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T-01.

1
FUNDAMENTAL PRINCIPLES OF TAXATION
Taxation
1.

As a power refers to the inherent power of the state to demand enforced contribution for public purpose to support the
government.
2. As a process the legislative act of laying a tax to raise income for the government to defray its necessary expenses.
Purpose of Taxation
1. Primary to raise revenue
2. Secondary
a. Regulatory
- To regulate the conduct of businesses or professions
- To achieve economic and social stability
- To protect local industries
b. Compensatory
- Key instrument of social control
- Check inflations
- Reduces inequities in wealth distributions
- Tools on international bargains
- Strengthens anemic enterprises
- Promotes science and inventions
- Provides incentives
- Uses as implement in the exercise of police power to promote general welfare
The Life Blood Doctrine
Taxes are indispensable to the existence of the state. Without taxation the state cannot raise revenue to support operations
Nature or Characteristics of the Power of Taxation
1. For public purpose
2. Inherently legislative in nature
3. Subject to international comity or treaty
4. Not absolute being subject to constitutional and inherent limitations
5. Exaction payable in money
6. Territorial
How exercised:
- Legislation of laws by Congress and tax ordinances by the Local Sangguanian
- Tax collection by the administrative branch of the government
Scope of the Power of Taxation
Taxation is supreme, comprehensive, unlimited and plenary. It includes the power to destroy
Discretion of the Taxing Power this extends to:
1. Amount or rate of the tax
5. Situs of taxation
2. Kinds of tax to be collected
6. Method of collection
3. Apportionment of the tax
7. Purposes for its levy, provided for public purpose
Underlying principles behind the power of taxation
1. Principles of Necessity the existence of the government is a necessity and it cannot continue without means to support
itself this is the Theory of Taxation
2. Benefit Received Theory the government and the people have the reciprocal and mutual duties of support and protection
this is the Basis of Taxation
Legal Basis of the Power of Taxation
1. Benefit-received theory
2. The sovereign power of the state over is people and property
3. The presumption of receipts or enjoyment of benefits and protection by the people
4. To protect new conditions by imposing special duties
5. To uplift social conditions by imposing regulatory taxes or licenses
Objects of Taxation
1. Businesses
5. Acts
2. Interests
6. Persons
3. Transactions
7. Properties
4. Rights
8. Privileges

Phases of Stages of Taxation


a. Levy or Imposition
b. Assessment of tax
c. Payment of the tax
- These all comprise the taxation system

Impact of taxation
Incidence of Taxation

Aspects of
Taxation

Elements of the tax system


a. Tax structure
b. Tax administration
c. Public tax consciousness
Principles of a sound tax system
a. Fiscal Adequacy sources of revenue should be sufficient to meet the demand for public expenditure
b. Administrative feasibility tax laws must be capable of convenient, just and effective administration
c. Theoretical Justice tax must be imposed with equity and certainty and must consider the taxpayers ability to pay and
benefits received.
Non-observance of the principles does not necessarily render a tax levy unconstitutional.
Principal Approaches in the distribution of tax burden
a. Benefit approach tax payment should be based on benefits received
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b. Ability to Pay Approach tax payments should be based relative to the ability of taxpayers to pay
Taxation and Economic Efficiency
1. Income Effect makes people economically efficient (ex: transactions)
2. Substitution Effect makes people economically inefficient (ex: indirect taxes)
The Inherent Powers of the Government
1. Power of Taxation the power to take property for the support of the government and for public purpose
2. Police power the power to enact laws to promote the general welfare of the people. It is wider in application because it is
the general power to make laws.
3. Power of the Eminent Domain the power to take private property for public use upon payment of just compensation
Point of Differences of the Inherent Powers of the State
Point of Difference
Exercising Authority

Taxation
Government

Police Power
Government

Necessity of Delegation

Delegation is not necessary


since it is inherent

There must be delegation


before local governments
could exercise it

Purpose

Revenue and support of the


government
Community or class of
individuals
Money paid as taxes
becomes part of the public
fund

Protect the well-being of


the people
Community or class of
individuals
There
is
no
transfer of title, at
most there is
restraint on the
injurious use of
property

