General Principles and Concepts of Taxation

Learning Objectives:

Define and enumerate the Inherent Sovereign State

Define what is taxation;
Identify the inherent powers of sovereign state;
Distinguish the similarities and differences among
Define the difference between taxation, eminent domain and police powers;
Describe the nature of taxation power;
Discuss the basis, purpose and scope of taxation;
Identify the constitutional and inherent limitations;
Enumerate the aspects of taxation;
Enumerate the objects of taxation;
Define what is situs of taxation;
Describe the principles of sound tax system

Inherent Powers of the State

Sovereign State exists with indispensable powers necessary for its survival. It is their right to enforce
mandatory or contribution money from the people to support the nation. They naturally exist as an
important factor that a government can command, maintain peace and order, and survive, irrespective
of any Constitutional provision. These are essential powers necessary for the survival of the sovereign
state. This also serves as the central force in order that a government can command, maintain peace
and order, and survive, irrespective of any constitutional provision.

Police Power
It provides protection of health, welfare and morals of the community. This power is restricted
by the “due process clause.” According to the Article III, Section 1 of Philippine Constitution
states that no person may be deprived of “life, liberty, or property without due process of law.”
Example: Imprisonment of convicted criminals.

Eminent Domain Power

It primarily takes private property for public purpose. The government may take private
property when it is necessary in the interest of national welfare. Pertinent provisions in the
Constitution are not grants of the power, but rather limitations upon its exercise, it limits the
power by providing that property may not be taken without just compensation.
Just Compensation – refers to paying the owner the full monetary equivalent of the property
taken for public use.

Taxation Power
It is the inherent power of the sovereign state to exact an enforced contribution upon persons,
properties, or rights for the purpose of generating revenues for the use of government. The act
of levying taxes by which government through its law making body, raises revenues to defray its
necessary expenses.
Power – it refers to the inherent power of a state with sovereignty to demand contributions for
public purposes to support the government.
Process – it passes a legislative undertaking through the enactment of tax laws by the Congress
which will be implemented by the Executive Branch of the government through its Bureau of
Internal Revenue to raise revenue from the inhabitants in order to pay the necessary expenses
of the government.
Means – it is a way of collecting and apportioning the cost of government among those who are
privileged to enjoy its benefits.

Distinction of Taxation, Police Power, and Eminent Domain

Taxation Police Power Eminent Domain

As a concept Enforce contribution Make and implement Take private property

to raise government laws for the general for public use with
funds welfare just compensation

As to scope Comprehensive and General power to Merely a power to

supreme make and implement take private property
laws for public use

As to authority Exercise only by Exercise only by May be granted to

government government public service

As to purpose Money is taken to Property is taken or Private property is

support the destroyed to promote taken for public use
government general welfare

As to necessity of Tax laws cannot be Can be delegated to Can be delegated to

delegation delegated the LGU the LGU

As to person Operates on a Operates on a Operates on the

affected community or a class community or a class particular private
of individual of individual property of an
individual

As to benefits Continuous protection Healthy economic Market value of the

and organized society standard of society property is
expropriated

As to amount of Generally no limit Cost of regulation, No imposition

imposition licensed and other
 necessary expenses

As to importance Inseparable for the Protection, safety and Common necessities

existence of a nation – welfare of society and interest of the
it supports police community transcend
power and eminent individual rights in
domain property.

As to relationship to Subject to Relatively free from Superior to and may

Constitution Constitutional and Constitutional override
Inherent limitations limitations Constitutional
impairment provision
because of the
welfare of the State is
superior to any
private contract

As to limitation Constraints by Limited by the Bounded by public

Constitutional and demand for public purpose and just
Inherent limitations interest and due compensation
process

Nature of Taxation Power

The power to tax is an attribute of sovereignty that is exercised by the government for the betterment of
the people within its jurisdiction whose interest should be served, enhanced and protected.

Inherent Power of Sovereignty – the government can enforce contributions upon its citizens
even without a specific provision in the Constitution authorizing it. Only the national
government exercises the inherent power of the state.
Essentially a Legislative Function – the law-making body of the government and its political
subdivisions exercise the power of taxation. The powers to enact laws and ordinances, and to
impose and collect taxes are given to the Congress. On the other hand, the power to make tax
laws cannot be delegated to the branches of the government. The power to make tax laws
cannot be exercised by the executive or judicial branch of the government. Therefore, whenever
the delegation is the power is the issue, it is important to know the distinction between tax
delegation and tax administration.
Public Purposes – public taxes are public money. They must be used to finance recognized
public needs. Thus, in order to consider appropriation of taxes valid, it must be for the common
good of the people. No individual or private person shall primarily be enriched or benefited by
the public needs.
 Territorial Operation – the taxing authority must observe “tax situs” because the country’s tax
laws are effective and enforceable only within its territorial limits. As a rule, the power to tax
can only be exercised within the territorial jurisdiction of a taxing authority, except when there
exists a “privity of relationship” between the taxing state and the object of tax based on the tax
principle of reciprocal duties. Taxation is bound to observe international comity. This is the
courteous recognition, friendly agreement, interaction and respect accorded by one nation to
the laws and institutions of another.
Tax Exemption of the Government – it is a grant of tax immunity to a particular class of persons
or corporations. The state’s immunity from taxation is inherent in its power to impose tax.
Strongest among the Inherent Powers – taxation power is the strongest of all inherent powers
of the government because without money, the government can neither survive nor dispense
any of its other powers and functions effectively.

Importance of Taxation

Primary source of government revenue to perform government functions

As an implement of police power in order to promote the general welfare of the people
The other inherent powers relied on taxation

Without revenue, there can be no continuing government. Without government, there can be no
civilization.

Basis of Taxation

Principles of Necessity – the government cannot exist without any means to pay its expenses –
a necessary burden to preserve the State’s sovereignty. Taxation is the “lifeblood” or the “bread
and butter” of the government and every citizen must pay their taxes.
Principles of Benefits-Received or Benefits-Protection Theory – the government’s right to tax
income emanates from its being a silent partner in the production of income through means of
providing protection, proper business climate, and peace and order to the taxpayers in the
making of earnings. The citizen pays taxes to support the government in order that he may
continuously be sustained with security and benefits of an organized society.

Purposes of Taxation

Revenue Purpose – is to raise revenue by collecting funds or property for the support of the
government in promoting the general welfare and protecting its inhabitants.
Regulatory Purpose – (Sumptuary) is a secondary objective of imposing tax to regulate inflation,
achieve economic growth and social stability, and serve as key instrument for social control.
The amount of taxes may be increased to curve spending power and minimize inflation in times
of prosperity. It may be reduced to expand business and ward off depression in times of
declining economic condition. Taxes may be imposed to encouraged economic growth by
 granting tax exemptions, tax relief and incentives to attract investments that will create
employment.
These are the following tools to protect trade relation, special duties:
Discriminatory duty – this is designed to offset any foreign discrimination against our local
commerce.
Countervailing duty – it may be imposed to offset any foreign subsidy granted to imported
goods to the prejudice of our local industries.
Marking duty – it is imposed as additional duty tax on imported articles and/or containers with
improper classifications.
Dumping duty – it refers to the additional duty taxes imposed on imported goods with lower
prices compared to their fair market values to protect local industries.
Compensatory Purpose – taxation is a way of giving back the expected economic and social
benefits due to the inhabitants. For example, an excise tax on gasoline consumed is imposed on
vehicle owners using roads. In this case, the tax is compensatory for the use of road.

Objects of Taxation – may refer to the subject to which taxes are imposed.

Persons
Natural Persons – refers to individual taxpayers
Juridical Persons – includes corporations, partnerships and any associations
Properties
Real Properties – immovable properties
Personal Properties – movable properties
Tangible Properties – may be felt or touched
Intangible Properties – are “rights” rather than physical objects
Excise
Transactions – activities related to any business or profession
Privilege – a benefit derived through gratuitous transfer by fact or death or donation
Right – a power, faculty or demand inherent in one person and incidental to another
Interest – an advantage accruing from anything

Scope of Taxation Power

In the absence of limitations provided by the Constitution, the power to tax is unlimited in its range,
complete (plenary), with wide extent of application (comprehensive) and with the highest degree
(supreme). If there is any limitation at all, it is the sense of responsibility by the members of the law-
making body to the people that restricts its exercise. It reaches every trade or occupation, every object
of industry and every species of possession. In case of failure to discharge, it may be followed by seizure
or confiscation of property.
Limitations to the Power of Taxation

Though taxation is supreme, its exercise is not absolute due to its Inherent and Constitutional
Restrictions. As an Inherent power, by its purpose and nature restrict taxation. It should be exercised for
its nature, purpose and jurisdiction. Our Constitution assumes the existence of taxation and it also
provides some provisions to limit the exercise of tax power. Its main purpose is to protect the objects of
taxation against its abusive implementation.

Therefore, if a tax law violates the Constitution, such law shall be declared null and void.

Inherent Limitations
These are natural restrictions to safeguard and ensure that the power of taxation shall be
exercised by the government only for the betterment of the people whose interest should be
served, enhanced and protected.
Taxes may be levied only for public purposes
Being inherently legislative, taxation may not be delegated
Tax power is limited to territorial jurisdiction of the State
Taxation is subject to international comity
Government entities are generally tax-exempt
Constitutional Limitations
These are provisions of the fundamental law of the land that restrict the supreme, plenary,
unlimited and comprehensive power to tax by the State. The Constitution does not create the
power to tax on the State. Instead, it simply defines and regulates the exercise of tax power in
order to safeguard the interest of affected taxpayers.
Due process of law
Article III, Section I of the Constitution provides that any deprivation of life, liberty or
property is with due process if it is done under the authority of a valid law and after
compliance with fair and reasonable methods or procedure prescribed.
Substantive – due process of requires that the law should be reasonable and not oppressive.
Procedural – it requires opportunity to be heard in proper court of litigation before judgment is
rendered affecting one’s person or property.
Its purpose is to secure the individual from the abusive exercise of the taxing power of the
government.
Equal protection of laws
It means that all persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and liabilities imposed.
Its purpose is to protect persons belonging to the same class against intentional and
arbitrary discrimination.
Rule of uniformity and equity
Article VI, Section 28. part 1 of the Constitution states that it shall be uniform and equitable.
Congress shall evolve a progressive system of taxation. All taxable articles or properties of
the same class shall be taxed at the same rate. Uniformity implies equality in burden not in
 amount. Equity requires that the apportionment of the tax burden be more or less just in
the light of the taxpayer’s ability to bear the tax burden.
Progressive system of taxation – means that the tax laws shall give emphasis on the ability to
pay principle of taxation whereby more direct rather than indirect taxes are imposed.
Non-impairment of contracts
Non-impairment clause, which provides that no law impairing the obligations of valid
contracts shall be passed, is limited in application to laws that derogate from prior acts or
contracts by enlarging, abridging or in any manner changing the intention of the parties.
Origination of appropriation, revenue and tariff bills
The power to tax is significantly legislative in function, so that the Constitution exclusively
vested to the Congress the origination of all revenues, appropriation or tariff bills.
President’s power to veto separate items in revenue or tariff bills
Veto power – refers to the Executive’s power to refuse to sign into law a bill that has been
passed by the legislature.
Item veto power – the power to veto in appropriation bills without affecting any other provision
of such bills
Pocket veto power – the disapproval of a bill by inaction of the President which shall make the
bill fail to become a law.
Congress granting tax exemption
it shall be observed the agreement of a majority not of the attendees constituting a quorum
but all of the members of the Congress as a safeguard against the indiscriminate grant of tax
exemptions.
Exemption from taxation of properties actually, directly and exclusively used for religious,
charitable or educational purposes
Article VI, Section 28, par 3 of the Constitution states that “charitable institutions, churches,
parsonages or convents, appurtenant thereto, mosques and non-profit cemeteries and all
lands, buildings and improvements, actually directly and exclusively used for religious,
charitable or educational purposes shall be exempted from taxation.”
To be exempted from taxation, the real property must be exclusively used for religious,
educational and charitable purposes.
Public money not for religious purposes
This limitation is fundamentally supported by the principle that taxes can only be levied for
public purposes. Thus, Congress has no power to appropriate funds for private purposes
with the exemption specified in the Constitution.
The State shall have no official religion, or shall not set up a church, whether or not
supported with public funds, or prefer one religion over another.
Likewise, the church should not interfere in purely political matters or affairs exclusively for
the State. The Constitution prohibits any infringement of religious freedom.

The power of judicial review

 The judicial tribunals have no concern on the wisdom of taxing act. Its power does not
include inquiry on the policy of legislation. The Congress may not deprive the Supreme
Court if its jurisdiction in all cases involving the legality of any tax, impose or assessment or
toll to any penalty imposed in relation to tax.
No imprisonment for nonpayment of poll tax
Poll tax – means a tax imposed on a person as a resident within a territory of the taxing
authority without regard to his property, business or occupation, (i.e community tax).
it is the prohibition of imprisonment applies only to the nonpayment of poll tax.
Consequently, imprisonment for nonpayment of other taxes or imposition of fine would not
be contrary to the Constitution.
Tax collection shall generally be treated as general funds of the government
Article VI, Section 29, par 3 of the Constitution states that “all money collected on any tax
levied for a special purpose shall be treated as a special fund and paid out for such purpose
only. If the purpose for which a special fund was created has been fulfilled or abandoned,
the balance, if any, shall be transferred to the general funds of the government.”

Stages, aspects or processes of taxation

Levy – (imposition) involves the passage of tax laws or ordinances through the legislature. It
refers to taxation or the tax policy of the Sovereign State. It also involves the granting of tax
exemptions, tax amnesties, tax remedies that the government and taxpayers may avail for the
proper implementation of tax measure.
Assessment – involves the act of administration and implementation of the tax laws by the
executive through its administrative agencies. Taxes are self-assessing. Assessment means the
appraisal and valuation of the subject taxation.
Tax payment or collection – is a process involving the act of compliance by the taxpayer in
contributing his share to defray the expenses of the government.
Impact of Taxation (levy and assessment)
Incidence of Taxation

Examples of tax administrative functions:

Valuation of property for taxation

Equalization of assessment
Collection of taxes

Aspects of Taxation
Principles of a Sound Tax System based on Adam Smith’s Canons of Taxation

Fiscal Adequacy – sources of revenues must be sufficient to meet the expenditures of

government regardless of the business or economic conditions. The revenue of the government
should be capable of expanding or contracting annually in response to variations in public
expenditures. An ideal budget to achieve fiscal adequacy is a balance between government
revenue and government expenses. It is desirable that the government shall adopt effective
measures to collect taxes efficiently and reduce its expenditures to obtain a balance and
adequate fiscal budget. This could be done through proper collection of taxes and reduction of
government expenditures to meet the available funds of the government.
Equality or Theoretical Justice – there must be an equitable (reasonable) and proportionate
distribution of the tax burden, which means that the tax burden shall be shouldered by those
who have the ability to pay. It concedes with the “ability-to-pay principle” which states that tax
burden should be in proportion to the taxpayer's ability to pay.
Administrative Feasibility – tax laws must be capable of reasonable and convenient
enforcement, just and effective administration, meaning, must be capable of being administered
and complied with.

