Name: Marayan Cris Andrei S.

Section: V-ABSA
Taxation Reviewer

Coverage:
GENERAL PRINCIPLES OF TAXATION
TAXES, TAX LAWS AND TAX ADMINISTRATION
BASICS OF INCOME TAXATION
FINAL INCOME TAXATION
CAPITAL GAINS TAXATION
REGULAR INCOME TAXATION
GENERAL PRINCIPLES OF TAXATION
Definition of Taxation
Scope and Limitation of Taxation
Situs of Taxation + Double Taxation and its remedies
Escapes from taxation
Principle of a Sound tax system
Taxation and Economic Efficiency
DEFINITION OF TAXATION

Taxation defined as a power, process and mode of cost allocation.

Taxation as a power
1. Taxation – enforced contribution public purpose
2. Police Power – enact laws or regulatory laws general welfare (public interest)
3. Eminent Domain – take property public purpose/use
Important Similarities
1. All are necessary attributes of sovereignty resting upon necessity.
2. All are legislative in nature
3. All are ways in which the state interferes w/ private rights and properties
4. They exist independently with the constitution although they may be prescribed or limited by it.
5. All presuppose an equivalent form of compensation.
6. Exercise of these powers by the LGUs may be limited by the national legislature (congress).
Important notes:
1. Taxation is the most important power; Police Power is the most superior
2. Taxation is the only power that is inferior to the non-impairment clause of the constitution.
3. Police Power and Eminent Domain are superior to the non-impairment clause (Public Interest> Private
interest/Private Contracts)
4. License fee (Police Power) can also be a source of fund/revenue of the government.

Differences as to Taxation Police Power Eminent Domain

Amount of Imposition Unlimited Sufficient to cover cost of No imposition

Regulation (license fee)
Limitation Inherent and Public Interest and Due Public use and just
Constitutional Process compensation

Exercising Authority Government Government Government

And certain private
Entities (public/private
Utility entities)
Philippine Government relative to tax

L E J

2 Divisions of the ph. Govt.

National Government
Local Government
Branches of the national government
L = Legislative
E = Executive
J = Judiciary
Legislative = law- making body levy tax laws (broad declaration of rules and regulation)
Executive = Implementing body Implementing Guidelines (RR, Rulings)
Judiciary = Guardian of the Constitution Checks the constitutionality of tax laws(L)
And legality of the implementation (E)
Legislative = Senate and Congress
Executive = President, Bureaus, Agencies. Instrumentalities = LGU
Judiciary = Supreme Court
These branches operate under the principle of check and balance.
Overriding veto = 2/3 votes (Congress)
Taxation as a Process

Legislative Act/Levy or Imposition/ Impact of Taxation

-matters of congress (Levy or imposition of tax laws or tax ordinances)
Example:
Determination of tax object (within jurisdiction) , Amount of tax or tax rate, Apportionment of Tax, Purpose of its
levy (Public), situs of taxation
Administrative Act/ Assessment or Collection/ Incidence of Taxation
-matters of implementation, assessment and collection.
Example:
Method of collection from non-compliant tax payers Levy (Immovable) or Distraint (Moveable), Seizures (Goods) or
Tax lien.

Taxation as a mode of cost allocation

Theories of Cost allocation
Benefit Received Theory – everyone is conclusively presumed to be receiving benefits from the government.
- Business Taxes
Ability to pay Theory – based on ability to pay.
- Income Taxes
Assessments of ability to pay:
Vertical Equity – Variable
Ex. Income
Horizontal Equity – Circumstance of the Taxpayer
Ex. Deductions, Exemptions, Tax Credit
Purpose, Scope and Limitation of Taxation
Purpose of Taxation (Public Purpose)
Primary Purpose: Revenue, General , Fiscal Purpose
Secondary Purpose: Regulatory Purpose and Compensatory Purpose
Life Blood Doctrine

Tax is the life blood of the government. Taxes are indispensable to the existence of the government. Without taxes
the government cannot raise revenue to support its operations.
Example of Application of Life Blood Doctrine
Government prefers early availability of funds (advance collection of taxes > deferred collection of taxes)
Higher tax base is preferred than lower tax base
Claim of exemption, deductions and tax credit are construed against tax payers
Non-Compensation or Set-off (Not Automatic)
Scope

Taxation as to scope is CPUS. Comprehensive, Plenary, Unlimited and Supreme.