Unlimited

Sufficient to cover the costs


of regulation

Most important of the three


Inferior to the Nonimpairment Clause of the
Constitution

Most superior
Superior to the NonImpairment Clause of the
constitution

Constitutionally
inherently restricted

Public interest and the


requirement of due process

Persons affected
Effect of transfer
property rights

of

Amount of Imposition

Importance
Relationship
Constitution

Limitation

with

the

and

Eminent Domain
Government or private
entities
There must
be
due
delegation before local
government or private
party may exercise it
Property is taken for public
use
Operates on the owner of
the property
There is transfer of right to
property whether it be of
ownership or lessor right

No imposition, the owner is


paid the fair market value
of his property
Superior
and
may
overidethe
NonImpairment
Clause
because the welfare of the
state is superior to private
contracts
Public purpose and just
compensation

Similarities of the three powers:


1. All three powers are necessary attributes of sovereignty, resting upon necessity
2. All are inherent powers of the State
3. All are legislative in nature
4. They are ways in which the State interferes with private rights and property
5. They exist independent with the Constitution although the condition for their exercise may be prescribed or limited by
the constitution.
6. They all presuppose an equivalent compensation received by the persons affected by the exercise of the power, whether
directly, indirectly or remote.
7. The exercise of these powers by the local government units may be limited by national legislature
*police power can be used to raise revenue for the government (ex: license fee)
LIMITATIONS OF TAXATION POWER
A. Constitutional Limitation
1. Observance of due process of law
2. Equal protection of the law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Non appropriation of public funds or property for the benefit of any church, sect or system of religion
9. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from real property
taxes
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions including grants,
endowments, donations or contributions for educational purposes
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
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Exception:
a. Power to tax was delegated to the President under the Flexibility Clause of the Tariff and Customs Code
b. Power to tax was delegated to the local government units under the Local Government Code
c. Matters involving the expedient and effective administration and implementations of assessment and collection of
taxes or certain aspects of taxing process that are not legislative in character
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments
16. Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in
the national taxes
B. Inherent Limitation
1. Territoriality of taxation
2. Subject to international comity or treaty
3. Tax exemption of the government
4. Tax is for public purpose
5. Non-delegation of the power of taxation
*the last 2 limitations are also Constitutional limitations
SITUS OF TAXATION
The place of taxation
Factors that determine the situs of taxation
1. Nature, kind or classification of the tax
2. Subject matter of the tax
3. Citizenship of the taxpayer

5. Sources of income
6. Place of exercise, business or occupation being taxed
7.Place where income producing activity was held or done

Applications
1. Persons residence of the taxpayer
2. Community development tax residence or domicile of the taxpayer
3. Business taxes- where the business was conducted or place where the transaction too place
4. Privilege or occupation tax where the privilege is exercised
5. Real property tax where the property located
6. Personal property tax
a. Tangible where they are physically located
b. Intangible domicile of the owner unless the property has acquired a situs elsewhere
7. Income- place where the income is earned or residence or citizenship of tax payer
8. Transfer taxes- residence or citizenship of the tax payer or location of property
9. Franchise taxes- state that grants the franchise
10. Corporate taxes- depend on the law of corporation
DOUBLE TAXATION
Taxing the object within the territorial jurisdiction twice, for the same period, involving the same kind of tax by the same taxing
authority.
Kinds:
1. Direct Double Taxation- this objectionable and discouraged because it violates the constitutional provision on
uniformity and equality.
2. Indirect Double Taxation- no constitutional violation. Ex. Taxing the same property by two different taxing authority.
International Double Taxation- a double taxation caused by two different taxing authorities, one domestic and one foreign.
Remedies to Double Taxation
1. Provision for tax exemption
2. Allowance for tax credit
3. Allowance for principle of reciprocity
4. Enter into treaties with an agreement with foreign government
Forms of Escape from Taxation
A. Those that will not result in loss of revenue to the government
1. Shifting- the process of transferring the tax burden from the statutory taxpayer to another without violating the law.
2. Capitalization- the seller is willing to lower the price of the commodity provided the taxes will be shouldered by the
buyers.
3. Transformation- the manufacturer absorbs the additional taxes imposed by the government without passing it to the
buyers for fear of lost of his market. Instead, it increases quantity of production, thereby turning their units of
production at a lower cost resulting to the transformation of the tax into a gain through the medium of production.
B. Those that will result to loss of revenue to the government
1. Tax Evasion- tax dodging-resorting to acts and devices that illegally reduces or totally escape the payment of taxes
that are due to the taxpayer. They are prohibited and are therefore are not subject to penalties.
2. Tax avoidance- tax minimization scheme- the reduction or totally escaping payment of taxes through legally
permissible means, that are not prohibited and therefore are not result to penalties.
3. Tax exemption- an immunity, privilege or freedom from payment of a charge or burden to which others are obliged
to pay.
Kinds of exemptions:
1. Express- granted by the constitution, statute, treaties, ordinance, contracts or franchise
a. Constitutional
b. Statutory
c. Contractual
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2. Implied- exempted by accidental or intentional omission
3. Total- exemption from all taxes (OFWs)
4. Partial- exemption from certain taxes, partially or totally
Grounds for Exemption
1. It may be based on a contract
2. It may be based on grounds of public policy ex: granting of exemptions to rural banks, and sweepstakes or lotto winnings
3. It may be based on some grounds to foster charitable and other benevolent institutions
4. It may be created under a treaty on grounds of reciprocity
5. It may be created to lessen the rigors of international double or multiple taxation
Distinction between tax evasion and tax avoidance
Tax Evasion
It is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to penalties
It is accomplished by breaking the law
It connotes fraud, deceit and malice