Certain Doctrines in Taxation

Prospective application of tax laws – states that a tax bill must only be applicable and operative
after becoming a law. Retroactive application – there is a clear intent of the legislature that
such law also be imposed on past transactions. Ex-post facto – provides for the infliction of
punishment upon a person for an act done which is not subject to any punishment.
Imprescriptibility of taxes – states that taxes in general are not cancelable.
Double Taxation – means an act of the sovereign by taxing twice for the same purpose in the
same year upon the same property or activity of the same person, when it should be taxed once,
for the same purpose and with the same kind of character of tax.
Indirect Duplicate Taxation – extends to all cases in which there is a burden of two or more
pecuniary impositions.
Counteractions:
Tax exemptions
Reciprocity clause/tax treaty
Tax credit
Allowance for deductions such as vanishing deduction in Estate Tax
Direct Duplicate Taxation – compromises imposition of the same tax on the same property for
the same purpose by the same state during the same taxing period.
Counteractions:
Taxing corporate income and stockholders’ dividends from the same corporation
Imposing tax to the state and the local government upon the same occupation, calling or
activity.
Collecting real estate tax and income tax on the same real estate property leased for earning
purposes.
Imposing taxes on the taxpayer’s final product and the storage of raw materials used in
production of the final product.
Escape from Taxation – permits the taxpayer to minimize payment of tax by lawful means.
Forms of Escape from Taxation:
Tax evasion – unlawful means
Tax avoidance – lawful means
Tax option – taxpayer may choose to pay lower tax rate in some transactions as permitted by
tax laws.
Shifting – is the transfer of tax burden to another; the imposition of tax is transferred from the
statutory taxpayer to another without violating the law.
Forward Shifting – the burden of tax is transferred from the manufacturer, then to the
distributor and finally to the ultimate consumer of the product, VAT.
Backward Shifting – the tax burden is transferred from the ultimate consumer through the
factors of distribution to the factors of production.
Onward Shifting – the tax burden is shifted two or more times either forward or backward.
Capitalization – refers to the deduction in the price of the taxed object equal to
the capitalized value of the future taxes which the purchaser expects to be
called upon to pay. It is made when the price of the property is lowered to
accommodate the exclusion of the tax which is expected to be paid by the seller
as a result of sale transaction.
Transformation – the producer absorbs the payment of tax to reduce prices and
to maintain market share. The tax is transformed into a gain through the
medium of production.
Exemption – denotes a grant of immunity, expressed or implied, to a particular person,
corporation, or two persons or corporations of particular classes, from a tax upon property or on
excise which persons and corporation generally within the same taxing district are obliged to
pay.
Expressed – are statutory laws in nature as provided by constitution, statute, treaties,
ordinances, franchises or similar legislative facts.
Implied – are either intentional or accidental.
Contractual – are those lawfully entered into by the government in contracts under existing
laws.
Tax Amnesty – grants general pardon or intentionally overlooked its authority
to imposed penalties on persons guilty of tax evasion or violation of tax law. The
government allows absolute forgiveness or waiver its right to collect what is due
in order to give the tax evader who wishes to reform a chance to become a part
of the new society with a clean slate.
Tax condonation or tax remission – desists or refrains from exacting, inflicting
or enforcing something as well as to restore what has already been taken.
Equitable Recoupment – states that a tax claim for refund, which is prevented by prescription,
may be allowed to be used as payment for unsettled tax liabilities if both taxes arise from the
same transaction in which over payment is made and underpayment is due.
Set-off Taxes – states that taxes are not subject to legal compensation because the government
and the taxpayer are not mutual creditor and debtor of each other.
Taxpayer Suit – effected through court proceedings could only be allowed if the act involves a
direct and illegal disbursement of public funds derived from taxation.
Compromises – provides that are generally allowed and enforceable when the subject matter
thereof is not prohibited compromised and the person entering such compromise is duly
authorized to do so.
Power to Destroy – is based on the Marshall Dictum which states that the power to tax includes
the power to destroy because the taxpayer has no option but to pay the tax imposed to him.
Power to Build – under the Holmes Doctrine, the burden to pay taxes is only a means to nation
building and a consequence of taxation.
Situs of Taxation – refers to the place of taxation, or the state or political unit which has
jurisdiction to impose tax over its inhabitants. It is the application of the “principle of territorial
jurisdiction” which limits the exercise of taxation power in defining the object of taxation
through setting boundaries of the taxing power whether or not it shall be subjected to tax.
Subject matter of the tax (person, property, or activity)
Nature, kind or classification of the tax being imposed
Source of income being taxed
Place of the excise, privilege, business or occupation being taxed
Citizenship of the taxpayer
Residence of the taxpayer

Summary of Application

GENERAL RULES OF TAX SITUS

Source or Location of Object

 Nature of Tax Citizenship Residency Within the Outside the
Philippines Philippines

Income Tax Filipino Resident Yes Yes

Filipino Nonresident Yes No

Aliens Resident Yes No

Aliens Nonresident Yes No

Transfer Tax Filipino Resident Yes Yes

Filipino Nonresident Yes Yes

Aliens Resident Yes Yes

Aliens Nonresident Yes No

Business Tax Yes No

Nature of Taxes

Taxes are forced burdens, charges, exactions, impositions or contributions assessed in accordance with
some reasonable rule or apportionment by authority of a sovereign state, upon the person, property, or
rights exercised within its jurisdiction, to provide public revenues for the support of the government, the
administration of the law, or the payment of public expenses.

Taxes are obligations created by law

Taxes are generally personal to the taxpayer

Essential Characteristics of Taxes

Enforced contribution
Imposed by the legislative body
Proportionate in character
Payable in the form of money
Imposed for the purpose of raising revenue
Used for a public purpose
Enforced on some persons, properties or rights
Commonly required to be paid at regular intervals
Imposed by the sovereign state within its jurisdiction
SUMMARY OF TAXES
OBJECT MAJOR DESCRIPTION INCOME
CLASSIFICATION CLASSIFICATION

Person Personal tax Community tax

Property Property tax Real property tax

Rights: Business taxes: Value added tax

(normal course of Other percentage tax

business)
Excise tax

Transfer taxes: Estate tax

(gratuitous transfer) Donor’s tax

Income taxes Final withholding tax Passive income within

Sale of real property

(capital asset)

Capital gain on sale of

share of stock outside
stock exchange

Credible with tax Compensation income

Professional fee

Rent, brokers, agent fee

Annual income tax Compensation income

Business income

Gain, sale of other

 capital assets

Passive income earned

outside

Classification of Taxes

As to scope
National - imposed by National government (e.g. Income Tax, Estate and Donor’s Tax, Value
Added Tax, Excise Tax, Customs Duties and Documentary Stamp Taxes)
Local - imposed by local government units (e.g. Community Tax, Municipal Licenses Taxes,
Professional Tax, Real Estate Tax)
As to subject matter or object
Personal, poll or capitation - tax of a fixed amount imposed upon individual, whether citizens
or not, residing within a specified territory without regard to their property or the occupation
in which he may be engaged (ex. Community Tax).
Property - tax imposed on property, whether real or personal, in proportion either to its
value, or in accordance with some other reasonable method of apportionment (e.g. Real
Estate Tax).
Excise - any tax which does not fall within the classification of a poll tax or a property tax. This
is a tax on the exercise of certain rights or privileges (e.g. Professional Tax Income Tax, Estate
Tax, Donor’s Tax, and Value Added Tax).
As to who bears the burden
Direct - tax which is demanded from the person who also shoulders the burden of tax or tax
which the taxpayer cannot shift to another (ex. Community Tax, Income Tax, Transfer Tax,
Traveler’s Tax and Corporate Income Tax).
Indirect - tax wherein the incidence of or liability for the payment of the tax falls on one
person but the burden thereof can be shifted to another person (ex. Value Added Tax,
Custom Duties, Amusement Tax, Excise Tax and Percentage Taxes).
As to determination of amount
Specific - tax of fixed amount imposed by the head or number, or by some standard of weight
or measurement(ex. Excise Tax).
Ad valorem - tax of fixed proportion of the value of the property with respect to which the
tax is assessed(ex. Custom Duties, Real Estate Tax and Excise Tax).
As to purpose
General, fiscal, or revenue - tax imposed solely for the general purpose of the government,
i.e., to raise revenue for government expenditures (ex. Income Tax, Value Added Tax and
Transfer Tax).
Special, sumptuary or regulatory - tax imposed for a specific purpose, i.e., to achieve some
social or economic ends irrespective of whether revenue is actually raised or not (ex. Custom
Duties, Tariff and Excise Tax).
Compensatory - tax imposed for the equitable distribution of wealth and income in the
society.
As to graduation or rate
Proportional or flat rate - tax based on a fixed percentage of amounts of the property,
receipts, or other basis to be taxed (ex. Value Added Tax and Real Estate Tax).
 Progressive or graduated - tax the rate of which increases as the tax base or bracket increases
(ex. Income Tax, Estate Tax, and Donor’s Tax).
Regressive - tax the rate of which decreases as the tax base or bracket increases. This is not
practiced in the Philippines.
Digressive - tax imposed on a fixed certain amount but diminishes gradually on sums below it.
The tax rate is arbitrary because the increase in tax rate is not proportionate to the increase
of tax base.
Mixed - it is a system that uses a combination of the different tax rates.

Other charges and fees

Penalty – is any sanction imposed, as a punishment for violations of law or acts deemed injurious.
Revenue – refers to all funds or income derived by the government whether from tax or from other
sources.
Debt – is an obligation to pay or render service for a definite future of time based on the contract.
Toll – is a compensation for the use of somebody else’s property determined by the cost of the
improvement.
Licensed fee – is a contribution enforced by the government primarily to restrain and regulate business
or occupation.
Special assessment – is an amount collected by the government for the purpose of reimbursing itself for
certain extended benefits regarding construction of public works.
Custom duties – are imposition on imported goods brought into the country to protect local industry.
Subsidy – is a monetary aid directly granted or given by the government to an individual or private
commercial enterprises demand beneficial to the public.
Tariff – is a schedule or list of rates, duties or taxes imposed on imported goods.
Margin fee – is a tax on foreign exchange designed to curb the excessive demands upon our
international reserves.

TAX LAW
- Body of laws which codifies all national tax laws including:
Income
Estate
Gift (Donation)
Excise
Stamp
Other taxes
- Comprises of the Republic Act 8424 (RA 8424) entitled: “The Comprehensive Tax Reform of the
Philippines” also known as National Internal Revenue Code of 1997 (NIRC) or Tax Code also includes RA
9337 – “The VAT Reform Law.”

Internal Revenue Law

– includes all laws legislated pertaining to the national government taxes embodied in
the NIRC such legislation is commonly known as revenue measures.
– the main purpose is to raise money to meet the pecuniary needs of the government.

- Internal Revenue Taxes

– taxes imposed by the legislative body other than custom duties on imports
– the following national taxes are classified as Internal Revenue Taxes under the administration of the
BIR:
Income tax - tax imposed on the income earned of a taxpayer
Transfer tax (Estate tax and Donor’s tax) - tax imposed on any mode of transferring the ownership of a
real property, either through sale, donation, barter, or any other mode.
Business taxes (VAT, Percentage tax and Excise tax) - tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal) lease of goods or properties
(real or personal) or vendors of services.
Documentary Stamps Tax (DST) - is an excise tax levied on documents, instruments, loan agreements
and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property
incident thereto.
Such other taxes as may be imposed and collected by the BIR

Nature of Tax Laws

The Philippine Internal Revenue laws are generally civil in nature; they are neither political nor penal in
nature.

Basically, they are not political in nature. They remain effective even if foreign invaders occupy our
country. They are deemed to be the laws of the occupied territory and not of the occupying enemy.
Hence, it is valid and legal that income tax returns shall be filed and paid by the inhabitants even if
foreign invaders occupy our country.

They are not penal in nature because they do not define crimes and provide for their punishment. The
internal revenue law provides for some penalties for tax delinquencies only to effect timely payments of
taxes or punishes tax evasion for neglect of duty by those subjects of taxation.

Revenues are not remedial laws. They do not include procedures to protect rights and prevent or rectify
wrong doings.

Tax code (1997 NIRC) is a special law which prevails over general laws such as Civil Code or Rules of the
Court.

Rules for interpretation and application of various tax laws:

Tax statute must be enforced as written
Imposition of tax burdens is not presumed
Doubts should be resolved liberally in favor of the taxpayer
Tax exemptions are strictly construed against the taxpayer
Tax laws are applied prospectively
Tax laws prevail over civil laws

SOURCES OF TAX LAWS

Constitution of the Philippines – is primarily intended to limit and regulate the exercise of taxation
power. The state can exercise the power to tax even if the Constitution is completely silent about
taxation.
National Internal Revenue Codes – are laws enacted and established by the will of the legislative
department of the government. The latest statutes of the Philippines are embodied in the R.A. 8424
which is now the prevailing NIRC.
Judicial Decisions (Supreme Court and the Court of Tax Appeals) – refer to the decisions for application
made concerning tax issues by the proper courts exercising judicial authority of competent jurisdiction.
Their decisions on tax laws compromise the greater portion of tax jurisprudence.
Executive Orders – are regulations issued by the President or some administrative authority under his
direction for the purpose of interpreting, implementing, or giving administrative effect to a provision of
the Constitution or some law or entity.
Tax Treaties and Conventions – refer to the treaties and international agreements with foreign countries
regarding tax enforcement and exemptions, i.e, Philippine-United States Military Bases Agreement
(PUSMBA).
Revenue Regulations by the Department of Finance – are rules or orders having force of law issued by
executive authority of the government to ensure uniform application of the law. Regulations contrary to
or inconsistent with law are null and void. The secretary of Finance is vested with the authority to
revoke, repeal, or abrogate acts or previous rulings of his predecessors in office because these are not
binding on their success. Regulations and administrative rules usually implement tax laws. The
regulations cannot increase nor decrease the requirement of the law, nor embrace matters not covered
or intended to be covered by the statute.
BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders – are administrative
rulings or opinions which are less general interpretations of tax being issued from time to time by the
Commissioner of BIR or Commissioner of BOC. They are primarily intended to maintain uniform
application of tax laws within the department or area of authority.
BIR Rulings – are expressed official interpretations of the tax laws as applied to specific transactions.
These are not the final interpretations of the tax laws. They are considered as the best opinion or
advisory at the moment and are considered sound law until changed by the court.
Local Tax Ordinances – are tax ordinances issued by the province, city, municipality and barrio subject to
such limitations as provided by the Local Government Code and the Real Property Tax Code.

References:
National Internal Revenue Code of 1997 . (n.d.). Retrieved from https://www.bir.gov.ph/index.php/tax-
code.html
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.). Quezon
City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good Dreams
Publishing.
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City: Valencia Educational Supply.
Tax Administration

Learning Objectives:

1. Define Tax Administration

2. Give Tax Agencies
3. Enumerate the Power, Duties and Responsibilities of Bureau of Internal Revenue and its
commissioner
4. Give meaning to Tax Credit Certificate
 5. Provide the efficient and effective collection through Administrative Provisions
6. Show the Tax Remedies and Assessment Procedure;
7. Provide insights about the Collection of Taxes

Tax Administration is a system of collecting taxes in accordance with the country’s tax policies.
It involves enforcement of taxes through the following aspects of taxation Assessment and
Collection.

It also includes the execution of judgment and capacity to act in all tax cases decided by the
court in favor of the Bureau of Internal Revenue (BIR).

Tax Administration Agencies

The Department of Finance (DOF) is the principal government office that handles the
administration and supervision of tax related matters. Under the DOF are the following
administrative offices:
1. Bureau of Internal Revenue (BIR) - an agency of Department of Finance that collects
more than half of the total revenues of the government.
2. Bureau of Customs (BOC) - is a Philippine government agency under the Department of
Finance which is responsible for regulating and facilitating trade, assessment and
collecting import duties and taxes, combating illegal trade and other forms of customs
fraud, and devising and managing customs management systems for trade facilitation.
3. Land Transportation Commission (LTC) - is an agency of the Philippine government
under the Department of Transportation and is responsible for all land transportation in
the Philippines, especially implementing transportation laws, rules and regulations.
4. Duly and lawfully authorized collectors – these are the persons, agencies or duly
accredited banks authorized by BIR, BOC, TC, and LTC to collect taxes.
5. Local offices
 Provincial, city, municipal and barangay treasurers
 Provincial and city and assessors
 Provincial and city board of assessment appeals
 Central board of assessment appeals

Other Tax Enforcers

1. Secretary of Justice, as the Chief Legal Officer of the government, has the authority to
ascertain the validity of the laws subject to review by the Courts of Justice.
2. Various offices:
a. The courts
b. Register of deeds
3. Secretary of Finance - is a Cabinet Member who is in charge of the Department of
Finance
4. Commissioner of Internal Revenue - is the head of the Bureau of Internal Revenue
 5. Commissioner of Customs - is the head of the Bureau of Customs
6. Presiding Justice and Associate Justices of the Court of Tax Appeals - expedite the
disposition of tax-evasion cases and decides other tax cases
7. Deputy Commissioner of the BIR - assists the Commissioner of Internal Revenue in
carrying the powers and duties of BIR
8. Regional Directors and Regional District Officers of the BIR - administers and enforces
internal revenue laws including the assessment and collection of all internal revenue
taxes
9. Provincial, City and Municipal Treasurers - responsible for managing the revenue and
cash flow of the local government unit, as well as banking, collection, receipt, reporting,
custody, investment or disbursement of municipal funds
10. Examiners and Collection Agents of the BIR and BOC - conducts the tax assessment as
well as collection of assessed tax deficiencies

Bureau of Internal Revenue

Chief Officials
1. Commissioner of Internal Revenue – known as the BIR Commissioner
2. Four (4) Deputy Commissioners

BIR Officers - they are task to administer and enforce the Tax Code
1. Revenue Regional Director
2. Revenue District Officer
3. Revenue Examiners
4. Division Chiefs
5. BIR Collection Agents

Powers and Duties of the Bureau of Internal Revenue

1. To assess and collect all national internal revenue taxes, fees, and charges.
2. To enforce all forfeitures, penalties, and fines connected with the assessment and
collection functions.
3. To execute judgments in all cases decided in its favor by the Court of Tax Appeals and
the ordinary courts
4. To administer, supervise and affect police powers authorized by the NIRC and other
laws.

