GENERAL PRINCIPLES OF TAXATION

I. Inherent Powers of the State

1. Police Power – power to make and implement laws for the general welfare
2. Taxation Power – power to enforce contribution to raise government funds; it is an inherent power by which
the sovereign through its law-making body raises revenue to defray the necessary expenses of the
government.
3. Eminent Domain Power – power to take private property for public use with just compensation

II. Similarities and Differences

POLICE TAXATION EMINENT DOMAIN

Power to TAKE private property

Power to MAKE and IMPLEMENT Power to ENFORCE contribution
for public use with just
laws for the general welfare to raise government funds
compensation

Plenary, comprehensive, and

Broader in application Merely to take private property
supreme BUT NOT ABSOLUTE

Property is taken or destroyed to Money is taken to support the

Property is taken for public use
promote general welfare government

Cannot be delegated, if
delegated, it should be to the
Can be expressly delegated Can be expressly delegated
legislative department of the
LGU (e.g. to make ordinances)

Limited to the cost of regulation,
license and other necessary
expense
No imposition as to amount,
instead, it is the Government
Generally, NO limit on amount
which is to compensate the
property taken.

Superior to and may override

Relatively FREE from Subject to Constitutional and
Constitutional impairment
Constitutional limitations Inherent limitations
provision

Superior to Non-Impairment Inferior to Non-Impairment Inferior to Non-Impairment

Clause Clause Clause

III. Concept of Taxation

1. Principles or Canons of a Sound Taxation System (FEA)
a. Fiscal Adequacy – sufficiency to meet government expenditures and other public needs (Government
Budget Balance). This is in consonance of the Lifeblood Theory.
a.1. Budget Deficit = Government Revenues < Government Expenditures
a.2. Budget Surplus = Government Revenues > Government Expenditures

b. Equality or Theoretical Justice – based on the taxpayer’s ability to pay; must be progressive
c. Administrative Feasibility – capability of being effectively enforced. Tax laws should not obstruct business
growth and economic development.

2. Purpose
a. Primarily, to raise revenue
b. To regulate (inflation, economic and social stability, social control, etc.)
c. To compensate the benefits provided by the government to the people

3. Characteristics (ILS)
a. Inherent power of the state.
b. Exclusively lodged with the legislative body
c. Subject to inherent and constitutional limitations

4. Nature
a. Plenary – full and complete in all respect
b. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges.
c. Supreme – it is supreme ONLY insofar as the selection of the subject of taxation is concerned
d. Not Absolute – it is subject to limitations
5. Limitations in Taxation Power
a. Inherent Limitations (PENTI)
a.1. Public purpose
a.2. Exemption of the Government
a.3. Non-delegability of the power to tax
 a.4. Territoriality
a.5. International Comity

b. Constitutional Limitations
b.1. Due process clause
b.2. Equal protection clause
b.3. Freedom of speech and of the press
b.4. Non-impairment of contracts
b.5. Rule requiring that appropriations, revenue and tariff bills shall originate exclusively from the House
of Represenatatives (Congress)
b.6. Uniformity, equality, and progressivity of taxation
b.7. Tax exemption of the properties actually, directly and exclusively used for religious, charitable and
educational purposes.
b.8. Voting requirement (2/3) in connection with the legislative grant of tax exemption
b.9. Non-impairment of the jurisdiction of the Supreme Court in tax cases
b.10. Exemption from taxes of the revenues and assets of educational institutions, including grants,
endowments, donations and contributions
b.11. Power of the Presidentto veto any particular item (item veto) or items in an appropriation, revenue
or tariff bill (pocket veto).
b.12. Necessity of an appropriation before money may be paid out of the public treasury
b.13. Non-appropriation of public money or property for the use, benefit or support of any sect, church
or system of religion

IV. Double Taxation

- It is taxing the same property twice when it should be taxed once.

1. Direct Duplicate Taxation – double taxation in the objectionable or prohibited sense; not allowed in the
Philippines. This constitutes a violation of substantive due process.
Elements:
i. Same property or subject matter is taxed twice
ii. Same purpose
iii. Same taxing authority
iv. Same jurisdiction
v. Same taxing period
vi. Same kind or character of tax
2. Indirect Duplicate Taxation – legal/permissible. The absence of one or more of the above-mentioned
elements.

V. Theories of Taxation
1. Necessity Theory (Theory of Taxation) – the power to tax is an attribute of sovereignty emanating from
necessity (national defense, health, education, public facilities, etc.).
2. Lifeblood Theory (Importance of Taxation) – without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it.
3. Benefits – Protection Theory/ Reciprocal Duties (Basis of Taxation) – there is a symbiotic relationship between
the State and the citizens whereby in exchange of the protection and benefits that the citizens received
from the State, taxes are paid.

VI. Aspects of Taxation (shared by both executive and legislative body)

1. Levy – the imposition or making of tax laws
2. Assessment – similar to audit
3. Collection – enforcement of tax
Note:
a. Levy is often called as tax legislation.
b. Assessment and collection are collectively termed as tax administration.
c. Levy and assessment comprise the impact of taxation, while tax collection comprises the incidence of
taxation.
d. An impact of taxation is a point on which tax is originally imposed.
e. An incident of taxation is a point on which the tax burden finally rests or settles down.

VII. Doctrines of Taxation

1. May the court interfere with tax legislation?
Answer: As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or
restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction, the
motives behind it, the amount to be raised or the persons, property or other privileges to be taxed. The
court’s power is limited only to the application and interpretation of the law.

2. Is the doctrine of equitable recoupment followed in the Philippines?

Answer: No. A tax presently being assessed against a taxpayer may not be recouped or set-off against an
overpaid tax, the refund of which is already barred by prescription.
 3. May a tax be subject of compensation or set-off?
Answer: Generally, no. Taxes cannot be the subject of compensation or set-off. Taxes are not contractual
obligations but one arising out of duty to the government.

4. What is a taxpayer suit?

Answer: It is a case fied by a bona fide taxpayer impugning the validity, legality or constitutionality of a tax
law or its implementation.

5. What is the nature of our tax laws?

Answer: Internal revenue laws are not political in nature. In times of war, they are deemed to be the laws of
the occupied territory and not of the occupying enemy. Tax laws are civil and not penal in nature, although
there are penalties provided for their violation.
6. A tax statute is construed against the government, liberally in favor of the taxpayer; while tax exemptions
are construed against the taxpayer and liberally in favor of the government.

7. Tax laws are special laws which prevail over a general law.

8. Tax laws operate prospectively unless the purpose of the legislature is to give a retrospective effect.

VIII. Concept of a Tax

1. It is an enforced proportional contribution from the persons and property levied by the law-making body of
the State.

2. Taxation vs. Tax

a. Taxation is the process or means of imposing and enforcing contributions.
b. Tax is the enforced contribution, itself, which generally payable in money.

3. Characteristics of Taxes
a. Forced charge
b. Generally payable in money
c. Exclusively levied by the legislative body
d. Assessed in accordance with some reasonable rule of apportionment (ability-to-pay principle)
e. Imposed by the State within its jurisdiction
f. Levied for public purpose

4. Classification of Taxes
a. As to subject matter:
i. Personal tax – imposed upon persons of certain class with fixed amount (e.g. Community tax or poll
tax)
ii. Property tax – assessed on property of certain class (e.g. Real Property tax)
iii. Excise tax – imposed on the exercise of privilege (e.g. income tax, donor’s tax, estate tax, etc.)
iv. Custom duties – charged upon the commodities being imprted into or exported from a country
(e.g. tariffs)

b. As to burden:
i. Direct tax – both incidence or liability for the payment of tax as well as the impact or burden of the
tax falls on the same person (e.g. income tax)
ii. Indirect tax – the incidence or liability for the payment of tax falls on one person but the impact or
burden of the tax falls on another person (e.g. VAT)

c. As to purpose
i. General tax – levied for the general or ordinary purposes of the government
ii. Special tax – levied for special purpose

d. As to measure of application
i. Specific tax – imposes a specific sum by the head or number or by some standard of weight or
measurement (e.g. excise tax on cigarettes)
ii. Ad Valorem tax – tax upon the value of the article or thing subject to taxation (e.g. VAT of 12%
regardless of the value of sales)

e. As to taxing authority
i. National tax – levied by the National Government (e.g. income tax, business taxes, transfer taxes)
ii. Local tax – imposed by the Local Government (e.g. Poll tax, real property taxes)

f. As to rate
i. Progressive tax – rate or amount of tax increases as the amount of income increases (e.g.
normal/tabular/schedular tax of 5% - 32%, tabular tax for donor’s tax and estate tax)
ii. Regressive tax – rate dcreases as the amount of income to be taxed increases (not applicable in
the Philippines)
iii. Proportionate tax – based on fixed proportion or rate of the value of the property assessed (e.g. VAT
of 12%)
 5. Impositions Other Than Tax
a. Toll – charged for the cost and maintenance of the property used
b. Penalty – punishment for the commission of a crime
c. Compromise Penalty – amount collected in lieu of criminal prosecution in cases of tax violation
d. Special Assessment – levied on land based entirely on the benefit accruing thereon as a result of the
improvements or public works undertaken by the government within the vicinity
e. License or Fee – regulatory imposition in the exercise of the police power
f. Margin Fee – exaction designed to stabilize the currency
g. Debt – a sum of money due upon contract or one which is evidenced by judgment
h. Subsidy – a legislative grant of money in aid of a private enterprise deemed to promote the public
welfare
i. Custom Duties and fees – duties charged upon commodities on their being transported into or exported
from the country.
j. Impost – in general sense, it signifies any tax, tribute or duty; in limited sense, it means a duty on imported
goods and merchandise
k. Tithe – contributions given to a church or sect
l. Tribute – imposed by a monarch.

IX. Escape from Taxation

1. Tax Avoidance (Tax Planning) – legal and permissible means
a. Shifting – the process by which the tax burden is transferred from the statutory taxpayer to another
without violating the law.
b. Transformation – the manufacturer or producer pays the tax imposed upon him and endeavors to
recoup himself by improving his process of production, thereby turning out his units of production at a
lower cost.
c. Capitalization – a mere increase in the value of the property is not an incoem but merely an unrealized
increase in capital.
d. Tax-exemption – a grant of immunity to a particular persons or corporations from the obligation to pay
taxes
2. Tax Evasion (Tax Dodging) – the use of illegal or fraudulent means to defeat or lessen the payment of tax

X. Tax Laws, BIR Rulings and Revenue Regulations

1. Tax laws
- A tax law is a set of rules that provide means for the State to raise revenues.
- All revenue bills must originatefrom the House of Representatives (Congress). After passing 3 readings by
a majority vote in technical committee, it shall be elevated to the Senate which needs to pass the same
3 readings. The President’s signature is necessary so that the bill becomes a law.
- In case of doubt, tax statutes are construed against the Government in favor of the taxpayer.
- In case of doubt, tax exemptions are construed against the taxpayer in favor of the Government.

2. Revenue Regulations
- These are interpretations of an administrative body (BIR) intended to clarify or explain the tax laws and
carry into effect its general provisions by providing details of administration and procedure.
- It is promulgated (made) by the Secretary of Finance, upon the recommendation of the Commissioner
of Internal Revenue (quasi-legislative function).
- It must be reasonable, within the authority conferred, not contrary to laws, must be published and
prospective in application.

3. BIR Rulings
- The BIR issues a general interpretation of tax laws usually upon a requrest of a taxpayer to clarify a
provision of law.

INDIVIDUAL INCOME TAXATION

I. Pro-Forma Computation

1. For INDIVIDUALS whose gross income solely includes compensation, allowances and other remunerations
arising from the employer-employee relationship, passive income and capital gains not subjected to final
tax and CGT:

Compensation income xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Gross Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
 2. For INDIVIDUALS with business or professional income:

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net income from business or profession xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx

3. For INDIVIDUALS whose income includes both compensation, business income and passive incomes and
capital gains not subjected to final tax and CGT:

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Total Gross Income before compensation income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net Income from Business or Profession xx
Add: Compensation Income xx
Total Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx

II. Classes of Individual Taxpayer and Their Situs

1. Resident Citizen (RC) – taxable globally (within and outside)

2. Non-resident Citizen (NRC) – taxable for incomes derived within the Philippines only
a. Who establishes to the satisfaction of the CIR the fact of their physical presence abroad with a definite
intention to reside therein;
b. Who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis;
c. Who stays outside the Philippines for more than 183 days
d. A citizen who has been previously considered as non-resident citizen and who arrives 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.
e. Overseas Contract Workers (OCWs). They are Filipino citizens employed in foreign countries who are
physically present in a foreign country as a consequence of their employment thereat. To be
considered as an OCW or OFW, he or she must be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).

3. Resident Alien (RA) – taxable for incomes derived within the Philippines only
a. We generally consider as residents those whose length of assignments are indefinite or exceeding two
(2) years (BIR Rulings Nos. 051-81 and 052-81).

4. Non-resident Alien Engaged in Trade or Business (NRAETB) – taxable for incomes derived within the
Philippines only.
a. The term trade or business shall not include performance of services by the taxpayer as an employee.
b. A nonresident alien individual who shall come in the Philippines and stay herein for an aggregate
period of more than 180 days during any calendar year shall be deemed as doing business in the
Philippines

5. Non-resident Alien Not Engaged in Trade or Business (NRANETB) – taxable for incomes derived within the
Philippines only
 6. Special Taxpayer – Taxed at their gross income at 15% when:
a. Any Filipino or Foreign individual employed, either holding a managerial or supervisory position, or a
rank-and-file, in any of the following:
i. Offshore Banking Units (OBUs)
ii. Regional Area Headquarter or Regional Operating Headquarter of a multinational company
iii. Petroleum contractor or subcontractor
b. A special taxpayer, generally, shall be taxed at 15% of his total GROSS COMPENSATION INCOME. Thus,
he cannot claim personal exemptions. However:
i. If a special taxpayer is a Filipino, he may opt to be taxed at 15% final tax or using the tabular tax if
his gross compensation income is at least P 975,000.
ii. Aliens are only taxed at 15%.
iii. All other income shall be taxed according to pertinent provisions of NIRC.

III. Components of Gross Income

1. Compensation Income
All remunerations paid to the employee arising from an employer-employee relationship which include,
but not limited to:
a. Salaries and wages
b. Bonuses and allowances
c. Holiday pay, Overtime pay, Night shift differential, and Hazard Pay received by persons other than
an MWE.
d. De minimis and other fringe benefits not subjected to fringe benefit tax (given to rank-and-file),
subject to P82,000 limit
e. Separation Pay, Retirement pay, and similar remunerations which do not meet the requirements.
f. De Minimis and other Fringe Benefits (See discussions on Fringe Benefits)
g. Fees, honoraria, emoluments, commissions, etc.

Remember:

Every income is generally taxable, unless, specifically exempted by the law and the requirements to be
exempted are met.

Situs of Compensation Income: place where the services are rendered regardless of the residence of payor
(Sec. 155, RR 02-40)

2. Business and/or Professional Income

a. Arise from selling goods or services.
b. Whether individual or corporate taxpayer, may include:
- Sale of goods and properties (real or personal)
- Sale of services (professional services, lease of properties, etc.)
Note: Withholding taxes from professional incomes and other sale of services which are subject to CWT
must be correctly withheld.