Practically Unlimited not Absolute Unlimited. Taxation is subject to certain limitations. Inherent and Constitutional.

Current Objects of taxation. BITRAPPP.

Businesses, Interests, Transactions, Rights, Acts, Privileges, Properties, Persons.
Limitation of Taxation
Inherent Limitations (TIPEnd) the bold letters have an equivalent constitutional limitation.
Non diversification of tax collections (Public Purpose), Non delegation of the power of taxation.
Territoriality (Benefit Received Theory)
Two-fold tax obligations
1. Self-Assessment Method (File and Pay) Declare Sales/Income then pay.
2. Withhold – Withhold estimated/final taxes on income payments. Expense on the Income Payor
and Income on the Income Payee.
Individuals are obligated to withhold only if they are engaged in business/ profession.
Corporations are obligated to withhold without any qualification as a rule.
International Treaty or Comity (All countries are equal) but contingent on reciprocity rule.
Properties and Income of Foreign Government are not objects of taxation.
Observance of treaty provisions (Treaty Provision > Domestic Tax laws)
Public Purpose – Absolutely for public purpose. No exception at all.
Exemption of the Government – not Absolute
The Government can tax itself however there is no benefit (no incremental revenue)
Tax treatment for Philippine Government and foreign government
1. Foreign Government Agencies and GOCC are exempt.
2. Philippine Government Agencies are exempt.
3. Philippine GOCC are generally taxable. Except SSS, GSIS Phil Health, Local Water Districts. PAGCOR, PCSO
are taxable GOCCs and other GOCCs.
Non-Delegation of the Taxing Power
Executive and Judiciary will not move without any action originating from the legislative. (Legislative in nature).
Formulation of a tax bill, introduction of a rule (which is taxable or exempt, change of tax rates) cannot be exercised
by other agencies executive or judiciary as a general rule. (Exemption is fixing of the Tariff rates by the president)
RR and Rulings are just implementation or clarifications but not introduced rules. Such RR or Rulings are patterned
or interpretations of those tax laws.
No Double Taxation* is not prohibited but only highly discouraged. These are mere considerations by congress in
formulation of tax bills.
Constitutional Limitations
1. Due Process
Substantive Due Process – legal basis that is expressed, categorical and unequivocal.
Procedural Due Process – there are procedures or rules set by the law for tax laws. Prescriptive period, Compliance
Requirements.
No compliance (1) = Assessment = No compliance (2) =File Action for Collection (3)

Deficiency of tax
Deadline of the tax or Filing of the return (whichever is late)
3yrs
Assessment
5yrs
Enforce Action for Collection
Non-Filing/Fraudulent Filing (Delinquency/Deficiency arising from fraud)
10 years from discovery
2. Equal protection of the law (Equality)
Same tax object = Same tax rule
If there is no substantial distinction between a tax object = same tax rule
Before there is a Special Alien under the NIRC. Which was removed.
Example of Special Alien, Aliens employed on OBUs ROHQ …
3. Uniformity – Accept the fact that tax payers are diverse or different. Uniformity adjusts for the non-
flexibility of the Equality Doctrine.

Uniformity can be interpreted as equality among classes.