Powers and Authorities of the Commissioner of Internal Revenue

1. Power to interpret tax laws and decide tax cases (Section 4, NIRC)
 power to interpret the provisions of this Code and other tax laws
 power to decide on
 disputed assessments,
 refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under this Code
 subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
2. Power to obtain information, and to summon, examine and take testimony of persons
(Section 5, NIRC)

In ascertaining the correctness of any return, or in making a return when none has been made,
or in determining the liability of any person for any internal revenue tax, or in collecting any
such liability, or in evaluating tax compliance, the Commissioner is authorized:
 To examine any book, paper, record, or other data which may be relevant or material to
such inquiry
 To obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of
the national and local governments, government agencies and instrumentalities,
including the Bangko Sentral ng Pilipinas and government-owned or -controlled
corporations, any information such as, but not limited to,
 costs and volume of production,
 receipts or sales and gross incomes of taxpayers, and the names, addresses, and
 financial statements of
 corporations,
 mutual fund companies,
 insurance companies,
 regional operating headquarters of multinational companies,
 joint accounts,
 associations,
 joint ventures of consortia and
 registered partnerships, and their members;
 To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or other data, and to give
testimony;
 To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; and
 To cause revenue officers and employees to make a canvass from time to time of any
revenue district or region and inquire after and concerning all persons therein who may
be liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.

3. Power to make assessments and prescribe additional requirements for tax administration
and enforcement (Section 6, NIRC)
 Examination of Returns and Determination of Tax Due (Section 6A, NIRC)
  After a return has been filed as required under the provisions of this Code, the
Commissioner or his duly authorized representative may authorize the examination of
any taxpayer and the assessment of the correct amount of tax: Provided, however, that
failure to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive the same shall not
be withdrawn: Provided, That within three (3) years from the date of such filing, the same may
be modified, changed, or amended: Provided, further, That no notice for audit or investigation
of such return, statement or declaration has in the meantime been actually served upon the
taxpayer.
 Failure to Submit Required Returns, Statements, Reports and other Documents (Section
6B, NIRC)
 In case a person fails to file a required return or other document at the time prescribed
by law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.
 Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross
sales and receipts (Section 6C, NIRC)
 The Commissioner may, at any time during the taxable year, order inventory-taking of
goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or
may place the business operations of any person, natural or juridical, under observation
or surveillance if there is reason to believe that such person is not declaring his correct
income, sales or receipts for internal revenue tax purposes. The findings may be used as
the basis for assessing the taxes for the other months or quarters of the same or
different taxable years and such assessment shall be deemed prima facie correct.
 Authority to terminate taxable period (Section 6D, NIRC)
 When it shall come to the knowledge of the Commissioner that a taxpayer is retiring
from business subject to tax, or is intending to leave the Philippines or to remove his
property there from or to hide or conceal his property, or is performing any act tending
to obstruct the proceedings for the collection of the tax for the past or current quarter
or year or to render the same totally or partly ineffective unless such proceedings are
begun immediately, the Commissioner shall declare the tax period of such taxpayer
terminated at any time and shall send the taxpayer a notice of such decision, together
with a request for the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, or such portion thereof as
may be unpaid, and said taxes shall be due and payable immediately and shall be
subject to all the penalties hereafter prescribed, unless paid within the time fixed in the
demand made by the Commissioner.

 Authority to prescribe real property values(Section 6E, NIRC)

  The Commissioner is hereby authorized to divide the Philippines into different zones or
areas and shall, upon consultation with competent appraisers both from the private and
public sectors, determine the fair market value of real properties located in each zone or
area. For purposes of computing any internal revenue tax, the value of the property
shall be, whichever is the higher of:
a. The fair market value as determined by the Commissioner; or
b. The fair market value as shown in the schedule of values of the Provincial and City
Assessors.
 Authority to inquire into bank deposit accounts(Section 6F, NIRC)
 Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and
other general or special laws, the Commissioner is hereby authorized to inquire into the
bank deposits and other related information held by financial institutions of:
a. A decedent to determine his gross estate; and
b. Any taxpayer who has filed an application for compromise of his tax liability under
Section 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, or under other general or special laws, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

c. A specific taxpayer or taxpayers subject of a request for the supply of tax information
from a foreign tax authority pursuant to an international convention or agreement on
tax matters to which the Philippines is a signatory or a party of: Provided, That the
information obtained from the banks and other financial institutions may be used by
the Bureau of Internal Revenue for tax assessment, verification, audit and
enforcement purposes.
In case of a request from a foreign tax authority for tax information held by banks and financial
institutions, the exchange of information shall be done in a secure manner to ensure
confidentiality thereof under such rules and regulations as may be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

The Commissioner shall provide the tax information obtained from banks and financial
institutions pursuant to a convention or agreement upon request of the foreign tax authority
when such requesting foreign tax authority has provided the following information to
demonstrate the foreseeable relevance of the information to the request:
a. The identity of the person under examination or investigation;
b. A statement of the information being sought, including its nature and the form in
which the said foreign tax authority prefers to receive the information from the
Commissioner;
c. The tax purpose for which the information is being sought;
 d. Grounds for believing that the information requested is held in the Philippines or is in
the possession or control of a person within the jurisdiction of the Philippines;
e. To the extent known, the name and address of any person believed to be in
possession of the requested information;
f. A statement that the request is in conformity with the law and administrative
practices of the said foreign tax authority, such that if the requested information was
within the jurisdiction of the said foreign tax authority then it would be able to obtain
the information under its laws or in the normal course of administrative practice and
that it is in conformity with a convention or international agreement; and
g. A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would give
rise to disproportionate difficulties.
h. The Commissioner shall forward the information as promptly as possible to the
requesting foreign tax authority. To ensure a prompt response, the Commissioner
shall confirm receipt of a request in writing to the requesting tax authority and shall
notify the latter of deficiencies in the request, if any, within sixty (60) days from
receipt of the request.

If the Commissioner is unable to obtain and provide the information within ninety (90) days
from receipt of the request, due to obstacles encountered in furnishing the information or
when the bank or financial institution refuses to furnish the information, he shall immediately
inform the requesting tax authority of the same, explaining the nature of the obstacles
encountered or the reasons for refusal.
The term "foreign tax authority," as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.
 Authority to accredit and register tax agents (Section 6G, NIRC)
 The Commissioner shall accredit and register, based on their professional
competence, integrity and moral fitness, individuals and general professional
partnerships and their representatives who prepare and file tax returns, statements,
reports, protests, and other papers with or who appear before, the Bureau for
taxpayers.
 Authority to prescribe additional procedural or documentary requirements (Section
6H, NIRC)
 The Commissioner may prescribe the manner of compliance with any documentary
or procedural requirement in connection with the submission or preparation of
financial statements accompanying the tax returns.

4. Authority to delegate power (Section 7, NIRC)

The Commissioner may delegate the powers vested in him under the pertinent provisions of
this Code to any or such subordinate officials with the rank equivalent to a division chief or
higher, subject to such limitations and restrictions as may be imposed under rules and
regulations to be promulgated by the Secretary of finance, upon recommendation of the
Commissioner: Provided, however, That the following powers of the Commissioner shall not
be delegated:
 The power to recommend the promulgation of rules and regulations by the Secretary of
Finance;
 The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;
 The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax
liability;
 The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

5. Authority to compromise, abate and refund or credit tax (Section 204, NIRC)
The Commissioner may -

A. Compromise the payment of any internal revenue tax, when:

a. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax.

The compromise settlement of any tax liability shall be subject to the following minimum
amounts:
For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%)
of the basic assessed tax; and
For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic
assessed tax.
Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement
offered is less than the prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board which shall be composed of the Commissioner and the four
(4) Deputy Commissioners.

B. Abate or cancel a tax liability, when:

a. The tax or any portion thereof appears to be unjustly or excessively assessed; or
b. The administration and collection costs involved do not justify the collection of the
amount due.

All criminal violations may be compromised except:

o those already filed in court, or
o those involving fraud.

C. Credit or refund taxes erroneously or illegally received or penalties imposed without

authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing
 with the Commissioner a claim for credit or refund within two (2) years after the payment
of the tax or penalty: Provided, however, That a return filed showing an overpayment shall
be considered as a written claim for credit or refund.

A Tax Credit Certificate validly issued under the provisions of this Code may be applied against
any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable.
Any request for conversion into refund of unutilized tax credits may be allowed, subject to the
provisions of Section 230 of this Code: Provided, That the original copy of the Tax Credit
Certificate showing a creditable balance is surrendered to the appropriate revenue officer for
verification and cancellation: Provided, further, That in no case shall a tax refund be given
resulting from availment of incentives granted pursuant to special laws for which no actual
payment was made.

Administrative Provisions:
1. Registration
Only one TIN shall be assigned to a taxpayer. Any person who shall secure more than one TIN
shall be criminally liable. (secs. 236 (I) and 275, NIRC)

Exceptions:

1. When a foreign currency deposit unit, which is merely a division of a local or foreign bank in
the Philippines, is assigned another TIN by the BIR, for purposes of filing its tax returns and
paying final tax on its foreign currency transactions. The peso and other transactions of the
regular banking unit of the bank shall be declared in its regular corporate income tax return
(BIR Form 1702), using its other TIN.

2. In cases where a registered taxpayer dies, the administrator or executor shall register the
estate of the decedent and a new TIN shall be supplied to the "Estate of the Deceased Person."
(Sec. 236 (I) NIRC)

Registration Period. Every person subject to any internal revenue tax shall register once with
the appropriate Revenue District Officer (RDO).

1. Within ten (10) days from date of employment;

2. On or before the commencement of business;
3. Before payment of any tax due; or
4. Upon filing of a return, statement or declaration as required in the Tax Code. (sec. 236 (A),
NIRC)

Annual Registration Fee. The annual registration fee is P500 for every separate or distinct
establishment or place of business, including facility types where sales transactions occur. It
shall be paid upon registration and every year thereafter on or before the last day of January.

Cooperatives, individuals earning purely compensation income and overseas contract workers
are not liable to the registration fee herein imposed. (Sec. 236 (13), NICR)
BIR Forms. The BIR Forms that are needed for registration are the following:

1. BIR Form 1901 - For registration of self-employed, mixed income individuals, estates and
trusts.
2. BIR Form 1902 - For individuals earning purely compensation income.
3. BIR Form 1903 - For registration of corporations nod partnerships.
4. BIR Form 1904 - For registration of one-time taxpayer and persons registering under E. 0.
No. 98 (securing TIN to be able to transact with any government agencies).
5. BIR Form 1905 - For updating/cancellation of registration, cancellation of TIN, new copy of
certificate of registration.

Contents of Registration Form. The registration shall contain the following:

1. Taxpayer's name and style of business;

2. Place of residence and business; and
3. Other information as required by the Commissioner in the form.
Any person maintaining a head office, branch or facility shall register with the RDO having
jurisdiction over the head office, branch or facility.

BIR Form 605 shall be accomplished in the following instances:

1. Upon payment of annual registration fee for new business and for renewals on or before
January 31, every year.

2. Upon receipt of a demand letter/assessment notice and/or collection letter from the BIR.

3. Everytime a tax liability or penalty is due or an advance payment is made.

Transfer of Ownership. When any individual who has paid the annual registration fee dies, and
the same business is continued by other person or persons interested in his estate, the
following rules shall be observed:

1. No additional payment shall be required for the remaining period within which the tax was
paid;
2. The person who will continue the business should submit inventories of goods or stocks to
the BIR within 30 days from the death of the decedent.
3. The same requirements (1 and 2) shall be applied in case of transfer of ownership or change
of name of the business establishment. (Sec. 242, NIRC)

Transfer of Business Place. In case a registered person decides to transfer his place of business
or his head office or branches, it shall be his duty to update his registration status by filing an
application for registration information update.
Cancellation of Registration. The registration of any person who ceases to be liable to a tax
type shall be canceled upon filing with the RDO where he is registered and where he applies for
registration information update in a prescribed form. (Sec. 236 (F), NIRC)

Printing of Receipts, Sales or Commercial Invoice

"Sales" or "Commercial Invoice" is a document issued by the seller of goods to the buyer.
"Receipt" is a document issued for sales of services.

The requirements before receipts, sales or commercial invoices are printed are as follows:

1. Authority to Print All persons who are engaged in business shall secure from the BIR an
Authority to' Print receipts or sales or commercial invoices before a printer can print the
same.
2. Other requirements

The printed receipts or sales invoices should.

A. Be serially numbered;
B. Contain the name, business style, TIN and business address of the person or entity to use
such receipts or invoices; and
C. Contain information that may be required by rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.

Issuance of Receipts, Sales or Commercial Invoice

The following rules are followed in the issuance of receipts or invoices:

1. The time for issuance of receipts or invoices should be the time when transaction is
affected.
2. All persons subject to any internal revenue tax are required to issue receipts or Sales
invoices when the value of merchandise sold or service rendered is' twenty-five pesos
(P25.00) or more.
3. Receipt/invoice is not required
a. When the value of the merchandise sold or service rendered his less than twenty-five
pesos (P25.00); and
b. When exempted by the BIR Commissioner in meritorious cases.
4. Regardless of amount, a receipt must be issued when
a. It covers payment made as 'rentals, commissions, compensations or fees; or
b. A VAT-registered person makes the sale to another VAT-registered person.
5. The receipt should indicate the name, business (if any), address of the purchaser, customer
or client when
a. It covers payment made as rentals, commissions, compensations or fees;
b. b. The sale is made by a person liable to VAT to another person also liable to VAT.
The phrase "in the case of sales, receipts or transfers in the amount of P100 or more, or
regardless of amount, where the sale or transfer is made by a person liable to value-added tax
to another person also liable to value-added tax" WAS DELETED under R.A. 9337 of 2005.

6. The original receipt shall be issued to the purchaser, and the issuer shall keep the
duplicate in his place of business for three years.
7. The purchaser or the issuer should keep his copy of receipts for a period of three years
in his place of business from the close of the taxable year in which such invoice or
receipt was made. (Sec. 237, NIRC)

Tax Returns

Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed form
showing an enumeration of taxable amounts and description of taxable transactions, allowable
deductions, amount of tax and tax payable to the government.

Examples of tax returns are

1. BIR Form Nos. 1700 and 1701 - Annual Income Tax Returns for Individual.
2. BIR Form No. 1702 - Annual Income Tax Return for Corporations and Partnerships.
3. BIR Form No. 1800 - Donor's Tax Return.
4. BIR Form No. 1801 - Estate Tax Return.

Certificate of Payment
The taxpayer is required to observe the following with regard to the certificate of payment:

1. The certificate or receipts showing payment of taxes issued to a person engaged in business
subject to annual registration fee shall be kept in plain view at the place where the business
is conducted;
2. In case of a peddler or other persons not having a fixed place of business, it shall be kept in
the possession of the holder thereof, and shall be presented• demand of any. internal
revenue officer. (Sec. 241,14112C)

TAX REMEDIES

Tax remedies are procedures or actions available both to the government to collect taxes and
to the taxpayer to avoid abuses in the payment of taxes.

Due to the "lifeblood doctrine," the government applies various tax remedies to collect taxes in
defraying its expenses. Examples of government remedies are assessment of tax, compromise,
tax lien, levy or distraint, etc.

The tax remedies afforded by law to the taxpayer are supported by the "due process of law" of
the Constitution. Examples of taxpayer's remedies are disputing an assessment, compromise,
tax refund, amendment of returns, etc.