3. Passive Income
General Rule: Passive income earned within the Philippines are taxable unless specifically exempted by
law.
Exception: If the passive income is not subjected to final tax, such is added to the gross income subject to
normal tax.

a. Subject to Final Withholding Tax

INDIVIDUALS

i. Interest on currency bank deposits, yield and other monetary benefit from deposit
substitute, trust and similar arrangement within the Philippines; Royalty from patents and
franchises, prizes exceeding P10,000 and winnings regardless of the amount: 20% final tax
ii. Royalty from books, literary works and musical compositions, and cash and property
dividend from domestic corporation: 10% final tax
iii. Interest on FCD under the expanded FCDS: 7.5%, except non-residents (NRC and NRAs)

CORPORATION

i. Interest on FCD under the expanded FCDS: 7.5%, except non-resident foreign corporation
ii. Interest on currency bank deposits, yield and other monetary benefit from deposit
substitute, trust and similar arrangement; Royalty from patents and franchises, prizes
exceeding P10,000 and winnings regardless of the amount: 20% final tax.
iii. Dividend from domestic corporation: exempt, intercorporate principle

b. Not Subject to Final Withholding Tax – those which are not subjected to final tax like those which are
earned abroad, prizes not exceeding P10,000, and interest from loans, trade and accounts receivables
 and those which are earned outside the Philippines shall be included in the computation of gross
income.

4. Capital Gains

Capital gains arising from the sale of capital assets (real or personal assets) are taxable as follows:
a. If REAL property not used in business, subject to capital gains tax of 6% of the selling price, or FMV, or
Zonal Value, whichever is the highest.
b. If shares of stocks not traded in the local stock exchange, subject to 5-10% capital gains tax.
c. All other capital gains, which are not subject to CGT, are subject to normal tax (5-32%), subject to the
pertinent rules in property. (See discussions on Dealings in Property.)

IV. Exclusions from Gross Income

1. Holiday pay, Overtime pay, Night shift differential, and Hazard pay (HONsHa) earned by MWE (non-
taxable).
2. 13th Month Pay, productivity incentives, Christmas bonus and other bonuses and benefits (de minimis) not
exceeding PhP 82,000.
3. Gifts, bequests and devises (subject to transfer taxes) are not subject to income tax, but income derived
from the use of such gifts, bequests and devises are subject to income tax.
4. Income derived by foreign government
5. Income derived by the Philippine government or its political subdivisions.
6. De Minimis not exceeding their statutory limits.
7. Proceeds of life insurance paid to the heirs upon death of the insured or whoever the beneficiary is (also
not subject to estate tax if the beneficiary is the third person irrevocably designated as heir; subject to
estate tax if the beneficiary is the estate, administrator or executor or if the designation to third persons is
revocable).
8. Retirement benefits under RA 7641 (private benefit plan), provided:
a. The employee is at least 50 years old at the time of retirement;
b. The employee has rendered 10 years in the same company;
c. The employee availed it for the first time
d. Such private benefit plan is approved by the BIR.
6. Separation pay paid to the employee for causes beyond the control of said employee (involuntary). If the
cause of separation is voluntary, such payment shall be taxable.
7. Mandated contributions such as SSS, GSIS, PHIC and HDMF contributions and union dues.
8. Amounts received as a return of premiums paid.
9. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement as well as awards in authorized sports competitions.
10. Gains from sale of bonds, debentures or other certificates of indebtedness with a maturity of longer than
five years.

V. Deductions from Gross Income (See discussions on Deductions.)

Note: Only those self-employed taxpayers or those having business may claim the following:
1. Optional Standard Deduction
2. Itemized Deductions

VI. Exemptions and Other Deductions

1. Personal Exemptions
a. Personal exemptions are only given to individuals whether RC, NRC, RA and NRAETB (subject to
reciprocity rule).
b. RC, NRC and RA may claim a basic personal exemption of PhP 50,000 regardless of the status.
c. NRAETB can only claim basic personal exemption if there is a reciprocity between Philippine laws and
the laws of his country where he resides. However, the BPE cannot exceed Php 50,000, but may be
lower instead.
d. For incomes of the estates, the estate may claim only to the extent of P 20,000.

2. Additional Personal Exemptions

a. RC, NRC and RA may claim an additional personal exemption of Php 25,000 for every qualified
dependent CHILD, but not exceeding four children, PROVIDED that the child is:
i. Not more than 21 years old
ii. Living with the taxpayer
iii. Depending upon the taxpayer at least ½ plus 1 for his living.
iv. Legitimate, illegitimate or legally adopted
v. Unmarried and not gainfully employed
b. Provided that, the taxpayer may also claim an additional exemption even if the child reaches above 21
years old when such child is incapable of self-support because of mental defect.

c. Rules on determining the status of the taxpayer who claim personal exemptions:
1. Whether single, married, head of the family or legally separated, the taxpayer can claim only to
the maximum amount of P 50,000 basic personal exemption.
2. If the taxpayer should marry or should have additional dependents during the taxable year, he
may claim the corresponding exemption in full for such year.
 3. If the taxpayer should die during the taxable year, his estate may claim his corresponding
exemptions (both personal and additional) as if he died at the end of such year.
4. If the spouse or any of the qualified dependent should marry or become twenty-one years old
during the year, or should become gainfully employed, the taxpayer may still claim the
exemption as if the spouse or dependent died or as if such dependent married, became
twenty-one years old or became gainfully employed at the close of such taxable year.

3. Premiums on Health and/or Hospitalization Insurance

Aside from the allowable deductions and personal exemptions, an individual taxpayer may also deduct
from his gross income SSS, Philhealth, Pag-IBIG and PHHI contributions. Provided, that in the case of PHHI,
the total family income shall not exceed PhP 250,000 per year and the total claimable amount shall not
exceed PhP 2,400 per year.

VII. Computation of Income Tax Due

1. Resident Filipinos (RC) who are taxable globally may claim tax credit for taxes paid in foreign countries,
however, the amount to be credited shall be subject to limitations. The claim must be made in the year the
tax is paid.

VIII. Income Tax Return Filing and Payment of Income Tax

General Rule: All taxpayers must file an income tax return.

Exceptions:
1. Married Individuals (Sec. 51(D),Tax Code)
a. May compute for their taxes separately, but shall file a single return for a taxable year;
b. If impracticable to file a single return, separate returns may be filed. The BIR will consolidate the
filed returns for purposes of verification for the taxable year.

2. Those who qualified under the substituted filing method (for purely compensation income earners).
a. It is when the employer’s annual return (BIR Form 1604 CF – Annual Information Return of Income
Taxes Withheld on Compensation) may be considered as the substitute income tax return of
employee in as much as the information provided in his income tax return (BIR Form 1700) would
exactly the same information contained in the employer’s annual return. [RMC No. 1-03].
b. BIR Form 2316 is a statement signed by both teh employee and the employer and serves as the
same purpose as if the BIR Form 1700 had been filed. This, however, is not submitted or filed with
the BIR if the employee is qualified for substituted filing.
c. Requirements:
i. The employee is a purely compensation income earner;
ii. The empolyee receives income only from one employer in the Philippines during the
calendar year;
iii. The amount of tax due from the employee at the end of year equals the amount tax
withheld by the employer;
iv. In case of married individuals, the employee’s spouse also complies with all the three
stated conditions above;
v. The employer files the annual information return (BIR Form 1604 CF); and
vi. The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each employee.
d. NRAETB are expressly prohibited from using the substituted filing method [RMC No. 01-03].
e. Individuals deriving income from two or more employees, concurrently or successively at any time
during the year are also disqualified from substituted filing method [RMC No. 01-03].
f. Individuals under the split-pay scheme (portion of the salary is paid outside the Philippines) is also
not allowed to substituted filing method.
3. Those whose sole income has been subjected to final withholding tax.

 The due date for filing the return (with no extension allowed)
a. On or before the 15th day of April each year covering income for the preceding taxable year
(Sec. 51 (CX1), Tax Code)
b. Extensions are not allowed, except in meritorious cases, as determined by the Commissioner of the
Bureau of Internal Revenue (Sec. 53, Tax Code)

 The modes of settling income tax liability may be:

a. Cash payment if the amount does not exceed P 10,000;
b. Bank Debit System
c. Cashier’s or manager’s check

 Penalties for failure to file the return, and/or pay the tax on time:
i. Civil Liabilities
a. Surcharge, amounting to 25% of the tax due; 50% in case of willful neglect to file a return, or in case
of filing a false or fraudulent return;
b. Interest at 20% per annum;
c. Compromise penalties for failure to file the return, and/or failure to pay the tax, at an amount not
exceeding P 50,000 [Sec. 255, Tax Code; RMO 19-2007]
 ii. Criminal Liability
a. Violations of tax laws are generally punishable by a fine and/or imprisonment, which depends on
the act committed or omitted

Example:
The attempt to evade or defeat tax is punished, upon conviction, by a fine of not less than
P 30,000 but not exceeding P 100,000, and imprisonment of not less two (2) years, but not more
than four (4) years. Conviction or acquittal does not bar the filing of civil suit for collection of taxes.
[Sec. 254, Tax Code]

 Tax Returns forms

1. BIR Form 1700, for purely compensation income earners
2. BIR Form 1701, for business or mixed earners
 The fact than an individual’s name is signed to a filed return is a prima facie evidence for all
purposes that the return was actually signed by him.

 Attachments:
1. BIR Form 2316 – Certificate of Compensation Payment/ Tax Withheld for Compensation Payment with
or without Tax Withheld
2. BIR Form 2306 – Certificate of Final Income Tax Withheld
3. BIR Form 2307 – Certificate of Creditable Tax Withheld at Source

 Disclosure of Supplemental Income

1. Revenue Memorandum Circular (RMC) 9-2014 futher amends the forms under RMC 40-2011 and
making the disclosure of supplemental income OPTIONAL on the part of the taxpayer for the calendar
year 2013 tax filing. However, for the income tax filing covering and starting with calendar year 2014,
the disclosures required under the Supplemental Information portion of the said forms will be
MANDATORY. Thus, the taxpayers are advised to demand from their payors and properly document
their BIR Form No. 2307 and other pieces of evidence for final taxes withheld as well as information on
the other tax exempt income.
2. In any returns filed with the BIR, individual taxpayers are given the option to use either:
a. Their Community Tax Certificates (CTC)
b. Passport
c. Driver’s License

 Where to FILE?
1. The return shall be filed with:
a. An authorized agent bank (AAB);
b. Revenue District Officer;
c. Collection Agent; or
d. Duly authorized Treasurer of the City or municipality
2. Filing with the incorrect RDO renders the taxpayer liable for a penalty
3. RR 5-2015 dated March 17, 2015, amending RR 6-2014
a. Mandatory for taxpayers enumerated under RR 6-2014 to use eBIR forms and must be filed online
through the eBIR Forms System
b. Penalty of P1,000 will be imposed for each return not filed electronically
c. Liable for surcharge amounting to 25% of the tax due to be paid.

DEDUCTIONS FROM GROSS INCOME

Deductions from gross income depends upon the taxpayer and his source of income.

GENERAL RULE:

A taxpayer seeking a deduction

 Must point to some specific provisions of the statute authorizing the deduction
 Must be able to prove that he is entitled to the deduction authorized or allowed

Optional Standard Deduction

1. Optional standard deduction of 40% may be claimed in lieu of the itemized deductions.
2. A taxpayer who opts to avail of this deduction need not submit the Account Information Form (AIF)/
Financial Statements.
3. Individual taxpayers (RC, NRC, RA, taxable estates and trusts) who are engaged in business or selling of
service may claim OSD, except NRAETB and NRANETB. For individual taxpayers, the 40% OSD is multiplied at
his gross sales or gross receipts. For purposes of computing OSD for individuals, gross sales/receipts shall
mean after deducting sales discounts actually taken, sales returns and sales allowances.
4. Corporate taxpayers (domestic and resident foreign), except non-resident foreign corporation, may claim
40% OSD of its gross income (sales/receipts less cost of sales/service plus other income not subjected to final
tax).
 5. The selection is not presumed; the taxpayer should signify his election to claim OSD and such would be
irrevocable for the taxable year in which the return is made.

Example of Erroneous Computation:

1st Quarter 2nd Quarter 3rd Quarter Annual

OSD Itemized Deduction OSD Itemized Deduction

Itemized Deduction OSD OSD Itemized Deduction

Example of Correct Computation:

1st Quarter 2nd Quarter 3rd Quarter Annual

OSD OSD OSD OSD

Itemized Deduction Itemized Deduction Itemized Deduction Itemized Deduction

6. The failure to indicate the election to avail the OSD shall be considered as having availed of the itemized
deductions.

Itemized Deductions (Ex InTaLoBa DepDep ChaRD PeT)

1. Ordinary and necessary business expenses, in general (STERO):

a. Salaries, wages, and other forms of compensation for personal services actually rendered, including
grossed up monetary value of the fringe benefits granted by the taxpayer-employer to the employee,
Provided, however, that such compensation is reasonable and the corresponding withholding tax is
properly withheld and remitted to the BIR for such compensation.
b. Travel expenses incurred in connection to a business pursuit.
c. Entertainment, Amusement and Recreation (EAR) expense directly connected to the development,
management and operation of the trade or business or profession of the taxpayer, subject to the
following limit:
i. ½ % (0.005) of the net sales if the taxpayer is engaged in selling of goods; and
ii. 1% (0.01) of the net receipts if the taxpayer is engaged in selling of services.
d. Rent expense is deductible only when:
i. Accrual basis – incurred regardless when paid.
ii. Cash basis – incurred and paid
e. Other necessary business expenses incurred in connection to the business or trade or profession.

2. Interests
a. There must be an indebtedness which pertains to the taxpayer.
b. The indebtedness must be connected to the business, trade or profession of the taxpayer.
c. There must be a legal (enforceable by law) liability to pay interest.
d. It must be paid or incurred during the taxable year.
e. It must be subjected to the following limit:
Interest expense, incurred or paid (depending whether accrual or cash basis) xx
Less: total interest income subjected to final tax times 33% (xx)
Deductible interest expense xx
Exception: Interest expense on tax delinquency or deficiency, provided the tax is related to trade or
business or practice of profession, shall be 100% deductible.
f. Interest related to acquisition of property used in trade or practice of profession may, at the option of
the taxpayer, be claimed as (1) outright expense or (2) capitalized and claimed as depreciation.
g. Interest paid in advance through discount or otherwise shall be claimed as deduction in the year the
indebtedness is paid.
h. The following interests are non-deductible:
1. Interests paid to persons classified as related taxpayers
2. If the indebtedness is incurred to finance petroleum exploration
3. Interest on preferred stocks.