Tax Avoidance
It is a tax saving device within the means sanctioned by law
Accomplished by legal procedures and not violate the law
No fraud is involved

Tax exemptions:
Is not automatic
Is non-transferable
Is revocable by the government (except when granted under a valid contract or by the Constitution)
Rule shall be uniform
Does not contravene the LifeBlood Doctrine
Is always disfavored
Is allowed only under a clear and unequivocal provision of the law
On real property tax will be based on the Doctrine of Usage and not Doctrine of Ownership, except for real
properties owned by the government which is absolutely exempt from taxation
On real property tax cannot be granted by Local governments but can condone real property tax liabilities in special
cases
On local taxes can be granted by local governments but they cannot condone existing liabilities on local taxes
Fundamental Doctrine in Taxation
1. No court may enjoin the collection of taxes
2. Claim for exemptions shall be interpreted strictly against the taxpayer
3. A law that permit deduction from the tax base is strictly construed against the taxpayer
4. Tax assessment are presumed to be correct and done in good faith
5. Tax laws are generally prospective in application
6. Tax are not subject to compensation or set-off
7. Refund of taxes do not earn interest because interest do not run against the government
Distinction between Tax Amnesty and Tax Condonation
Tax Amnesty a general pardon or intentional overlooking by the state of its authority to impose penalties on persons
otherwise guilty of tax evasion or violation of tax laws. The purpose is to give the erring taxpayer a chance to reform and
become part of the society with a clean slate.
Tax Condonation means to remit or to desist or refrain from exacting or imposing a tax. It cannot extend to refund of
taxes already paid when obtaining condonation.

Tax Exemption
There is no tax liability at all
The grantee need not pay anything
Can be availed of by any qualified taxpayer

Tax Amnesty
Connotes condonation from payment of existing tax liability
The grantee pays a portion
Not always available

TAXES, TAX LAWS AND TAX ADMINISTRATION


Tax
An enforced proportionate contribution imposed upon persons, properties, businesses, rights, interests, privileges,
transactions and acts within the territorial jurisdiction of the taxing authority exercise by the legislature for a public purpose
and generally payable in money.
Elements of a Valid Tax:
1. Must not violate the constitutional, inherent and or contractual limitation of the power of taxation
2. Must be uniform and equitable, no unjust, excessive, oppressive, consficatory or discriminatory
3. Must be for a public purpose
4. Must be levied by the taxing power (legislature) having jurisdiction over the object of taxation
5. Must be proportionate in character
6. Generally payable in money, at regular interval (not regular in payment)
Classification of Taxes
a. As to purpose
1. Fiscal general, fiscal or revenue tax imposed for the general purpose of the government or to raise revenue for
government needs ex: income tax
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2.

