming to a person or corporation within a specified time, whether as payment for
services, interest, or profit from investment.

NATURE OF INCOME TAX

An income tax is an excise tax and not a tax on property. It is levied upon the privilege of receiving income or
profit. Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning
income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as
a source of revenue to finance its activities.

GENERAL PRINCIPLES

Resident Citizen- taxable on all income derived from sources within and outside the Philippines

Non-Resident Citizen- taxable only on income derived from sources within the Philippines

Alien (whether resident or non- resident)-taxable only on income derived from sources within the Philippines

Domestic corporation-taxable on all income derived from sources within and outside the Philippines
Foreign corporation-taxable only on income derived from sources within the Philippines (whether the he foreign
corporation engaged or not in trade or business in the Philippines)

Only resident citizens and domestic corporations are taxable on their worldwide income (both Income inside
and outside the Philippines) while the other types of individual and corporate taxpayers are taxable only on
income derived from sources within the Philippines.

H. INCOME

INCOME means the gain derived from capital, from labor, or from both combined, including profits gained from
dealings in property or as well as any asset clearly realized whether earned or not.

NATURE OF INCOME

Income is that flow of services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time. Income is the “fruit” of capital or
labor severed from the “tree.”

Income is a flow of services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time. Income is gain derived and
severed from capital.

Capital is a fund of property existing at an instant of time.

•Are stock dividends income or capital?

Generally, stock dividends represent capital and do not constitute as income to its recipient. Mere issuance
thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of
capital investment. Such are considered unrealized gain and cannot be subjected to income tax until that gain
has been realized.

However, stock dividends constitute as income if a corporation redeems stock issued so as to make a
distribution.

WHEN INCOME IS TAXABLE

1. There is income, gain or profit (existence of income)

2. The income, gain or profit is not exempt from income tax.

3. The income, gain or profit is received or realized during the taxable year (realization of income)

• When is income considered received for income tax purposes?

1. If actually or physically received by the taxpayer (actual receipt)

2. If constructively received by the taxpayer (constructive receipt)

Actual receipt involves actual physical taking of the income in the form of cash or property.

Constructive receipt involves no actual physical taking of the income but the taxpayer is effectively benefited.

•When is income recognized?

1. The earning process is complete or virtually complete

2. An exchange has taken place

METHODS OF ACCOUNTING

Accounting methods are accounting techniques used to measure income.

CASH METHOD

Method of accounting whereby all items of gross income received during the year shall be accounted for in
such taxable year and that only expenses actually paid shall be claimed as deductions during the year.

Income is reported in the year payments are received while expenses are deducted in the year paid.

ACCRUAL METHOD

Method of accounting for income in the period it is earned, regardless of whether it has been received or not.
Expenses are accounted for in the period they are incurred and not in the period they are paid.

Income is reported in the year it is earned while expenses are deducted in the year it is incurred, regardless of
receipt or disbursement of cash.

INSTALLMENT PAYMENT

A method of accounting considered appropriate when collections of the proceeds of sales and incomes extend
over relatively long periods of time and there is strong possibility that full collection will not be paid. As
customers make installment payments, the seller recognizes the gross profit on sale in proportion to the cash
collected during the year.

PERCENTAGE OF COMPLETION METHOD

Is a method of accounting 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.

DEFERRED PAYMENT METHOD

A method of accounting considered when payments are made at a later date.

When the asset sold is an ordinary asset or a capital asset other than property subject to capital gains tax, the
income from deferred payment sale of property may be reported under the instalment method or deferred
payment method.

Tests in determining whether income is earned for tax purposes

(i) Realization test

There is no taxable income until there is separation from capital of something of exchangeable value, thereby
supplying the realization or transmutation which would result in the receipt of income.

Income is not deemed realized until the fruit has been plucked from the tree.

(ii) Claim of right doctrine or doctrine of ownership, command or control

The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the
payment of income to another is the enjoyment and hence the realization of the income by him who exercises
it. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create
the right to receive it and enjoy the benefit of it when paid.

(iii) Economic benefit test, doctrine of proprietary interest

Where stock, options, shares of stock of other assets are transferred by an employer to an employee to secure
better services they are plainly compensation which is taxable Income.

(iv) Severance test

Income is reportable when all the events have occurred that fix the taxpayer’s right to receive the income and
the amount can be determined with reasonable accuracy.

(v) All events test

The test of taxability is the source (the property, activity or service that produced the income determines
whether any gain was derived from the transaction.