3. Taxes
a. Taxes paid or incurred within taxable year in connection with the taxpayer’s business, trade or
profession, shall be allowed as deduction.
b. The following taxes are not deductible:
1. Income tax
2. Income tax paid abroad, IF claimed as tax credit
3. Estate tax
4. Donor’s tax
5. Value-added tax
6. Special assessment
4. Losses
a. The following losses may be claimed as deduction:
1. Casualty losses
2. Net Operating Loss Carry-Over (NOLCO)
3. Capital losses – see discussions on Dealings in Property
4. Special losses
i. Losses from wash sales of stock or securities
ii. Wagering losses
iii. Abandonment losses
iv. Securities becoming worthless

b. Requisites:
1. The loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement;
2. The property lost is connected with the trade business or practice of profession;
3. Actually sustained during the taxable year;
4. Not compensated for by insurance or other forms of idemnity;
5. Incurred in trade, profession or business;
6. Reported with the BIR within forty-five days from the time of loss; and
7. Not claimed as deduction for estate tax purposes.

c. Net Operating Loss Carry-Over

1. Net operating loss means the excess of allowable deductions over gross income of the business in a
taxable year.
2. The net operating loss of the business or enterprise for any taxable year shall be carried over as a
deduction from gross income for the next three (3) consecutive years immediately following the
year of such loss.
3. Provided, that at the time of incurring net loss, the taxpayer must not be exempted from income
tax.
4. Provided further, that there is no substantial change in the ownership of the business or enterprise in
that –
 Not less than seventy-five percent (75%) in the par value (nominal value) or paid-up capital
of outstanding issued shares, if the business is in the name of a corporation, is held by or on
behalf of the same persons; or
5. For mines other than oil and gas wells, net operating loss incurred in any of the first ten (10) years of
operation may be carried over for the next five (5) years after the incurrence of such loss.

Notes to remember:

a. The following taxpayers are permitted to deduct NOLCO from their gross income:
i. Individual taxpayers engaged in trade or business or in the exercise of profession;
ii. Domestic and resident foreign corporation subject to normal income tax (30%).
iii. Special corporation subject to preferential tax rates such as private educational
institutions, hospitals, and regional area headquarters
b. Any persons, natural or juridical, enjoying exemptions from income tax pursuant to the provisions
of the Tax Code and any special law shall not be entitled to deduct NOLCO from gross income.

d. Losses from wash sales of stocks or securities

1. In case of any loss claimed to have been sustained from any sale or other disposition of shares of
stocks or securities shall not be deductible if:
 The seller is not a dealer in securities (shrinkage) – the loss should be ACTUAL.
 Within a period of 30 days before the sale or 30 days after the sale, the seller either:
1. Acquired (by purchase or exchange) stock or securities identical to the stock or
securities sold; or
2. Has entered into a contract or option to acquire stock or securities identical to the
stock or securities sold.
3. In case of wagering transactions, the loss shall be allowed only to the extent of the
gains from such transactions.

e. Abandonment losses
1. In the event a contract area where petroleum operations are taken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall
be allowed as deduction.
2. In case a producing well is subsequently abandoned, the unamortized costs thereif, as well as the
undepreciated costs of equipment directly used therein, shall be allowed as deduction.
3. If the abandoned well is re-entered and production is resumed or equipment is restored into service,
the effects are:
 The amount previously claimed as deduction shall be recognized as income; and
 Such amount shall also be capitalized and amortized or depreciated, as the case may be.
5. Bad Debts
a. Requisites:
1. There must be an existing debt due to the taxpayer which must be valid and legally demandable.
2. The same must be connected with the taxpayer’s trade, business or practice of profession.
3. The same must not be sustained in a transaction between related taxpayers.
4. The same must be actually written off in the books of accounts of the taxpayer as of the end of the
taxable year.
5. The same must be actually ascertained to be worthless and uncollectible.
6. Accounts previously written off which are later recovered shall be taxable to the extent of the
amount which benefited the taxpayer, meaning the tax shield which was availed and for which had
benefited the taxpayer

b. Securities becoming worthless:

1. Securities are ascertained to be worthless;
2. The same is charged off within the taxable year;
3. It must be a capital asset.

6. Depreciation
a. Requisites:
1. The property subject to depreciation is used in the trade, business or practice or profession.
2. The allowance for depreciation must be sustained by the person who owns or who has a capital
investment in the property.
3. The allowance for depreciation must be reasonable.
4. The allowance for depreciation should not exceed the cost of the property.
5. The schedule of the allowance must be attached to the return.

b. Depreciation Methods in General

1. Straight-line method
2. Declining-balance method – rate should not exceed twice the rate in the straightline method
3. Sum-of-the-years digit method
4. Any other method which may be prescribed by the Secretary of Finance upon recommendation of
the Commissioner.

c. Properties used in PETROLEUM OPERATIONS

1. Properties directly related to production:
i. Straight-line method
ii. Declining balance method*
*Useful life to be used in either of the above methods, should be the shorter of the property’s
useful life or 10 years.

2. Properties not directly related to production

i. ONLY straight-line method is used.
ii. Useful life is always presumed to be 5 years.

d. Properties used in MINING OPERATIONS

1. If expected life of the property is 10 years or less, normal rate of depreciation (depreciate over the
actual useful life).
2. If expected life is more than 10 years, depreciate over any number of years between 5 and
expected life.

e. In the case of a nonresident aliens engaged in trade or business or a resident foreign corporation,
depreciation shall be allowed only if the property is located in the Philippines.
f. Allowance for obsolescence may be deducted in addition to the reasonable allowance for the
exhaustion, wear and tear.

7. Depletion
a. In case of oil and gas wells or mines, capital invested may be amortized using the cost-depletion
method, provided:
1. When allowance for depletion shall equal to capital invested, and no further allowance shall be
granted.
2. Afte production in commercial quantities has commenced, intangible exploration and
development drilling costs shall be treated as
i. If incurred for non-producing wells and/or mines, deductible in the year incurred.
ii. If incurred for producing wells and/or mines:
 Deductible in full in the year paid or incurred; or
 Capitalized and amortized
b. In the case NRAETB or resident foreign corporation, depletion shall be allowed only if the oil and gas
wells or mines are located in the Philippines.
 8. Charitable Contribution
1. Fully deductible contributions:
a. Donations to the Government of the Philippines or any of its agencies or political subdivisions
including fully owned government corporations, exlusively to be used in undertaking priority
activities in Education, Health, Youth, Sports Development, Human Settlements, Science and
Culture, and Economic Development.

b. Donations to foreign institutions or international organizations which are fully deductible.

c. Donations to Accredited Non-Government organizations organized and operated exclusively for

Scientific, Research, Educational, Character Building; Youth and Sports Development, Health, Social
Welfare; Cultural, Charitable purposes and a combination thereof, PROVIDED, that no part of NET
INCOME of which inures to the benefit of any private individual and not more than 30% of such
contributions are utilized for administrative purposes.

2. Contributions subject to Limit

a. Donations to the Government of the Philippines or any of its agencies or political subdivisions
including fully owned government corporations, to be used in a non-priority activities.

b. For corporations, the limit is 5% of the taxable income from trade or practice of profession before
the deduction for charitable contributions.

c. For individuals, the limit is 10% of the taxable income from trade or practice of profession before the
deduction for charitable contributions.

9. Research and Development

If not chargeable to capital account. Outright Expense

If chargeable to capital account but not At the option of the taxpayer:

chargeable to property subject to depreciation OPTION 1 – Claim as outright expense
or depletion OPTION 2 – Amortize over 60 months

If chargeable to property subject to Capitalize

depreciation or depletion.

a. The following R&D expenditures are not deductible:

i. Any expenditure for the acquisition or improvement of land, or the improvement of property to
be used in connection with research and development of a character which is subject to
depreciation and depletion; and
ii. Any expenditure paid or incurred for the purpose of ascertaining of any deposit of ore or other
mineral including oil or gas.

10. Pension Trust

Actual contribution to the extent of pension xx
Amortization of Past Service Cost* xx
Total xx

Past Service Cost is the excess of actual contributions over the Normal Cost. It shall be amortized over ten
(10) years.

FRINGE BENEFITS

FRINGE BENEFITS- any good, service or other benefit furnished or granted by an employer, in cash or in kind, in
addition to basic salary to an individual employee.

Subject to FBT Not Subject to FBT

 Those given to managerial or supervisory
 Those given to rank-and-file employees
position*
 Not subject to FBT, but Those benefits given
 For purposes of determining what a managerial other than those which do not exceed the
position is, the decision-making test may apply. statutory threshold shall be subject to tax under
Normal Income Tax (5%- 32%)

Examples: Examples:
a. De Minimis, non-taxable if not exceeding the
a. Housing
limits, however, any excess of de minimis over
b. Expense Accounts
the statutory limits is added to the “Other
c. Vehicle of any kind
Bonuses” category subject to P 82,000 limit
d. Household personnel
taxable under Normal Tax
 e. Interest
f. Membership fees b. those which are required and necessary to the
business of the employer
g. Expense for Foreign Travel
c. those which are for the convenience or
h. Holiday and vacation expenses
advantage of the employer
i. Educational assistance
j. Life or health insurance and other non- life
insurance premium in excess of what the law
allows

 The employer is liable for FBT regardless of

whether he is taxable or not since he is
considered to be the withholding agent.

 The grossed-up monetary value shall be an

expense deductible on the part of the employer,
computed as follows:

32%- FBT since January 1, 2000

GMV= MV/68% (for RC, NRC, RA, and NRAETB)
GMV= MV/75% (for NRANETB)
GMV= MV/85% (for employees in RAH, ROH, OBUs)
– special taxpayers

 The fringe benefit tax shall be 32%, 25% and 15%

Monetary Values
 If Cash, the face amount or value received.

 If Property, wherein the ownership is transferred to the employee, the basis shall be the FMV, Zonal
Value, or Assessed Value, whichever is the HIGHEST.

 If ONLY USUFRUCT (use):

1. Personal Property, FV to be depreciated by 5 years then divided by 2.
2. Real Property, ZV, AV, or FMV, whichever is the highest, to be depreciated by 20 years then
divided by 2.
 If Interest, MV is equal to interest forgone.

*Managerial Employee
 Those who are vested with powers or prerogatives to lay down and execute management policies and/or
to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. (Labor Code of The
Philippines)

Supervisory Employee
 Those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of
such authority is not merely routinary or clerical in nature but require use of independent judgment. (Labor
Code of The Philippines)

De Minimis Benefits

Whether rank-and-file or managerial/supervisory employee, the following de minimis benefits shall be non-
taxable:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid to government officials and employees;
3. Medical cash allowance to dependents of employees not exceeding P750 per employee per semester or P
125 per month;
4. Rice subsidy of P 1,500 or one (1) sack of 50-kg. rice per month amounting to not more than P 1,500;
5. Uniform and clothing allowance not exceeding P 5,000 per annum;
6. Actual yearly medical benefits not exceeding P 10,000 per annum;
7. Laundry allowance not exceeding P 300 per month;
8. Employees achievement awards which must be in the form of a tangible personal property other than cash
or gift certificate, with an annual monetary value not exceeding P 10,000 received by the employee under
an established written plan which does not discriminate in favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding P 5,000 per employee per
annum;
 10. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum
wage.
11. All other benefits given by the employers which are not included in the above enumeration shall not be
considered as “de minimis” benefits, and hence, shall be subject to income tax as well as withholding tax on
compensation.

DEALINGS ON PROPERTY

GENERAL FORMULA: Selling Price – Cost of Property = Gain or Loss

1. Where, Selling Price equals to the total consideration received or Fair Market Value or the property in
case disposed through exchange.

2. Where, Cost is equal to the acquisition cost if purchased or acquired on or after March 1, 1913;
a. If acquired through inheritance, the cost is equal to the FMV on the date of transfer;
b. If acquired through donation or gift, the cost is the same as if it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, EXCEPT if such basis is
greater than the FMV at the time of gift, then for purposes of determining the LOSS, the basis
shall be such FMV;
c. If acquired by less than full and adequate consideration, the basis is the money or money’s
worth paid.

Properties are classified into:

Ordinary Assets Capital Assets

a. Inventories, stocks in trade held by

dealers, other property or in kind
included in inventory of the taxpayer a. Other than those enumerated as ordinary assets
(e.g. work in process inventory and
finished goods inventory, stocks) b. All properties not used in business

b. Property held for sale to customers in c. investment whether or not connected with taxpayers trade
the ordinary course of business (real are capital assets (e.g. investment in equity securities and
estate developer) investment in subsidiary)

c. Properties used in business which is d. Residential house and lot

subject to depreciation or
amortization (factory, office building, e. Family car
patents)
f. Receivables arising from sale of inventory
d. Real property used in business (land
which the factory stands)
Subject to CGT Subject to Normal Tax

a. Sale of stocks not listed and

NOTE:
1. Gains and losses derived from sale or
exchange of these properties are
ORDINARY GAINS and LOSSES which
are included in determining ordinary
income subject to tax.
2. Gains/Losses shall be part of GROSS
INCOME of such seller (as other
income) subject to Normal Tax.
not traded in local stock
a. Other than those listed as
exchange (5%- 10% of capital
Major Capital Assets (stocks not
gains)
traded and listed, and real
properties subject to 6% CGT), all
other capital gains are subject to
b. Sale of real capital properties normal tax (added in the gross
NOT used in business (6% CGT income)
based on FMV or SP, whichever is
higher).
c. NO HOLDING PERIOD since the
b. HOLDING PERIOD is applicable
capital gains tax is a final tax on
ONLY to individual taxpayers
the date of sale.
c. NO HOLDING period for
corporations.
d. GAINS or LOSSES are no longer
reportable since the sale was
d. Gains are reportable in full
already subjected to final CGT.
subject to holding period clause.

e. Losses are reportable only to

the extent of CAPITAL GAINS.

NOTE: ALL ordinary gains are ADDED to the GROSS INCOME and all ordinary losses are deducted from the gross
income, ordinary gains and/or capital gains. HOWEVER, capital losses are ONLY deducted from CAPITAL GAINS. No
capital losses exceeding capital gains may be deducted from ordinary gains nor gross income.
Selling price means net selling price: (SP or FMV) – Expenses of sale or exchange

HOLDING PERIOD is applicable ONLY to individual taxpayers.

a. Capital assets held for not exceeding 12 months, the taxable gain or deductible loss is 50% of such gain or
loss.
b. Capital assets held for more than 12 months, capital gains taxable in full, however, in case of capital loss
deductible in full, but limited only to the extent of capital gains.
c. In case of net capital loss, such loss shall be carried over to the succeeding year.

Net Capital Loss Carry-Over (NCLCO)

 The net capital loss of one year may be carried over to the succeeding year, but not exceeding the taxable
income of the year when such net capital loss was sustained. Corporate taxpayers are not subject to
holding period, thus cannot carry-over its net capital loss.

Installment Reporting
When a deferred payment is of sale of an ordinary asset, or of a capital asset which is not subject to capital gain tax,
the gross profit or gain from the sale may be reported on the installment method, IF such sale is by:
a. One who is a dealer in personal property regularly selling on installments; or
b. One who makes a casual sale or disposition of personal property (other than inventory) for a selling price in
excess of one thousand pesos (P1,000.00) and with initial payments not exceeding 25% of the selling price; or
c. One who makes a sale of real property, with initial payments not exceeding 25% of the selling price.

Without Mortgage
IP= DP + Payments received this
year
IP ÷ SP = 25% or less (allowed for
Installment Reporting)
With Mortgage but no Excess
over the Cost
IP= DP + Payments received this
year
IP ÷ SP = 25% or less (allowed for
Installment Reporting)
With Mortgage in excess over
the Cost
IP= DP + Payments received this year
plus Excess of Mortgage over the Cost
IP ÷ SP = 25% or less (allowed for IR)

GP ÷ CP x total collections = GP ÷ CP x total collections = GP ÷ CP x total collections = Income

Income Realized Income Realized Realized

IP= Initial payments, payments of

the buyer to seller, whatever
form (cash, properties,
cancellation of indebtedness,
etc.) which is received during
the year. It is not similar to down
payment.
In this case, the contract price is equal
In this case, the contract price is to the selling price minus mortgage
equal to selling price minus assumed by the buyer plus excess of
DP= Downpayment mortgage assumed by the buyer. mortgage over cost.
SP= Selling price
GP= Gross Profit
CP= Contract Price

In this case, the selling price is

the contract price.