Regulatory special or sumptuary tax imposed for a special purpose or to achieve some social or economic ends
ex: tariff or custom duties
b. As to subject matter
1. Personal, poll or capitation tax of a fixed amount imposed on individuals residing within a specified territory
without regard to their property or the occupation in which they be engaged in ex: community tax certificate
2. Property tax tax imposed on property, whether real or personal, in proportion, either to its value or in accordance
with some other reasonable method of apportionment. Ex; real estate tax
3. Excise tax or privilege tax tax imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. Ex: income tax, value-added tax, privilege tax on business or occupation
c. As to incidence
1. Direct - the tax is demanded from one person in who is intended to pay it. Example: income tax and personal tax.
2. Indirect the tax is demanded from one person in the expectation and intention that he shall indemnify customs
duties and some percentage taxes
d. As to amount
1. Specific tax the tax is demanded from one person in who is intended to pay it. Example: income tax and personal
tax
2. Ad valorem tax is imposed for a fixed proportion of the amount or value of the property to which the tax is
assessed. Examples: excise taxes on cigarettes and gasoline, real property taxes and certain customs duties
e. As to rate
1. Proportional or flat rate the tax is based on a fixed percentage of the amount of the property, income or other
basis to be taxed. Ex: real estate tax, VAT and percentage taxes
2. Progressive or graduated tax - the rate increases. Progressive rate is preferred in achieving vertical equity. Ex:
income tax, estate tax, and donors tax.
3. Regressive tax the tax the rate of which decreases as the tax base increases. The Philippines has no regressive tax,
but some indirect taxes manifest a regressive effect
4. Mixed tax
f. As to imposing authority
1. National tax imposed by the National Government
Examples:
a. Income taxes
c. Value-added tax
e. Other percentage taxes
b. Estate and donors tax
d. Excise tax
f. Documentary stamp tax
2. Local tax tax imposed municipal or local governments
Examples:
a. Real property tax
d. Community tax; and
b. Professional tax
e. Tax on banks and other financial institutions
c. Business taxes, fees and charges
DISTINCTION OF TAX WITH SIMILAR ITEMS
TAX VS. REVENUE
TAX
Refers to the amount imposed
Only one of the sources of government revenues

REVENUE
Refers to the amount collected
The product of taxation. It refers to all the funds
derived by the government whether from tax or from
other sources

TAX VS. LICENSE


Point of distinction
Purpose
Amount
Subject of Imposition

When imposed
Basis of imposition

Tax
For revenue
No limit
Person, properties, business rights,
interests, privilege, acts and
transactions
Does not necessarily make the act,
business or profession illegal
Has a nature of permanence
The power to tax includes the power
to license
Post-activity
Current data

Sources of Power

Taxing power of the government

Effect of non-compliance
Revocability
Scope

License
For regulation
Limited
Required for the commencement of
a business profession
Makes the business illegal
Always revocable
Power to license does not include
the power to tax
Pre-activity
Preceding year or quarter date. If
new
business,
based
on
capitalization
Police power of the government

TAX VS. DEBT


Basis
Effect of non-compliance

Tax
Law
May involved imprisonment, except
for poll tax

Debt
Contract
No imprisonment
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Assignable?
Mode of settlement
Set -off?
interest

No
Generally money
Generally not subject to set-off
Does not earn interest except when
delinquent

Yes
Cash or In kind
Subject to set-off
Draws interest when stipulated or
when in default

TAX VS. TOLL


Tax
Demand of sovereignty
Ones support for the government
Imposed only by the government

Toll
Demand of ownership
Compensation for the use of somebodys elses property
May be imposed by the government or by private
individuals
Determined by the cost of the property or improvements
thereon

Based on government needs

TAX VS. SPECIAL ASSESSMENT


Subject of the imposition

Effect on the person owning the


subject

Basis of Imposition
Coverage of application

Tax
Business,
interests,
transactions,
rights,
persons,
properties
or
privileges
May be made a personal liability of
the person assessed

Necessity with no hope of direct or


immediate benefit to the taxpayer
General application

Special Assessment
Land

Cannot be made the personal


liability of the person assessed,
because it is the land that answers
for the liability
Entirely on benefits received
Exceptional in application

TAX VS. TARIFF


Tariff refers to a book of rates containing names of merchandises with corresponding duties to be paid for the same. Tariff
refers to the duties payable on goods imported or exported. It is a system or principle of imposing duties on the importation
or exportation of goods *Customs duties and tariffs are used interchangeably
TAX VS. PENALTY
Purpose

Tax
To raise revenue

Exercising authority

The government

Source
Mode of settlement

Law
In money

Penalty
To regulate conduct through
punishment and suppression of
injurious act
The government or by private
individuals
Law of contract
In money or in kind

Note:
Payment of tax is compulsory to those who are covered by imposition
Taxes are important because they are the lifeblood of the government
Taxes are personal. The burden of taxation cannot be transferred from one person to the other by private agreement
as this is determined by law
While the power of taxation includes the power to destroy, it is not absolute. It is subject to limitation or
restrictions.
Tax Law
Any law that provides for the assessment and collection of taxes for the support of the government and other public purposes.
Sources of Tax Laws:
1. Constitution
2. Statutes and Presidential Decrees
3. Executive Orders and Batas Pambansa
4. Tax treaties and conventions with foreign countries