Classify based on substantial distinction (Classes) and adopt a uniform rate based on equality.
Best example is the graduated tax table for individuals.
Are they interchangeable? Example rice and sugar are not interchangeable hence there is substantial distinction.
4. Progressive scheme of taxation (Progressivity of tax laws) – Consistent with Ability to pay Theory
Types of tax rates. Proportional (Fixed), Progressive, Mixed, Regressive.
Corporate RIT appears to be unconstitutional however it is not because corporations can distribute itself by creating
juridical personality or separate tax payer like subsidiaries. However, Individuals cannot divide its personality.
However, there is now an OPC (One-Person Corporation) which is also a separate legal personality taxable as a
corporation.
5. Non-Imprisonment for non-payment of Debt or poll tax.
Not absolute if debt is incurred due to fraud. Non-payment of tax as a rule will lead to imprisonment since tax is a
civil obligation except poll tax/ sedula sibil.
Basic community tax 5 per head for Philippine Residents vs additional community tax (Ability to pay) 1/1,000 income
from business or profession maximum of 5,000 pesos.
Non payment of tax despite there is ability to pay is tantamount to tax evasion.
6. Non – Impairment of Obligations and Contracts
Distinguish contracts from Privilege
Contracts (Consent, Object, Cause/Consideration) – cannot be impaired/revoked.
Example: Free Carriage of the government in exchange of Exemption from franchise tax.
Since there is consideration, this is a contractual exemption and hence cannot be impaired or revoked by the
congress.
Privilege (Consent and Object) no consideration given up. – can be revoked since it is not based on contract.
Ex. Mandatory Discount of senior citizen and PWD
3 types of exemption
Exempt based on Contract – cannot be repealed
Exempt based on Constitution – cannot be repealed
Legal Exemption (No consideration/Not based on Constitution) can be repealed.
7. Free Worship Rule – exercise of religion is not an object of taxation. Tithes are not subject to Donor’s tax.
8. Non-Appropriation for religious entities. No appropriation law for churches.
Priest under military service are compensated from the tax funds. These are not unconstitutional since such is not
considered appropriation but rather a consideration from government service (consideration). Appropriation = No
cause or consideration.
9. REC religious educational and charitable entities without any qualification are exempt from property tax
however not all properties only those that are ADE used in REC purposes.
10. Non- Profit Education Institution exempt from income and property tax (based on number 9)
11. Majority of all members of congress for the passage of law granting tax exemption. Tax exemption bill.
300/2 + 1 = 151 quorum majority of the quorum normally will validate a motion however with regards to
exemption bill required not the majority of present members but majority based on original members. (not
76 but rather 151)
How about tax bill? Tax bill requires a lesser majority which is majority of the present members.
Why is there a difference? To avoid unethical lobbying.
12. Non-diversification of tax collections. – No Diversification for private purpose.
13. Non-delegation of taxing power.
Except: Power to tax (Fixing the tax rate) by the president under the flexibility clause of the TCC.
Power to tax by LGU under the Local Government Code. Local governments can impose taxes.
Matters of assessment and collection and certain aspects of taxing process that are not
Legislative in character. (Broad general category)

14. Non-Impairment of the supreme court to review tax cases.

 Disputed Assessment that was denied by the BIR is not final. There are judicial remedies (Court of Tax
appeals (Court specialized in tax matters such decision is still not final, the dispute can still be elevated to
the supreme court (Court of last resort).
The point is the CTA is not the last remedy of the tax payer but the supreme court is.
15. Appropriations, revenue(tax) of tariff bills shall originate from the house of representative but the senate
may propose or concur amendments.
Any law that will add money to the treasury (tax bill or tariff bill) or appropriation bill (reduce the fund of
the treasury must originate from the congress.
16. LGU can create its own sources(Local taxes imposed by LGUs) and have a just share from the national taxes.

Situs of Taxation (Place of Taxation) or location of the object of taxation.