CAPITAL GAIN TAX EXEMPTION: Requirements

a. The capital asset sold was a principal residence;
b. The taxpayer is a citizen of the Philippines or resident alien;
c. The proceeds of the sale was invested in acquiring a new principal residence;
d. Notice to make such utilization was given to the BIR within 30 days from the date of sale;
e. Utilization of the proceeds of the sale was made within eighteen (18) months from the date of sale;
f. A cash deposit is made with an accredited bank for an amount equal to the capital gain tax, and
answerable for the capital gain tax should the conditions for the exemption be not satisfied;
g. The exemption shall be availed of once only every ten years.

 If the entire proceeds of the sale is invested, the entire capital gain is exempt. The cost basis of the new
principal residence will be the basis of the old residence.

 If only a portion of the proceeds of the sale is invested in the new residence,
 Exemption on Capital gain tax:
Proceeds of the sale not invested x what should have been
Entire proceeds of the sale the tax (CGT)
Basis of the new principal Residence:
Proceeds of the sale invested x Basis of the old Residence
Entire proceeds of the sale

 If the amount invested is in excess of the proceeds of the sale, the capital gain is exempt and the basis
for the new principal residence is equal to the basis of the old residence plus the additional investment (
New Residence = Old residence + additional capital investment)

CORPORATE INCOME TAXATION

I. Pro-Forma Computation

For CORPORATIONS, including business partnerships, domestic corporations, resident foreign corporations, joint
ventures, and associations, except non-resident foreign corporations (which is taxable at gross income):

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
*NCLCO is not applicable since the holding period is also not applicable.

II. Overview

The term ‘corporation’ includes 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 (GPPs) and joint venture or consortium formed for the purpose of undertaking
construction porjects or engaging in petroleum operation, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with the Government.

III. Classes of Corporate Taxpayer

1. Domestic corporations are taxed on worldwide income, at 30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the taxable
income.
3. Non- Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the gross
income.
Note:
a. GPPs 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.

IV. Components of Gross Income

5. Business and/or Professional Income
6. Passive Income
7. Capital Gains

 The components of gross income for individuals are also the same in the case of corporate taxpayers. (See
discussions on Gross Income for individuals, Lecture 2)

V. Deductions from Gross Income

3. Optional Standard Deduction
4. Itemized Deductions
(See discussions on Deductions and Dealing in Property.)

VI. Corporate Tax

1. Gross Income Tax (GIT)
It is an optional income tax given to corporate earners equivalent to 15% of its gross income instead of the
30% net income tax.
 Only domestic corporations and resident foreign corporations may avail such GIT.
 Requirements:
a. A tax ratio of 20% of Gross National Products
 b. A ratio of 40% income tax collection of total tax revenues
c. A VAT tax effort of 4% of GNP
d. A 0.9% ratio of consolidated public sector financial position to GNP
e. Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources is 55%.
f. The election shall be irrevocable for three (3) consecutive year
g. Recommendation from the Secretary of Finance
h. Subject to approval of the Office of the President

2. Normal Corporate Income Tax (NCIT)

Period Corporate Income
Tax Rate

January 1 to October 31, 2005 32%

November 1, 2005 to December 31, 2008 35%

January 1, 2009 and onwards 30%

3. Minimum Corporate Income Tax (MCIT)

The following are liable to MCIT beginning the 4th taxable year in which such corporation commenced its
business operations:
a. Domestic Corporations
b. Resident foreign corporations

 The 2% of gross income is imposed whenever a company:

a. Has no taxable inocome; or
b. Has taxable income but the amount of MCIT is greater than the NCIT (30%)
 Excess MCIT can be carried forwards for 3 succeeding years and credited againts the normal
corporate income tax only when the NCIT is greater than MCIT
 MCIT can be claimed as a credit against the MCIT itself or against any other losses

The following are exempt from MCIT (these are special corporations):

a. Domestic corporations operating as proprietary (private) educational institutions subject to tax at 10%
on their taxable income;
b. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at 10% on their
taxable income;
c. Domestic corporations engaged in business as depository banks under the expanded foreign currency
deposit system on their income from foreign currency transactions which has been subjected to final tax
at 10%;
d. Resident foreign corporations engaged in business as “international carrier” subject to tax at 2 ½% of
their Gross Philippine Billings;
e. Resident foreign corporations engaged in busines as Offshore Banking Units (OBUs) on their income from
foreign currency transactions which has been subjected to a final income tax at 10% of such income;
f. Resident foreign corporations engaged in business as regional area headquarters subject to tax at 10%
of their taxable income; and
g. Firms that are taxed under a special income tax system

 The computation and payment of MCIT, shall likewise apply at the time of filing the quarterly corporate
income tax.
 In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the
quarterly corporate income tax return shall be the MCIT.

VII. Improperly Accumulated Earnings Tax

It is a tax imposed on improper accumulation of earnings. “Improperly accumulated earnings (IAE)” are the
profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its
shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of
another corporation.

 The rate of 10% of the Improperly Accumulated Taxable Income, computed as follows:
Taxable Income for the Year xx
Add:
Income exempt from tax xx
Income excluded from gross income xx
Income subject to final tax, net xx
NOLCO xx
Less:
Income tax paid for the taxable year (xx)
Dividends actually or constructively paid/issued
from the applicable year’s taxable income (xx)
 Amount reserved for the reasonable needs (xx)
Tax Base for IAET xx

Note: Earnings for the reasonable needs are enumerated as follows [Revenue Regulation No. 2-
2001]:
1. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital
of the corporation as of the balance sheet date, inclusive of accumulation taken from other
years;
2. Earnings reserved for definite corporate expansion or projects as approved by the board;
3. Earnings reserved for building, plants or equipment acquisition as approved by the board;
4. Earnings reserved for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement;
5. Earnings required by law or applicable regulations to be retained by the corporation;
6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved investments within the Philippines as can be proven by corporate records.

 Applicability:
a. Shall apply to every corporation formed or availed for the purpose of avoiding the income tax with
respect to its shareholders or shareholders of any other corporation, by permitting earnings and profits
to accumulate instead of being divided or distributed. These are:
i. Domestic corporations
ii. Closely-held corporations

 Exceptions:
a. Publicly-held corporations
b. Banks and other non-banks financial intermediaries
c. Insurance companies
d. Taxable (business) partnerships (deemed to have actually or constructively received the taxable
income under Sec. 73D)
e. General professional partnerships
f. Non-taxable joint ventures
g. Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916 and enterprises
registered pursuant to the Bases, Conversion and Development Act of 1992 under R.A. 7227

VIII. Income Tax Return Filing and Payment of Income Tax

Income Tax Return (BIR Form) Deadline for Filing and Payment

Annual Income Tax Return – Corporate On or before the 15th day of the 4th month of the
(BIR Form 1702) following the close of the taxable year

Annual Income Tax Return – Self-Employed On or before the 15th day of the 4th month of the
Individual (BIR Form 1701) following the close of the taxable year

Quarterly Income Tax Return (BIR Form 1702Q) Within 60 days after the end of each first 3 quarters
of the taxable year

IX. BIR Issuances and Court Decisions Related to Income Tax

1. Valuation of Contributions or Gifts Actually Paid or Made in Computing Taxable Income

 Revenue Memorandum Circular (RMC) No. 86-2014 dated December 5, 2014
- This circular is issued to clarify the valuation of contributions or gifts actually paid or made in
computing taxable income as part of the substantiation requirement under Revenue Regulations
No. 13-98:
Information Required in Certificate of Donation  Actual receipt by the accredited NSNP/
(BIR Form No. 2322) NGO of the donation or contribution
 Date of the receipt of donation, and
 Amount of donation
a. Amount of donation or contribution –if
cash
b. Acquisition cost – if real or personal
property
Allowable income tax deduction (on the part of Net book value of the property donated as
the donor) reflected in the financial statements of the
donor.

2. Requirements for Deductibility of Certain Income Tax Payments

 Revenue Regulation No. 12- 2013 dated July 12, 2013
- Requirements for deductibility: Any income payment which is otherwise deductible under the Code
shall be allowed as a deduction from the payor’s gross income only if it is shown that the income tax
 required to be withheld has been paid to the Bureau in accordance with Sections 57 and 58 of the
Code.
- No deduction will also be allowed notwithstanding payments of withholding tax at the time of audit
investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in
accordance with Sections 57 and 58 of the Code.

3. Validity of Principal and Supplementary Receipts/Invoices

 Revenue Regulations No. 18- 2012 dated October 22, 2012
- All taxapyers are mandated by the BIR to make new sets of ORs and Sales invoices wuth special
security marking features printed by BIR – Accredited printers only.
- All ORs and Sales invoices shall be valid only until full usage of the approved serial numbers or five
years from its issuance whichever comes first.
- This should be effective starting January 18, 2013

4. Taxability of Associations Dues, Membership Fees Received by Condominium Corporations

 Revenue Memorandum Circular (RMC) No. 65-2012 dated October 31, 2012
- Amounts paid in as dues or fees by members or tenants of a condominium corporation form part of
the gross income of such corporation subject to income tax. This is because the condominium
corporation furnishes its members and tenants with benefits, advantages, and privileges in return for
such payments.
- For tax purposes, the following constitute income tax payment or compensation which are subject
to income tax:
a. Association dues
b. Membership fees
c. Other assessments/charges
- The previous interpretation that the assessment dues are funds which are merely held in trust by a
condominium corporation lacks legal basis and is hereby abandoned.

Note: The same rule applies to homeowner’s association per RMC No. 9-2013 dated January 9, 2013

5. Rules on Deductibility of Depreciation Expenses on Vehicles

 Revenue Regulation No. 12 – 2012 dated October 12, 2012
- Limitations on deductions:
a. Only one (1) vehicle for land transportation is allowed for the use of an official or employee, the
value of which should not exceed P2.4 million
b. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the said threshold.
c. All related maintenance expenses on account of a non-depreciable vehicle for taxation
purposes are also disallowed in its entirety.
d. Loss to be incurred from sale of non-depreciable vehicle shall not be allowed as deduction from
gross income [Revenue Memorandum Circular (RMC) No. 2 -2013 dated December 8, 2012]

- Exception:
a. Unless the taxpayer’s mainline of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in the said operations.
- This regulation shall take effect immediately. (Published in October 17, 2012)

6. Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation and Other
Non-Profit Purposes
 Revenue Memorandum Circular (RMC) No. 35 – 2012 dated August 3, 2012
- Clubs which are organized and operated exclusively for pleasure, recreation and other non-profit
purposes are subject to income tax under the Tax Code, as amended.
- Background:
The provision in the NIRC of 1977 which granted income tax exemption to such recreational
clubs were omitted in the current of tax exempt corporations under NIRC of 1997, as
amended.

HENCE, the income of recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees are subject to income
tax.

A transfer may be gratuitous or onerous.

CONCEPT OF TRANSFER TAXATION

Gratuitous Onerous

1. Donacion inter vivos (death) 1. Value-added Tax

2. Donacion mortis causa (during lifetime) 2. Other Percentage Taxes
3. Excise Taxes
 with applicable Documentary Stamp Tax

ESTATE TAX

I. Gratuitous Transfer: ESTATE TAX

 An estate tax is a tax on the right to transfer certain property at death and on certain transfers which are
made by law equivalent to testamentary disposition (in contemplation of death).
 It is an excise tax (a tax impose upon the right or privilege), the object of which is the shifting of economic
benefits and the enjoyment of the property from the deceased to the living.
 It accrues as of the time of death of the deceased.
 The taxpayer in estate taxation is the estate of the decedent represented by the administrator, executor or
legal heirs.

1. Concept of Succession – a mode of acquisition by virtue of which the property, rights and obligations to
the extent of the value of the inheritance, of a person are transmitted through his death to another or
others by will or by operation of law.

 Will – is an act whereby a person is permitted with the formalities prescribed by law, to control to a
certain degree the disposition of his estate, to take effect after his death. From the moment of
death of the decedent, the rights to the succession are transmitted, and the possession of the
hereditary property is deemed transmitted to the heir.
 Kinds of Will:
a. Notarial or Ordinary Will – one which is executed in accordance with the formalities prescribed
by Art. 804 to 808 of the New Civil Code. It is the will that is created for the testator by a third
party, usually his lawyer, follows proper form, signed and dated in front of the required bumber
of witnesses and acknowledged by the presence of a notary public.
b. Holographic Will – is a written will which must be entirely written , dated and signed by the hand
of the testator himself, without the necessity of any witnesses.
c. Codicil – A supplement or addition to a will, made after the execution of a will and annexed to
be taken as part thereof, by which any disposition made in the original will is explained, added
or altered.

2. Elements of Succession
 Decedent – the person whose property is transmitted through succession, whether testamentary,
intestate, or mixed.
 Heir – the person called to the succession either by the provision of a will or by operation of law.
 Estate – refers to all property, rights and obligations of a person which are not extinguished upon his
death.

3. Kinds of Succession
a. Testamentary – results from the designation of an heir, made in a will executed in the form
prescribed by the law.
 The descedent may dispose his properties in his last will and testament in the manner he wants,
however, he must reserve some for certain persons who are called by the law as compulsory
heirs.

 Compulsory heirs are:

i. Legitimate children and descendants, which include legally adopted children
ii. In the absence of legitimate descendants, the legitimate parents or ascendants*
iii. Surviving spouse
iv. Illegitimate child, both natural and spurious
*Note: Legitimate parents or ascendants can only inherit in the absence of legitimate
children or descendants. Brothers and sisters of the decedent are not considered as
compulsory heirs, thus they cannot inherit from the legitime of the decedent

 In the absence of compulsory heirs, the successors would be:

i. Relatives up to 5th degree of consanguinity
ii. If there were no relatives, the government shall inherit the whole estate.
iii. If there is a will, the decedent may name other persons to inherit the free portion of the net
distributable estate

 Kinds of Successors
i. Legatee – an heir of personal property given by virtue of a will
ii. Devisee – an heir of real property given by virtue of a will

 Under testamentary succession, properties left by the decedent are classified into:
i. Legitime – portion of the testator’s property which could not be disposed freely because
the law has reserved it for the compulsory heirs.
 ii. Free portion – part of the whole estate which the testator could dispose of freely through a
written will irrespective of his relationship to the recepient.