ASSESSMENT

By nature, internal revenue taxes are self-assessing. When the taxpayer earns income, he has
the responsibility to compute, file and pay his tax to the BIR. Hence, the taxpayer creates his tax
liability even without the government's assessment.

The tax assessment as used in the Tax Code involves the following:

1. Determining of the correctness of tax due in accordance with the prevailing tax laws;
2. Giving a written notice of the finding to the taxpayer; and
3. Issuing a demand for the payment of tax liability or tax deficiency within a specified period.

Accordingly, a tax assessment is a formal letter made by the Big demanding the taxpayer to
settle his tax liability within the indicated period. It is based on actual facts and not on hearsay
evidence and it must be directed to the right party subject to tax investigation.

Assessment made by the Government is relevant in the proper pursuit of judicial and extra-
judicial remedies to enforce taxpayer's liabilities. To some extent, it is relevant in the imposition
of surcharges and interest, in the application of statutes of limitations and in the establishment
of tax liens.

Presumption of Correctness
Basically, an assessment is presumed correct and made in good faith in the performance of
official duties and failure to present proof of error will prosper such assessment. (Atlas
Consolidated Mining and Development Corp. vs. CA, Commissioner of Internal Revenue and
CTA, 59 SCAD 870, G.R. No. 105563,10 March 1995)

Who Makes Assessment

After the return has been filed, the BIR Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of tax.
Failure on the part of the taxpayer to file a return shall not prevent the Commissioner from
authorizing the examination of any taxpayer. (Sec. 6,1VIRC)

Assessment Period

Assessment period refers to the span of time allowed by law to the BIR to investigate a
taxpayer's tax discrepancy to enforce collection of taxes.

The Tax Code provides the prescriptive periods in assessing taxes that are returnable as follows:

Jeopardy assessment terminates or condenses the taxpayer's period. It requires no audit

because the taxpayer failed to comply with audit and investigation requirements to present his
books of accounts and other related records and substantiate the deductions claimed in his
return.
When to Effect Tax Assessment

Government tax assessment could be made:

1. Before a tax return is filed. a. After prescription period expired b. If the taxpayer intends to
leave the country or close, business. (Jeopardy Assessment)
2. After a fraudulent tax return is uncovered.
A revenue officer's computation of the taxpayer's liability communicated to the latter, giving
him an opportunity to disprove the BIR examiner's findings, is not an assessment because it is
not yet definite.

Kinds of Tax Assessment

Assessment of taxes may be classified as follows:

1. Self-Assessment - this tax assessment is made by the taxpayer himself reflecting the
amount of tax due in the ITR which he has to pay at the lime of filing his tax return.
2. Prospective Assessment - also called a preliminary assessment notice (PAN) which informs
the taxpayer about the findings by the tax examiner regarding the taxpayer's tax deficiency.
The taxpayer is usually given 15 days from notice to explain his side.
3. Disputed Assessment - a tax assessment that is being questioned by the taxpayer as to its
validity or legality and asks the same to be cancelled. The taxpayer or its authorized
representative or tax agent may protest administratively against the aforesaid Formal letter
of Demand (FLD) and Final Assessment Notice (FAN) within thirty (30) days from the date of
receipt thereof. This may be done through (a) request for reconsideration or (b) request for
reinvestigation.
4. Final Assessment - an official assessment which was not disputed or properly appealed by
the taxpayer within the prescribed period, and has become final and executory. The
taxpayer is barred from disputing the correctness of the issued assessment by introduction
of newly discovered or additional evidence.
5. Deficiency Assessment - an assessment made by a tax assessor showing the correct amount
of tax after tax audit.
6. Jeopardy Assessment - an assessment without the benefit of complete or partial tax audit
intended to prevent the delay of the assessment and collection of taxes cause by the
taxpayer's failure to comply with tax investigation requirements and substantiate his
records with proper documents.
7. Illegal or Void Assessment - an assessment made by a BIR officer without authority or an
assessment made in violation of law.

Preliminary Assessment Notice

Preliminary Assessment Notice (PAN) of the I3IR .shows in d, tail the facts, and the law, rules
and regulations, or jurisprudence which the proposed assessment is based. It is a due process
requirement in the issuance of a deficiency tax assessment.

It is issued after the Commissioner or his duly authorized representative, as the case may be,
reviewed, evaluated and found out that there exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes.

When Preliminary Assessment Notice Not Required

"Pursuant to Section 228 of the Tax Code, as amended, a PAN shall not be required in any of the
following cases:

1. Deficiency tax is the result of mathematical error appearing on the face of the return;
2. Discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent;
3. Taxpayer opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period automatically applied the same against the estimated tax liabilities for the
quarters of the succeeding taxable year;
4. Excise tax due (on excisable articles) has been paid; and
5. An article locally purchased or imported by an exempt person' such as vehicles, capital
equipment, machinery and 'P 00 parts, has been sold, traded or transferred to non-exempt
persons.

Requisites of a Valid Assessment

A valid assessment must possess the following:

1. The tax official and the taxpayer have no agreement made during the pre-assessment stage;
2. It must be in writing; and
3. It must state the facts, law, rules and regulations or jurisprudence on which the assessment
is made; otherwise, the assessment notice shall be rendered NULL and VOID. (sec. 228,
NIRC)

Ways to Contest the Validity of an Assessment

The taxpayer may dispute or protest the validity of an assessment which may involve the
question of fact or law or both by the following written motions or requests:

1. Motion for Reconsideration. The taxpayer requests the BIR to review the existing records
without the need of additional evidence.
2. Motion for Reinvestigation The taxpayer requests the BIR to have a second look based on
the newly discovered or additional evidence which must be submitted within sixty (60) days
from the date of filing of the protest.
3. Motion for Withdrawal. The taxpayer requests the BIR or Court to remove a tax plea bargain
he entered because he was pressured to accept the agreement which he believes not in his
best interest.
4. Motion for Cancellation. The 'taxpayer requests the SIR or Court to stop the tax assessment
due to prescription and violation of due process of law.

Assessment Procedure

Relative to the due process requirement in the issuance of deficiency tax assessment and to
effect valid assessment, the following summarized procedures as provided by Section 228 of
the NIRC must be observed:

COLLECTION OF TAXES

By nature, the government's power to impose taxes carries with it the power to enforce
contribution. As the lifeblood of the government, taxes are not optional and the taxpayer
thereof must make payment promptly.
The law protects the taxpayer against the abuses of tax collection by requiring tax collectors to
reasonably exercise the process in accordance with the prescribed procedure. Hence, even if
taxes are obligatory by reason of command, the taxpayer is still protected by the principle of
due process (i.e. he must at least be served a notice and given an opportunity to be heard).
(Commissioner Algue, Inc., 168 SC. 9, February 17, 1988)

On the other hand, the government is clothed with authority to devise ways and means to
accomplish tax collection in the most effective manner. (Hodges vs. Municipal Board of Iloilo
City, L-18929, January 31, 1973)

Collection Remedies Available to Government

There would be instances that tax payments are not voluntarily observed within the prescribed
period by reason of delinquency. For this reason, the law provides the government various
remedies to enforce effective collection of internal revenue taxes, fees, and charges and
increments thereto where the taxpayer is delinquent.

The government can use administrative remedies and judicial remedies in the collection of
taxes.

Administrative remedies in the collection of taxes are available at the administrative level. The
administrative remedies for the collection of the delinquent taxes are

1. Distraint of personal property;

2. Levy of real property; and
3. Other administrative collection remedies.

Judicial remedies are means of enforcing tax collection through court litigations which may be
1. Civil action; and

2. Criminal action.

Either or both of these remedies may be pursued simultaneous, in the collection of taxes once
the assessment becomes final and demandable. (Sec. 205 and Sec 228, IVIRC; Central cement
Corp. us. Commissioner, CTA, Case No. 4312, December 21, 1988)

Any internal revenue tax that has been assessed within the prescribed limitation period may be
collected by distraint or levy, or by a proceeding in court within five (5) years following the
assessment of tax.

Distraint of Personal Property

Distraint of Personal Property is the seizure by the government of personal property (tangible
or intangible) to enforce the payment of taxes, followed by its public sale if taxes accruing
thereto are not voluntarily paid. (Sec. 207(A), NIRC)

Kinds of Distraint

Distraint of personal property may be classified as:

1. Constructive distraint - the government prohibits the taxpayer from disposing his personal
property to enforce collection of taxes. (Sec. 206, NIRC)
2. Actual distraint - the government takes possession of the taxpayer's personal property and
sells the same through public auction to settle the latter's unpaid tax liabilities. (Sec. 207 -
209, NIRC)
Any excess on what is required to pay the entire claim, including expenses, shall be returned to
the owner of the property sold. No charge shall be imposed for the services of the local internal
revenue officer or his deputy. (Sec. 209. NIRC)

Release of Distrained Property upon Payment Prior to Sale.

If, at any time prior to the consummation of the sale, all proper charges are paid to the officer
conducting the sale, the goods or effects distrained shall be restored to the owner. (sic. 210,
NIRC)

Purchase by Government at Sale Upon Distraint.

When the amount bid for the property under distraint is not equal to the amount of the tax or
when the amount of bid is substantially lower than the actual market value of the articles
offered for sale, the BIR Commissioner or his deputy may purchase the same in behalf of the
National Government for the amount of taxes, penalties, and costs due chevron. (sec. 212,
NIRC)

Further Distraint.

The remedy of distraint of personal property may be repeated if necessary until the full amount
due and all expenses are collected. (Sec 217, NIRC)

Levy of Real Property

Levy of Real Property is the seizure by the government of immovable property in order to
enforce the payment of taxes. As in distraint, the property may be sold at a public sale if, after
seizure, the taxes are not voluntarily paid. (sec. 207 (B), NIRC)
After the expiration of the time required to pay the delinquent tax or delinquent revenue as
prescribed by law, real property may be levied upon, before, simultaneously or after the
distraint of Personal property belonging to the delinquent taxpayer.

Levy - shall be effected in writing upon the certificate detailing a description of the property
upon which levy is made. A failure of notice is a fatal defect. (Sec 207 (B) NICR; Cabrera to
Provincial Treasurer of Tayabas, 75 Ph. 780)

The levy, as a remedy on realty, may be repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 217, NIRC)

In case the proceeds of the sales exceed the claim and cost of sale, the excess shall be turned
over to the owner of.the property. (Sec. 213, N1RC)

Redemption of Property Sold. Within one year from the date of sale, the delinquent taxpayer,
or anyone for him, shall have the right of paying to the RDO the amount of the public taxes,
penalties thereon from the date of delinquency to the-date of sale, together with interest on
said purchase price at the rate of 15% per annum from the date of purchase to the date of
redemption

The owner shall not, however, be deprived of the possession of the said property and shall be
entitled to the rent and other income thereof until the expiration of the time allowed for its
redemption. (Sec. 214, NIRC)

In case the taxpayer does not redeem the property, the RDO shall as grantor, execute a deed
conveying to the purchaser how much the property has been sold, free from all liens of any
kind whatsoever. (Sec. 202, NIRC)

OTHER COLLECTION REMEDIES

Other remedies to enforce collection of taxes are as follows:

1. Imposition of injunction;
2. Enforcement of tax lien;
3. Enforcement of forfeiture;
4. Entering into compromise of tax case;
5. Requiring the filing of bonds;
6. Requiring proof of filing of income tax returns;
7. Giving of rewards to informers;
8. making arrest, search and seizure;
9. Deportation of aliens;
10. Inspection of books of accounts;
11. Use of national tax register; and
12. Imposition of civil and criminal action.
Imposition of Injunction

An injunction is a restraining order issued by the court having jurisdiction over the filed suit
intended to forbid the continuance of the action of law for purposes of due process.

Tax Lien

A tax lien is a legal claim granted to the government to secure the proper payment of the tax,
surcharges, interest and costs on all property subject to levy or distraint.

A tax lien is directed to the property subject to tax regardless of the owner of the property,
irrespective of who is the possessor thereof. It is enforced (a) by a seizure of the property, and
(b) by a sale of the property. (51 Am. Jur. 857)

By seizure, the proceeds of the property sold are applied to satisfy the tax liability and the
excess thereof shall be returned to the taxpayer.

By forfeiture, no part of proceeds goes to the taxpayer because the property is confiscated in
favor of the government. (Hong,Kong and Shanghai Bank vs. Rafferty, 39 Phil, 145)

This lien is not valid against any mortgage, purchaser or judgment creditor until notice of such
lien shall be filed by the , Commissioner in the Office of the Register of Deeds of the province of
city where the property of the taxpayer is situated or located. (Sec. 219, NIRC)

Forfeiture

Forfeiture of Confiscated Article implies taking of property without compensation as a result of

an offense committed.

When the sale of the articles confiscated for consumption or use would be injurious to the
public health; the Commissioner of Internal Revenue may order that these be destroyed,

The seizure and sale or destruction of the specific forfeited property shall enforce the forfeiture
of chattel and removable fixtures. The forfeiture of real property shall be enforced by a
judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case
require. (Sec. 224, NIRC)

As a form of evidence, forfeited property shall not immediately be destroyed for at least 20
days after seizure. (Sec. 225, NIRC)

Forfeiture of Government for Want of Bidder.

In case there is no bidder for real property exposed for sale or if the highest bid is for an
amount insufficient to pay the taxes, penalties and costs, the Internal Revenue Officer
conducting the sale shall declare the property forfeited to the Government in satisfaction of the
claim in question. (Sec. 215, par. 1, NIRC)

The forfeiture need not be for the whole tax liability which will merely be for the amount
equivalent to the fair market value of the property. (Castro vs. Collector, 4 SCRA. 1193)

Within one (1) year from the date of such forfeiture , the taxpayer, or any one for him, may
redeem said property: He must pay the full amount of the taxes and penalties, together with
interest thereon and the costs of sale. If the property is not redeemed, the forfeiture shall
become absolute. (Sec 215, pa, 2, NIRC)

Compromise

Compromise is a contract whereby the parties, by reciprocal concessions, avoid litigation or put
an end to one already commenced.

Cases which may be Compromised

The taxpayers and the BIR may agree to compromise the following cases:

1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional Offices, Revenue District Office, Legal
Service, Large Taxpayer Service, Collection Service, Enforcement Service and other offices in
the National Office;
3. Civil tax cases disputed before the courts;
4. Collection cases filed in courts; and
5. Criminal violations, other than those already filed in court, Or those involving criminal tax
frauds. (Rev. Reg. No. 30 — 2002)

Cases that are NOT Subject to Compromise

The following cases are not subject to compromise:

1. Withholding tax cases, unless the- applicant taxpayer invokes provisions of law that cast
doubt on the taxpayer's obligation to withhold;
2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his
duly authorized representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved schedule of installment payments;
5. Cases where final reports of reinvestigation or reconsideration have been issued where the
taxpayer is agreeable.
6. Cases which became final and executory after final judgment of a court, where compromise
is requested on the ground 4)., doubtful validity of the assessment; and
7. Estate tax cases where compromise is requested on ground of financial incapacity of the
taxpayer.

References:
National Internal Revenue Code of 1997. (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.).
Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing.
Valencia, E. G., Roxas, G. F., & author. (2016). Income taxation: principles and laws with
accounting applications. Baguio City: Published and distributed by Valencia Educational
Supply.Minimum Compromise Percentage

Revenue Regulations No. 7-2001 provides the following minimum compromise rate on tax compromise
settlement:

A. 10% of basic tax assessed due to financial incapability for

a. An individual taxpayer whose only .source of income is from employment and whose monthly
salary, if single, is P10,500 or less, or if married, whose salary together with his spouse is
P21,000/month, or less; the taxpayer, however, must possess no other leviable/distrainable
assets, other than his family home;

b. An individual without any income;

c. Zero net worth, negative net worth taxpayer;

d. Non-operating companies for a period of 3 years or more as of the date of application for
compromise.

B. 20% of basic tax assessed due to financial incapability for

a. Dissolved corporation;

b. Non-operating companies for a period of less than 3 years; and

c. Corporations declared insolvent or bankrupt.

C. 40% of assessed tax due to financial incapability for surplus or earnings deficit resulting to impairment
in the original capital by at least 50%

D. 40% for doubtful validity of assessment

Posting of Bonds

Posting of bonds is mostly applicable to customs duties and excise taxes.