Location of business for business tax, location of income for income tax.
Tax is territorial which is why as a rule only objects that are within tax jurisdiction/territory are taxable. With
exception – RC and DC.
Example of Situs
Tax object – Situs Rule
Persons – residence of taxpayer (personal tax)
Property – location (property tax)
Business tax – where it conducts business principal place (HO) of business or branch.
Income (in general) – where the income is earned, residence or citizenship of the tax payer. However there are many
types of income. Such as interest income – debtor’s residence, Income from sale of property (immovable property
– location of the property, movable property place of sale (place of agreement) however not absolute. Sale of
Domestic securities are always located within regardless of place of agreement.
Double Taxation (Taxing the same object twice)
Primary Element: Same Object (Once satisfied there is already double taxation however there are 2 types of double
taxation one that is allowed one that is discouraged)
Secondary Elements: Same taxing authority ex. National Government, LGUs
Same tax period – ex. Effectivity of tax laws.
Same tax type/nature ex. Income, business
Direct Duplicate Taxation – satisfaction of all secondary element - Discouraged
Indirect Duplicate Taxation – satisfaction of not all of the secondary elements – Allowed
Remedies: Tax Exemption, Tax credit, Allowance for principle of reciprocity (Ex. Tax Sparring Rule), Treaty provisions.
Ex. Intercorporate Dividends. DC to DC or RFC. Exempt.
Premiums on reinsurance. Exempt. Direct premiums are taxed 2%.
Foreign taxes can be claimed as tax credit (with limit) or tax deduction provided that the taxpayer is globally
taxable.
There is no business tax credit.
 Forms of Escape from taxation
Those that cause loss of revenue and those that do not cause loss of revenue.
Those that will not cause loss of revenue.
1. Shifting (Forward or Backward)
Ex. Donor’s tax assumed by the done, Business taxes (VAT) Backward shifting (Customs duties or vat on importation
assumed by the seller).
2. Capitalization – capitalization of taxes. Decrease the selling price or fair value provided the buyer will
shoulder the tax.
3. Transformation – here there is no transfer of burden not like shifting or capitalization because of fear of
loss of market/customers. Instead, the seller will increase the quantity of production efficiently thereby not
increasing costs as production increases and transforming the taxes into a gain through the productions.
Those that will result loss of revenue.
Evasion – tax dodging, illegal reduction or total escape from tax. – subject to penalties
Avoidance – tax minimization scheme, legal reduction or total escape from tax. – not subject to penalties
Ex. Tax planning
Exemption – immunity or privilege from payment or burden to pay taxes.
AMNESTY VS. CONDONATION.
Amnesty – general pardon to qualified tax payers. (Conditional) Pay a portion all taxes are waived. Retrospective –
forgiveness of past violations. Forgive criminal, civil and administrative penalties.
Condonation – specific pardon. Prospective – current or existing balance are waved. No condition. Forgive civil
penalties only.
Tax due 1000
Paid (400)
Bal 600 – condoned
PRINCIPLES OF A SOUND TAX SYSTEM – as a general rule non observance of such principles will not render a tax levy
unconstitutional. With the exemption of theoretical justice.
Fiscal adequacy – sufficiency of funds, the government must not run out of money.
Increase of cost – Increase the taxes
Administrative Feasibility – convenient, just and effective compliance or tax administration
Ease of Compliance - Electronic filing
Theoretical Justice – consideration of ability to pay and benefit received.
Theoretical Justice is equivalent to progressivity of tax laws.
TAXATION AND ECONOMIC EFFICIENCY
Income effect – makes people economically efficient (direct taxes) if tax burden is not transferred ex.
Transformation.
Substitution effect – makes people economically inefficient (indirect taxes)
GENERAL PRINCIPLES OF TAXATION
TAXES, TAX LAWS AND TAX ADMINISTRATION
Taxes and its classification
Tax laws vs revenue regulation vs rulings
Powers of the BIR and CIR
TAXES, TAX LAW AND ITS CLASSIFICATION
Tax classification (purpose, subject matter, incidence, amount, rate, imposing authority)
As to purpose
General, Revenue or Fiscal tax
Regulatory tax – imposition of exorbitant taxes on vices or non-essential commodities
As to subject matter
People – Personal, Poll or Capitation tax
Property – Property tax
Privilege or Excise tax – Tax on Privilege to earn income/ engage in business, or exercise of a
profession.
As to Incidence/who shoulders the burden
Direct tax – property tax, donor’s estate tax, income tax.
Indirect tax – business taxes.
As to amount
Specific tax – per unit/per piece ex. Basic community tax
Ad valorem – according to value. fixed percentage/progressive or regressive.
As to rate
Proportional/Flat rate
Progressive – almost all local taxes are progressive.
Regressive – no imposition, because regressive rate are believed to be anti-poor.
Mixed
As to imposing authority
National Tax – internal revenue taxes, customs duties/tariff, others.
Local Tax
Tax Laws are civil. 3 types of laws civil, political, criminal.
No ex post facto law. Imposition and revocation are prospective.
TAX LAWS, RR AND RULINGS
Tax Laws vs. Revenue Regulations vs Rulings
source HoR/Congress Department of Finance* BIR
superiority 1st 2nd 3rd
scope Broad Broad Specific
POWERS OF THE BIR AND CIR
BIR – primary obligated to collect internal revenue taxes. Vat on importation (being an internal revenue tax) is the
primary obligation of the BIR to collect. However, it is collected by the Bureau of Customs as an agent of the BIR.
Composition. 1 commissioner and 4 deputy commissioners.
Powers of the CIR that cannot be delegated.
To recommend promulgation of revenue regulation to the department of finance. (Sign recommending approval)
The power to issue rulings of first impression or the power to reverse, revoke or modify a ruling.
To compromise or abate
Except: if the basic tax amounts to 500k or less -delegated to the REB or
1M and up - NEB.
To assign or reassign accredited BIR agents in charge in monitoring excisable articles.
GENERAL PRINCIPLES OF TAXATION
TAXES, TAX LAWS AND TAX ADMINISTRATION
FUNDAMENTALS OF INCOME TAX
Essential Characteristic of Gross Income
Return on Capital
Realized Benefit
Not exempted by law, treaty, contracts or constitution.
Return on capital
1. Basic sale transaction of goods/service.
Goods = return on is the gross margin
Service = revenue.
2. Capital Assets deemed with infinite value (Life, health, reputation)
Considerations received from loss/deterioration or impairment of such assets with infinite value
or deemed 100% return of capital.
3. Recovery of lost profits vs recovery of lost capital
Recovery of lost profits are considered gross income while recovery of lost capital
are not gross income.
Realized Benefit
Benefit = when there is inflow of wealth (Asset increase) there must be an increase in net worth
(Equity).
Donation - yes
Inheritance - yes
Gain on Sale of property – yes
Holding gains - yes
Loans – No
However, taxation benefit in order to be considered gross income must be realized.
The benefit is realized through an exchange or sale transaction with another party.
Another Party or persons
Proprietorship businesses, home office and branch are not juridical persons for taxation purposes.
Hence proprietorship businesses are taxable to the owner and home office or branch are taxable to the individual
owner or corporate owner.
Parent and subsidiary companies however are considered to be separate juridical entity for taxation purposes.
Must not be exempted by law, treaty, contracts or constitution.

