PRINCIPLE OF TAXATION
Based on necessity
Definition of Taxation
A process or act of imposing a charge by
government authority on property, individuals or
transactions to raise money for public purposes.
A power by which an independent state, through
its law-making body, raises and accumulates revenue
from its inhabitants to pay the necessary expenses
of the government.
A means by which the sovereign through its law-
making body demands for revenue in order to
support its existence and carry out its legitimate
objectives.
Nature of Taxation
- Inherent power of sovereignty
- Essentially a legislative function
- For public Purposes
- It is Comprehensive, Unlimited, Plenary,
Supreme
- Territorial in Operation
- Subject to constitutional land inherent
limitations
Inherent Powers of Taxation
Taxation Power
Police Power is the power to enact laws to
promote the general welfare of the people
Power of Eminent Domain is the power to take
private properties for public use with due process
and just compensation
Purposes of Taxation
Revenue Purpose
to defray necessary expenses of the
government
Regulatory Purpose
to regulate inflation
to achieve economic and social stability
to serve as key instrument for social control
Compensatory Purpose
for the equitable distribution of wealth and
income in society
as a tool and weapon in international
relations
Bases of Taxation
Based on reciprocal duties of protection and
support between the state and its inhabitants
Stages of Taxation
Levy or imposition
Assessment and Collection
Payment
Scope of Taxation
Comprehensive
Unlimited
Plenary
Supreme
Limitations of the Power to Tax
Inherent Limitations
Territoriality of taxation
International comity
Public purpose
Exemption of the government
Non-delegation of the taxing power
Constitutional Limitations
Due process of law
Equal protection of the law
Uniformity rule in taxation
Progressive system of taxation
Non-imprisonment for non-payment of debt/poll
tax
Non-imprisonment of obligation and contract
Exemption of religious or charitable entities,
non-profit cemeteries, churches and mosque from
property taxes
Non-appropriation of public funds or property
for the benefit of any church.sect or system of
religion
Non-impairment of supreme court jurisdiction
Principles of Sound Tax System
Fiscal adequacy - the sources of revenue of the
government should be sufficient to meet the
demand of public expenditures
Equality or theoretical justice - tax burden must
be proportionate to the taxpayer’s ability to pay
Administrative Feasibility - tax law must be
capable to convenient, just and effective
administration (free from confusion and uncertainty)
Situs of Taxation C. Proportional - VAT
Persons (place of residence) D. Mixed - ph proportional progressive
Real Property (location of the property)
Tax distinguished from other terms
Tangible Personal Property (location)
Tax vs Toll
Intangible Personal Property (residence of owner
Tax vs penalty
except when the property acquires situs of its own)
Tax vs special assessment
Income (where it is earned)
Tax vs revenue
Business, transactions, occupation (where it
Tax vs subsidy
happened)
Tax vs permit or license
Definition of Taxes Tax vs custom duties
Taxes are the lifeblood of the government which
Double Taxation
are an enforced contribution expected from the
Direct double taxation means taxing twice
people, payable in money and proportionate in
(1) by the same taxing authority
character which are levied by the law-making body
(2) for the same purpose
of the state on persons, property and transactions
(3) in the same year of taxing period
for public purpose.
(4) same subject or object
Characteristics of Taxes (5) same kind/character of the tax
1. It is an enforced contribution
Means of Avoiding or Minimizing the Burden of Tax
2. It is generally payable in money
1. Shifting
3. It is proportionate in character
2. Transformation
4. It is levied on persons, property, or the
3. Evasion
exercise of
4. Avoidance
a right or privilege
5. Capitalization
5. It is levied by the law-making body of the state
6. Kinds of Exemption
6. It is levied for public purpose.
As to Basis
Classification of Taxes According to Constitutional
1. Subject matter Statutory