5. Administrative Issuances or BIR Rulings


6. Judicial Decisions
7. Local Ordinances
8. Revenue regulation of by the DoF

Revenue Regulation
Formal pronouncement intended to clarify or explain the tax law and carry into effect its general provisions by providing
details of administration and procedure. They have the force to effect of law.
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Administrative issuances or BIR Rulings - these are the less general interpretations of the tax laws at the administrative
levels, being issued from time to time by the CIR, to clarify certain provisions of the tax law. They are merely advisory or
sort of an information service to the taxpayer such that, none of them are binding except to the addressee and may be
reversed by the BIR at any time.
NATURE OF PHILIPPINES TAX LAWS
Philippine tax laws are civil in nature and character. They remain effective even in times of war. They are not penal
in nature although penalties are provided for their violation because they do not define crimes and provide for their
punishment.
FUNDAMENTAL DOCTRINES IN TAXATION
A. Marshall Dictum- The power to tax includes the power to destroy
- constitutional if taxation power is used validly as an implement of police power in discouraging certain acts and
enterprises inimical to public welfare.
- Unconditional if in raising revenue, taxation is allowed to confiscate or destroy properties.
B. Holmes Doctrine-Taxation power is the power to build
-the power to tax should not be the power to destroy. The power to destroy is merely a consequence of taxation.
C. Doctrine of Judicial Non-interference
-the courts cannot inquire into the wisdom of a taxing act or the advisability or expediency of a tax. The
impracticability and absurd consequences of a tax law should be addressed to the legislature and administrative
authorities and not the courts.
D. Prospectivity of Tax laws
-tax laws are prospective in character and applications.
Exemptions:
1. The retroactive application is necessarily implied from the provisions of the law.
2. It involves income tax
3. The retroactive application is clearly the intent of the congress
E. Imprescriptibility in Taxation
-taxes are imprescriptible unless the law itself provides, for such prescription.
F. Principle of Strictissi Jurris- Taxation is the rule and exemption is the exception
-Tax exemption must be strictly construed against the taxpayer and liberally in favor of the government.
G. Doctrine of Equitable Recoupment
-where the refund of taxes are barred by prescription which can no longer be claimed by a tax payer but there is a
present tax being assed against the said taxpayer, such present tax may be recouped or set-off against the tax, the
refund of which has been barred.
-Basis: The government cannot enrich itself at the expense of the taxpayer
*This doctrine is not applicable in the Philippines as if it conflicts with prescription laws.
H. Non-compensation or Set-off rule
-the government and the taxpayer are not creditor and debtor to each other. Taxes are not in the nature of contracts
between the parties but grew out of duty arising from law; hence, they cannot be set-off.

I.

Doctrine of Estoppel
-the state cannot be estopped by the neglect, errors, or mistakes of its agents or officers. Thus the erroneous
application and enforcement of law by public officials do not block the subsequent correct application of the
statutes. The doctrine of estoppel operates only against the taxpayer.

TAX ADMINISTRATION
The Bureau of Internal Revenue
The Bureau of Internal Revenue is tasked with tax administration function of the government. Together with the
Bureau of Customs, they are under the supervision and control of the Department of Finance.
Chief Officials of the Bureau
1. 1 chief officer: The Commissioner Of Internal Revenue
2. 4 assistant chief: Deputy Commissioners
Powers of the Bureau
1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties, and fines and judgments in all cases in its favor by the courts
3. Giving to and administering the supervisory and police powers conferred to it by the NIRC and or other laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution to proper officials of forms, receipts, certificates, stamps: etc.
6. Issuances of receipts and clearances
7. Submit annual report, pertinent information to Congress and reports to the Congressional Oversight Committee in
matters of taxation
Powers of the Commissioner of Internal Revenue
1. To interpret the provision of NIRC (subject to review by the secretary of Finance)
2. To decide tax cases(subject to the exclusive appellate jurisdiction of the Court of Tax Appeals)
3. To obtain information and to summon, examine and take testimony of persons to effect tax collections
4. To make assessment and prescribe additional requirement for tax administration and enforcement
5. To make or amend a return for and in behalf of a tax payer; or to disregard one filed by the tax payer
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6.
7.
8.
9.
10.