In cases where the computation of required actual tax payment is be not readily done, and will cause
delays, an agreement shall the effect that a bond is secured instead of assuring Gf tax that may still be
due.

Exporter's Bond. Exporters of good that would be subject to excise tax, if sold or: removed for
consumption in the Philippines, shall submit proof' of exportation satisfactory to the Commissioner.

When the same is deemed necessary, they shall be required to give a bond prior to removal of the
goods for shipment, conditioned upon. The exportation of the same in good faith. (Sec. 159, NIRC)

Manufacturers' and Importers' Bond. Manufacturers and importers of articles (alcohol and tobacco
products) subject to excise tax shall-post a bond subject to the following conditions: '1. Initial bond - In
case of initial bond, the amount shall be equal to P100,000. If after six '(6) months of operation the
amount of initial bond is less than the amount of the total excise tax paid during the period, the amount
Of the bond shall 'be adjusted to twice the tax actually paid for the period. 2. Bond for succeeding years
of operation - the bond for succeeding years of operation shall be based on the actual total excise tax
paid during the year immediately preceding the year of operation. (Sec.160, NIRC).

Requiring Proof of Filing Income Tax Return

Before a renewal of license to engage in trade, business or occupation or practice a profession can be
issued to a taxpayer required by law to file an income tax return, the same must present to the officer
issuing such license or permit proof that he or it has filed the income tax return during the preceding
year and that taxes due have been paid thereon:

Informer's Reward

For voluntary sworn information given to the BIR which leads to the discovery of frauds thereby
resulting in revenue recoveries, 10% of such amount recovered may be rewarded to the informer.

1. For Violation of NIRC - Any person, except an internal revenue official or employee, or other public
official or employee, or his relative within the 6th degree of consanguinity shall be rewarded in a, sum
equivalent to 10% of the revenue, surcharges or fees recovered and or fin:: or penalty imposed and
collected or P1,000,000 per case, whichever is lower if:

a. He voluntarily gives definite and sworn information not yet in the possession of the BIR;

b. The said information leads to the discovery of frauds upon internal revenue laws or violations
of any of the provision thereof;

c. The discovery of the frauds resulted in the recovery of revenues, surcharges and fees and/or
the conviction of the guilty Party and/or the imposition of any 'fine or penalty. (Sec. 282 (B),
NIRC)

The information mentioned herein shall not refer to cases already pending or previously investigated,
examined by the Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance
or any of his deputies/agents.

2. For discovery and seizure of smuggled goods - A cash reward equivalent to 10% of the fair market
value of the smuggled and confiscated goods or P1,000,000 per case, whichever is lower, shall be given
to persons instrumental in the discovery and seizure of such smuggled goods. The cash rewards of
informers shall be subject to income tax, collected as a final withholding tax, at the rate of 10%. (Sec.
282 (B), NIRC)
Making Arrest, Search and Seizure

An internal revenue officer has the authority to make arrests and seizures for the violation of internal
revenue code being committed within his view.

Deportation in Case of Aliens

Any alien is subject to deportation if he knowingly and fraudulently evades the payment of any Internal
Revenue Tax, or willfully refuses to pay such tax and its accessory penalties after the final and executory
decision of the BIR Commissioner or the Court of Tax Appeals or any competent judicial tribunal.

An alien convicted of a crime penalized by the Code, in addition to being liable for the payment of the
tax, shall be deported immediately after serving the sentence without further proceedings of
deportation.

Inspection of Books

As authorized by the CIR, the Internal Revenue Officers (IRO) are authorized to examine and inspect
books of accounts and other accounting records of taxpayers. The IRO shall subject the said books and
records to examination and inspection. Such examination and inspection shall be made only once in a
taxable year, except in the following cases:

1. Fraud, irregularity, mistakes as determined by the Commissioner;

2. The taxpayer requests for reinvestigation;

3. Verification of compliance with withholding tax laws and regulations; and

4. Verification of capital gains tax liabilities.

Internal revenue officers and examiners may not examine a taxpayer's books of accounts and their
accounting records, without the necessary Letter of Authority.

A Letter of Authority is a request to the taxpayer to permit the bearer thereof to conduct the necessary
examination of said books and records, and signed either by the BIR Commissioner his deputy, officials
of the investigating division, -Regional Director, Assistant Director, or the Revenue District Officer.

Keeping of Books of Accounts

All Corporations, companies, partnerships, or persons required by law to pay internal revenue taxes
shall keep a journal and a ledger or their equivalent including copies of audited financial report three (3)
years from due date of filing tax returns. (Rev. Regs No. 7-2007, July 3, 2007; Sec. 203, NIRC)

Those whose quarterly sales, earnings, receipts, or output do not exceed. P50,000 shall keep and use a
simplified set of bookkeeping records duly authorized by the Secretary of Finance.

Taxpayers whose gross quarterly sales, earnings, receipts or output exceed P150,000 shall have their
books of accounts audited and examined yearly by an independent CPA and their income tax returns
accompanied with a duly accomplished Account Information Form (AIF). (Sec. 232, NIRC)

Language and Translation of Books of Accounts

The books or records mentioned above shall be kept in a native language, English or Spanish.

If, in addition to said books or records, the taxpayer keeps other books or records in a language other
than a native language, English or Spanish, a true and complete translation of all the entries shall be
made of the said required language. (Sec. 234 NIRC)

Use of the National Tax Register

The National tax register is a record of the names of persons residing in each city or municipality kept
and maintained by every revenue regional director of every regional district. It is available for use by any
internal revenue or other tax-collecting officer as aid in the collection of taxes.

Civil and Criminal Actions

The approval of the BIR Commissioner -required for the judicial enforcement of tax merely _affects the
cause of action or capacity to sue. (Arches, vs. Bellosillo, 20 SCRA 32)

No , civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeitUre
under this Code shall be filed in court without the approval of the BIR Commissioner. (Sec. 220, NIRC)

A civil action is one that is brought to enforce, redress or protect private rights. In general, all types of
legal actions other than criminal proceedings are civil actions. (Gilliken vs. Gilliken, 248 N.C. 710, 104 3.E.
21351, 2531 II" Lanicanner.

For tax purposes, this refers to civil actions • instituted by the government to collect national internal
revenue taxes in the ordinary courts.

Since the BIR or the Government cannot make an appeal to the Court of Tax Appeals (Acting Collector of
customs vs. Court of Appeals, Oct 31, 1957), the filing of the government's answer to the taxpayer's
petition for review constitutes a civil action for the collection of tax in question. (Alhambra cigar and
Cigarette Mfg. Co. vs. Collector, 105 Phil. 1227)

A criminal action is a penal prosecution. It is an action, suit or cause instituted to punish an infraction of
the criminal laws. (Black's Law Dictionary)

The judgment in the criminal case shall not only impose the penalty but also order payment of the taxes
as decided by the CIR. (Sec. 205, NIRC)
The tax crime is committed when the violator has knowingly and willfully filed a fraudulent return or
neglected to file a return with intent to evade the tax. (Urvgab vs. Cusi, 1,41919-24, May 30, 1980)

As a rule, assessment is not necessary before filing criminal complaint for tax evasion. (Sec. 222, NIRC;
CIR vs. Pascor Realty and Dev't. Corp., G.R. No. 128315, June 29, 1999)

A tax fraud or evasion case is basically a criminal case. In the establishment of fraud, the burden of proof
is on the BIR. The presumption that an officer of the government has performed his duty regularly (Sec.
5, Rule 131 of the New Rules of Court), as in the case of the correctness of deficiency assessments, is not
applicable in fraud cases.

In criminal cases, the burden of proof as to the offense charged lies on the prosecution (Sec. 2, Rule 131,
New Rules of Court). Mere suspicions and mere doubts on the intention of the taxpayer are not
sufficient proof of fraud. Fraud is never presumed; it must be proven.

Due Dates

Due dates refer to the last day for filing return and payment of tax. The following are the due date
prescribed by laws for filing of return and payment of taxes.

The following are the due, dates prescribed by laws for filing of return and payment of taxes.

Taxes: Due Date

1. Income tax (taxpayer is employee). . . . . April 15 succeeding year

(BIR Form 1700)

2. Income tax (taxpayer is individual,

in business/practice of profession)
 a. First quarter (Jan-March). . . . . April 15 same year (new)

b. Second quarter (April-June). . . . August 15 same year

c. Third quarter ( Jul-Sept). . . . . November 15 same year

d. Annual (final return). . . . . . April 15 succeeding year

(BIR Form 1701)

3. Income tax (corporate taxpayers)

a. First-quarter. . . . . . 60 th day after end qtr.

b. Second quarter. . . . 60 th day after end qtr.

c. Third quarter. . . . . 60 th day after end qtr.

d. Final/ adjustment return. . . . . 15 th day of the 4th month

After close of taxable year

(BIR Form 1702)

4. Value-added tax

a. On sale of goods, services or property

(1) Monthly-declaration/payment. . . . 20 th day after month’s end

(2) Quarterly return. . . . . . . . . . . . . . . . 25 th day after quarter’s

5. Excise tax.

a. On importation. . . . . . . . . . . Before release from BOC

b. On goods manufactured. . . . . . . Before transfer from factory

6. Non-VAT percentage tax (monthly return). . . . . . 20 th day after month’s end

(BIR Form 2251)

7. Estate tax. . . . . . . . . . 6 th month after death

8. Donor's tax. . . . . . . . 30 th day after each donation

9. Capital gains tax - sale of shares of stock

(not traded thru local stock exchange) 30 th day after sale

a. Per transaction return. . . . . . . . . . . . . . . . . 15 th day of 4th month after

b. Final/consolidated return . . . . . . . . . . . . . close of taxable year

10. Capital gains tax on sale of real property

(capital asset) by individual

a. Cash sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 th day after sale

b. Installment sale. . . . . . . . . . . . . . . . . . . . . . 30 th day after receipt of

Installment payment

11. Remittance of tax withheld

a. In general

January to November. . . . . . . . . . . . . . . . . . . .

December. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Large taxpayers . . . . . . . . . . . . . . . . . . . . . .

Additions to Tax
The government may impose surcharges and interest in addition to basic taxes to ensure tax collection
once a taxpayer neglects to pay his taxes.
A surcharge is a civil penalty imposed by law in addition to the main tax required to be paid dud to
delinquency or misrepresentation of taxes.

The term "delinquency" means failure on the part of the taxpayer to pay the tax due on the date fixed
by law or indicated in the assessment notice or letter of demand.

"Misrepresentation" may result from fraudulent returns reported to the BIR by the taxpayer.

Surcharges
The payment of surcharge is mandatory and the BIR is not vested with any authority to waive the
collection thereof. (Phile.x Mining Corp. vs. OR, G.R. No. 125704, August 28, 1998)

Tax surcharges are classified as simple neglect and willful neglect.

A. Simple Neglect - twenty five percent (25%) surcharge. A simple neglect surcharge of twenty-five
percent in addition to tax assessed to be paid shall be imposed when the taxpayer:
1. Fails to, file any return and pay the tax due on the date prescribed;
2. Files income tax returns with an internal revenue officer other than with whom the return is required
to be filed;
3. Fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment,
or
4. Fails 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 prescribed date for its
payment. (Sec.248A, NIRC)

The late filing and payment is considered as one violation and the filing and paying to wrong Revenue
District Office is another violation. The P25,000 is a penalty in addition to the basic tax plus interest.

B. Willful Neglect - 50% of the tax or of the deficiency tax.

A willful neglect surcharge of fifty percent in addition to tax assessed to be paid shall be imposed when
the taxpayer:
1. Presents false or fraudulent return to the BIR, or
2. Willfully (intentionally) neglects to file the return with the period prescribed by the Tax Code or by
rules and regulations. (Sec.248B, NIRC)

The 50%. surcharge on willful neglect to file shall be applied only in case the taxpayer files only r notice
in 1. Written from the Commissioner or his duly representative. (Rev. Regs. No. 12-99)
Meaning of False or Fraudulent Return

Failure to report sales, receipts, or income in an amount exceeding thirty percent (30%) per declared tax
return, and a claim of deductions in an amount exceeding thirty percent .(30%) of actual deductions is
considered false or fraudulent return. (Sec. 248, NIRC)

Interest

In general, rules and regulations require that from the date prescribed for payment until the amount is
fully paid, an interest of twenty percent (20%) per annum or such higher rate as determined by the BIR
shall be imposed on the basic tax unpaid after due date. (Sec. 249, NIRC)

Installment Payments of Tax

The following rules are to be observed in installment payments of tax:

a. The taxpayer's request for extension of the period within which to pay is made on or before the
deadline prescribed for the payment of the tax due.

b. When the tax due is in excess of two thousand pesos (P2,000) the taxpayer other than a corporation
may elect to pay the tax or in two equal installments. (Sec. 56 (A) (2), NIRC)

c. When deadline for payment has been duly extended, the 25% surcharge shall not be imposed for the
late payment of the tax. However, 20% interest per annum for the extended payment shall be imposed,
computed based on the diminishing balance of the "unpaid amount." (Sec. 249, NIRC)

d. If the request for extension is made. after the deadline 'prescribed for payment, the taxpayer shall
already be treated late in payment, in which case, the 25% surcharge shall be imposed, even if payment
of the delinquency be allowed in partial amortization. (Rev. Regs. No. 12 — 99, Sec. 5.6)
Deficiency is the amount still due and collectible from the taxpayer upon audit or investigation; while,
delinquency is the nonpayment of tax on time after issuance of FLD and FAN.

The following rules shall be applied for interest on deficiency and delinquency tax:

1 Any tax due deficiency shall, be subject to the interest at the rate of 20% prescribed in subsection (A)
of Section 249, which interest shall be assessed and collected from the date prescribed for its payment
until the full payment thereof.

2. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and
demand of the Commissioner shall be assessed and collected on the unpaid amount plus interest at the
rate of 20% per annum until the amount is fully paid. (Sec. 249 A, NIRC)

3. Interest on extended payment (delinquency) shall be assessed and collected at the rate of 20% per
annum on the tax or deficiency or any part thereof unpaid from the date of notice and demand until it is
paid. (Sec. 249, NIRC)

The Supreme Court in "SC GR No. 197117 dated 10 April 2013" ["SC Case"] confirmed the imposition of a
"20% delinquency interest" on a deficiency tax assessment that remains unpaid after the deadline set
forth in the formal assessment notice (FAN) pursuant to Section 249(c)(3) of the Tax Code.

The delinquency interest is in addition to the interest set forth in the FAN as a result of the taxpayer's
failure to pay the deficiency tax assessed within the time prescribed for its payment.

Illustrated below is a comparison of the imposition of delinquency interest and deficiency interest.

Deficiency Interest Delinquency Interest

Imposed On Shortage of the taxes that Imposed on the delay in

payment of taxes due as
Should have been paid provided in the FAN

Compound From From the date prescribed for its From the due date appearing in
the FAN until full payment of
 Payment until full payment of the tax due, surcharge and
the tax due deficiency interest

Revenue Regulations No. 12-99 was amended by anew Revenue Regulations No. 18-2013 providing
specific illustrations in putting the interest on deficiency tax, delinquency, and penalties

PENALTY ON CRIMINAL OFFENSES

Any person convicted of crime penalized by this Code shall, in addition to being liable for the payment of
the tax, be subject to the penalties imposed herein as follows:

1. If the offender is an alien, he shall be deported immediately deportation' after serving the sentence
without further proceedings of deportation;

2 the offender is a public officer or employee, the maximum penalty prescribed for the offense shall be
imposed. Furthermore, he shall be dismissed from the public service and perpetually disqualified from
holding any public. office;

3. If the offender is a CPA, his CPA certificate shall be automatically revoked or cancelled upon
conviction; and

4. In the case of associations, partnerships or corporations, the penalty shall be imposed on the partner,
president, general manager, branch manager, treasurer, officer in-charge, and employees responsible
for the violation.

Nature of Violations, Criminal Penalty Imposed and Amount of Compromise

Sections 236 to 278 of the National Internal Revenue Code (R.A. 8424) provide the nature of violations
and criminal penalty imposed.