Income taxpayers and its classification

1. Intention
Short term stay = no automatic reclassification
 Tourist Visa
Long term stay = automatic reclassification citizen upon departure, alien upon arrival.
Working Visa, Immigration Visa

2. Length of Stay

Resident Citizen
Citizen at least 183 days
Non- Resident Citizen
Individual
Resident Alien
Alien more than 1 year
Non- Resident Alien
NRA-ETB
more than 180
NRA – NETB
Domestic Corp
Corporation Resident Foreign Corp
Foreign Corp
Non-Resident Foreign Corp

Expatriate employee - Alien

Assigned here in the Philippines – resident alien
Visitorial only – remains to be nra-netb
Employee under secondment assignment abroad – remains to be a citizen, they are only in abroad for advancement
or refinement purposes.
Special Considerations
Partnership and Joint Venture – generally taxable unless exempt. Partnership – GPP Joint venture – Oil exploration
and Construction
Taxable estate - Judicially settled
Taxable trust – irrevocably designated
Cooperatives – generally exempt if the cooperative is limited to income preservation and income distribution.
However, if there is reinvestment of income to other income producing activities the cooperative will be regarded
as unregistered partnership.
Situs of Income
Interest Income – debtor’s residence
Dividends
Declared by:
DC – 100% within
FC – pre dominance test
Benchmark the year of declaration and go back 3 years before the year of declaration.
GI – phils / GI world = % if the % is atleast 50 percent such percentage is assumed to be located within
and the residual to be located outside. However, if the % is less than 50 percent 100% of the dividend is located
outside.
Service Income – place where the service is rendered
Rental Income – place where the property is situated
Royalty – where intangible is employed. Franchise = location of the outlet/franchise.
Gain on sale – immovable -location of the property
Movable (buy and sell/merchandising) – place of sale except domestic securities (always within).
securities = stocks/bonds.
Mining – location of the mine
Farming – location of the farm – not place of sale because farming income is not from buy and sell but rather
manufacturing using biological processes.
Manufacturing – place of manufacturing/production and place of sale.
The complexity arises when there is a cross border activity. Transfer Pricing Rule – transfer between related parties
of a manufacturing company must be at arm’s length.