 Executor (executrix) is the person nominated by the testator to carry out the directions and
requests in the decedent’s will and to dispose his property according to the decedent’s
testamentary provisions after his death.

b. Legal Intestate Succession – transmission of properties where there is no will, or if there is a will, such is
void or lost its validity, or nobody succeeds the will.
 In the intestate succession, the entire estate of the decedent is distributed to the heirs. The
compulsory heirs in testamentary succession are also the heirs in intestate succession. However,
intestate heirs include brothers and sisters, collateral relatives within the fifth degree of
consanguinity and the state.
 Administrator (administratrix) is the person appointed by the court, in accordance with the
governing statute, to administer and settle intestate estate and such testate estate as no
competent executor designated by the testator.

c. Mixed Succession – a transmission of properties, which is effected partly by will and partly by
operation of law

II. Formula in Computing Estate Tax

1. For married decedents (residents and citizens)

Exclusive Conjugal/Community Total
Properties Properties
Gross Estate xx xx xx

Less: Allowable Deductions

1. Ordinary (ELITE) (xx) (xx) (xx)

Net Estate before Special Deductions xx xx xx

2. Special Deductions

 Family Home (xx)

 Medical Expenses (xx)

 Standard deduction (xx)

 Benefits received under RA 4917 (xx)

 Share of the Surviving Spouse (1/2 of the net

conjugal/community estate before special (xx)
deductions)
Net Taxable Estate xx

Estate Tax Due xx

Less: Estate Tax Credit (xx)

Estate Tax Payable xx

 As a general rule, obligations contracted during the marriage are presumed to have benefited the
marriage, and are charges againts the community/conjugal property (e.g. funeral expenses, judicial
expenses, claims against the estate).

 Vanishing deduction may be a dedcution against exclusive or community/conjugal property, depending

on the classification of the property to which it is related, if exclusive or community/conjugal.

 A deduction, whether against exclusive or community/conjugal estate follows the classification of the
property in the gross estate. If the property to which the deductioon is related is exclusive property in the
gross estate, the deduction is against the exclusive gross estate. If the property to which the deductioon
is related is community/conjugal property in the gross estate, the deduction is against the
community/conjugal gross estate.


2. For single decedents

Gross estate xx
Less: Ordinary Deductions (xx)
Special Deductions (xx)
Net Taxable Estate xx
 Estate Tax Due xx
Less: Estate Tax Credit (xx)
Estate Tax Payable xx

III. Gross Estate

Residents and Citizens Non-Resident Aliens

What are included? How to value? What are included? How to value?

1. ALL real properties The higher between the 1. Real properties The higher between
wherever situated. Fair Value or the Zonal located ONLY in the the Fair Value or the
Value. Philippines Zonal Value.

2. ALL personal Fair Value at the time of 2. Personal properties Fair Value at the time
properties wherever death located ONLY in the of death
situated: Philippines:
In case of shares of In case of shares of
a. Tangible stocks: a. Tangible stocks, same as
b. Intangible b. Intangible properties residents and citizens.
a. If traded in the local situated only in the
stock exchange, the Philippines unless
MEAN between the exempted on the
highest and lowest basis of reciprocity.
quotations.
b. If not traded in the
local stock
exchange:
i. Ordinary shares –
book value
ii. Preferred shares
– par value

3. Whether real or a. If the transfer is a The same as residents Same valuation as in

personal property: bona fide sale, no and citizens, however, the case of residents
amount shall be only for properties and citizens.
a. In contemplation included in the gross situated within the
of death estate. Philippines.
b. Transfer with
retention or b. If the transfer is a
reservation of sale but for no or
certain right insufficient
c. Transfer under consideration, the
general power of difference between
appointment the FAIR VALUE at
d. Revocable the time of death
transfer and the
consideration
received.

c. If the transfer is a
sale for no or
insufficient
consideration and
the fair value at the
time of death is LESS
than the
consideration
received, no
amount shall be
included in the gross
estate.

4. Proceeds of life Amount of proceeds. Same treatment as in the

insurance, case of residents and
included only if: citizens, only if
a. Whether applicable.
REVOCABLE or
IRREVOCABLE,
 when the
beneficiary is
i. The estate of
the
deceased
ii. His executor
or
iii. His
administrator
b. The beneficiary is
a third person,
and the transfer is
REVOCABLE

 What intangible properties are considered as situated within the Philippines?

1. Franchise which must be exercisable in the Philippines;
2. Shares, obligations or bonds issued by domestic corporations;
3. Shares, obligations or bonds issued by any foreign corporation, 85% of business of which is in the
Philippines;
4. Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds
have acquired business in the Philippines;
5. Shares or rights in any partnership, business or industry established in the Philippines.

IV. Exemptions and Exclusions from Gross Estate

 Under Section 85 and 86 of NIRC
1. Capital or exclusive property of the surviving spouse
2. Properties outside the Philippines of a non-resident alien decedent
3. Intangible personal property of a non-resident alien in the Philippines when the rule of reciprocity
applies.

 Under Section 87 of NIRC

1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the
fideicommissary
3. Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with
the will of the predecessor
4. All bequests, devices, legacies or transfers to social welfare , cultural and charitable institutions,
provided:
i. No part of the net income of said institution inure to the benefit of any individual;
ii. Not more than 30% of such transfers shall be used for administration purposes.

 Under Special Laws

1. Proceeds of life insurance and benefits received by members of the GSIS (RA 728)
2. Benefits received by members from SSS by reason of death (RA 1792)
3. Amounts received from Philippine and United States governments for war damages
4. Amounts received from United States Veterans Administration
5. Retirement benefits of officials/employees of a private firm (RA 4917), provided they are included in
the gross estate.
6. Payments from the Philippines and US governments to the legal heirs of deceased of World War II
Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army (RA
136)

V. Property Relationship Between Spouses

Conjugal Partnership Absolute Community

I. Property acquired BEFORE Marriage

a. Gratuitous Exclusive Communal

b. Onerous Exclusive Communal

c. Where the spouse has a legitimate Exclusive Exclusive

descendant from a previous marriage

II. Property acquired DURING marriage

a. Gratuitous title Exclusive Exclusive

b. Onerous Title Conjugal Communal

 c. In exchange of EXCLUSIVE property Exclusive Exclusive

d. In exchange of conjugal/ community Conjugal Communal

property

e. Fruits or income from EXCLUSIVE property Conjugal Exclusive

f. Fruits or income from conjugal/ Conjugal Communal

community property
 The highlighted rows are the differences between the two systems.
 Jewelries shall form part of the communal property (in case of absolute community).
 Rules in determining the property of relationship
1. Agreement on marriage settlement
2. If there was no prenuptial agreement and:
i. The date of marriage took place before August 3, 1988, conjugal partnership of gains.
ii. The date of marriage took place on or after August 3, 1988, absolute community of property.

VI. Deductions
Deductions from gross estate
 Residents and Citizens: ELITE + PP + VD + FH + STD + R + M + Share of the Surviving Spouse
 Nonresident Aliens: ELITE + PP + VD + Share of the Surviving Spouse

1. Expenses, losses, indebtedness and taxes (please see discussions below).

a. If decedent was a citizen or resident alien, deduct all ELIT.
b. If decedent was a non-resident alien, prorate ELITE as follows:

Phil. Gross Estate x Total ELITE

World Estate

2. Transfers for PUBLIC PURPOSE. These are bequests, legacies, devises or transfers for the use of the
government of the Phil. or any political subdivision thereof, exclusively for public purpose.
3. Deduction for property previously taxed (VANISHING DEDUCTION).
4. The family home not exceeding P1,000,000.
5. Standard deduction for citizen or resident alien decedent only of P1,000,000.
6. Retirement benefits received by employees of private firms from private pension plan approved by the
BIR under R.A. 4917.
7. Medical expenses paid or incurred within 1 year prior to decedent’s death duly substantiated with
receipts but not to exceed P500,000 for citizen or resident decedent.
8. Net share of the surviving spouse in the conjugal partnership property or community property as
diminished by the expenses properly chargeable to such property shall be deducted from the estate.

Expenses, losses, indebtedness, and taxes deductible from gross estate (ELIT)
1. Funeral expenses. Limit is 5% of the gross estate but not exceeding P200,000 (statutory maximum).
2. Judicial expenses for the testamentary or intestate proceedings.
3. Losses due to fire, storm, shipwreck, or other casualty.
4. Losses due to theft, robbery or embezzlement.
5. Claims of the decedent against insolvent persons, where the value of the decedent’s interest therein is
included in the gross estate.
6. Claims against the estate, provided that the debt instrument was notarized at the time the
indebtedness was incurred; and, if the loan was contracted within three years before the death of the
decedent, a statement showing the disposition of the proceeds of the loan (or how the proceeds of the
loan was used) must accompany the estate tax return.
7. Unpaid mortgage, where the value of the decedent’s interest, undiminished by the mortgage, is
included in the gross estate.
8. Income tax on income prior to death of the decedent.
9. Property taxes which have accrued prior to death of decedent.

REQUISITES for deduction of losses in Nos. 3 and 4 above

a. The loss is not compensated by insurance or otherwise.
b. The loss is not claimed as a deduction in the estate income tax return.
c. The loss must occur not later than the last day for payment of the estate tax. (The last day for
payment of the estate tax is 6 months from the decedent’s death).

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

1. Purpose - to minimize the effects of a double tax on the same property within a short period of time.
2. Conditions for allowance:
a. There is a property forming a part of the gross estate of the present decedent situated in the Philippines;
b. The present decedent acquired the property by inheritance or donation within 5 years prior to his death;
c. The property subject to vanishing deduction can be identified as the one received from the prior
decedent, or from the donor, or can be identified as having been acquired in exchange for the property
so received;
 d. The property acquired formed part of the gross estate of the prior decedent, or of the taxable gift of the
donor;
e. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
f. The estate of the prior decedent has not previously availed of the vanishing deduction.

3. Percentage of vanishing deduction - the rate depends on the interval between the death of present
decedent and death of prior decedent (if the property was acquired by inheritance) or death of present
decedent and date of gift (if the property was acquired by donation), as follows:
More than Not more than Percentage

xxx 1 years 100%

1 years 2 years 80%

2 years 3 years 60%

3 years 4 years 40%

4 years 5 years 20%

5 years Xxx Xxx

4. Procedures in computing vanishing deduction

a. Determine the initial value by comparing the FMV of the property used in computing the first transfer tax
paid with the FMV of the property in the present decedent. The lower of the two is the initial value.
b. From the initial value taken, deduct any mortgage or lien on the property previously taxed which was paid
by the present decedent prior to his death, where such mortgage or lien was a deduction from the gross
estate of the prior decedent or gross gift of the donor. This is the initial basis.

c. The initial value taken, as reduced by Step (b), shall be further reduced by prorated deductions for
expenses, losses, indebtedness, taxes (ELIT) and transfers for public purpose (PP) only, allocable to the
property previously taxed as follows:
Initial basis
x Deductions = Portion deductible
Gross estate

This is the final basis.

d. Determine the time interval between the death of present decedent and death of prior decedent (if the
property was acquired by inheritance) or death of present decedent and date of gift (if the property was
acquired by donation) to find the applicable percentage of vanishing deduction.
e. Multiply the final basis by the percentage of vanishing deduction to arrive at the VANISHING DEDUCTION.

The FAMILY HOME

1. Defined - The family home is the dwelling house where a person and his family reside, and the land on which it
is situated.
2. Value included in the gross estate. The current fair market value or zonal value of the family home, whichever
is higher, shall be included in the gross estate of decedent.
3. Valuation date. The family home shall be valued as of the date of death.
4. Conditions for allowance of deduction:
a. Decedent must have died on or after July 28, 1992.
b. The total value of the family home must be included in the gross estate of the decedent.
c. The family home must be the actual residence of decedent and his family at the time of death, as certified
by the Barangay Captain of the locality where the family home is situated.
d. Deduction cannot exceed the fair market value or zonal value of the family home as included in the gross
estate but not exceeding P1,000,000.
e. It is a deduction from common properties or separate properties of the decedent, as the case maybe.

Tax credit for estate tax paid to a foreign country

1. Who can claim? Only citizen or resident alien decedent.

2. Amount Deductible, whichever is lower:
a. Actual estate tax paid abroad
b. Limit
2. Limitations on tax credit:
a. Only one country is involved

Net estate (per Foreign Country) x Philippine estate tax

Total net estate

b. Two or more foreign countries are involved

Limit 1: per country
 Net estate (per Foreign Country) x Philippine estate tax
Total net estate

Limit 2: Total Foreign Country

Net estate (all Foreign Countries) x x Philippine estate tax

Total net estate

VII. Compliance Requirements

a. Notice of death shall be given when the value of the gross estate exceeds P 20,000
b. The executor, administrator or any of the legal heirs shall file the notice of death within 2 months after
the decedent’s death or within 2 months after the executor or administrator has qualified.
c. The estate tax return shall be filed within 6 months after the decedent’s death, but may be extended to
not exceeding 30 days if authorized by the BIR Commissioner.
d. When the estate tax return shows a gross value exceeding P 2,000,000, it shall be supported with a
statement duly certified by a CPA.
e. The payment of estate tax shall be made at the time the return is filed. However, the CIR may allow an
extension of until 5 years if settled judicially or 2 years if settled extra-judicially.

DONOR’S TAX

I. Nature of Donor’s Tax – a tax on the privilege of the donor to give; it is not a property tax but is a tax imposed
on the transfer of property by way of gift during the life time of the donor. The donor’s tax shall not apply unless
and until there is a completed gift. It is an excise tax imposed upon the right of a person to transfer property
gratuitously during his lifetime.

II. Essentials of a Taxable Donation

Donation takes place only when there is a concurrence of the following:

1. Capacity of the donor

2. Donative intent
3. Delivery of the gift - Completed
4. Acceptance by the donee - Perfected

Note:
a. The transfer of property is completed by delivery, either actually or constructively, of the
donated property to the donee.
b. The transfer of property by gift is perfected from the moment the donor knows of the
acceptance of the donee.
c. The composition and valuation of gross gift is the same as the composition and valuation of
gross estate.

III. Classification of Donors

1. Residents and Citizen – taxable globally
2. Non-resident Alien:
a. With reciprocity
b. Without reciprocity

IV. Computation of Donor’s Tax

On first donation:
Gross Gift xx
Less: Deductions from gross gift (xx)
Net gift xx
Times the Applicable rate* %
Donor’s tax due and payable xx
Less: Tax Credit (xx)
Donor’s Tax Payable xx

On subsequent donation:
Gross gift made this month xx
Less: Deductions from gross gift (xx)
Net gifts, current xx
Add: ALL prior net gift w/in the year xx
Aggregate net gifts xx
Times applicable Tax rate %
Donor’s Tax Due xx
Less: Donor’s Tax paid on prior gifts (xx)
 Tax Credits (xx)
Donor’s Tax Due and Payable xx

1. Who are Relatives?

a. Brothers, sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
b. Legally adopted children are considered as relatives, hence they are entitled to the same
rights, privileges and obligations of legitimate children, as provided by law.
c. Relative by consanguinity (by blood) in the collateral within fourth degree of relationship.
2. Remember
a. ONLY gifts to relatives are computed using the cumulative basis.
b. Donation to strangers (beyond 4th degree) is computed using individual basis since the rate will
be the same regardless of the amount.
c. The classification of taxpayers are still the same in estate tax.
d. The reciprocity rule shall also be considered for intangible personal property of Non-Resident
Aliens in computing gross gift.

V. Gross Gift
1. Direct Gift (donor to donee)
2. Gift through creation of trust
3. Condonation of debt
4. Repudiation of inheritance if:
a. Specifically and categorically done in favor of identified heirs; and
b. To the exclusion or disadvantage of other co-heirs.
5. Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute
community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any
other person/s
6. Transfer for insufficient consideration, provided that it is not in contemplation of death, revocable
transfer or transfer under general power of appointment. Otherwise, it will be subject to estate tax.