The amounts of compromise on the said violations and criminal penalties are provided in the Revised
Schedule of Compromise Penalty. (RMO 19-2007) See Appendix C for detailed summary.
Other Penalties. Other instances resulting in penalties related to the filing and payment of tax are as
follows:

1. Failure to file certain information returns due to simple neglect.

Certain tax information returns are:

a. The income tax return itself;

b. Records, statement or list; or

c. Any information required by the Tax Code or by the Commissioner.

2. Failure of a withholding agent to collect and remit taxes or refund excess withholding tax.

Penalty: One thousand pesos (P1,000) for each failure, provided that the aggregate amount to be
imposed for all such failures during the calendar year shall not exceed twenty-five thousand pesos
(P25,000). (Sec. 252, IVIRC; Sec. 5, Rev. Reg. 2-2006)

PRESCRIPTIVE PERIODS

The prescriptive periods of tax assessment and tax collection are summarized below:

Tax Return Filed Assessment Period Collection Period

Regular return Within three (3) years from five (5) years from assessment
filing of return (Sec. 203, NIRC) (BPI vs. CIR, G.R. No. 139736,
473 SCRA 205)
or

Within three (3) years from

filing of return(Sec. 203, NIRC) Within five (5) years from the
assessment (Sec. 222, [d] NIRC)

Fraudulent, false, or Within ten (10) years from the Within five (5) years from the
 discovery of fraud, falsity, or assessment (Sec. 222, [c] NIRC)
omission (Sec. 222, [a] MRC)
failure to file return
Or

Without assessment (Sec. 222,

[a] NIRC) Court proceeding for tax
collection within ten (10) years
from the discovery of fraud,
falsity, or omission (Sec. 222, [a]
NIRC)

The civil penalties, such as surcharges and interest being dependent on the principal tax liability, must
be deemed to prescribe with the tax itself.

In case of failure to file a return, the tax may be assessed at any time within 10 years after the omission,
and any tax so assessed may be collected by levy upon real property within three (3) years following the
assessment of the tax. (CIR vs. Arturo Tulio, G.R. No. 139858, Oct. 25, 2005)

It is noted that the collection period (of a false or fraudulent return, or failure to file a return) as decided
by the Court (under CIR vs. Arturo Tulio, G.R. No. 139858, Oct. 25, 2000) has a shorter period (3 years) to
collect taxes by levy following the assessment of the tax; while the Tax Code allows collection by
distraint or levy within five (5) years following the assessment of the tax in cases of-false or fraudulent,
or failure to file a return. (Sec. 222 [c], NIRC)

REMEDIES AVAILABLE TO TAXPAYER

A person adversely affected by the action taken by the BIR can avail of the administrative and judicial
remedies to question the enforcement of tax collection.

The administrative remedies should be first observed; otherwise, the taxpayer's right to seek judicial
relief could be foreclosed.

Administrative Remedies
The administrative remedies usually availed by the taxpayer are the following:

1. Tax Avoidance - Before the payment of tax, the taxpayer can reduce, or totally escape the payment of
tax through legally permissible means such as applying for tax exemption in the sale of his principal
residence classified as capital asset or choosing the lesser tax rate applicable to the taxable transaction.

Tax avoidance is valid if used by the taxpayer in good faith. The law does not forbid it and it does not
constitute tax fraud. (Heng Tong Textiles Co. Inc., vs. Commissioner, August 26, 1968; Delpher Trades
Corp. vs. IAC, 157 SCRA 349)

2. Amendment of Tax Returns - As a rule, a tax return once filed cannot anymore be withdrawn but it
can still be modified for as long as (a) the amendment is made within three (3) years om the date of the
filing of such return; and (b) no notice for Wit or investigation of such return has been served to the
taxpayer (Sec. 6(A), NIRC)

Tentative Annual Income Tax Returns

(Revenue Memorandum Circular No. 50-2013)

It shall be the policy of the BIR to consider a' "Tentative ITR" as a final, return, unless a final amended
return is filed b the concerned taxpayer within three years from the date of filing such return. However,
once an electronic Letter of Authority or any other notice of audit is received by the concerned
taxpayers, they shall already be barred from making amendments to their tentative ITRs 'subject of
examination pursuant to Section 6(A) of the Tax Code.

3. Demand for the Letter of Authority (LA) - It authorizes or empowers a particular Revenue
Enforcement Officer (REO) to go over, verify and scrutinize a taxpayer's books and records.

Only the Commissioner or the Deputy Commissioners who are specially authorized by the Commissioner
and the Regional Directors are authorized to issue LAs.

This must be, served or presented to the taxpayer within 30 days from its date of issue; otherwise, it
becomes null and void.
A taxpayer once served with an LA should first verify or check from the BIR's National Office whether he
is listed or not for National Office audit.

If he is listed and the LA being served is issued by the Regional Office, then such LA is not issued by the
proper office or jurisdiction within the BIR and he may refuse audit under that particular LA.

On the other hand, if he is being served an LA issued by the National Office, but he is not listed in its list
of taxpayers to be audited, then the jurisdiction to audit belongs to the Regional Office and he can
immediately refuse to be audited by the National Office. (Taxpayer's Bill of Rights, The Philippine
Revenue Journal, 1998)

4. Protesting an Assessment - Before payment, the taxpayer can contest the assessment within 30 days
from the receipt of the notice of assessment. This is made by filing a petition for reconsideration or
reinvestigation of the tax assessment against him. (Sec. 228, par. 4, NIRC)

5. Applying for No Audit Program (NAP) - For a taxpayer to qualify for the NAP, he must satisfy all of the
following:

a. Income tax payment for the current taxable year must exceed the income tax payment for the base
year by at least 20%.

b. Ratio of income tax payment' to gross sales/'receipts for the current taxable year must be at least
equal to that of the base year. (Sec. 3, Rev. Reg. 9-2006)

Taxpayers who are reporting net loss or have a Net Operating Loss Carry-over without MCIT due shall be
disqualified for participating in the NAP. This includes taxpayers having net income but having no tax
payable due to their deduction of personal and additional exemptions. (Sec. 4, Rev. Reg. 9-2006)

6. Entering into a Compromise - Before payment, the taxpayer may offer an amount which is lesser than
the amount of tax liability assessed to him. This topic has been' explained in the preceding discussions.
7. Filing of Claim for Tax Credit - After payment, a tax credit certificate could be issued to the taxpayer,
which may be applied against any internal revenue tax for which the taxpayer is liable. This is not
applicable to withholding taxes.

8. Filing of Claim for Refund - After payment, a request for actual return in cash of erroneously or
illegally collected taxes should be made through filing a claim for tax refund.

Tax Credit or Tax Refund

Summary Application

Tax Claim Filing Prescriptive Period Forfeiture in Favor of the

Government

(1) Tax Credit Within 2 years after the Tax credit certificate unutilized
payment of tax or penalty within 5 years from date of
mailing or delivery

(2) Tax Refund Within 2 years after the Refund check or warrant
payment of tax or penalty unclaimed or uncashed within 5
years from date of mailing or
delivery

JUDICIAL REMEDIES

1. Civil Action a. Appeal to the Court of Tax Appeals (CTA) - If the protest is denied in whole or in part, or
is not acted upon within 180 days from submission of documents, the taxpayer adversely affected by the
decision or inaction may appeal to the CTA within 30 days from receipt of the said decision, or from the
lapse of the 180-day period; otherwise, the decision shall become final, executory and demandable.
(Sec. 228, NIRC)

The CTA is a regular court that specializes in tax cases headed by a Senior Justice and assisted by 5
Associate Justices. To have quorum, there should be 4 Justices in en Banc, and 2 Justices- in Session of
Division. Tax cases pass in this Court must be resolved within 30 days.
Section 1 of R.A.- 9282, the amendment of certain sections of R.A. 11125, provides that the Court of Tax
Appeals (CTA), which shall be of the same level of the Court of Appeals (CA),' shall possess all the
inherent powers of a Court of Justice.

The CTA now has the exclusive appellate jurisdiction to review tax need to ax cases, (Sec. 7, R.A. 9282).
There is no need to make appeal to the CA. The taxpayers remedy is to directly appeal the CTA's decision
to the Supreme Court.

The CTA may issue injunctions against administrative collection by distraint and levy when collection
could jeopardize the interest of the government or the taxpayer subject to the posting of the bond. (R.A.
No. 1125)

The BIR or the Government cannot make an appeal to the CTA. (Acting Collector of customs vs. Court of
Appeals, Oct. 31, 1957)

b. Secure Injunction Order from CTA - The taxpayer may secure injunction against administrative
collection by distraint or levy of when collection of taxes would jeopardize his interest subject to the
posting of bond. (R: A. No. 1125)

c. Appeal from CTA to the Supreme Court (SC) - This should be filed within 15 days from the receipt of
the decision of the CTA. (Supreme Court Circular No. 1-91, February 27, 1991)

2. Criminal Action The taxpayer could file a complaint against erring BIR officials and employees who
commit any of the delinquencies specified in the Tax Code, like extorting, conspiring to violate the
provisions of the Code, etc. (Sec. 269, NIRC)

3. Other Judicial Remedies

a. Action for Damages against Revenue Officers - An action may be brought against any Internal Revenue
Officer to recover damages by reason of any act done in the performance of official duty. (Sec. 227,
NIRC)
b. Action to Contest Forfeiture of Chattel - The owner desiring to contest the validity of the forfeiture
may, at any time before sale or destruction of the property, bring an action against the person seizing
the property, and upon giving proper bond, may enjoin the sale; or after the sale and within 6 months,
he may bring an action to recover the net proceeds realized at the sale. (Sec. 231, NIRC).

References:
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing.
Valencia, E. G., Roxas, G. F., & author. (2016). Income taxation: principles and laws with
accounting applications. Baguio City: Published and distributed by Valencia Educational Supply.

Concept of Income and Gross Income

Learning Objectives:

Define the concept of Income

Determine the income if taxable or non-taxable
Know the sources of income
Enumerate the classification of income
Distinguish the differences and procedures in normal between final tax
Provide the methods of reporting income and expenses
Define the concept of gross income
Enumerate the classification of gross income
Know the sources of gross income
Provide the tax rulings in each sources of gross income

Concept of Income
One popular definition of income is the amount of wealth accumulated plus savings and the value of the
personal consumption.

It refers to all earnings derived from service rendered, from capital, or both including gain derived from
sale or exchange of personal or real property classified as either ordinary or capital asset.

Net Worth is equal to total assets minus total liabilities.

The net worth method is commonly used in determining taxable income.

Basic Formula
Net worth, ending Pxxx
Less: Net worth, beginning Pxxx
Increase (decrease) in net worth xxx
Add: Nondeductible items xxx
TOTAL: Pxxx
Less: Nontaxable items xxx
Personal Exemptions (for individuals) xxx xxx
Net taxable income Pxxx

Illustration:
Mr. Carlos Padilla, a sole proprietor, reports the following during the taxable year:

2008 2009
Total Assets 300,000 800,000
Total Liabilities 250,000 200,000
Additional Investments 100,000
Personal Withdrawals 100,000 230,000
Gain on proceeds of life insurance received 150,000
Utilized loss – debt securities deducted 20,000

How much is the net taxable income of Mr. Padilla in 2009?

The net taxable income of Mr. Padilla in 2009 would be.

2009 net worth 800,000-200,000 600,000

Add: 2009 Personal Withdrawals 230,000
Total: 830,000
Less: 2009 Additional Investments 100,000
Balance 730,000
Less: 2008 net worth (300,000-250,000) 50,000
2008 Personal withdrawals 100,000 150,000
Increase in net worth 580,000
Add: Nondeductible item – unrealized loss 20,000
Total: 600,000
Less: Nontaxable item – gain on life insurance 150,000
Basic Personal Exemption 50,000 200,000
Net taxable income 400,000

Return on Capital is a return on investment.

If a P1,000,000, 90-day time deposit earns P9,000, the return of capital is P1,000,000 and the return on
capital is P9,000.

Distinctions between Income and other Terms

Capital – denotes the original investment.
Revenue – pertains to all funds accruing to the treasury of the government derived from tax, donation,
grants, and any other source.
Receipts – may include capital as well as its earnings.

Nontaxable Income – it should be excluded by law or treaty from taxation, example: winning in a
sweepstakes.
Taxable Income – means the pertinent items of gross income specified in the Tax Code less the
deductions. It is synonymous to net income.

Characteristics of Taxable Income:

There must be gain or profit – the recovery of amount is not an income, but the excess over the amount
invested is an income. Mere expectation for profit is not income and not taxable.
The gain must be realized or received. – a mere increase in the value of property is not income but
merely an unrealized increase in invested capital.
The law or treaty does not exclude the gain from taxation – all items are taxable unless a law or treaty
exempts them from taxation.

Income constructively received

An income is considered constructively received when it is credited to the account of, or segregated in
favor of a person. The person may withdraw the said account credited in his favor anytime without any
substantial limitations or conditions upon which payment or enjoyment is to be made or exercise:
Interest credited on savings bank deposit
Matured interest coupons not yet collected by the taxpayer
Dividends applied by the corporation against the indebtedness of a stockholder
Share in the profit of a partner in a general professional partnership, although not yet distributed, is
regarded as constructively received
Intended payment deposited in court

Sources of Income
Source is ascribed to the place wherein the income is earned. It is governed by the situs of taxation. This
classification of income is necessary to determine whether such income is subject to tax or not.

Income may be earned from, within the Philippines, outside the Philippines, or party within and partly
without the Philippines.

Income within the Philippines comprises earnings from within the Philippines. If income is derived
within the Philippines, it is taxable. Examples are:
Compensation for labor or service derived from the Philippine sources
Interest on bonds, notes, deposits and the liked earned in the Philippines
Dividends declared received from domestic corporations
Rentals and royalties from property located within the Philippines
Gains, profits and income from sale of real property as well as from property in the Philippines
Income without the Philippines refers to earnings coming from outside the Philippines or income
derived from foreign countries. Income earned outside the Philippines is taxable only if the taxpayer is a
Filipino citizen and a Domestic Corporation. Examples are:
Compensation for labor or service rendered by overseas
Interest on bonds, notes, deposits, and the like earned abroad
Rentals and royalties from property located outside the Philippines
Gains, profits and income from sale of real property as well as from personal located outside the
Philippines.

Income partly within and partly outside the Philippines are earnings from sources partly within and
partly without the Philippines includes gains, profits and income derived from:
Transportation or other services rendered partly within and partly outside.
Dividend received from a domestic corporation and foreign corporation

Classification of Income
Compensation Income – the gain derived from labor, especially employment (earned from employer
and employee relationship) like salaries and commissions. These are subject to normal tax.
Profession or Business Income – the value derived from an exercise of profession, business or utilization
of capital including profit or gain derived from sale or conversion of assets. These earnings are subject to
normal tax.
Passive Income – an income in which the taxpayer merely waits for the amount to come in like royalty,
interest, prizes, and winnings. It is subject to final tax.
Capital Gain – an income derived from sale of assets not used in trade or business. Examples are sale of
family home and other sales of shares of stocks which are subject to final taxes. Other sales of capital
assets are subject to normal tax.

Income Tax Return – is a formal statement of the taxpayer’s taxable income and deductions, reported in
the BIR prescribed form, to be filed and paid using the normal or regular tax rates.

Normal Tax – also called “regular” or “customary/ordinary tax”, is imposed on earnings such as
compensation, professional/business income, and all other incomes not subjected to the final tax in the
Philippines. Normal Taxes are withheld on certain income payments are creditable because they are
intended to equal or at least approximate the tax due of the payee on the said income.
Earnings outside the Philippines by resident Filipino citizen (except OFW) and domestic corporations are
subject to normal tax.
Regular tax for the individual taxpayers starts from 5% to 32%, and for corporate taxpayers, the normal
tax is 30%.
Final Tax – is the term used to describe the tax on earnings that have been subjected to complete
withholding tax payment at sources. Examples are interest income from the bank, royalty, and dividend
income. Final taxes are withheld by the withholding tax agent constitute as a full and final payment of
the tax from the payee on the said income.