A. Personal tax - sedula, income tax As to Form
B. Property tax - Express
C. Excise tax - transaction jollibee vat Implied
2. Who bears the burden As to Extent
A. Direct Tax - directly BIR Total
B. Indirect Tax - you paid tax hut not you, Partial
VAT
Sources of Tax Law
3. Authority
1. Constitution
A. National - BIR
2. National Internal revenue code
B. Local - local government units
3. Tariff and customs code
4. Purpose
4. Local Government code
A. General travel tax
5. Local tax ordinances
B. Special
6. Tax treaties and international agreement
5. Determination of Amount
7. Special laws
A. Specific tax - quantity (cigarette)
8. Decisions of the supreme court and court of
B. Ad valorem - value - VAT
tax appeals
6. Graduation or rate
9. Revenue regulations and administrative rulings
A. Progression
and
B. Regression - france
opinions
Construction of Tax Laws
• Public purpose is always presumed.
• If the law is clear, apply the law in accordance
to its plain and simple tener.
• A statute will not be construed as imposing tax
unless it does so Clearly, Expressly and
Unambiguously.
• Provisions of a taxing at are not to be extended
by implication.
• In case of doubt, it is construed most strongly
against the government, liberally in favor of the
taxpayer
• Tax laws operate prospectively unless the
purpose of the legislature to give retrospective
effect is expressly declared or may be implied
from the language used
• Tax laws are special laws and prevail over a
general law.
Power of BIR Commissioner
Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.
Power of the Commissioner to Obtain
Information, and to Summon, Examine, and Take
Testimony of Persons.
Power of the Commissioner to Make
assessments and Prescribe additional Requirements
for Tax Administration and Enforcement.
Authority of the Commissioner to Delegate
Power.
Income Taxes for Individuals
Classification of Individual Taxpayers
1. Resident citizens
1. Nonresident citizens
2. Resident aliens
3. Nonresident aliens
◦ Engaged in trade or business
◦ Not engaged in trade or business
5. Special Employees
◦ Special alien employees
◦ Special Filipino employees
Importance of Classification
1. Situs of taxation
2. Manner of computing tax
3. Treatment of certain passive incomes
4. allowable deductions
1. Citizens of the Philippines
Under Section I, Article IV of the 1987 Philippine
Constitution, a Filipino citizen is a natural person
who
1. Is born with father and/or mother as Filipino
citizens
2. Is born before January 17, 1973 of Filipino
mother who elects Philippine citizenship upon
reaching the age of majority.
3. Has acquired Philippine citizenship after birth
(naturalized) in accordance with Philippine laws.
2. Non-resident citizen of the Philippines
Under Sec 22(E) of the NIRC, he is a citizen who
1. Establishes, to the satisfaction of the
Commissioner of Internal Revenue, the fact of his
physical presence abroad with a definite intention
to reside therein.
2. Leaves the Philippines during the taxable year to
reside abroad
◦ As an immigrant
◦ For employment on a permanent basis
3. Work and derives income from abroad and
whose employment thereat requires him to be
physically abroad most of the time during the
taxable year. (183 days or more)
4. A citizen who has been previously considered as
nonresident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines.
OCW / OFW
Nonresident citizen
◦ Duly registered as OFW/OCW with POEA
◦ With valid Overseas Employment Certificate
(OEC)
◦ For seaman, with Seafarer’s Identification
Record Book issued by Maritime Industry
Authority
3.Resident Alien
Section 22 (F) of the NIRC defines resident aliens as
◦ An individual whose residence is within the
Philippines and who is not citizen thereof. An
alien who lives in the Philippines with no
definite intention as to his stay is also a resident
 alien. Likewise, an alien who comes to the
Philippines for the purpose that requires Types of Income
extended stay for its accomplishment, so he Income subject to tax
makes his home temporarily in the Philippines, ◦ Passive income
regardless of his intention to return to his ◦ Capital gains subject to capital gains tax
residence abroad. ◦ Regular or ordinary income