7. Rules to observe:
a. As a rule, the value of the property/right donated shall be the fair market value existing when
the gift was made (as of the time of donation).
b. The time to value is the moment when the donation has been completed and perfected
(delivered and accepted).
c. When the donation is subject to a suspensive condition, the value of the gift is to be determined
only at the time when the stipulated condition is fulfilled, subject to the time of delivery and
acceptance of the gift.

8. Valuation Methods:
a. Real properties are valued at the assessed value or zonal value, whichever is higher.
b. Personal properties are valued at current market price or fair market value.
c. Right to use or usufructuary is valued based on the Basic Standard Mortality Rate Table (BSMT)
with the consideration of the present value using the prevailing market interest rate at the time
of donation.
d. Shares of stocks are valued at:
i. If traded – Closing price
ii. If not traded – using the adjusted net asset method

VI. Donation Between husband and wife

 Gift from common property – the gift is taxable one-half to each donor spouse.
 General Rule: Donation between husband and wife is not taxable as it is declared void by law.
 Exception: Moderate gifts between the spouse are valid.
 Husband and wife are considered as separate and distinct taxpayers for purposes of the donor’s tax.
However, if what was donated is a conjugal or community property and only the husband signed the deed
of donation, there is only one donor for donor’s tax purposes, without prejudice to the right of the wife to
question the validity of the donation without her consent pursuant to the pertinent provision of the Civil
Code of the Philippines and the Family Code of the Philippines.

VII. Political Contributions (Omnibus Election Code (OEC) and Repulic Act No. 7166)
1. As a rule, any contributions given to candidates, political parties or coalition of parties are not subject to
donor’s tax as long as the following conditions are met:
2. The contribution is for campaign purposes; and
3. The donation is duly reported to the Commission on Election (COMELEC)
4. The campaign contribution is subject to donor’s tax on the part of the donor, if such contributions are not
reported to the COMELEC.
VIII. Exemptions and Deductions

DEDUCTION RESIDENTS OR CITIZENS NON-RESIDENT ALIENS

1. Dowries or gift made on account marriage

of a son or daughter, legitimate, illegitimate
or legally adopted, to the extent of P10,000
YES NO
per child per marriage. The gift must be
made before marriage or within one year
thereafter.

2. Gifts to the National Government, its political

subdivisions or any entity created by any of
YES YES
its agencies which is not conducted for
profit

3. Gifts in favor of educational, charitable,

religious, cultural and social welfare YES YES
institutions, etc. (subject to 30% rule)

4. Encumbrance on property donated

YES YES
assumed by the done (mortgages, if any)

5. Diminution in the value of property YES YES

 Exemptions under Special Laws

1. International Rice Research Institute
2. Ramon Magsaysay Foundation
3. Integrated Bar of the Philippines
4. Development Academy of the Philippines
5. National Museum
6. National Library
7. Archives of the National Historical Institute
8. Musuem of Philippine Costumes
9. Intramuros Administration

IX. Destroyed Donations

1. Donor’s tax accrues upon the completion of the donation, meaning upon delivery.
2. Gifts destroyed after they have been delivered are considered as valid donations. Thus, even if it had
been destroyed already, the donation shall be subject to donor’s tax still.
3. Total destruction has nothing to do with the donor’s tax liability when the thing donated is already
delivered.

X. Tax Rates Applicable

1. If given to relatives, 2% - 15% tabular tax
2. If given to stranger, 30%.
Note: A stranger is a person who is NOT:
a. A brother or sister (whether whole or half-blood)
b. Spouse
c. Ancestor
d. Lineal descendant
e. Relative by consaguinity in the collateral line within 4th civil degree of relationship

XI. Tax credit for donor’s tax paid to a foreign country

1. Who can claim? Only citizen or resident alien decedent.
2. Amount Deductible, whichever is lower:
c. Actual estate tax paid abroad
d. Limit
3. Limitations on tax credit:
a. Only one country is involved

Net gift (per Foreign Country) x Philippine donor’s tax

Total net gift

c. Two or more foreign countries are involved

Limit 1: per country

Net gift (per Foreign Country) x Philippine donor’s tax

Total net gift
 Limit 2: Total Foreign Country

Net gift (all Foreign Countries) x Philippine donor’s tax

Total net gift

XII. Deadline for Filing of return

1. The deadline for the filing of donor’s tax return (BIR Form 1800) will be 30 days after the donation was
made.
2. The payment for donor’s tax shall be the same day as of that the day the return was filed (Pay-as-You-
File System)
3. When the Commissioner gives an extension, the payment of the tax due may be made on such day as
extended by the CIR, but not to exceed six (6) months.
4. The filing of returns for donor’s tax is with the Revenue District Office or duly authorized collection (e.g.
City Treasurer) in which the donor resided at the time of transfer.
5. If there is no legal residence in the Philippines, filing should be made with the Office of the Commissioner
on Internal Revenue.

XIII. Attachments
1. Based on the BIR Form 1800, the following documents shall be attached:
2. Sworn statement of the relationship of the donor to the donee;
3. Proof of tax claimed tax credit, if applicable;
4. Certified true copy of the Original/Transfer/Condominium Certificate of Title (OCT, TCT, CCT) of the
donated property (for real properties);
5. Certified true copy of the latest Tax Declaration of lot and/or improvement, if applicable (for market
value purposes);
6. Certificate of No Improvement issued by the Assessor’s Office where the donated real property/ies
have not declared improvements, if applicable;
7. Proof of valuation of shares of stock at the time of donation, if applicable;
8. For listed stocks – newspaper clippings/certification issued by the Stock Exchange as to the value of per
share
9. For unlisted stocks – latest audited Financial Statements of the issuing corporation with the computation
of the book value per share.
10. Proof of valuation of other types of personal properties, if applicable;
11. Proof of claimed deductions, if applicable; and
12. Proof of the Tax Debit Memo used as payment.

VALUE ADDED TAX

I. Pro-Forma Computation

Output VAT from regular Domestic Sales and Receipts (limit P 1,919,500) xx
Output VAT from Importation (paid prior to release from Customs) xx
Output VAT from Deemed Sale Transactions xx
Output VAT from Zero-Rated Sales xx
xx
Less:
Input VAT from Purchases of Goods (xx)
Input VAT from Importation (xx)
Input VAT from Purchases of Services (xx)
Input VAT from Deemed Sale Transactions (if not previously claimed) (xx)
Input VAT from Depreciable Capital Goods (xx)
Input VAT from TIV/ Presumptive (xx)
VAT Payable xx

II. Concept of VAT

1. A VAT is a tax levied on the value of the products of an enterprise in the course of its production and
distribution. It is otherwise known as the tax on Mark-ups.
2. It is a percentage tax imposed at every stage of the transfer of goods on sale, exchange, barter, and the
importation of goods, including transaction deemed by law as a sale or leasing of goods or property and
the performance of services in the course of trade or business.
3. It is based on the gross selling price or gross value in money or net sales when there are sales discounts or
sales returns, whichever is applicable, of the goods or property sold, bartered, or exchanged or the gross
receipts dervied from the sale or exchange of services, including the lease of goods or property, or in the
case of imported goods, on the total value of importation or its landed cost plus excise and ad valorem tax
and other charges on importation.
III. Sources of Output VAT
1. Importation
a. All importations are subject to VAT of 12%, except those exempt under Sec. 4 of RR No. 6-97.
b. Importations made by a tax-exempt taxpayer shall, likewise, be exempt from VAT. However, the
subsequent purchaser, transferee or recepient who are not tax-exempt shall pay the VAT on the
imported goods as if he was the importer.
c. The tax base of imported good for VAT purposes include total value of importation or its landed cost
plus excise and ad valorem tax and other charges on importation.

2. Sale of goods
Tax base of VAT on sale of goods or properties

Gross sales xxx (a)

Less:
Sales discounts xxx (b)
Sales returns and allowances xxx (c) Xxx
Net sales Xxx
Add Excise tax, if any xxx (d)
Tax base Xxx
Notes:
a. Gross sales include:
i. Cash sales
ii. Sales on account (open account)
iii. Installment sales
iv. Deemed sales (Consumption, Consignment, Distribution, Dacion en Pago, and Retirment)
v. Other amounts due from buyer such as for packaging, delivery and insurance.
b. Sales discount granted and indicated in the invoice at the time of sale and the grant of which
does not depend upon the happening of future event may be excluded from gross sales
within the same month or quarter it was given.
c. Sales returns and allowances may be deducted from the gross sales for the month or quarter in
which a refund is made or a credit memo is issued.
d. Excise tax (a business tax), if any, is included in the gross sales, while VAT is excluded.

3. Sale of Properties
1. Sale of real property classified as capital asset is not subject to VAT. Such transaction is subject to
capital gains tax of 6% based on sales price or FMV, whichever is higher.
2. In general, sale of real property primarily held in the normal course of business (inventory/ordinary asset)
is subject to VAT, except:
a. Residential lot with selling price of P 1,919,500 and below; and
b. Sale of house and lot and other residential dwellings with selling price at P 3,199,200 and below.

3. Sale of real properties in the course of trade or business

c. On installment plan (initial payments do not exceed 25% of the gross selling price)

Installments received Xxx

Add:
Interest xxx
Other charges xxx Xxx
Tax base Xxx
Note: Upon full payment, if the zonal or market value is higher than the total receipts or collections,
the additional VAT shall be paid accordingly.

d. On cash basis or deferred payment plan (initial payments exceed 25% of the gross selling price)

The tax base shall be the higher between SELLING PRICE stated in the sales document and ZONAL
OR MARKET VALUE.

Notes:

a. If the gross selling price is the zonal or market value of the real property, the zonal or market value
shall be deemed inclusive of the VAT.
b. If the VAT is not billed separately, the selling price stated in the sales document shall be deemed
inclusive of the VAT.

4. Sale of Scrap Materials

1. Sale of scrap such as empty drums, plastic bags, cartons, and wood crates; obsolete inventories and
fully depreciated fixed assets at a minimal prices or lower than the purchase price are subject to VAT.
2. Ordinary assets, other than inventories held for sale, which are originally subject to depreciation are are
likwise subject to VAT, when sold.

5. Sale of Service
a. In general, all kinds of sale, exchange or supply of services rendered in the Philippines are subject to 12%
VAT, except those which are classified and qualified as zero-rated or VAT-exempt.
 b. Under the situs of service criteria services performed outside the Philippines, even if undertaken in the
course of business, are BEYOND the scope of VAT.
c. Tax Base:
i. Total amount of money or its equivalent representing the contract price, compensation service fee,
rental or royalty.
ii. Amount charged for materials supplied, with the services and deposits and advance payments
actually or constructively received during the taxable quarter, excluding VAT.

d. VAT in Professional Fees

As a rule, earnings from a practice of profession will be subject to VAT if:
i. The professional is a VAT-registered person; or
ii. A non-VAT registered but his total gross receipts exceed P 1,919,500.

Also, aside from VAT is subject to 10% creditable withholding tax if the aggregate amount per year is
P720,000 and below, and 15% creditable withholding tax if exceeding P720,000.

e. VAT on Service Contractors

i. Subject to 12% VAT
ii. If the contract is with the government, the government shall withhold final withholding VAT of 5%.
iii. Also subject to 2% creditable withholding tax for sale of services and 1% creditable withholding tax
for sale of goods.

f. VAT on Security Agency

i. Agency fees are subject to 12% VAT, excluding the salary of the guards.
ii. Subject to a 2% creditable withholding tax for sale of service based on the agency fee.
iii. If the contract does not separate the agency fees from the salary of the guards, the whole amount
will be subjected to VAT and 2% creditable withholding tax.

g. VAT on Real Estate Brokers

i. The commission income of real estate brokers are subject to VAT of 12% if he is VAT-registered or his
total commission exceeds P1,919,500 per year.

h. VAT on Dealers in Securities

i. Dealers in securities are subject to VAT based on their gross receipts (gross selling price less cost of
securities sold).

j. VAT on Lending Investors

i. Lending investors includes all persons not include banks (depository and savings), non-bank
financial intermediaries, finance companies, and other financial intermediaries not performing
quasi-banking.
ii. Subject to VAT of 12% on their interest incomes.
iii. Does not include banks, other financial intermediaries performing quasi-banking functions and
pawnshops.

k. VAT on Transportation Services

i. Subject to VAT of 12% on:
 Transport of goods and cargoes whether by land, air and sea.
 Transport of passengers by air and sea.
ii. Transport of passengers by land are subject to 3% OPT.

l. VAT on Lessor of Commercial and Residential Units

i. If the monthly rent per unit does not exceed P12,800, regardless of the aggregate amount, the
lessor is exempted from VAT and OPT.
ii. If the monthly rent per unit exceeds P 12,800, but the aggregate amount does not exceed
P1,919,500, the lessor is only subject to OPT, not to VAT.
iii. If the monthly rent per unit exceeds P 12,800 and the aggregate amount does exceed P1,919,500,
the lessor is only subject to VAT.

6. Deemed Sale Transactions (CCDDR)

a. Transfer, use or consumption not in the course of trade or business of goods or properties originally
intended for sale or for use in the course of trade or business;
b. Consignment of goods if not sold within 60 days following the date of consignment;
c. Distribution or transfer to creditors in payment of debt or dacion en pago;
d. Distribution or transfer to shareholders or investors as share in the profit; and
e. Retirement from or cessation of business or incorporation of single proprietorship with respect to all
goods on hand, whether capital goods, stock in trade, supplies or materials, as of the date of such
retirement, cessation or incorporation,

Notes: The tax base for deemed sale transactions would be the lower of (a) acquisition cost or (b) the
current market price. Where the gross selling price is unreasonably lower than the actual market value,
the appropriate tax base shall be determined by the Commissioner. The gross selling price is
 unreasonably lower than the actual market value if it is lower by more than 30% of the actual market
value of the same goods of the same quantity or quantity sold in the immediate locality on the the
nearest date of sale.

f. Transfer of assets as a result of merger or consolidation are not considered as deemed sale transaction.
However, the unused input tax of the dissolved corporation, as of the date of merger or consolidation,
shall be absorbed by the surviving corporation.

7. Zero-Rated Sales
a. Export Sales
i. The sale and actual shipment of goods from the Philippines to a foreign country.
ii. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise.
iii. Sale of raw materials or packaging materials to export-oriented enterprises whose export sales
exceed 70% of total annual production.
iv. Sale of gold to the Bangko Sentral ng Pilipinas.
v. Those considered export sales under the Omnibus Investment Code of 1987 (E. O. No. 226) and
other special laws, e.g., sales to diplomatic missions and other agencies and/or instrumentalities
granted tax immunities.
vi. Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations.

b. Foreign currency denominated sale

i. It means sale to a nonresident of goods (except automobiles and nonessential goods)
assembled or manufactured in the Philippines for delivery to a resident in the Philippines.

c. Effectively zero-rated sales

- Effectively zero-rated sales of goods and properties shall refer to the local sale (constructive export) by
a VAT-registered person to a person or entity who was granted indirect tax exemptions under special
laws or international agreement, such as:
i. Sale to Asian Development Bank (ADB);
ii. Sale to International Rice Research Institute (IRRI);
iii. Sale to duly registered and accredited enterprises with Subic Bay Metropolitan Authority
(SBMA); and
iv. Sale to duly registered and accredited enterprises with Philippine Economic Zone Authority
(PEZA).