Transfer between related parties (ex. Sale of the production or manufacturing operation to a sale operation abroad
)
Arm’s length – fair rate of billing.
Ex. 1 Production (PH) Sale branch abroad
Cost is incurred in the Philippines hence the question as to arm’s length must be as to the selling price.
What is the presumptive selling price? Reasonable Markup rate. Selling price must be at arm’s length

Ex. 2 Sale’s branch (PH) Production abroad

Sales are earned in the Philippines hence the question as to arm’s length transfer must be as to the cost.
What is the presumptive cost? Reasonable Cost of Sale. Cost of sale must be at arm’s length.
However, the rate is always volatile throughout the year. Which is why taxpayers normally secure APA for presumed
selling price(ph.-abroad) or presumed cost(abroad-ph.) with the commissioner.
Accounting Period
Regular Accounting Period (Calendar and Fiscal)
 Short Accounting Period – Death of tax payer, start of business, dissolution of business, change of
accounting period by the corporate taxpayer oe+1 to ne = adjustment return (deadline is 15th day of 4th month eoy),
termination of accounting period by the CIR.
Accounting Methods
Installment Method (Deferred Payment Sales)
Principal Methods (Accrual and Cash basis)
Long- term construction contracts - % of completion method and Completed contract basis
Farming Income (Crop year basis)
Leasehold Improvement – Outright method – the estimated value of the land at the end of the lease term (book
value) shall be recognized as income from leasehold improvement at the year the improvement was completed.
Spread-out method – the estimated value of the land (book value) at the end of the lease term shall be amortized
through out the technical* lease term. Lease term exclusive of the construction period.
Income Tax Compliance

Two-fold tax obligations

1. Self- assessment method
2. Remittance of withholding taxes
Types of income tax returns
Regular income tax returns
1701 – individuals
1702 - corporations
Capital Gains tax returns
1706 – real property capital asset
1707 – capital stock directly to buyer
Types of withholding tax returns
1. Final Withholding tax
2. Creditable Withholding tax
Classification of tax payers for income tax compliance (administration purposes)
Large taxpayer (LTSD) – e-Fps
Distinguishment – Tax Payments (VIEW), Financials (SPN), Others.
Non-Large tax (RDO) Manual, e-birforms, e-Fps
Where does non large tax payers file tax returns (in practice)
1. AAB - file
2. RDO - file
3. Collection Agent (payment)
4. DAT of which the tax payer has his legal residence or principal place of business (Municipal Treasurer)
5. Office of the Commissioner if the tax payer has no legal residence or place of business in the Philippines.
Determining non-compliance with tax obligations
1. Lifestyle check
2. Inventory surveillance
3. Mystery shopping
4. Networth Method
GENERAL PRINCIPLES OF TAXATION
TAXES, TAX LAWS AND TAX ADMINISTRATION
FUNDAMENTALS OF INCOME TAX
FINAL INCOME TAXATION
FINAL INCOME TAX
1. Withholding at source
2. Final Tax
3. No ITR
4. Certain Passive Income
5. Certain Non-Residents
6. Territoriality
List of passive income subject to FIT
1. Interest
2. Dividends
3. Royalties
4. Prizes
5. Winnings
6. Informers Reward
7. Fringe Benefit tax
8. Others

Interest Income – from deposits from banks

Rules
Individual Corporation
ST 20% 20%
LT Exempt 20%
Long-term = 5 years placement period

Pretermination Rate
Individuals Corporations
20 0 to less than 3 Always 20%
12 3 to less than 4
5 4 to less than 5
0 5 years
Foreign Currency Deposits
Individuals Corporations
Resident 15% 15%
Non – Resident Exempt Exempt
Non- resident includes NRFC and NRA- NETB
Dividend Income
Cash
Property
Script
Stock Dividend (unless in lieu)
Situs
DC – always within
FC – pre- dominance test
Individual Corporation
Dividends 10% Exempt (Statutory Provision)
*NRFC = 30% or 15%
NRA- NETB = 25%
NRA-ETB = 20%
Concept of BPRT = 15%
Taxable BP/JV (treated as corporations) 10% 10% (absence of statutory provision)
Share in NI from BP or JV is broader than Dividends
If silent are just means of distributing Income If S, I, B are treated as expense in the books
Rule:
Salaries Salaries
Interest subject to 10% Interest subject to creditable withholding tax
Bonus Bonus and RIT
Residual Residual – 10%
*GPP or Exempt JV
Distributions (actual or constructive) shall be reported by the partners to their individual ITR.
Compliance
Monthly Quarterly Annual
Others 0619-F 1601-FQ 1604-F
Interest 0619-F 1602-Q 1604-F
Fringe B. ------- 1603-Q 1604-F
Deadline 10th day EOM EOM – EOQ EOM - EOY
January 31* next year