Illustration:
The business data of Panay Company are as follows:
Sales 1,060,000 Other incomes:
Sales returns/allowances 60,000 Royalty income 80,000
Cost of sales 600,000 Interest income 60,000
Expenses allowed 100,000 Gain on sale of land 40,000

Required: Compute the reportable taxable income at the end of the year using the following
assumptions:
The other types of income have been subjected to final taxes and capital gains tax
It was discovered that the other incomes have not been subjected to final taxes and capital gains

Assumption 1 Assumption 2
Sales 1,060,000 1,060,000
Less: Sales Returns/allowances 60,000 60,000
Net sales 1,000,000 1,000,000
Less: cost of sales 600,000 600,000
Gross income from businesses 400,000 400,000
Add: other income
Royalty income 80,000
Interest income 60,000
Gain on sale of land 40,000
Total income 180,000
Gross income 400,000 580,000
Less: operating expenses allowed 100,000 100,000
Income taxable at normal tax rate 300,000 480,000
Summary of Application
Normal Tax vs. Final Tax

Forms and Valuation of Income

Cash – pertains to money or money substitutes received as compensation or earnings derived from
labor, practice of profession and conduct of business like bills, coins (legal tender, bank drafts, money
orders, treasury warrants).
Property – denotes the right of ownership over a tangible or intangible thing earned as a result of labor,
business or practice of profession like real estate, stocks, bonds, etc.
Service – is a form of income based on performance received in payment for the work previously
rendered by one person to another.

Tax Accounting Periods to report on Income

The dates for paying taxes are fixed by law to comply with the principle of administrative feasibility.
Calendar Period – all taxpayers elect to report income covering a “calendar year” which covers a period
from January 1 to December 31.
Fiscal Period – some taxpayers may opt to report income on a “fiscal year” covering a period of 12
months which ends on the last day of any calendar month other than December 31.
Short Period – income for a period less than 12 months is required to be reported when the taxpayer
dies or when the taxpayer is under jeopardy assessment.
Variable Period – a taxpayer is required to file and pay tax within a period that varies depending on the
nature of income earned. This period may be monthly, quarterly, semi-annually or a specific time per
scale or exchange transaction.

Methods of Reporting Income and expenses

Cash method – reports income upon collection and reports expenses upon payment.
Accrual method – reports income when earned and reports expense when incurred.

Accounting Applicable business Reportable

methods Income Expense
Cash Basis Servicing businesses
Single proprietorship, except with Cash received Cash paid
inventory (earned and (incurred or not
unearned) incurred)
General professional partnership
Leasing/renting business
Accrual Basis Trading and Manufacturing Earned Incurred (paid or
(received or not not paid)
received)
Expectations: Income constructively received Report
Advance/prepaid rent Prorate
Prepaid interest (individual
taxpayer)
When to report interest expense?
No amortization of principal Year when
principal debt is
paid.
With amortization of principal Proportionate to
principal
amortization.

Special methods – when the nature of its operation is peculiar to the business industry.
Installment Method – is a method considered appropriate when collections extends over relatively long
periods of time and there is a strong possibility that full collection will not made. Generally, the
reportable income derived on installment sale is the proportion of installment collection actually
received during the year in relation to the gross profit and contract price.
Installment sale of personal property
Installment sale of real property
Deferred Method – the initial payments on installment sale exceed 25% of the selling price but they may
only be realized in the subsequent year, the taxpayer is allowed to defer reporting income.
Income from long-term construction contracts – refers to the earnings derived from construction
usually covering a period of more than one year.
Completed contract method – if the construction project is completed within one year, the 100%
completed contract method of reporting income is applicable.
Percentage of completion – is also used when the contract price is definite and estimates of cost to
complete or the stages of completion can be determined with reasonable accuracy.
Gross income from farming – farming business embraces in the ordinary accepted sense and includes
stock, dairy, fruit and truck farms also plantations, ranches, and all land used for farming operations.
Farming could derive income from following sources:
Farms products
Trading of farm products purchased
Other farm income
Ordinary farm assets – assets used in farm
Capital assets – assets not used in farm
Miscellaneous income – may consist of rent from crop shares, proceeds on growing crops

Gross Income Defined

Gross income means the pertinent items of income referred to in section 32(A) of the Tax Code. It
includes all income from whatever source (unless exempt from tax by law) including, but not limited to,
the following items:

Compensation for services in whatever form paid including fees, salaries and wages, etc.
Gross income derived from the conduct of trade
Gains from dealing in property
Interest
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Pensions

Accordingly, the definition of gross income includes a catch all clause to supplement the enumeration by
including any non-enumerative items which can properly be defined as "income".

Gross Compensation Income

Gross compensation income means any remuneration for rendering personal services. Generally,
compensation income is obtained from an employer-employee relationship between payor and
recipient.

When does an employer-employee relationship exist?

Generally, an employer-employee relationship exist when the person for whom the services is rendered
has the right to control and direct the individual who performs the services, not only as to result in
accomplishing the work but also as to the details and means by which that result is accomplished.
Classification of Gross Compensation Income

The Gross Compensation Income maybe classified as follows:

Basic salary or wages

SALARY refers to earnings received periodically for a regular work other than manual labor, such as
monthly salary of an employee.

WAGES on the other hand are earnings, received usually according to specific intervals of works, as by
the hour, day, or week.

Honoraria are payments given in recognition for services performed for which established
practice discourages charging a fixed free.
Fixed or variable allowance

In general, fixed or variable transportation, representation, COLA and other allowances that are received
by a public officer or employee or officer or employee of a private entity, in addition to the regular
compensation fixed for his position or office, are compensation subject to withholding tax.

Any amount paid specifically, either as advanced or reimbursements for travelling, representation and
other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the
employee in the performance in the performance of his duties are not compensation subject to
withholding tax, if the following conditions are satisfied:

It is for ordinary and necessary traveling and representation or entertainment expenses paid or
incurred by the employee in the pursuit of the employer's trade, business or profession; and
The employee is required to account/ liquidate for the foregoing expenses pursuant to
substantiation requirements of section 34 of the tax code.

The excess of actual expenses over advances made shall constitute taxable income if such amount
returned to the employer.

Latest Rulings on Allowances

The following latest BIR Rulings provide the latest rules for some allowances

Transportation and Cellphone allowances given to all call-center employees are not taxable
compensation
Fixed monthly transportation allowance P1500 for rank and file employees and P3000 for
supervisory employees pre-computed on a daily basis
Mobile phones allowance of P1,200 for supervisors, managers and directors who are expected
to be on call 24 hours a day
"Transportation and Nightshift allowances" granted to nightshift employees and " meal and/or
out of town allowances" granted to employees assign to conduct field works are not subject to
FBT, income tax and withholding tax.
Taxi or Transportation Allowance of P100/day given by BPO company serving global businesses
24 hours a day to employees who worked Over Time beyond 10PM or whose work shifts starts
at 10PM onwards.
 Commission is usually a percentage of total sales or on certain quota of sales volume attained as
part of incentives such as sales commission.
Fees received by an employee for the services rendered to the employer including the directors
fee of the company, fees paid to the public official, such as clerk of courts or sheriffs for services
rendered in the performance of their official duties over and above their regular salaries.
Tips and Gratitude paid directly to an employee (by a customer of the employer) which are not
accounted for by the employee to the employer are considered taxable income but not subject
to withholding tax.
Hazard or Emergency Pay additional payment received due to workers exposure to danger or
harm while working. This is normally added to the basic salary together with the overtime pay
and night differential pay to arrive at gross salary.

Hazard, overtime, night shift differential and holiday pay of a minimum wage earner (MWE) is
nontaxable, as long as the MWE has no other reportable income

Retirement Pay refers to a lump sum payment received by an employee who has served a
company for a considerable period of time and has decided to withdraw from work into privacy.

In general, retirement pay is taxable except in the following instances:

SSS or GSIS retirement pay

Retirement pay due to old age provided that the following requirements are met:
The retirement program is approved by the BIR commissioner
It must be a reasonable benefit plan. Its implementation must be fair and equitable for the
benefit of all employees
The retiree should have been employed for 10 years in the said company
The retiree should have been 50 years old at the time of retirement, and;
It should have been availed of for the first time.

Separation Pay- is taxable if voluntarily availed of. It shall not taxable if involuntary. Example of
involuntary separation are:
Death
Sickness
Disability
Reorganization/merger of company, and;
Company at the brink of bankruptcy

When a company is at the brink of bankruptcy, the sequence of satisfying the company’s indebtedness
should be in this order:

BIR
Employee
Creditors

As a rule, any amount received by an official or employee or by his heirs from the employer due to
death, sickness or other physical disabilities or for any cause beyond the control of the said official or
employee ( such as retrenchment, redundancy, or cessation of business) are exempted from tax.
Any amount made by an employer to an employee on account of dismissal constitutes compensation
regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such
payment.

Pension is a stated allowance paid regularly to a person on his retirement or to his dependents
on his death, in consideration of past services, meritorious work, age, loss, or injury.

Pension pay is taxable unless the law states otherwise, or unless the BIR approves the pension plan of a
private company.

Vacation or seek leave

The following rules shall be observed in determining whether money received for vacation and sick
leave are taxable compensation income:

If paid or availed of as salary of an employee who is on vacation or in sick leave notwithstanding

his absence from work, it constitute taxable compensation income
Monetized value of unutilized vacation leaves credits of ten days or less which were paid to
private employees during the year are not subject to tax and to the withholding tax.
Monetized value of vacation and sick leave credits paid to government officials and employees
are not subject to income tax and to the withholding tax.

Thirteenth month pay and other benefits

13th month pay and other benefits are not taxable if the amount is P82,000 or less. Any amount
exeeding P82,000 is taxable.

Fringe benefits and de minimis

The tax codes defines fringe benefits as "any good service or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries of an individual employee".

Overtime pay refer to premium payment received for working beyond regular hours of work
which is included in the computation of gross salary of an employee. Back pay and overtime pay
constitute compensation.

Profit sharing is the proportionate share in the profits of the business received by the employee
in addition to his wages.

Awards for special services the amount received as an award for special services of employee,
or suggestion to employer resulting in the prevention of theft or robbery. Awards for past
services and the like are also compensation.

Beneficial payments such as where an employer pays the income tax owed by an employee are
additional compensation income.
 Other forms of compensation received due to service rendered are compensation paid in kind.
It is to be noted that compensation can be paid in kind but taxes are generally paid in money.
For example, an insurance premium paid by employer for insurance coverage where the heirs of
employee are the beneficiaries is the employer’s income.

Shares of stock received as Compensation

Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation sold
the stock at its market value and paid the employee in cash.

Hence, if compensation is received in the form of shares of stock, the fair market value of the shares of
stock at the time the service is rendered is the basis of tax.

Stock option

A stock option is a privilege granted to some key employees of a corporation or other entities to avail of
the said corporation's shares of stock in the future for a certain price.

Under RMC No. 79-2014, stock options can either be (a) equity settlement option or, (b) cash-
settlement option.

Equity settlement option is a stock granted by a person, natural or juridical, to a person or entity
entitling said person or entity to purchase shares of stock of a corporation, which may or may not be the
shares of stock of the grantor corporation.

Cash-settlement option entitles the holder to receive cash, equivalent to the difference between the
actual fair market value (FMV) of the share and the fixed nominal value of the share of stock set in the
grant of the option, at a specific date or period.

The following are the salient provisions or RMC No. 79-2014:

Grant of option
If the stock option was granted due to employer- employee relationship and no payment was
received for such grant, the grantor- employer cannot claim deduction for the grant of the
option.
If the option was granted for a price the full consideration should be subject to capital gains tax.
Sale or transfer of option
The sale, barter, or exchange of stock option by the grantee is treated as sale, barter, or
exchange of shares of stock not listed on the stock change, thus, subject to capital gains tax if
transferred to a consideration.
If the option is sold or transferred without any consideration, it shall be treated as a donation
subject to donor’s tax, basing on the FMW of the option at a time of donation.

Exercise of options:

The difference between the book value/ FMW of the shares whichever is higher, at the time of the
exercise of the stock option and the price fixed on the grant date shall be taxed depending on yne
grantee, as follows;

Rank and file employee- subject to income and withholding tax on compensation;
Supervisory or managerial position- subject to fringe benefit tax
 Supplier of goods or services- subject to the relevant withholding tax at source and other taxes
applicable
Person, natural, or juridical who is not an employee pr suplier- subject to donor cash

Cancellation of debt

The cancellation and forgiveness of indebtedness may amount to a payment of income, gift, or capital
transaction, depending upon the circumstances.

The following rules shall then be observed:

If a creditor merely desires to benefit a debtor and without any consideration cancels the debt,
the amount of the canceled debt is a gift, not an income of debtor.
If a corporation to which a stockholder is indebted forgives the debt, the transaction has the
effect of the payment of the dividend income to debtor.
If, however, a debtor performs services for a creditor, who in consideration thereof cancels the
debt, the debtor realizes income for his services to the extent of the amount of debt cancelled.

Insurance premium as compensation

These are premiums paid by the employer on life insurance coverage of the employee wherein the
beneficiary is the employee’s family. This constitute taxable income on the basis of the amount of
premium paid.

Income tax paid as compensation

For income tax paid by the employer in favor of the employee, the basis of tax is the amount of tax paid.

Convenience of the employer's rule

This tax rule provides that allowances in kind of furnished to the employee for and as a necessary
incident to a performance of his duties are not taxable, example are food and lodging benefit by a
household maid, driver, etc.

Living Quarters

The following rules govern the living quarters and meals:

When living quarters are furnished in addition to cash salary, the rental value of such quarters
should be reported as income.
However, if living quarters or meals are furnished to an employee for the convenience of the
employer, the value thereof need not be included as part of compensation income.

Unless provided for the exclusive benefit of the employer, the rental value of living quarters is
compensation income to the employee to the extent of his reasonable needs, and the exess shall be
considered as expenses of the corporation.
Meals subsidized by employer

The value of any board and lodging, furnished by an employer is ordinarily taxable to the employee.

The exclusion for meals is allowed only when meals are furnished or subsidized to an employee for the
convenience of the employer, and incidental to the requirement of his work or position.

Remuneration for casual Labor

The following rules shall be observed regarding remuneration for casual labor

Remuneration for casual labor not in the course of an employer’s trade or business is not
considered compensation.

The term" casual labor" includes labor which is occasional, incidental or regular. The expression" not in
the course of the employer’s trade or business" includes labor that does not promote or advance the
trade or business of the employer;

Any remuneration paid for casual labor (that is labor which is occasional, accidental or irregular
but which is rendered in the course of the employer’s trade or business) is considered
compensation. And;
Any remuneration paid for casual labor performed for a corporation is considered as
compensation

GROSS INCOME FROM BUSINESS AND PROFESSION

Business means any commercial activity engaged in as a means of livelihood or profit of an individual or
group of individuals. Examples are trading, merchandising, manufacturing and other similar activities

For tax purposes, profession is primarily any endeavor or work requiring any specialized training in the
field of learning, art or science engaged in as a means of livelihood or profit of an individual or groups of
individuals.

Gross income from business

The gross income from business is classified into several groups, namely:

Manufacturing
Merchandising or trading
Servicing
Farming
Long term contract

In case of manufacturing, merchandising or mining business, gross income shall means gross sales less
sales returns, discount and allowances, and cost of goods and sold. Plus other items of income not
subjected to final tax, and other incidental or outside operations or sources.

Cost of goods sold shall include all business expenses directly incurred to produce the merchandize to
bring them to their present location and use. The cost of sale is deducted from the net sales to calculate
gross income from business. Cost of sales of a business may be classified as follows:
 Cost of goods manufactured and sold of manufacturing concerns
Cost of goods sold of trading or merchandising concern; and
Cost of service of servicing concern

Cost of goods Manufactured and sold

For manufacturing business "cost of goods manufactured and sold" shall include all cost of finished
goods that are sold such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other cost incurred to bring the raw materials to the factory or warehouse.

Cost of goods sold of trading or merchandising concern

Cost of goods sold of trading or merchandising business refers to the invoice cost of the goods sold, plus
import duties and freight incurred in transporting the goods to the place where they are actually sold,
including insurance while the goods are in transit.

Cost of services (MCIT)

For minimum corporate income tax purposes "gross income from service business" is gross receipts less
returns, allowances, discount, and cost of services. The "cost of service" shall provide the services
required by the customers and clients which includes the following items:

Salaries
Benefits of personnel, consultants and specialist directly rendering the service
Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies. And
In the case of banks, cost of services shall include interest expense

Telegraph and Cable services

The gross income of telegraph and cable services of a foreign corporation shall include income from
services within the Philippines only. Specifically, the income maybe derived from the following:

Gross revenues derived from messages originating in the Philippines. And;

Amount received by the company collected abroad on collect messages originating in the
Philippines and deducting from such amount paid or accrued for transmission of messages
beyond the company’s own circuit

Amount received by the foreign company in the Philippines with respect to collect messages originating
outside the Philippines shall not be included in the taxable gross income.