IV. Sources of Input VAT

1. Importation and Domestic Purchase of Goods
a. Goods for sale
b. Goods for conversion into finished product (including packaging materials)
c. Goods for use as supplies
d. Goods for use as materials supplied in the sale of services
e. Goods for use in trade or business for which depreciation or amortization is allowed
f. Transactions deemed sale (CCDDR)
g. In case of importation, an input tax may be claimed for the importation of goods for business use by a
VAT-registered taxpayer. Input tax paid by a non-VAT person, whether for personal or business use, are
not creditable. Also, input VAT paid by a VAT registered on goods imported for personal use are not
creditable.

2. Purchase of Services
3. Purchase of Capital Goods
Claim for input tax on depreciable goods
a. Applies only to domestic purchase or importation of capital goods subject to depreciation for
income tax purposes.

b. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital goods during any
calendar month does not exceed P1,000,000, the total input tax is creditable against output tax in
the month acquired (Outright Credit)

c. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital goods during any
calendar month exceeds P1,000,000, the total input tax is creditable against output tax, as follows:
i. Spread evenly over 60 months (starting in the calendar month acquired) the input tax, if the
estimated useful life of the depreciable capital good is 5 years or more.
ii. Spread evenly over the actual number of months of estimated useful life (starting in the
calendar month acquired) the input tax, if the estimated useful life of the depreciable
capital good is less than 5 years.

d. If the depreciable capital good is sold or transferred within a period of 5 years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital
 good sold or transferred can be claimed as input tax credit in the month/quarter when the sale or
transfer was made.

4. Zero-Rated Sales
a. The input VAT may at the option of the taxpayer, be claimed for (a) tax refund, the claim of which
shall be filed and made within 2 years from the close of the quarter when such sales are made, or
(b) tax credit against internal revenue taxes.

5. Presumptive Input VAT

a. Persons or firms who can avail:
i. Processor of sardines, mackerel and milk (SaMaMi)
ii. Manufacturer of refined sugar, cooking oil and packed noodle-based instant meal
(ReCoPa)
b. Basis of presumptive input tax - Gross value in money of purchases of primary agricultural and
marine food products used as inputs in the processing or manufacturing of SaMaMi and ReCoPa.
c. Rate of presumptive input tax – 4%

6. Transitional Input VAT

a. Persons who can avail:
a. Persons who become liable to VAT for the first time
b. Persons who elect to be VAT-registered
b. Basis of transitional input tax - Beginning inventory of VAT-subject goods, materials and supplies.
c. Transitional input tax allowed - The HIGHER between:
a. 2% of the VAT-subject beginning inventory value for income tax purposes; and
b. Actual VAT paid on such beginning inventory.

7. Standard Input VAT (Sale to Government)

a. The sale to Government or its political subdivision by VAT-registered person shall be subject to 12%
VAT, provided that:
i. The government shall withhold 5% final withholding VAT upon payment to the VAT
registered person;
ii. The VAT-registered person may claim a Standard Input VAT of 7% against its output VAT
from the sale to government. The Actual Input VAT attributable to sales of goods and
services to the government shall not be credited against the Output vat arising from sales to
non-government entities.

V. Excess output or input taxes

a. If at the end of any taxable month or quarter the output tax exceeds the input tax, the difference is
VAT payable (current liability).

b. If the input tax at the end of any taxable quarter (inclusive of input tax carried over from the
previous quarter) exceeds the output tax, the excess input tax (current asset) shall be carried over
to the succeeding taxable month or quarter, provided that any input tax attributable to 0-rated
sales by a VAT-registered person may at his option be refunded or applied for a tax credit
certificate.

c. Input taxes on zero-rated sales of goods, properties or services

The input taxes on zero-rated sales of goods, properties or services may at the option of the VAT-
registered person be:
i. Refunded (within 2 years after the close of the quarter when such sales were made); or
ii. Converted into tax credit certificates which may be used in paying other NIRC taxes (the
two-year peremptory period applies); or
iii. Applied against the output tax of domestic sales.

d. Unused input tax of persons who retired

Unused input taxes of persons whose registration has been cancelled due to retirement from or
cessation of business may be converted into tax credit certificate which may be used in payment of
other NIRC taxes within 2 years from the date of cancellation or claim for refund if there be no
internal revenue tax liabilities against which the tax credit certificate may be utilized.

e. Period within which to refund

Refund or tax credit certificate shall be granted within 120 days from the date of submission of
complete documents.
If the Commissioner fully or partially denies the application for VAT refund or issuance of tax credit
certification (TCC) on the expiration of 120-day period, the taxpayer may appeal to the Court of
Tax Appeals within 30 days from the receipt of the denial; otherwise, the decision will become final.

f. Manner of giving refunds

Refunds shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his
authorized representative without the necessity of being countersigned by the COA Chairman.
VI. Administrative Requirements
1. Return and payment of VAT
a. In general - VAT return shall be filed and the tax due thereon be paid within 25 days following the
close of each taxable quarter.
b. VAT-registered persons shall declare and pay VAT on a monthly basis, not later than the 20th day
following the close of each of the first two months of a taxable quarter; taxpayers under the EFPS,
on or before a prescribed due date based on the business industries classification.

2. Persons whose registration has been cancelled

a. Any person whose registration has been cancelled shall file a return and pay the tax due thereon
within 25 days from the end of the month the business ceases to operate or when VAT registration
has been officially cancelled.
b. Only one consolidated return shall be filed for the principal place of business or head office and all
branches.

3. Where to file the return and pay the tax - In any one of the following located within the revenue district
where the taxpayer is registered or required to register:
a. Authorized agent bank
b. Revenue collection officer
c. Duly authorized city or municipal treasurer

PERCENTAGE TAX

I. Percentage Taxes

Summary rules on Other Percentage Taxes (OPT) under R.A. 8424, as last amended by R.A. 9337

Section Tax Base Tax Rate

Tax on persons exempt from VAT (except

116 Cooperatives) and not liable to pay the other Monthly gross sales or receipts 3%
percentage taxes below.

Tax on franchises:
1. On gas and water utilities Monthly gross receipts 2%

2. On radio and/or television broadcasting Monthly gross receipts or pay VAT 3%

119
companies with annual GR of not more than at their option. Once exercised, it
P10,000,000 becomes irrevocable.

125 Amusement taxes from operators of:

1. Boxing exhibitions Quarterly gross receipts 10%
(Exempt, if a World or Oriental championship in any division is at stake, promoted
by a Filipino citizen or Corporation, at least 60% Filipino owned, and one of the
contenders is a Filipino citizen)
2. Professional basketball games Quarterly gross receipts 15%
3. Cockpits Quarterly gross receipts 18%
4. Cabarets, night or day clubs Quarterly gross receipts 18%
5. Jai-alai and race tracks Quarterly gross receipts 30%

For the purpose of the amusement tax, the term “gross receipts” embraces all the receipts of the
proprietor, lessee or operator of the amusement place. Said gross receipts also include income from
television, radio, and motion picture rights, if any.

126 Tax on winnings  Winner of the prizes in double 4% of the net prize
forecast/quinella & trifecta bets
 Person winning not in double 10% of the net prize
forecast/quinella & trifecta bets
 Owners of winning race horses 10% of the prize

123 Tax on life insurance premium, except purely Insurance premiums collected 5%
cooperative companies or associations

124  Owners of property who obtain insurance On premiums paid 5%

directly with foreign companies
 Agents of foreign insurance companies Insurance premiums collected 10%
 (fire, marine or miscellaneous insurance agents)

127-A Tax on sale, barter or exchange of shares of stock listed and traded through the local stock exchange
(LSE), other than sale by a dealer in securities – ½ of 1% of gross selling price or gross value in money of
the shares of stock sold, bartered, exchanged or otherwise disposed of.

127-B Tax on shares of stock sold or exchanged through the LSE in an initial public offering of shares of stock of
a closely held corporation in accordance with the proportion of shares of stock sold, bartered or
exchanged or disposed of to the total outstanding shares of stock after the listing in the LSE:
Up to 25% 4% of GSP
Over 25% to 33 1/3% 2% of GSP
Over 33 1/3% 1% of GSP
117 Percentage tax on domestic common carriers Monthly gross receipts 3%
by land for the transport of passengers and
keepers of garages, except owners of bancas
and animal-drawn two-wheeled vehicles.

The following shall be considered per unit minimum quarterly gross receipts (for Sec. 117 only):

Manila and other Cities Provincial

 Jeepney for hire P2,400 P1,200
 Public utility bus:

Not exceeding 30 passengers 3,600 3,600

Exceeding 30 but not exceeding 50 6,000 6,000
Exceeding 50 7,200 7,200
 Taxis 3,600 2,400
 Car for hire (with chauffeur) 3,000 3,000
 Car for hire (w/o chauffeur) 1,800 1,800

118 OPT on international carriers (air & shipping) Monthly gross receipts 3%
for the transport of both passengers & cargoes

120 Tax on overseas dispatch, message or Quarterly gross receipts from

conversation originating from the Philippines such services 10%

Exempted from Sec. 120 are: (DING)

 Diplomatic services
 International organizations
 News services
 Government

121 Tax on banks and non-bank financial Monthly gross receipts

intermediaries performing quasi-banking
functions:
a. On interests, commissions and discounts from lending activities as well as income from
financial leasing, based on remaining maturities of the instruments, as follows:
Maturity period of more than 5 years 1%
Maturity period of 5 years or less 5%
Note: In case of pretermination, the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction and applying
the correct rate of tax.
b. On royalties, rental of property (real or personal), profit from exchange and all other
items treated as gross income under Section 32 of the tax code. 7%
c. On trading gains within a taxable month on foreign currency, debt securities,
derivations and other similar financial instruments. 7%
d. On dividends and equity shares in the net income of subsidiaries. 0%

122 Tax on other non-bank financial intermediaries, Monthly gross receipts

including finance companies, money changers
and pawnshops:
a. On interests, commissions and discounts from lending activities as well as income from
financial leasing, based on remaining maturities of the instruments, as follows:
Maturity period of more than 5 years 1%
Maturity period of 5 years or less 5%
Note: In case of pretermination, the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction and applying
the correct rate of tax.
b. On royalties, rental of property (real or personal), profit from exchange and all other
items treated as gross income under Section 32 of the tax code. 7%
c. On dividends and equity shares in the net income of subsidiaries. 0%
Return and payment of other percentage taxes

a. General rule: Every person liable to pay percentage taxes shall file a monthly return of the amount of his gross
sales, receipts or earnings and pay the tax thereon within twenty (20) days after the end of each taxable month.
The taxpayer may file a separate return for each branch or place of business, or a consolidated return for all
branches or places of business with the authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the City or Municipality where said business or principal place of business is located, as the
case maybe.

b. Exceptions:

 The tax on overseas dispatch, message or conversation originating from the Philippines shall be paid by the
person rendering the service within twenty (20) days after the end of each quarter.
 Amusement taxes shall be paid by the proprietor, lessee, operator or any party liable within twenty (20) days
after the end of each quarter.
 The tax on winnings shall be deducted and withheld by the operator, manager or person in charge of the
horse races and remitted to the Bureau of Internal Revenue within twenty (20) days from the date the tax was
deducted and withheld.
 The stock transaction tax of 1/2 of 1%, shall be collected by the stock broker and remitted to the Bureau of
Internal Revenue within five (5) banking days from the date of collection.
 The stock transaction tax of 4%, 2% and 1%, in case of primary offering, shall be paid by the corporation within
thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In case of secondary
offering, the tax shall be collected by the stockbroker and remitted to the Bureau of Internal Revenue within
five (5) banking days from the date of collection.
 Any person retiring from a business subject to percentage tax shall notify the nearest internal revenue officer,
file his return and pay the tax due thereon within twenty (20) days after closing his business.

TAX REMEDIES

I. Overview
1. The basic purpose of remedies is to maintain equilibrium between the interest of the state and the
taxpayer.
2. Remedies can be either administrative or judicial.
3. Administrative remedies involves assessment and collection, protest and refund.
4. Judicial remedies may either be a civil suit or criminal suit, appeal to CTA, injunction/ temporary
restraining order, or criminal suit against erring BIR officials.

5. Summary of Remedies
REMEDIES TO THE STATE COMMON REMEDIES REMEDIES TO THE TAXPAYER

1. ADMINISTRATIVE LEVEL (BIR)

Assessment Compromise Protest

Collection Abatement Refund

2. JUDICIAL LEVEL (Courts)

Civil Suit/Action Appeal to CTA

Criminal Suit/ Action TRO/ Injunction

Criminal Suit against erring BIR

officials

II. Remedies Available to the Government

1. Administrative Remedies
a. Assessment
- Similar to audit
- It is a finding by the taxing authority that the taxpayer has not paid the correct taxes.
- An assessment contains not only a computation of tax liabilities but also a demand for
payment within a prescribed period. It also signals the time when penalties and interests
begin to accrue against the taxpayer.
- Time of assessment (statute of limitation or prescriptive period) – national internal revenue
taxes shall be assessed within 3 years:
 After the due date for the filing of the return (a return filed before the due date shall be
considered as filed on such due date);
 From the day the return was filed, where the return is filed beyond the due date; and
 From the filing of the amended return, if the return was amended substantially.

- EXCEPTIONS - The 3-year prescriptive period of assessment is extended if:

 False or fraudulent return with intent to evade the tax was filed - the assessment may be
made within 10 years from the discovery of the falsity or fraud;
  No return is filed - assessment may be made within 10 years after the discovery of the
failure or omission to file the return; and
 Before the expiration of the 3-year prescriptive period for assessment of the tax, both
the taxpayer and the CIR have agreed in writing (waiver) to its assessment after such
time, the tax may be assessed within the period agreed upon. The period so agreed
upon may be extended by subsequent written agreement made before the expiration
of the period previously agreed upon.

- If the government tries to assess a tax beyond the prescriptive periods, the taxpayer may
claim defense of prescription of the right of the government to assess. The defense of
prescription, however, is not jurisdictional and must be raised seasonably, otherwise it is
deemed waived.

- How are tax audits/investigations initiated?

 Issuance of Electronic Letter of Authority (eLA), Tax Verfication Notice (TVN) and/or
Letter of Notice (LN) is considered as a “notice of audit or investigation” that prohibits
amendment to any return covering period referred to in the eLA, TVN and/or LN
 RMO No. 62 – 2010 discontinued the manual issuance of Letter of Authority (LA)
andTVNs
 There must be a grant of authority before any revenue officer can conduct an
examination or issue an assessment. Thus, the BIR cannot extend its examination or
assessment beyond the period covered by the Letter of Authority (LA).
 LA should cover a taxable period not exceeding one taxable year. The practice of
issuing an LA covering audit of “unverified prior year’s” is prohibited.