Royalties – ACTIVE – RIT Individual Corporations

PASSIVE - books, literary works, musical compositions 10 % 20%
Others 20% 20%
Prizes - Effort
Award – Exempt accredited- org – exempt
Non-Award/ Competition – sports non accredited Individuals Corp
Non-sports >10k 20% RIT
At least 10k RIT RIT

Winnings - Chance Individual Corporations

PCSO/Lotto >10K 20% 20%
At least 10K Exempt Exempt

Others 20% RIT

Informer’s Tax Reward – 10% of tax collected or 1M whichever is lower but there are limits
Fringe Benefit Tax – To be discussed under RIT (as an employee benefit subject to final tax)
OTHERS
CAPITAL GAINS TAXATION

CAPITAL GAINS - CAPITAL ASSET – financial assets and intangible assets

Properties held for sale
ORDINARY ASSET – use in business (strictly*)
Nature of Business held for use (supplies, PPE)
Assets of non-profit entities as a rule are all capital assets since they are not engaged in business however if there
are assets of a non-profit that are commercial in nature shall be classified as O.A.
Exceptional Rules:
ROPA of banks – OA
Loans Receivable of financial institutions – allowed full deductibility under the NIRC – OA
What if I discontinued the use of the asset from business? – Still OA (if silent as to length of discontinuance)
Acquisition to be used in business – OA, even if the asset remains to be unused because of an unforeseen
circumstance beyond the taxpayer control.
What if there is a change hand? The purpose and actual use of the buyer or heir will be the classification.
Previously used in business – abandonment – automatically becomes a capital asset after 2 years. Except on any
ordinary asset (not limited to real properties) of those that are engaged in the realty business (3) and those who
executed at least 6 real property transaction on the prior year.

OA
O.G – GI -RIT (Dealings in Properties)
O.L – DEDECTION AGAINST GI
Final tax* Compliance
CA C.G SALE OF DEMESTIC STOCKS 15% CGT S.A.M Annual
C.L SALE OF REAL PROPERTY 6% CGT F.W.M Transactional
OTHERS – RIT (Dealings in Properties)
CGT on Sale of Domestic stocks directly to buyer
Equity Securities – be it stocks, warrants or options. Stocks of a corporation (profit or nonprofit) but not interest on
a partnership.
Mode of disposition
Through PSE (listed stocks) – stock transaction tax of 1% of 6% of GSP. No Income tax.
Except if you are a dealer of securities. Income tax and Vat.
General Rule: Directly through a buyer (non-listed) 15% CGT as a general rule also. Except Foreign Corpo.
How to compute:
SP
(Cost)
(Selling Expenses)
2 types Commission/Finder’s Fee
Documentary Stamp Tax (if assumed by the seller w/c is the general rule)
Net Gain x 15% (all individual including NRA-NETB and domestic corporations)
Two – tiered CGT for Foreign Corporations (RFC or NRFC) – first 100k of net gain 5% excess is 10%
Compliance
1. Per Transaction – BIR FORM 1707 w/n 30 days Gain = File and Pay Loss = File only.

2. Annual Compliance – BIR FORM 1707A (annual general deadline of 15th day of 4th month following EOY)
If the buyer pays in installment. The installment payment of tax may be applicable. Installment method of
recognition of income is of another story.
6% CAPITAL GAIN TAX ON SALE OF REAL PROPERTY CAPITAL ASSET
6% of which ever is higher of FMV or GSP
FMV according to NIRC is whichever is higher of zonal value or FV per tax dec (100%) not the assessed value which
is significantly lower.
Gain is conclusively presumed.
Nature: Final Tax and Transactional Tax
Sale, Exchange, or other disposition. (Expropriation, foreclosure etc.) 30 days from the date of disposal or
transaction. Ex. April 25 – May 25
For foreclosure consider the mortgage law – no instant taxation upon foreclosure (1 year redemption period) not
yet consummated. If the owner did not buyback the property within the 1-year redemption period the foreclosure
will be deemed consummated.
DST = 15/1000 of the basis. Or 1.5% of the basis. Withheld by the buyer. 10 days from the end of the month where
the transaction/disposal took place. Ex. April 25 – May 10.
Exceptions: A. Exemption Rule = CGT = 0% - replacement of residence.
Req.
Must be a Filipino Citizen or a Resident.
The asset disposed must be the principal residence of the tax payer. Principal Residence or Declared
Residence for RPT purpose if the are a number of properties.
Reacquisition (Purchase or Construction) of the new residence must be within 18 months. Regardless
if the construction is not yet fully constructed within 18 months as long as there is an executed contract to buy.
The availment must be once every 10 years.
The cost basis of the old must be carried forward to the new residence. (There will only be adjustment
if there is an additional cost incurred for the new residence)
Full utilization of proceeds
There must be a deposit on an escrow account. File BIR form 1706 – avail exemption (yes) computes
the tax and deposit the tax on an escrow in favor of the government. The BIR will release the fund in the escrow if
you are really qualified for the exemption after the construction or purchase of the new principal residence.
Replacement (Strictly) The sale of old residence must precede the new.
Principal Residence to Principal Residence (Strictly) Principal House and Lot to another Principal
House and Lot