To change a tax period


To compromise a tax liabilities of taxpayers
To conduct inventory surveillance
To prescribe presumptive gross sales or receipts
To prescribe real estate values
The CIR is authorized to divide the Philippines into zones or areas and determine the fair market value of the real
properties located in each zones or area.
11. To accredit tax credits
Individuals or general professional partnerships who have been denied their accreditation may appeal to the Secretary of
Finance who shall act on the appeal within 60 days from the receipt of such appeal. Failure by him to rule on the appeal
within the prescribe period shall be deemed approval of the application for accreditation.
12. To inquire into bank deposits under certain cases
13. To prescribe additional procedures or documentary requirements
14. To delegate his powers to any subordinate officer with rank equivalent to a division chief of an office
15. To refund or credit internal revenue taxes
16. To abate or cancel tax liabilities in certain cases
17. To examine tax returns and determine tax due thereon
18. To cause revenue officers and employees to make a canvass from time to time of any revenue district or region
concerning tax payers
Powers of the CIR that cannot be delegated*
1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of the Bureau
3. The power to compromise or abate any tax liability (note: to be discussed in tax remedies)
Exception: compromise by Regional Evaluation Boards under the following requisites
a. Assessment are issued by the regional offices involving basic deficiency tax of P500,000.00, and
b. Involves minor criminal violations as may be determined by rules and regulations by the Secretary of Finance, upon
recommendation of the CIR, discovered by regional and district officials.
4. The power to assign and reassign internal revenue officers to established where articles subject to excise tax are
produced or kept. Revenue officers assigned to any such establishments shall in no case stay in his assignment for more
than 2 years.
Rules in assignments to other duties
Revenue officers assigned to perform assessment and collection function shall not remain in the same assignment for more
than 3 years. Assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year.

Agents and Deputies for collection of National Internal Revenue Taxes


1. The commissioner of customs and his subordinates with respect to collection of national internal revenue taxes on
imported goods.
2. The head of appropriate government offices and his subordinates with respect to the collection of energy tax
3. Banks duly accredited by the commissioner with respect to receipts of payments of internal revenue taxes authorized to
the made thru banks.
FUNDAMENTALS OF INCOME TAXATION
INCOME
All wealth which flows into the taxpayer other than a mere return of capital and includes gains
Why is income taxed?
Income is the best measure of taxpayers ability to pay.
Basic Definitions:
Gross Income - refers to what is income for taxation purposes
Taxable income as the pertinent items of gross income that are subject to tax after allowable deductions
Tax Base the value of a certain goods, or property for taxation purposes.
Characteristics of Gross Income:
1. Return on capital and resulted increased networth at the moment of its generation
2. Realized benefit by the taxpayer (realization means actual or constructive receipt of in cash)
Example of constructive receipts of income:
1. Credit to an account own by the taxpayer
2. Declaration of a share of the profits of a general professional partnership
3. Offsetting debt with right to receive dividends
4. Cancellation of debt in payment of service
Which do not constitute gross income?
1. Receipts representing returns of capital
Examples:
a. Proceeds of life insurance policy (upon death of the insured)
b. Proceeds received by the insured (still living) representing return of premium
2. Unrealized income
Examples:
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3.

a. Appreciation of value of properties


b. Unrealized gains on investments
Those exempted by the Constitution, statues or treaty or contract with taxpayers
Examples:
a. Receipt of non-profit institutions from their main activities
b. Contributions to GSIS, SSS, PhilHealth, Pag-Ibig and
c. Retirement and separation benefits under certain circumstances
d. Tax holiday for entities registered pursuant to the Omnibus Investment Code
e. Income of foreign government or corporations owned or controlled by them

Taxation of Gross Income under the NIRC:


a. Passive Income Tax
1. Capital gains tax few final tax is imposed on certain gains on dealings on properties
Examples include final tax on:
a. Final tax on net gain on sale of domestic stocks directly to buyer (withheld at source)
b. Final tax on gains on sale of real property located in the Philippines classified as capital asset
2. Other withheld final tax- these are groups of passive income that are subject to withholding by the income payor.
Examples include final tax on:
a. Interest on deposits with banks
d. Winnings
b. Prizes
e. Royalties
c. Dividends received from domestic corporation
b. Regular (Active) Income tax applies to all items of gross income that are generated by the taxpayer in the ordinary course of
business or to those items of passive income that are not covered by final taxes.
Regular income tax is either:
1. Progressive tax (0-32% schedular rates) applicable to individual and taxable trusts and estates
2. Final tax (35%) applicable to corporations
Examples active income:
1. Compensation income
2. Professional income
3. Business income
4. Those items of income that are excluded from capital gains tax
a. Gain on sale of properties located abroad
b. Gain on sale of properties located in the Philippines by non-resident
c. Gain on sale of other non-domestic stocks and non-real property capital assets
5. Those items of income that are excluded from other final taxes
a. Interest income on notes receivable (not deposit)
b. Prizes where the taxpayer has no intention or active effort to compete (Nobel Prize, cash awards to Most Outstanding
Citizens of Baguio)
c. Dividends from foreign corporations
6. Others
a. Certain tax benefits (example items of deductions claimed in the past that are subsequently recovered)
b. Obligations waived by the creditors in consideration of service.
SITUS OF INCOME
A. Interest debtors residence
B. Dividends
1. By a domestic corporation within the Philippines
2. By a foreign corporation apply the income dominance test
Basis:
World gross income for the three-year period ending the current taxable year preceding the declaration of such
dividends
a. If Philippine gross income is more than 85%, the whole dividends are considered within
b. If Philippine gross income is less than 50% of the basis, the whole dividend is considered earned outside the
Philippines.
c. If the Philippine gross income is at least 50% of this, the ratio of Philippine gross income over the basis multiplied
by the dividend received is considered earned within the Philippines.
C. Service place of performance of the service
D. Rent - location of the property
E. Royalties place where the intangible is used
F. Gain on sale
a. Real property location of the property
b. Domestic shares of stock always within the Philippines
c. Personal property place of sale
G. Mining location of mine
H. Farming location of farm
I. Merchandising place of sale
Place of Purchase
Place of Sale
Income is earned
a. Within
within
within
b. Within
abroad
abroad
c. Abroad
Within
within
d. Abroad
abroad
abroad
J. Manufacturing place of production and place of sale:
Whether full or partial processing, for example:
Place of production
Place of Sale
Income is earned
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a. Within
Within
Within
b. Within
Abroad
Within and abroad
c. Abroad
Within
Within and abroad
d. Abroad
Abroad
Abroad
Allocation methods:
1. With factory or production price the value as transfer price of the factory to the selling segment is deemed the selling
price of the commodity transferred.
2. Without factory or production price the portion deemed earned within the Philippine is:
(Property value, Philippines/ Property value, world) *50% of income
xxx
(Gross sales, Philippines/ Gross sales, world)* 50% of income
xxx
Manufacturing income earned from the Philippines
P xxx
TAX ACCOUNTING PERIODS
Gross income accumulates over a period of time. Income taxation would require adoption of an accounting period wherein to
measure the income. The NIRC provides that taxable income shall be computed upon the basis of the taxpayers annual
accounting period in accordance with the methods of accounting regularly employed in keeping the books of such taxpayer
There are two types of tax accounting periods:
1. Calendar year - the 12-month period ending December 31 and is applicable to:
a. Individuals
b. Taxpayers who do not keep books
c. Taxpayers with no annual accounting period
d. Taxpayers with accounting periods other than the fiscal year

2. Fiscal period any 12 months period ending the last day of any month other than December 31 st. this is not available to noncorporate taxpayers
Normally, accounting period are uniformly 12 months, however, short accounting period may arise in the following cases:
1. Death of a taxpayer
3. Dissolution of a business
2. Newly organized business
4. Changes in accounting period
TAX PAYMENTS
Tax shall be paid on the 15th day of the fourth month following the close the taxpayers taxable year
TAX ACCOUNTING METHODS
So as the reporting of items of gross income would be consistent, tax accounting methods should be applied such as the
following:
a. PRINCIPAL METHODS
1. Cash basis Method income is recorded in the year it is actually or constructively received; expenses are generally
reported in the year it is paid
2. Accrual Method income is reported in the year it is earned and expenses are deducted in the year incurred
3. Hybrid Method combination of both cash basis and accrual basis method
b. DEFERRED PAYMENT SALES
1. Installment method applicable in the following three cases only:
a. Sale of personal property by a dealer
b. Casual sale of personal property where:
Selling price is over P1,000.00
Initial payment do not exceed 25% of the selling price
Property is of a kind which would be included in the taxpayers inventory if on hand at the close of the
taxable year
c. Sale of real property where the initial payment do not exceed 25% of the selling price
Initial payment - refers to payments which the seller receives upon the execution of the instruments of sale and
those scheduled to be received in the year of sale or disposition. It simply means total first year payments but do
not include receipts of evidence of indebtedness of the buyer such as notes.
2. Deferred payment basis applicable when the buyer has issued evidence of obligation (notes). The notes shall be valued
at its market value at the date of receipt. The difference between the fair value and the face value is reported as interest
income in the future taxable period. This is an alternative to delaying tax payments when the installment method is not
available.
c. LONG-TERM CONSTRUCTION CONTRACTS
1. Percentage of completion this is applicable only to long-term construction contracts covering a period in excess of one
year. (architect or engineers certification is required)
2. Completed contract basis gross income is recognized upon completion of construction contract
d. FARMING INCOME
Crop year basis - applicable only to farmers engaged in the production of crops which takes more than a year from the time
of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in the year of the gross income
from the sale of the crops is realized.
e. LEASEHOLD IMPROVEMENT
1. Outright method the value of the leasehold improvement attributable to the lessor is reported in taxable income at the
time of completion of the leasehold.
2. Spread-out method the value of the leasehold improvement attributable to the lessor is recognized in taxable income
over the lease term.
Reminders of Tax Accounting Methods:
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a.