- Place of Examination
 The primary place of examination is the taxpayer’s place of business.
 The secondary place of examination is at the Office of the BIR
 Only duly authorized Revenue Office can audit
- Submission of documents
 Use of best evidence available when:
i. The reports or records of the taxpayer are not available (i.e. lost or destroyed;
unreasonably refuses to submit records); or
ii. The reports and records submitted by the taxpayer are determined to be false,
incomplete or erroneous or cannot be understood. [Sec. 6(B), Tax Code]
- End of Audit/Investigation
 Preparation of report of investigation showing preliminary findings
 Notice of Informal Conference – RR No. 18 -2013 removed the requirement for the
issuance of a letter of informal conference before a Preliminary Assessment Notice
(PAN) is issued.

b. Collection
- Collection means enforcing the payment of tax. The following are the administrative
collection remedies of the government:
i. Summary proceedings
 Distraint (actual or constructive)
 Levy
 Tax lien
 Forfeiture
 Suspension of business operations in violation of VAT
 Enforcement of an administrative fine
ii. Judicial proceedings

- Time of collection (statute of limitation or prescriptive period):

i. Return filed was not false or fraudulent
 Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or by judicial proceedings.
 Collection without prior assessment - within 3 years from the date of filing the
return or from the last day required by law for filing, if the return was filed on or
before such last day, by judicial proceedings only.
ii. Return filed was false or fraudulent with intent to evade the tax or no return is filed.
 Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or judicial proceedings.
 Collection without prior assessment - within 10 years after the discovery of the
falsity, fraud or omission to file the return, by judicial proceedings only.

- Any internal revenue tax, which has been assessed within the period agreed upon by the
taxpayer and the CIR, may be collected by distraint or levy or by a proceeding in court
within the period agreed upon in writing before the expiration of the 5 years prescriptive
period to collect. The period so agreed upon may e extended by subsequent written
agreement made before the expiration of the period previously agreed upon.
- If the government tries to collect by any of the above remedies beyond the prescriptive
periods, the taxpayer may claim defense of prescription of the right of the government to
 collect. The defense of prescription, however, is not jurisdictional and must be raised
seasonably, otherwise it is deemed waived

c. Distraint
- It is the seizure (taking) by the government of personal property (tangible of intangible) to
enforce payment of taxes.

- It can either be actual distraint or constructive distraint.

-
ACTUAL DISTRAINT CONSTRUCTIVE DISTRAINT

Made only on the property of a Made on the property of any

delinquent taxpayer taxpayer, whether delinquent or not.

There is taking of possession. The taxpayer is merely prohibited from

disposing of his property.

d. Levy:
- It is the seizure (taking) by the government of real property to enforce payment of taxes.

DISTRAINT LEVY

1. Personal Property 1. Real Property

2. Forfeiture by the government is not 2. Forfeiture is authorized

provided.

3. The taxpayer is not given the right of 3. The right of redemption is granted in
redemption with respect to the case of real property levied upon and
distrained personal property. sold or forfeited to the government.

Levy Garnishment

1. As to subject matter Real property owned by and Personal property owned

in possession of the taxpayer. by the taxpayer but in the
possession of a third party.

2. As to disposition for Forfeited in favor of the Purchased by the

want of bidders or bids
inadequate to satisfy
tax deficiency
3. As to advertisement for
sale
government then sold to government then resold to
meet the deficiency. meet the deficiency.
Advertisement once a week No advertisement is
for three weeks. required.

e. Tax Lien:
- It is a legal claim or charge on property, either real or personal, established by law as
security in default of the payment of taxes. The extent of lien shall be the tax together with
the interests, penalties, and costs that may accrue. The lien attaches not only from the
service of warrant of distraint but from the time the tax become due and payable.

f. Forfeiture
- If there is no bidder in the public sale or if the amount of the highest bid is insufficient to pay
taxes, penalties and costs, the real property shall be forfeited to the Government. The effect
is to transfer the title of the specific thing from the owner to the Government.

g. Run After Tax Evaders (RATE)

i. It is a program initiated by the DOF and BIR to investigate and prosecute individuals
and entities engaged in tax evasion and other criminal violations of the National
Internal Revenue Code of 1997
ii. The objectives of the RATE program are:
 generate the maximum deterrent effect on the taxpaying public by impressing the
fact that tax evasion is a crime and violators will be caught and punished
 enhance voluntary compliance among taxpayers
 promote confidence of the public in the tax system.
iii. Fraudulent activities or criminal tax violations covered by the RATE Program
 Offenses relating to income:
a. Failure to file tax returns
b. Failure to pay taxes
c. Deliberate underdeclaration of income by more than 30% of that declared per
return (substantial underdeclaration)
d. Hiding or transferring assets or income
e. Non-remittance of withholding taxes
  Offenses relating to deductions:
a. Deliberate overstatement of amountof deductions by more than 30% of actual
deductions (substantial overstatement of deductions)
b. Claiming personal expenses as business expenses
c. Claiming false deductions
 Other violations:
a. Use of fake Certificate Authorizing Registration (CAR), Tax Clearance
Certificate (TCC) or other accountable forms.
b. Failure to register with the BIR
c. Keeping more than one (1) set of books of accounts
d. Making false entries in books and records
iv. Background
 In March 2005, the BIR and the DOF launched the Run After Tax Evaders (RATE)
Program.
 Since March 2005, 87 complaints of tax evasion have been submitted to the
Department of Justice (DOJ) for preliminary investigation under the RATE Program,
including those filed against actors, businessmen, public officials and other high
profile personalities.
 The BIR registered a record income tax collection in 15 April 2005 of P21.4 Billion or a
43.6% increase from the P14.8 Billion collected compared to the previous year.
 But almost 5 years after the program’s launch, only 6 out of the 87 complaints for
tax evasion submitted to the DOJ progressed to the filing of criminal cases in court.

h. Run After The Smugglers (RATS)

i. In 2005, the Bureau of Customs launched an aggressive battle against smugglers who
pose serious and direct threat to the national economy by depriving the government of
its much- needed revenues.
ii. To boost its collection, the BOC introduced the Run After the Smugglers (RATS) Program
which aimed to file customs cases against high profile smugglers.
iii. It is designed not onluto collect taxes but also to ensure that importers comply with
existing laws and regulations on tariff and customs which complements the post-audit
power of the BOC under RA 9135, which took effect on June 2, 2001.

i. Oplan Kandado
i. On January 23, 2009, the BIR issued Revenue Memorandum Order No. 3 – 2009 to
implement a nationwide “Oplan Kandado” Program
ii. Under the program, business operations of non-compliant taxpayers will be suspended
and their establishments will be temporarily closed if they will be found to have violated
certain tax laws.
iii. The programs aims to intensify the Bureau’s enforcement operations through strict
imposition of prescribed administrative sanctions for non-compliance with the basic tax
requirements.
iv. Grounds for suspension:
 Failure to issue receipts or invoices by a VAT-registered or registrable taxpayer;
 Failure to file a VAT return;
 Understatement of taxable sales or receipts by 30% or more of the correct amount
thereof in the case of a VAT-registered or registrable taxpayer;
 Failure to register
v. The closure of the business establishment shall last for a period of not less than five (5)
days, and shall be in force until the violation is rectified by the concerned taxpayer.
vi. The suspension and temporary closure of business shall not preclude the BIR from filing the
appropriate charges under the RATE Program of the Bureau, if evidence so warrants the
taxpayer concerned or responsible office of the corporations.
vii. The closure order shall only be lifted by the BIR when there has been:
 A subsequent filing or amendment of returns with the payment of the tax inclusive of
statutory penalties;
 Subsequent registration with the payment of the corresponding compromise
penalties
 Payment of deficiency taxes inclusive of penalties corresponding to the sales where
no invoices/receipts have been issued; and
 Payment of deficiency taxes inclusive of penalties corresponding to the
understatement of taxable sales or receipts.

III. Remedies to the State: Judicial Remedies – Civil and Criminal Action
a. Civil action is resorted to when a tax liability becomes collectible, that is, the assessment becomes
final and unappealable, or the decision of the CIR has become final, executory, and demandable.
b. Criminal action, like civil action, cannot be instituted without the approval of the CIR. It is resorted to
not only for collection of taxes but also for enforcement of statutory penalties of all sorts. The
judgment in the criminal case shall not only impose the penalty but shall also order the payment of
the taxes.
 c. The extinction of a taxpayer’s criminal liability does not necessarily result in the extinguishment of his
civil liability. Conversely, the subsequent satisfaction of a tax liability will not operate to extinguish the
criminal liability.

IV. Remedies Available to the Taxpayer

1. Administrative Remedies
a. Protest
 Protest is a challenge against assessment.
 The filing of a petition for reconsideration or reinvestigation shall be made within 30 days
from the receipt of the assessment with the CIR. Within 60 therefrom, all relevant supporting
documents should have been submitted, otherwise the assessment shall become final.

b. Refund or Tax Credit

 A taxpayer may file for tax refund in case of excessive or erroneous payment of a tax with
the BIR:
i. Tax is collected erroneously or illegally.
ii. Penalty is collected without authority.
iii. Sum collected is excessive

V. Remedies to the Taxpayer: Judicial Remedies – Civil Action

a. General Rule: No action shall suspend the collection, payment, levy or distraint, and/or sale of any
property of the taxpayer.
b. Exception: The CTA is empowered to suspend the collection of internal revenue taxes and custom
duties only when there was a:
c. Showing that collection of the tax liability may jeopardize the interest of the government and/or the
taxpayer;
d. Deposit of the amount claimed or file a surety bond for not more than twice the amount of tax with
the Court when required; and
e. Showing by the taxpayer that appeal is not frivolous nor dilatory
f.
g. Appeal to the CTA within 30 days from the receipt of decision on the protest or from the lapse of 180
days due to inaction of the Commissioner, whichever comes earlier.
h. Action for damages against a revenue officer by reason of any act done in the performance of
official duty
i. Filing of criminal complaint against erring BIR officials and employees.
j. Injunction, when the CTA in its opinion the collection by the CIR may jeopardize the taxpayer.

VI. Remedies to Both Government and Taxpayer

1. Compromise
a. Mutual concession between the taxpayer and the government in setting a tax deficiency
amicably.
b. What cases may be compromised?
i. Delinquent accounts
ii. Cases under administrative protests
iii. Civil tax cases being disputed before the courts
iv. Collection cases filed in courts
v. Criminal violation, other than those already filed in court or those involving criminal
tax refunds.
c. What cannot be compromised?
i. Criminal violation of NIRC already filed in court.
ii. Cases involving fraud.
d. What are the grounds for compromise?
i. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
ii. The financial position of the taxpayer demonstrate a clear inability to pay the
assessed tax
e. Prescribed minimum compromise rates:
i. Financial incapacity - 10% of the basic assessed tax
ii. Other cases - 40% of the basic assessed tax
f. Compromised settlement subject to approval of the Evaluation Board, composed of the
CIR and the 4 Deputy Commissioners:
i. Where the basic tax exceeds P1,000,000, or
ii. Where the settlement offered is less than the prescribed minimum rates above.

2. Abatement
a. A tax may be cancelled or obliterated upon the authority of the BIR under certain
circumstances.
b. What are the grounds for abatement?
i. The tax or any portion thereof appears to be unjustly or excessively assessed;
ii. The administration and collection costs involved do not justify the collection of the
amount due; and
 iii. The Commissioner may also, even without claim therefore, refund or credit any tax
where on the face of the return upon which payment was made such payment
appears clearly to have been erroneously paid.

ADDITIONS TO TAX

I. Civil Penalties and Criminal Penalties

II. Civil penalties

a. Interest
In general, there shall be assessed and collected on any unpaid amount of tax, interest at the rate
of 20% per annum, or such higher rate as may be prescribed by rules and regulations, from the date
prescribed for payment until the amount is fully paid.

1. Deficiency Interest
Any deficiency in the tax due, as the term is defined in the Tax Code, shall be subject to the
interest at the rate of 20% per annum, which interest shall be assessed and collected from the
date prescribed for its payment until the full payment thereof.

Formula:
Deficiency Interest = Deficient tax x 20% x no. of days or months
Total No. of days or months in a year

2. Delinquency Interest
Delinquency interest in case of failure to pay:
i. The amount of the tax due on any return required to be filed, or
ii. The amount of the tax due for which no return is required, or
iii. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the CIR, there shall be assessed and collected on the unpaid
amount interest at the rate of 20% per annum until the amount is fully paid, which
interest shall form part of the tax.
Formula:

Delinquency Interest = Deficient tax plus any deficiency interest or surcharges

times 20% times no. of days or months
Total No. of days or months in a year
3. Interest on extended payment
If any person required to pay the tax is qualified and elects to pay the tax on installment
under the provisions of the Tax Code, but fails to pay the tax or any installment thereof, or any
part of such amount of installment on or before the date prescribed for its payment, or where
the CIR has authorized an extension of time within which to pay a tax or a deficiency tax or any
part thereof, there shall be assessed and collected interest at the rate of 20% per annum on the
tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is
paid.
b. Surcharges
1. Simple Neglect (25%)
i. Failure to file any return and pay the tax due thereon.
ii. If the return is not filed with the proper internal revenue officer.
iii. Failure to pay on time the deficiency tax shown in the notice of assessment.
iv. Failure to pay the full or part of the amount of tax shown on any return required to be
filed, or the full amount of tax due for which no return is required to be filed, on or
before the date prescribed for its payment.

2. Willful Neglect (50%)

i. Willful neglect to file the return on time.
ii. False or fraudulent return is willfully filed (failure to report sales, receipts or income in an
amount exceeding 30% of that declared per return, and a claim of deductions in an
amount exceeding 30% of actual deductions, shall render the taxpayer liable for
substantial under-declaration of sales, receipts or income or for substantial
overstatement of deductions, thus making the return filed false or fraudulent).

COMMUNITY TAX

I. Overview

A community tax is a tax levied by cities and municipalities on qualified individuals and juridical
persons who are domiciled in the Philippines.
II. Individual

Every inhabitant of the Philippines who are at least 18 years old are required to pay community tax
when:
a. He has been regularly employed on a wage or salary basis for at least thirty (30) consecutive
working days during any calendar year;
b. He has been engaged in business or occupation;
c. He owns real property with an aggregate value of P1,000.00 or more; or
d. He is required by law to file an income tax return.

However:

“No person shall be imprisoned for debt or nonpayment of poll tax.”

Amount Applicable:

1. Basic Tax – P5.00

2. Additional Tax – P1.00 for every P1,000.00 of income regardless of whether from business, exercise of
profession or from property.
3. Maximum Additional Tax is only limited to P5,000.00.

In the case of husband and wife, the additional tax shall be based upon the total property owned by
them and the total gross receipts or earnings derived by them.

III. Corporate

Every corporation no matter how created or organized, whether domestic or resident foreign, engaged
in or doing business in the Philippines.

Amount Applicable:

1. Basic Tax - P500.00

2. Additional Tax:
a. P2.00 for every every P5,000.00 worth of real property in the Philippines owned by it during the
preceding year based on the valuation used for the payment of the real property tax under
existing laws, found in the assessment rolls of the city or municipality where the real property is
situated.
b. P2.00 for every P5,000 of gross receipts or earnings derived by it from its business in the
Philippines during the preceding year.
3. Maximum Additional Tax is only limited to P10,000.00.
 Dividends received by a corporation from another corporation shall, for the purpose of the
additional tax, be considered as part of the gross receipts or earnings of said corporation.
 Exemptions from Community Tax:
a. Diplomatic and consular representatives; and
b. Transient visitor when their stay in the Philippines does not exceed (3) three months

IV. Place of Payment

1. Individual – Place of residence

2. Corporation – Place where the principal office is located