4.Nonresident alien 1. Passive Income (subject to final tax)

Section 22(G) of the NIRC defines nonresident
alien as an individual whose residence is not in the
Philippines and who is not a citizen thereof. They are
aliens who come to the Philippines for a definite
purpose, which in its nature may be promptly
accomplished. A nonresident alien who stays in the
Philippines for more than 180 days during the
taxable year shall be classified as nonresident alien
engaged in trade or business in the Philippines. But
those whose aggregate stay in the Philippines is 180
days or less in a taxable year shall be classified a
nonresident alien not engaged in trade or business
in the Philippines.
5. Special Employees
1. Regional or area headquarters (“RHQ”) and
regional operating headquarters (“ROHQ”) of
multinational companies;
2. Offshore banking units (“OBU”); and
3. Petroleum service contractors and
subcontractors
(used to be taxed with preferential tax rate)
Applicable Taxes and Tax Rates
Depends on
◦Classification of the taxpayer
◦Source of income
◦Type of income
Source of Income
Regular income of individuals
1. Interest income from currency bank deposit
2.Yield or any other monetary benefit from deposit
substitute
3.Yield or any other monetary benefit from trust
funds and similar arrangements
4. Royalties on books, literary works and musical
compositions
5. Other royalties
6.Prizes exceeding P10,000
7. Other winnings
8. Interest incomes received from depository bank
under expanded foreign currency system
9. Interest income from long term deposit or
investment evidenced by certificates prescribed by
BSP.
10. Cash and/or property dividends actually/
constructively received from a domestic
corporation or form a joint stock company,
insurance or mutual fund companies and ROHQ of
multinational companies beginning January 2000.
11. Share of an individual in the distributable net
income after tax of a partnership, other than the
general professional partnership, beginning January
1, 2000
GROSS INCOME PER
INCOME TAX RATE
YEAR
P250,000 and below 0%
Above P250,000 to 20% of the excess over
P400,000 P250,000

Above P400,000 to P30,000 + 25% of the excess

Taxpayer Tax Base Source of Tax Rate P800,000 over P400,000
Income

RC Net Within & Graduated Above P800,000 to P130,000 + 30% of the excess
Income Without Rate P2,000,000 over P800,000

NRC, RA, Net Within only Graduated Above P2,000,000 to P490,000 + 32% of the excess
NRA-ETB Income Rate P8,000,000 over P2,000,000
NRA-NETB Gross Within only Final Tax
Above P8,000,000 P2,410,000 + 35% of the excess
Income (25%)
over P8,000,000
12. Share of an individual in the net income after tax
of an association, joint venture or consortium
taxable as corporation, which he is a member/co-
venture beginning January 1, 2000
2a.Capital Gains Tax
1. Capital gains tax on sale of real properties held as
capital asset situated in the Philippines computed at
a rate of 6% of the highest value among :
◦Selling price
◦Fair market value
◦Zonal value
2. Capital gains tax on sale of shares of stock of a
domestic corporation sold directly to a buyer
computed at a rate of 15% of the fair market value
of shares of stock at the time of sale.
3. Ordinary Income
1. Income not listed in the passive income list, and
are not capital gains, are considered ordinary
income.
Compensation Income
◦ Salary/wages
◦ Bonuses
◦ Honorarium
◦ Allowances
◦ Tips
◦ Commission
◦ Other benefits
◦ Other income received by employee out of
employer-employee relationship
2..Regular or Ordinary Income Tax Graduated Rates
De Minimis Benefits
1. Monetized unused vacation leave credits for
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 semester or
P125 per month.
4. Rice subsidy of not more than P1,500 per month
or 1 sack (50 kg.) rice per month.
5. Uniforms given to employees by the employer
not exceeding P5,000 per annum.
6. Actual medical assistance given not exceeding
P10,000 per annum such as medical allowance to
cover medical and healthcare needs, annual medical/
executive check-up, maternity assistance and
routine consultation.
7. Laundry allowance not exceeding P300 per
month.
8. Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per
employee per annum.
9. Employees achievement award (e.g. for length of
service or safety achievement, which must be in the
form of a tangible personal property other than
cash or gift certificate with and annual monetary
value not exceeding P10,000 under an established
written plan which does not discriminate in favor of
highly paid employees).
10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis provided such
benefit is given on account of:
◦ * overtime work or
◦ *If given to employees on night/graveyard shift.
11. Additional non-taxable de minimis benefits,
effective January 5, 2015,
◦ Benefits received by an employee by virtue of a
collective bargaining agreement;
◦ Productivity incentive schemes
Provided that the total annual monetary value
received from the two items above combined, do
not exceed P10,000 per employee per taxable
year.
Definition of Fringe Benefit
Fringe benefits are goods, services or other
benefits furnished or granted by an employer in
cash or in kind, in addition to basic salary to
individual employee except rank and file.
Nature of Fringe Benefit Tax
It is a final tax imposed on the employee
withheld by the employer computed as 35% of the
grossed-up monetary value of the fringe benefit
granted by the employer to an employee who holds
supervisory or managerial position.
Fringe Benefits Tax is effective regardless of
whether the employer is an individual, professional
partnership, corporation (whether or not taxable),
the government or its instrumentalities.
Withheld and paid by the employer on or before
the 10th day following the calendar quarter