B. Alternative Taxation Rule = 6% CGT or RIT

Allowed under expropriation of an Individual’s property.
Not Allowed for Corporations. CGT only
Scope: All Individuals and Domestic Corporations. 6% CGT
Note*
Foreign Corps are not allowed to owned lands here in the Philippines which is why the congress did not provide a
provision for Foreign Corps to be subjected on CGT. However, Condominium Properties of Foreign Corps are subject
to RIT not CGT because of the absence of provision subjecting foreign corporations to CGT on sale of condominium
properties.
*6% CGT are not present to foreign corporations.
REGULAR INCOME TAXATION
Scope:
1. Active Income
2. All other passive income not subjected or exempted to final tax or capital gains tax
Nature:
1. It is a general and a residual tax
2. It is imposed on net income
3. It is self-assessed tax of the taxpayer
4. It employed creditable withholding system

GI

FIT CGT RIT

Individuals
Corporations

Gross Income xx Exclusion and Inclusion

Less: Deductions (xx)
Taxable Income: xx Individuals (Tax Table)
Corporations (30%)
Exclusion vs. Exempt Income

Globalization Rule

Compensation Income – Exempt Benefits = Taxable Compensation Income

GI from B/P less deductions = Net Income

Other Income Taxable Income
 SERVICE

Employment Contract for provision of service

Employee Benefits Income from B/P

Compensation
Regular CI Fringe Benefit
Supplemental CI 1. De minimis
13th month pay and other benefits (Exempt 90k) Excess 2. Not De minimis or Excess (Other Fringe B.)

Rank and File Employees - RIT

Taxable Compensation Income
S/M Employees (FBT)

De minimis Benefits (Statutory Listing)

Dealings in Properties (Dealings of O.A and Capital Assets not subject to CGT)
Individual Rules under Dealings – Rules do not exist for corporations always 100% NCLCO is not allowed.
1.Holding Period Rule
LT = 50% more than 1 year
ST = 100% at least 1 year
2.Capital Loss Carry Over
1. must not exceed the NI in the year sustained
2. must not exceed the Net Capital Gain on the year of carry Over
3. can only be carried over for a period of 1 year
Principle of Deductions (EXPLAIN)

LOAN Principle (Legal Ordinary Actual and Necessary

Matching Principle
Related Party Rule
Withholding Rule

Classification of Deductions
COGS/COS – DIRECT Actual Deductions
RAID - INDIRECT
SAID – INCENTIVES Incentive Deductions
NOLCO

Itemized Deductions
1. Interest Expense – Interest arbitrage is 33% x Interest Income subject to FIT
Interest Expense less Interest arbitrage = Deductible Interest Expense

2. Taxes – National Tax = not deductible, except DST, percentage tax (expensed on the book not a liability)
and FBT

Local Tax = deductible, except sales tax and special assessment

Foreign Income Tax may be claimed as deduction or tax credit (w/ limit)

3. Losses – Ordinary Loss vs Capital Loss

4. Bad Debts – loss on income (GR) – deductible for accrual only
or loss of capital – deductible weather accrual or cash basis
5. Depreciation – apply the accounting methods
6. Depletion
7. Charitable Contributions
Donee = domestic org/institution – Fully Deductible (PTA)
Partially Deductible
Individuals Corporations
10% 5%
Based on NI before Contribution Expense

NOLCO – 3years except if 5 years (for companies engaged in constructive industries and losses sustained
on 2020 or 2021 under the bayanihan act)