Absence of accounting method or use of one that do not clearly reflects the income
If the taxpayer has no accounting method or if the method employed does not clearly reflect the income, the computation
shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income.
b. Consolidation of gross income from two or more methods
If a taxpayer adopted the cash basis and accrual basis in accounting for income earned on separate trade or business, he may
opt to combine the two incomes determined from the respective methods as a consolidated income for tax purposes
c. Change of Tax Method
- Prior BIR approval is required
- If the taxpayer changes its accounting methods from accrual to installment method, he should include in future periods the
collection of receivables in future gross income.
d. Expenditures benefiting future periods
Expenditures benefiting more than one taxable period is deferred and allocated to those periods expected to be benefited by
the expenditure.
e. Advanced receipt of items of gross income
Receipt of income in advance is taxable in the year of receipt

GENERAL RULE IN INCOME TAXATION


Income Taxable in the Philippines
Type of Taxpayers
Earned Philippines
Earned abroad
Individuals
a. Citizens
1.
Resident
2. Non-resident
b. Aliens
1. Resident
2. Non-resident
a. In business
b. Not in business
c. Estate and Trusts
same rule with individuals
II. Corporation
a. Domestic
b. Foreign
1. Resident
2. Non-resident
TAX COMPLIANCE
The Philippine follows the self-assessment method wherein taxpayers determine their gross income, prepare their income tax
returns and pay the tax accordingly. The return filed is presumed correct unless proven otherwise by the government. However,
in cases of failure to file a return, the Commissioner of Internal Revenue shall file a return from the best available information and
such return thus filed is presumed correct. The taxpayer has the burden of proof in this case. The same rule applies when tax
authorities has reasons to believed that the tax return of the taxpayer is grossly misstated.
Income tax return is required for items of gross income that are subject to:
1. Regular income tax (quarterly and annual consolidated return)
2. Capital gains tax (per transaction and an annual consolidated return)
Who shall file income tax return?
1. Every resident Filipino citizen
2. Every non-resident Filipino citizen on his income from sources within the Philippines
3. Every resident alien on income from sources within the Philippines; and
4. Every non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on income from
sources within the Philippines
Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and additional exemptions, except those engaged in
business or profession
2. And individual with respect to pure compensation income, derived from sources in the Philippines, the income tax on which
has been correctly withheld, except those with concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individual who is exempt from filing income tax returns in pursuant to other provisions of the Tax Code and other laws
Where to file income tax returns?
1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent
4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his legal residence or principal place of
business in the Philippines or
5. Office of the Commissioner if the taxpayer has no legal residence or place of business in the Philippines
Payment of Income Tax
1. Outright
2. Installments (for individual taxpayers)
The Networth Method
The Networth method serves as a test of the existence of income when not specifically disclosed.
Possible Gross Income = Personal Expenditures + Change in Networth*
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*The change in Networth is computed as:
Asset, end
Liabilities, end
=
Networth, end
Less: assets, beginning
Liabilities, beginning
=
Networth, beginning
Change in networth
the possible gross income is generally taxable, except when it:
1. Is excluded by law, contract, treaty, public policy from taxation
2. Result from additional investment
3. Is not income for income tax purposes (i.e does not meet the three characteristics of gross income)
_______________________________END-01______________________________
OUR GREATEST GLORY IS NOT IN NEVER FAILING, BUT IN RISING UP EVERY TIME WE FAIL.

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