TAX EXEMPT FRINGE BENEFITS
1. Fringe benefits which are authorized and
exempted from income tax under the special law
such as: contribution required under the SSS law,
GSIS law, similar contributions under the existing
law, premiums for group insurance of employees.
2. If the grant of fringe benefits to the employee is
required by the nature, or necessary to the trade or
profession of the employer.
3. De Minimis benefits
4. If the grant of the benefits is for the convenience
or advantage of the employer.
Fringe Benefits subject to tax
1. Housing
2. Expense Account
3.Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loan at less than market rate to the
extend of the difference between the market rate
and the actual rate granted.
6. Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs and similar organizations.
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents
10. Life and health insurance and other non-life
insurance premium or similar amounts in excess of
what the law allows.
Rules on computing the monetary value of housing
benefits
1. Employer leases a residential property for the use
of the employee
◦Monetary Value : Rental Paid x 50%
2. employer owns a residential property for the use
of the employee
◦Monetary Value : The higher between FMV in
the real property declaration or zonal value x
5% x 50%
3. employer purchases residential property in
installment for use of the employee.
◦Monetary Value : Acquisition cost, exclusive of
interest x 5% x 50%
◦ 4. employer purchases residential property and
transfers ownership to employee
◦ Monetary value : the higher between the
acquisition cost or zonal value as determined by
the BIR
5. employer purchases residential property and
transfer ownership to employee on a lesser amount.
◦ Monetary Value: The higher between the FMV in
the real property declaration or zonal value as
determined by the BIR less cost to the
employee.
Rules on computing the monetary value of motor
vehicles benefits
1. Employer owns and maintains a fleet of motor
vehicle for the use of the business and employees
◦ Monetary Value : Acquisition cost of vehicles not
normally used for business divided by 5 years x
50%
2. Employer leases and maintain a fleet of motor
vehicle for the use of the business and employees
◦ Monetary Value : Amount of rental payments not
normally used in business x 50%
3. employer purchases motor vehicle in the name of
the employee.
◦ Monetary Value : Acquisition cost
4. employer provides employee with cash for the
purchase of the vehicle in the name of the
employee
◦ Monetary value : Cash received
5. employer purchases the vehicle on installment
and in the name of the employee.
◦ Monetary value : acquisition cost exclusive of
interest divided 5 years
6. Employer shoulders a portion of the amount of
the purchase price of vehicle and ownership is
placed in the name of the employee.
◦ Monetary Value: Amount shouldered by
employer.
Other non-taxable Fringe Benefits
1. Housing benefit if the housing unit is inside or
adjacent (within 50 meters) from the perimeters of
the business premises and the employees are
required to be on-call due to the nature of the
employer’s business operation.
2. Stay in the temporary housing unit for three
months or less.
3. Housing privilege of military officials of the
Armed Forces of the Philippines.
4. Expense account that are receipted in the name
of the employer and do not partake the nature of
“personal expenses”.
5. Expenses in connection with attending business
meeting or convention (inland travel expenses) such
as food, beverages and transportation during foreign
travel (except lodging cost) at an average of $300
per day.
6. The cost of economy and business class airplane
ticket during foreign travel and 70% of the first class
airplane ticket.
7. Educational assistance of employees when the
study is directly connected with the employer’s
trade, business or profession and there is written
contract between the employee and employer that
the employee is under obligation to remain in the
employ of the employer for a period of time.
8. Educational assistance to dependents of
employees through a competitive scheme under
scholarship program of the company.