Rental Income

Rental income refers to earnings derived from leasing real estate as well as personal property. Aside
from regular amount of payment for using the property, rental income also includes all other obligations
assumed to be paid by the lessor to the third party in behalf of the lessor.

Rental income is generally determined by the gross receipts for the year because the nature of business
involved is service.
 Prepaid rental- if the advance payment is a prepaid rental received without restriction as to its
use, the entire amount is taxable in the year it is received weather the lessor uses cash or
accrual method of accounting
Security deposit with restriction-If the advance payment is a security deposit which restrict the
lessor as to its use, then such amount should be excluded in the determination of rental income
Security deposit with an acceleration clause- If the advanced payment is a load deposit or option
money for the property, or a security deposit for a faithful compliance of the lessee of the lessor
contract, such as advance payment is not an income to the lessor. The income to the lessor
inures when the lessor violates the term of the contract

Income from Leasehold Improvements

When the lessee erected or built permanent improvement on the leased property which will become
the property of the lessor upon the expiration of the lease, the value of the improvements should be
reported as income of the lessor using either outright method or spread-out method

Outright method

Under this method, the income from leasehold improvement shall be recognized when the
improvement is completed at its fair market value.

Spread-out Method

Under this method, the estimated book value of the leasehold improvement at the end of the lease is
spread over the term of the lease and is reported as income for each year of the lease an aliquot part
thereof.

Termination of the Contract of Lease

Where there is an immovable improvement made by the lessee on the lease property and the
termination of the term, the following rules should regulate the circumstances:

If the improvement is destroyed before the expiration of the lease, the lesson is entitled to deduct as a
loss for the year, when such destruction takes place, the amount previously reported as income less any
salvage value, to the extent that such loss was not compensated for by insurance.
If for any reason other than a bona fide purchase form the lessee by the lessor, the lease is terminated
so that the lessor comes into possession of the property prior to the final fixed period of the lease
contract, the lessor receives additional income for the year if the value of improvement exceeds the
amount of income already reported.

GAINS FORM DEALINGS PROPERTY

This refers to the income derived from the sale, and/or exchange of assets, which results in gain because
of the excess of the amount or value received by the taxpayer over the determined value of the
property he has disposed of.

The general rule is that the entire amount of the gain or loss arising there from is a taxable gain or
deductible loss.
PASSIVE INCOME

Under section 24(B)of the Tax Code,a final tax is imposed upon gross passive income of citizen and
resident aliens

Yield from deposit substitutes and trust fund:

Interest income;
Royal income;
Divided income; and
Prizes and winnings

Yield from deposit substitutes and trust fund

A deposit substitute is a debt instrument issued by the bank to borrow money from the public other
than the client’s deposit.

A trust fund is any estate, especially, stock, securities, or money which is held in trust by a person in
behalf of another person.

Both deposit substitute and trust fund yield earnings that are to be treated as interest income.

Interest income

Interest income is an earning derived from depositing or lending of money, goods, or credits, unless
exempted by law, interest income received by the taxpayers, whether or not usurious, is subject to
income tax.

For individuals, except nonresident aliens not engaged in trade or business in the Philippines interest
income from long-term deposit or investment (e.i.,saving, common or individual trust fund, deposit
substitutes, invesment management accounts and other investments)shall be exempt from income tax,
provided that the following conditions must be met:

The deposit or investment must be evidenced by certificates conforming to the Bangko Sentral ng
Pilipinas (BSP)prescribed form; and
The same must have maturity period of not less than five years and in denominations of P10,000 or
other denominations as may be approved by BSP issued by banks (not by non-bank financial
intermediaries or finance companies).(Sec.22(ff),NCR)
However, should the holder of the certificate pre-terminate the deposit or investment before the fifth
year, a tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long term deposit or investment certificate based on the remaining
maturity thereof, as follows:(Sec.24(B)(1),NCR)

Final tax of 5%………………….. Four years to less than five years

Final taxof 12%……………….… Three years to less than four years
 Final tax of 20%………………… Less tahn three years
Classifications of Interest Income

Interest income may be classified into three categories, namely:

Exempt from income tax;

Subject to final withholding tax; and
Subject to normal tax
Tax Exempt Interest Income

Interest earned is exempted from income tax if received form:

By members form a duty-registered cooperative;(Rev.Regs.No.20-2001)

BSP prescribed form of investment maturing more than five years;
Expanded foreign currency deposit system by nonresident citizen/aliens; and
A tenant who paid to a landowner on the price of land under a tenant-purchaser agreement as part of
CARP.
Interest Income OFW with Co-depositor

Interest on expanded foreign currency deposit (EFCD) whereby the OFW is a co-depositor in the
Philippines is subject to 50% of the 7.5%final tax (Sec.3(A).Rev.Regs.No.1-2011)

Interest Income Subject to Final Withholding Tax

Interest income deposits made in banking institutions is a passive income which is usually subjected to
final withholding tax of twenty percent.

Interest Income Subject to Normal Tax

(Lending is the Main Course of Business)

These are earning derived from lending money, goods or credits from one person to another without
any withholding tax made since these interest earning received in its total amount, they should be
subjection to normal tax of the taxpayer.

Since the interest income is earned in the normal conduct of business, this shall be included as part of
income to be reported in the Annual income Tax Return.

Classification of Interest Income

Royalty Income

A royalty income is a payment or portion of proceeds paid to the owner of a right, such as an oil right or
a patent for the use of it or a portion of the proceeds from the work of an author or composer.

Royalty income may be classified as follows:

 In general, royalty income includes those which are derived from natural resources or products
such as coal gas oil copper, silver, gold and other similar product. These kinds of royalty income
are subject to 20% final tax; and
Royalties on books, literary works and musical composition are royalty income subject to 10%
final tax.

Dividend Income

Dividend income is a form of earnings derived from distribution made by a corporation out of its
earnings or profits and payable to its stockholders, whether in money or in other property.

Such earnings may be exempted from income tax, or subject to tax of individuals or corporations.

Tax rules on Dividend Income:

If received by a domestic corporation or resident corporation from a domestic corporation

subject to tax, such dividend is tax-exempt.
Pure stock dividends, dividends received from cooperative and pure liquidating dividends are tax
exempt.
Cash or property dividend is subject to final tax if received by an individual or nonresident
corporation from a domestic corporation subject to income tax.
If received by a resident citizen, nonresident citizen and resident alien, the final tax applicable is
10%
If received by a nonresident alien engaged in business in the Philippines, the final tax is 20%.
If received by a nonresident alien not doing business within, the final tax is 25%
If received by a nonresident foreign corporation form a domestic corporation, the final
withholding tax is 15%.(as amended by R.A.9337 which took effect on November
1,2005;Sec28(B)(5)(b),NIRC)
Other dividends excluded from rule 1,2and 3 are included in the computation of the taxable
income and income tax at the end of the year.

Taxes on Dividends

Tax Sparing Rules

Tax Sparing Rules is an inter-corporate dividend received by a nonresident foreign corporation from a
domestic corporation is subject to 15%Final withholding tax providing that foreign law allows taxpayer
clauses; otherwise, it will be subject to the normal domestic rate 30% (R.A.9337).

The tax rate of 15% shall be applicable if the foreign country does not impose and income tax on
dividends received by the nonresident foreign corporation from a domestic corporation. The 15%tax
rate shall be effective starting January 1, 2009.

Forms and Valuation of Dividend Income

For income tax purposes, the form of dividend income shall determine its applicable treatment.
Dividends that are usually receive by a stockholder are as follows:

Cash dividend;
Property dividend;
Stock dividend;
Scrip dividend;
Indirect dividend; and
Liquidating dividend

Cash dividend

A cash dividend is the most common form of dividend. It is valued and taxable to the extent of amount
of money received by the stockholder.

Property Dividend

A dividend payable in property of an issuing corporation is a property dividend. The property dividend is
usually valued and taxable to the extent of the fair market value of the property received at the time of
declaration.

Examples of property dividend are:

Merchandise inventory, supplies, etc..,

Shares of stock of another corporation, or
Treasury stock of issuing corporation if acquired at cost different from its par value.

Stock Dividend

As a general rule, pure stock dividend are not subject to tax because they simple involve a transfer of
the retained earnings to the paid-in capital account, execpt when the following circumstance exist:

There is an option that some stockholders could take cash or property dividends instead of stock
dividends;
Some stockholders exercise the option to take cash or property dividends ;and
The exercise of option resulted in a change of the stockholders’ proportionate share in the outstanding
shares of the corporation.(Sec.73(b);NIRC;Rev.Reg2.Sec.252)
Redemption of Stock Dividend

If the corporation cancels or redeem stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock
is considered taxable income to the extent that it represent a distribution of earnings or profits.
(Sec.73(b),NIRC 1997;BIR Ruling March 12,1962)

Stock Dividends Different from Shares Previously Acquired

When stock dividends receive are of a different class from shares previously acquired the stock
dividends are not income, and therefore, not taxable. the original cost of the investment is allocated
between the original shares and the stock dividends on the basis of their respective market value at the
date of receipt.

Scrip Dividend

A scrip dividend is an issued in the form of promissory note and is taxable to the extent of its fair
market value. It is taxable in the year when the warrant was issued. (Sec.251,Rev.Reg.No.2)

Indirect Dividend

Indirect dividend are those other dividends representing payments or rights received by the taxpayer,
which are really dividends. (Sec.50.Rev.Regs.No.2)

Liquidating Dividend

Liquidating dividends are return of stockholders investment. It arises from the distribution of assets by a
corporation to its stockholders upon corporate dissolution. (Sec.73(A),NIRC)
As a rule, the excess amount of liquidating dividend over cost of shares surrendered is taxable. Such
excess is a gain realized which is taxable.

If the stockholder sustains a loss, such loss is deductible.

Distribution of liquidating dividends is to be treated as a sale stock. The difference between the cost or
other basis of the stock and the amount received in liquidating of the stock is a capital gain or a capital
loss. The gain realized or loss sustained by the stockholder is a taxable income or deductible loss as the
case may be (Sec.73(A).NIRC;Sec.256.Rev.Reg.No.2). Consequently, the capital gain on liquidating
dividend is not subject to final tax

Prizes and Winnings

A prize is a rewards for a contest or a competition. In other words, a prize represent remuneration for an
effort reflecting one’s superiority, like prize money of a boxing contest.

On the other hand, a winning is a reward for an event that depends on a chance such as winning from
gambling, lottery or raffle ticket.
In general, prize are subject to final tax of 20% except if the amount of the prize is then thousand
(10,000) or less which shall be subjected to normal tax (Sec.24(B)(1)and Sec.24(A).NIRC). Winnings are
subject to final tax of 20% regardless of amount.

PARTNERS’DISTRIBUTIVE PROFITS FROM PROFESSIONAL PARTNERSHIP’S NET INCOME

The partner’s share in the distributive profit of a professional partnership represents his gross income.
(Sec.32.NIRC)

OTHER SOURCES OF INCOME

These earnings are categorized as “other sources of income” because they are generally incidental
earnings or not common source earnings. Usually, these incomes are, but not limited to the following:

Bad debt recovery;

Tax refund or credit;
Damage recovery;
Annuities; and
Income from whatever source.
Tax Benefit Rule

Tax benefit rule is a general principle in taxation which states that if a taxpayer deducted an item on his
income tax return and enjoyed a tax benefit (reduced his income tax) thereby and in a subsequent year
recovers all or part of that item, he will recognize gross income in the year the deducted item is
recovered (Dobson v. Commissioner,320 U.S.489).

The rule has both an inclusionary and an exclusionary component, i.e., the recovery is included in the
taxpayer’s gross income to the extent that the taxpayer obtained a tax benefit from the prior year’s
deduction, and the recovery is excluded to the extent that the prior year’s deduction did not provide a
tax benefit.

Bad Debt Recovery

The following are the requisites for deductibility of bad debts:

There must be a valid and existing debt arising from business or trade of the tax payer;
Tax refund or credit shall be included as part of gross income in the year of receipt to the extent of the
income tax benefit of the said deduction.

The debt must be actually ascertained to be worthless and uncollectible during the taxable year.
The debt must be charged off during the taxable year.
For taxation purposes, bad debts are considered the amounts of receivable being ascertained worthless
to be written off during the taxable year.
When a written off receivable has been recovered I the succeeding year, the recovered amount must be
included in the gross income during the taxable year of recovery. However, under the doctrine of
equitable benefit, the amount recovered id only taxable to the extent to the tax benefit in the year the
account was written off.

Tax Refund or Credit

As a general rule, refunds from taxes paid are taxable except for the following:
Estate or donor’s tax
Philippine income tax
Stock transaction tax
VAT, claimed as input tax
Tax refund is subject to tax benefit rule which states that the refund of tax would only be subjected to
tax if such tax was previously deducted from gross income resulting in the reduction of reported taxable
income.
As a rule, if the tax paid is deductible, refund is taxable. If the tax paid is not deductible, refund is not
taxable.
Tax refund or credit shall be included as part of gross income in the year of receipt to the extent of the
income tax benefit of the said deduction.

Damages Recovery

Damage recovery is an amount receive by an injured person as payment for loss income or payment to
compensate damage to property, injury to person, or loss of life.

As a rule recoveries of damage representing compensation for loss of profit or income are taxable ( BIR
Ruling No. DA-489-2005 dated December 6, 2005).

Recoveries that are to compensate for damages to property, injury to person, or loss of life are not
taxable (Sec.63,Regs.No2).

Annuities

Annuities are installment payments received for life insurance sold by insurance companies. The annuity
payments represent a part that is taxable and not taxable. If the part of annuity payment represent
interest, then it is a taxable income. If the annuity is a return of premium, it is not taxable.

Under the contract of life annuity the debtor binds himself to pay an annual pension or income during
the life of one or more determinate persons in consideration of a capital consisting of money or other
property, whose ownership is transferred to him at once with the burden of the income (art 2021.New
Civil Code).
Income from Whatever Sources Defines

“Income from whatever source derived” means inclusion of all income not expressly exempted with the
class taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from legal or illegal sources.

Examples of income from legal source are:

Employee’s salary, bonus; and

Commissions/rebates of a medical representative.
Example of income from illegal source are:

Gambling;
Kidnapping;
Extorting
Smuggling; and
Embezzlement;

Illegally obtained Income

As rule, illegal income is taxable. Income obtained through illegal means is included in the wrongdoer’s
gross income even though he is obligated to return it when discovered. (D.A.Kahn.p.870

The mere fact that a transaction is illegal doesn’t not exempt it from income tax law. Gains from such
transaction as gambling extortion swindling and the like are all taxable. (Michie;p.282.)

Income that is not realized is not taxable, even though its absence is due to an illegal act.” moral
turpitude is not a touchstone of taxability; (P.Hsbough Milk co,26T.C.707)

The courts have sustained the BIR’s determination of the illegal gains from such records as bank deposit,
or on the basic of commission paid out, and even from a formula determination based upon the
nationwide experience. The burden is on the taxpayers to offer independent evidence to contradict such
determination. (Humprey vs Commissioner.162 F.(2d)853;Nellis us Commissioner,232.F(2d.)89)

Embezzled Funds

Embezzled funds are income without consent (express or implied with an obligation to repay).

If the embezzler reaps the fruit of his crime without restriction as to disposition, he is in receipt of
income though it may be claimed he is not entitled to the money and may be adjudged liable to restore
its equivalent. When reported as income, actual repayment of embezzled fun will give rise to deduction
(James u.s.u.s366. u,s 313).

Income Received by Error

When income is received under a mistake or fact or law, the income is included in the gross taxable
income of the recipient no withstanding the fact that the recipient may be required to return the
income item to the payor when the error is discovered.

References:
National Internal Revenue Code of 1997. (n.d.). Retrieved from https://www.bir.gov.ph/index.php/tax-
code.html
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.). Quezon
City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good Dreams
Publishing.
Valencia, E. G., Roxas, G. F., & author. (2016). Income taxation: principles and laws with accounting
applications. Baguio City: Published and distributed by Valencia Educational Supply.